-
For the period ended 12/31/14
All-Cap ValueMuhlenkampSMAMuhlenkamp & Companys All-Cap
Value SMA (Separately Managed Account) is designedfor investors
accounts over $100,000. We employ full discretion, applying
fundamental analysis.
Investment ObjectiveWe seek to maximize total return through
capital appreciation, and income from dividends and interest,
consistent with reasonable risk.
Investment StrategyWe invest in undervalued assets wherever they
may be found. Typically, this results in holding a portfolio of
companies we believe are materially undervalued by the market.
Bonds may be included in the portfolio if they are a good
investment.
Investment ProcessWe start with a bottom-up scan of domestic
companies, typically looking at most U.S. companies at least four
times per year. We add to that an understanding of the sector
dynamics in which companies are operating, an assessment of the
business cycle, and a review of macroeconomic conditions.
Our primary screening metric is return on shareholder equity
(ROE). We are looking for companies with stable returns that can be
purchased cheaply, or for companies with improving returns that
have not yet been recognized by the market.
We dont believe that a holding period of forever is appropriate
in all cases, but are comfortable holding companies as long as they
continue to meet expectations.
Investment RiskWe define investment risk as the probability of
losing purchasing power over long periods of time, which is quite
different from Wall Streets definition of price volatility in very
short periods of time. Taxes, inflation, and spending will ALL
impact the purchasing power of your assets.
* The S&P 500 is a widely recognized, unmanaged index of
common stock prices. The figures for the S&P 500 reflect all
dividends reinvested but do not reflect any deductions for fees,
expenses, or taxes. One cannot invest directly in an index.
** Consumer Price Index As of November 2014 U.S. CPI Urban
Consumers NSA (Non-Seasonally Adjusted), Index
Consolidated performance with dividends and other earnings
reinvested. Performance figures reflect the deduction of broker
commission expenses and the deduction of investment advisory fees.
Such fees are described in Part II of the advisers Form ADV. The
advisory fees and any other expenses incurred in the management of
the investment advisory account will reduce the clients return. It
should not be assumed that recommendations made in the future will
be profitable or will equal the performance of the above accounts.
A list of all security recommendations made within the past twelve
months is available upon request.
All-Cap Value Composite Performance (Net of Fees) Annualized
Year to One Past 3 Past 5 Past 10 Past 15 Date Year Years Years
Years Years
Return 9.37% 9.37% 17.49% 9.80% 2.75% 4.85%
S&P 500 Total Return* 13.69% 13.69% 20.41% 15.45% 7.67%
4.24%
Consumer Price Index** 1.33% 1.32% 1.44% 1.77% 2.14% 2.28%
Top Twenty Holdings % of NetCompany Industry AssetAlliance Data
Systems Corporation IT Services 6.89%Hanesbrands, Inc. Textiles,
Apparel & Luxury Goods 6.16%Covidien PLC Health Care Equipment
& Supplies 4.01%Gilead Sciences, Inc. Biotechnology
3.71%Discover Financial Services Consumer Finance 3.65%J.P. Morgan
Chase & Company Diversified Financial Services 3.40%American
International Group, Inc. Insurance 3.25%Microsoft Corporation
Software 3.23%State Street Corporation Capital Markets 3.10%Apple
Inc. Computers & Peripherals 3.08%Celanese Corporation
Chemicals 2.98%American Axle & Manufacturing Holdings, Inc.
Auto Components 2.95%Celgene Corporation Biotechnology 2.75%DIRECTV
Media 2.70%Annaly Capital Management Inc. Real Estate Investment
Trusts 2.66%General Motors Company Automobiles 2.60%American
Airlines Group Inc. Airlines 2.51%Spirit Airlines Inc. Airlines
2.43%Berkshire Hathaway Inc. - Class B Diversified Financial
Services 2.41%ARRIS Group Inc. Communication Equipment 2.37%
Composite holdings are subject to change and are not
recommendations to buy or sell any security.
Composite Top Twenty Holdings are presented as supplemental
information to the fully compliant presentation on the next
page.
Return on Equity (ROE) is a companys net income (earnings),
divided by the owners equity in the business (book value).
-
Jeffrey P. Muhlenkamp, Investment Analyst and Co-Manager, has
been active in professional investment management since 2008.
He is a graduate of both the United States Military Academy and
Chapman University.
Portfolio ManagersRonald H. Muhlenkamp, Portfolio Manager, CFA,
has been active in professional investment management since 1968.
He is a graduate
SMA FactsAverage Number of Equity Holdings 31Cash & Cash
Equivalents 7.94%Portfolio Turnover 23.90%
Trailing 12 months
SMA InformationCreated in December 1993, Muhlenkamp &
Companys All-Cap Value Composite includes separately managed
fee-paying accounts over $100,000, full discretion, under
management for at least one full quarter. The Composite excludes
the Muhlenkamp Fund and any wrap fee account.
Minimum Initial Investment $100,000.00Management Fee* 1% (first
$1 million); 0.5% on the remainder
* May vary by account.
Muhlenkamp & Company, Inc. All-Cap Value Composite Annual
Disclosure Presentation
The objective of this All-Cap Value Composite is to maximize
total return, consistent with reasonable riskusing a strategy of
investing in highly profitable companies, as measured by Return on
Equity (ROE), that sell at value prices, as measured by
Price-to-Earnings Ratios (P/E).
Muhlenkamp & Company, Inc. (Muhlenkamp) claims compliance
with the Global Investment Performance Standards (GIPS) and has
prepared and presented this report in compliance with the GIPS
standards. Muhlenkamp has been independently verified for the
periods December 31, 1993 through December 31, 2013 by Ashland
Partners & Company LLP.
Verification assesses whether (1) the firm has complied with all
the composite construction requirements of the GIPS standards on a
firm-wide basis and (2) the firms policies and procedures are
designed to calculate and present performance in compliance with
the GIPS standards. The All-Cap Value Composite has been examined
for the periods December 31, 1993 through December 31, 2013. The
verification and performance examination reports are available upon
request.
Muhlenkamp is an independent registered investment advisory firm
registered with the Securities and Exchange Commission. The firms
list of composite descriptions is available upon request.
Returns are based on fully discretionary accounts under
management, including those accounts no longer with the firm.
Composite may invest in American Depositary Receipts (ADRs).***
Accounts may be shown gross or net of withholding tax on foreign
dividends based on the custodian. Past performance is not
indicative of future results.
Total ANNUAL PERFORMANCE THREE-YEAR ANNUALIZED Firm Composite
STANDARD DEVIATION* Assets Assets Number S&P 500 S&P 500
Year (USD) (USD) of Composite Composite Total Return Total Return
Composite End (millions) (millions) Accounts Gross Net Index
Composite Index Dispersion**
2014 541 51 67 10.27 9.37 13.69 9.55 8.97 2.06 2013 585 50 60
35.50 34.39 32.39 11.29 11.94 3.13 2012 491 41 66 11.29 10.34 16.00
12.02 15.09 1.14 2011 555 45 74 (2.84) (3.67) 2.11 16.60 18.70 0.85
2010 724 59 82 2.96 2.15 15.06 1.45 2009 839 90 107 32.68 31.72
26.46 2.80 2008 759 112 155 (40.53) (40.94) (37.00) 1.97 2007 1886
327 289 (7.61) (8.19) 5.49 3.77 2006 3393 371 337 6.09 5.34 15.79
3.70 2005 3471 287 289 10.04 9.22 4.91 3.38 2004 2261 197 206 24.54
23.56 10.88 3.33 2003 1350 132 167 43.36 42.10 28.68 5.57 2002 742
81 139 (19.80) (20.49) (22.06) 3.65 2001 699 97 124 (2.72) (3.51)
(11.93) 5.16 2000 428 101 99 16.10 15.23 (9.10) 5.98
The U.S. dollar is the currency used to express performance.
Returns are expressed as percentages and are presented gross and
net of management fees and include the reinvestment of all income.
Net of fee performance was calculated using actual management fees.
The annual Composite dispersion presented is an asset-weighted
standard deviation calculated for the accounts in the Composite the
entire year. Policies for valuing portfolios, calculating
performance, and preparing compliant presentations are available
upon request.
* Three-Year Annualized Standard Deviation is a measure of
volatility, calculated by taking the standard deviation of 36
monthly returns, then multiplying the result by the square root of
12 to annualize it. Since standard deviation measures the
dispersion of a set of numbers from its mean, higher results
indicate more variation in monthly returns over the trailing three
years.
** Composite Dispersion is a measure of the similarity of
returns among accounts in the Composite. It is the standard
deviation of the annual returns for all accounts which were in the
Composite for the entire year.
*** American Depositary Receipts (ADRs) are shares that trade in
U.S. markets, but represent shares of a foreign company. A bank
(the depository) purchases a number of the foreign shares and holds
them in a trust or similar account; in turn, the bank issues shares
tradable in the U.S. that represent an interest in the foreign
company. The ratio of ADRs to foreign shares is set by the bank.
ADRs do not mitigate currency risk, but can reduce transaction
costs and simplify trading compared to buying the local shares in
the foreign markets.
SMA Facts are presented as supplemental information.
of both M.I.T. and the Harvard Business School.
Copyright 2015 Muhlenkamp & Company, Inc. All Rights
Reserved.
Investment AdviserMuhlenkamp & Company, Inc.5000 Stonewood
Drive, Suite 300Wexford, PA
15090-8395(877)[email protected]
www.muhlenkamp.com
Muhlenkamp & Company serves individual and institutional
investors through our no-load mutual fund and separately managed
accounts.
-
February 19, 2015 Amended Transcript Tony Muhlenkamp, President
Ron Muhlenkamp, Founder and Portfolio Manager Jeff Muhlenkamp,
Investment Analyst and Co-Manager
Tony
Good afternoon, everyone. Thank you for joining us today as were
going to talk about some of the things we are
seeing in the markets and economy, and discuss how were
investing your money. With me, of course, I have Ron
and Jeff. Ron is portfolio manager, Jeff is co-manager, and Ill
be asking them questions and walking them through
sharing some ideas with us.
Before we start, there are a couple of housekeeping items that I
want to address. Everyone should have received a
copy of Muhlenkamp Memorandum #113 by now; if not, you can go to
our website and download a copy. The website
is new, brand new as of the first of January, so were interested
in any feedback you have, ideas on what we can do
with it further, what you like, what youd like to see changed.
Were looking for feedback, so Id appreciate any time
youd spend on that.
Finally, we ask you to mark your calendar for our next seminar.
Its scheduled for May 5. Were hoping if youre
nearby, you can join us at the live event; otherwise, there will
be a webcast that you can attend and view over the
Internet. Well keep you posted on the details as we get closer.
But if youre anything like me, you need to get it on
the calendar early in order to make it. As usual, if you have
any questions on any of these things, please give us a call
or send us an email. Were happy to talk with you.
With that taken care of, Ron, I wanted to start with the
question that Ive been receiving from clients: performance of
2014. Some of our portfolios were flat for the year and some did
well; on average, we underperformed, which we
found disappointing. What happened?
-
February 19, 2015 Conference Call Page 2 Ron
2014 was a mixed bag. Large U.S. stocks, including the S&P
500 Index1 did well, up about 13% or so. Small U.S.
stocks did rather poorly. International stocks did poorly. Bonds
recovered what they lost in 2013.
If youve been coming to our seminars the last couple years,
reading our publications, and paying attention to what
we talk about, you know weve been talking about energy and
biotech. In 2014, biotech worked well for us; Ill say
more about that in a moment. Energy did poorly. We had been
impressed with the spread in the price of energy
between liquid energy, that is crude oil, and gaseous energy,
that is natural gas. We hosted a seminar In November
2013 [Natural Gas: An Energy Game Changer] and wrote various
essays on it. We believed that the price spread
(between crude oil and natural gas on an energy equivalent
basis) had to close and that it would close gradually
over a period of several years. And, in fact, we were saying
that we were in the process of cutting the price of energy
in half in the U.S. in the current decade.
What we thought would take a few years in terms of bringing the
price of crude oil down, primarily through
substitution of natural gas which was cheaper, occurred in the
last six months of 2014. We believe it was helped by
Saudi Arabia changing its mindset as to what level it would try
to support the price of crude. They basically took the
stops off. The price of crude oil got cut in half.
We were not invested in oil stocks. We were invested in energy
stocks that we thought would benefit from a shift
from crude oil to natural gas. Some of them were industrial
stocks, some of them were natural gas stocks themselves,
and we got hit harder than we ever thought we would, given that
that was going on. So, we got hurt by that, and that
was probably about two-thirds of our disappointing performance
relative to the S&P 500 Index in 2014.
At current prices, frankly, energy stocks are starting to look
interesting again, but they hurt us badly in the second
half of 2014.
The lower price of crude oil did help our airlines. We own a
number of airline stocks, and the cost of fuel is a major
cost center for airlines. It did help those stocks, but it was
not enough to offset what we had in energy stocks.
Biotech for the year did well. People regularly ask us, What are
the drivers behind biotech? Everybody's familiar
with the demographics. That is, baby boomers like me are getting
older and there are a lot of us, but theres also
amazing things going on within the industry in terms of new
drugs and new protocols.
1 S&P 500 Index is a widely recognized, unmanaged index of
common stock prices. The S&P 500 Index is weighted by market
value and its performance is thought to be representative of the
stock market as a whole. You cannot invest directly in an
index.
-
February 19, 2015 Conference Call Page 3
As an example, 10 or 15 years ago, HIV was a death sentence.
Today, its a managed disease. That is, you take a
number of pills on a daily basis, and you can control the
disease. As recently as two or three years ago, Hepatitis C
was a managed disease. Today theres a cure, literally a cure.
The first cure out is by Gilead, which we happen to
own, and its done well for us; they now have a competitor
brought out by AbbVie. But when you go from a
managed disease to a cure on something as broadly suffered from
as Hepatitis C, thats a big thing. So we continue
to look, always, for individual companies that are doing well.
But if we can package it within a broader theme thats
doing well, that helps us have confidence in terms of what were
doing.
That, in a nutshell, is what happened in 2014.
I wanted to say one more thing. As you know, 2013 was a very
strong year. In 2014, we did poorly, the markets did
well, but we took a lot of capital gains. And people have asked
how we can have capital gains distributions in a year
when we did very little. The answer comes back to farming or
gardening. You want to plant in the springtime.
During the growing season you want to let things grow. Its after
they quit growing that you want to harvest some.
Well, the growth that we had, literally, from 09 to
Tony
First half of 2104
Ron
Yes, up to the middle half of 2014 things were growing
nicely.
Early on, in the earlier years, we were able to offset capital
gains with realized capital losses, but were about to tell
you that, today, we think stocks are fully priced, so were
harvesting investments. Harvesting means thats the time
you realize the gains. And the way the tax laws are writtenand
the IRS may want to change thisbut the way the
tax laws are written, you dont realize the gain and pay the tax
until you sell the stock. And weve been net sellers of
some stocks, so we ended up in 2014 with taxable gains, which,
of course, is costing people in their tax bills in
2015.
Our underlying goal is always to try to get long-term capital
gains as opposed to ordinary income or short-term
gains. Simply put, its a lower tax rate; and that we were
successful in doing. The second thing we tried to do is we try
to delay the realization of the long-term gains so that we delay
the tax bill. And, in fact, we did that rather well, too.
-
February 19, 2015 Conference Call Page 4 We tried to let people
know this was coming This is harvesting the crops that we planted,
in some cases as long as
five or six years ago. But those are always our goals: To make
it long-term capital gains at the lower rate, and to delay
it as long as it makes sense from an investment viewpoint. Thats
my sum and summary of what happened last year.
Tony
Before I move forward to what youre seeing today, I wanted to
change your phrasing. You said, It so happens we
owned Gilead. I just wanted to make it clear that that was a
deliberate decision on our part. That was a result of a
lot of work and some good work on our part. It wasnt just
happenstance.
Ron
Thats right.
Tony
So with that as a backdrop, Im going to walk you through some
sectors. You had mentioned energy looks
interesting. Tell me more, elaborate on that.
Ron
Simply, the prices have been cut in half. Energy remains a
useful commodity, and when prices get cheap, they look
more interesting to us than when they were not cheap.
Tony
You say prices of energy companies, [you mean] the stocks of
those companies.
Ron
Yes. In many cases, the price of crude got cut in half. The
price of natural gas probably fell by 30% or so. A lot of the
companies that produce these products got hit more than that.
The big heavies, for instance, an Exxon did not. But a
lot of the littler companies got hit more than that. So where
their markets remain viable and their business remains
good, the prices are far lower than they were.
As you know, we always want to own good companies at cheap
prices. We think weve identified good companies;
for a lot of them, the prices are far cheaper than they were six
months ago.
-
February 19, 2015 Conference Call Page 5 Tony
Are you comfortable talking about whether those companies are
still the ones we owned a year ago, or are you
finding different names and different opportunities?
Ron
A mix of both. Someits the same companies. Othersthe
fundamentals of their business have changed. People
know that there are a number of plans on the books to build LNG
export plants.
Tony
Liquefied natural gas.
Ron
Liquefied natural gas. And theres probably, I believe, five or
six [LNG export plants] that have been approved,
and theres another dozen that are planned. With the current
price of crude oil, rather than a year ago price of crude
oil, my guess is fewer of those will be built. The people who
are in the business of building those plants dont face as
much demand for their services as they did for the contracts
they signed six months ago.
Its funny how long-term contracts get canceled when the
economics change.
Tony
Short-term economics change.
Ron
In that case, its been a difference. In terms of the amount of
natural gas used by homeowners or by utilities, those
things are ongoing, so it becomes simply a matter of price. Weve
been trying to say for several years that we were
betting on the volumes of natural gas used, not the price of
natural gas. In the last six months, the volumes have
not come down, but the prices have come down.
Tony
And enough to change the fundamentals on a number of these
companies?
Ron
Yes.
-
February 19, 2015 Conference Call Page 6 Tony
So let me segue from there. You talked about the impact of
energy [prices] on airlines. Is that the only argumentary
driver behind the airlines that weve owned? Where do we stand on
that today?
Ron
Thats helped them big time in the last six months as the price
of crude came down. The background reason we
owned airlines was that theyve changed; the managers of the
business have changed what they do. Historically,
anytime airlines started making cash flow, theyd expand the
fleetgo buy new airplanes and fly more routes.
Theyve gotten better at not doing that. Theyre still buying new
airplanes and retiring old airplanes, but they are
taking their cash flow and paying down debt rather than
expanding the fleet.
In the last six months, airline stocks have benefited big time
from the price of crude coming down. But the last three
or four years, theyve benefited gradually from the fact that the
managers are running the business differently than
they used to. Both of those are pluses.
Tony
And those continue to be true?
Ron
That continues to be true. The history of the industry says that
most airline managers, historically, have been retired
pilots or old pilots, and they love to buy airplanes. So were
keeping an eye on that because thats been the history of
the industry.
Tony
Thats been a non-profitable trend.
Ron
Right. Five years ago they swore they werent going to do that
anymore. So far, theyve been pretty disciplined about
that. Very few of our decisions are 95% versus 5%. Its mostly
55% and 45% and then you monitor to see whether
those things remain true.
Tony
Speaking of monitoring, energy/crude is certainly huge. Natural
gas is huge. Talk chemical companies. Youve
mentioned those in the past. What are you seeing...how has this
impacted themare there opportunities there?
-
February 19, 2015 Conference Call Page 7 Ron
We think so. Weve begun spending some money in chemical
companies. I cant yet disclose a whole lot because
were not done.
Tony
Fair enough. Describe chemical companies to me. I think of
companies like DOW Chemical or DuPont. What fits
into that sector? Are those the only ones?
Ron
When you get natural gas out of the ground, its called methane.
Then you put it through a cracker plant, and it
becomes ethane; and then you put it through another process, and
it becomes ethylene; and then it becomes
polyethylene; and then it becomes plastic. When people look at
plastic, Im looking at a plastic Coke bottle sitting
on my deskplastics are all over the place. Very few people know
the names of the companies in the middle of that
stream.
Tony
They may know the beginning names. They know the ending names.
But the three or four names in between
Ron
You may know DuPont and some of the other guys, but most of the
chemical companies dont have names that are
well known to the consuming public.
Tony
Consumer brand types.
Ron
But thats where the focus has been. What remains true is that
many of the chemical plants in this country use
natural gas as a feedstock. Many of the plants in Europe use
crude oil as a feedstock. And when that [price] gap was
huge, it was a great benefit to us. The gap is less, but its
still sizeable. So that whole industry is facing lower costs;
i.e. energy to run the plants, and lower cost of the feedstock
to make the products.
Where those stocks have dropped more than we think is justified
by the change in the prices of crude oil and natural
gas, they look interesting to us. When prices get cut in half,
you find more value than what it was otherwise. Any
shopper will tell you that.
-
February 19, 2015 Conference Call Page 8
Tony
Remind me to tell you about [my wife] Inger buying a piano at
auction one of these days. Thats where I learned my
lesson. Im going to shift from energy related [stocks] to
healthcare which did work well for us in 2014. What are we
seeing there? Do the drivers continue?
Ron
The drivers continue. Anybody who gets a chance to attend a
lecture on whats happening in healthcare, I would
encourage you to do it. What theyre doing is truly game
changing, life changing. Tammy Neff [Investment Analyst]
did a nice presentation at our last seminar [Game Changers in
Biomedical Science]. We have that presentation captured
in a booklet. Its the best primer I can give you on some of
these advances.
Tony
We even have a video [archive] on our website if Im not
mistaken.
Ron
Yes, I believe it is. But the long and short of it is, those
dynamics remain and the stocks have done well for us, but
the companies have done better.
Tony
That leads to my next question...
Ron
When your sales were up 50% to 100% and your earnings double
because you found a cure for Hepatitis C, thats of
ongoing value and we think those stocks are remaining modestly
priced, so we still own them.
Tony
So, value can come about in a couple of ways. You can maintain
your business and the price of your stock can get
cut in half, theres a value; or the price of the stock can go
up, but your business can improveProbability, revenues,
sales, and so on, and it remains a decent [stock] value.
Ron
Yes.
-
February 19, 2015 Conference Call Page 9 Tony
But just because the price hasnt gotten cut, doesnt mean its no
longer a value in the case of our healthcare
[companies]. Am I following you on that?
Ron
Either one can make you money. If you can get them both, thats
when they work real well.
Tony
Better yet.
And what about big tech? I dont know if weve owned any big tech
or how its working for us.
Ron
We do. Apple is big tech. Microsoft is big tech. Oracle is big
tech.
Tony
Im hearing Apple is going to set record-breaking market caps.2
Theres speculation out there.
Ron
They are. Apple, in the marketplace, is worth more than IBM, or
General Motors, or Exxon, or Walmart, or other
giants in the industry. Apples [nearly] worth more than all of
that. The whole question is can they continue to bring
out new game-changing products that the public loves and is
willing to pay for. At the current [stock] price, we think
that remains a good holding, so its something we hold.
Tony
What is Apples price in terms of P/E [price-to-earnings ratio]3?
Any idea?
Ron
Next years P/E on 15 earnings is probably 14 or 15.
2 Capitalization, often referred to as Market Cap, is the total
dollar market value of all of a company's outstanding shares.
Example: if a company has 25 million shares outstanding, each with
a share price of $100, the company's market capitalization is $2.5
billion (25,000,000 x $100 per share). This figure is often used to
rank a company's size, as opposed to sales or total asset figures.
Note: Small Cap is often $250 million to $1 billion capitalization;
Mid Cap is often $1 billion to $5 billion capitalization; Large Cap
is often over $5 billion capitalization. 3 Price-to-Earnings (P/E)
is the current price of a stock divided by the (trailing) 12 months
earnings per share.
-
February 19, 2015 Conference Call Page 10 Tony
On estimated 2015 earnings?
Ron
Yes. Some people say, Well, gee, it [Apples stock] has run up so
much. Well, if they continue to bring out products
that your daughters and my grandkids want to own, in fact,
everybody wants to own I get laughed at. I still own a
flip phone. People tell me there are things out there called
iPhone, something like that. Not everyone yet has an
iPhone.
Jeff
So the same market for healthcare is the remaining market for
iPhones, is that what youre telling us, Ron?
Ron
Yes. Something like that. All of those baby boomers remain in
the market for iPhones
Jeff
So, you can get a hip replacement and an iPhone in the same
year!
Ron
Something like that.
Tony
I did notice that you had an iPad floating around, so youre not
completely out of that Apple loop.
So let me move into the broader market because you mentioned
Apples selling at something like 14, 15 times 2015
earnings. Whats the market, on average, priced to do, using the
S&P 500 or the Wilshire 50004?
Ron
Im going to start with the economy. Weve been hearing for five
years that the economy was going to grow at 3%
plus. And for the last four years, each year it came out at
about 2 percent. Were hearing once again, that in 2015
people think its going to grow at over 3 percent. My guess is it
will be 2%-2 percent. One of the things that
4 The Wilshire 5000 Total Market Index, or more simply the
Wilshire 5000, is a market-capitalization-weighted index of the
market value of all stocks actively traded in the United States.
The index is intended to measure the performance of most publicly
traded companies headquartered in the United States, with readily
available price data, (Bulletin Board/penny stocks and stocks of
extremely small companies are excluded). It can be tracked by
following the ticker W5000.
-
February 19, 2015 Conference Call Page 11 should help in 15 is
the price of energys down. So far, that seems to have helped
consumer confidence, but its
hard to find that its helped consumer spending very much. It
looks like people are putting into savings most of
what theyre not spending, what theyre saving on the price of
gasoline.
If the economy grows at 2% and inflation is not a problem, we
think stocks, which on average are priced about 18
times earnings, are fully priced. In 09, they were dirt cheap
and over the last few years theyve caught up to what we
think is now fully priced. Last year, on average, sales of
companies in the U.S. and in the S&P 500, particularly the
big companies, grew about 4% and profits grew about 10
percent.
In big companies like those in the S&P 500, about one-third
of their earnings come from overseas. With all thats
going on financially, and we really dont have time to cover that
at the moment, but suffice it to say that the dollar
has been stronger versus the euro, or the yen, or the Chinese
renminbi. So when companies, even if they dont bring
their money back, when they report their earnings that they
earned in foreign lands When the dollar is stronger, it
actually reduces the amount that theyve earned in dollars
because the dollar is stronger. And were starting to see
that in reports for the 4th quarter.
I said, last year, sales were on the order of 4 percent. Going
forward, my guess is theyre going to be on the order of
2-3 percent. Last years profits increased on the order of 10
percent. Going forward, my guess is thats going to be
more like 5 percent. So the growth that weve had in corporate
earnings, reported in dollars, is leveling off. We dont
see a recession, certainly, not in the U.S., but Europes
flirting with one and China remains slow. All these things
weve been talking about for the last five years, none of them
have been solved. Jeff may want to say a little bit about
Greece
Tony
Well get to that in a second, when you say fully priced
Ron
Yes. On average, stocks are fully priced, and were finding it
harder to find Were still finding good companies, but
most of them are fully priced. I dont want to pay sticker price
for a Buick or a Cadillac, I want to buy Buicks and
Cadillacs at Chevy prices. Were not finding Chevy prices any
more to the extent that we did.
Hence, weve harvested some of the companies weve owned, weve got
a little more cash than weve had, and were
less enthused going forward. So you put all of that together,
and it says to me that things are fully priced.
-
February 19, 2015 Conference Call Page 12 Tony
Fully priced implies what for returns on averageany ideas, or
hard to say?
Ron
I can tell you that over the next five years the prices wont go
up as much as they did the last five years, but Id have
to do a whole essay on how we determine what we think is fair.
[To learn more, read Why the Market Went Down.]
All Im telling you is the Buicks, and the Cadillacs, and the
Chevys are fully priced. Its hard to find good values
anymore and what that means is, theres less of a cushion. If
values are moving up at 10% per year, thats a lot bigger
cushion than when theyre moving up at 5%, because the prices
will swing around those values, and they can do
plus or minus 10% for no reason.
If youve ever been to an auction, you know that over time prices
make sense, but on any given dayI went to an
auction on Saturday when it was 12 degrees outside and the wind
was blowing sideways, great time to buy at an
auction because the crowd was small.
Tony
Nobody was there.
Ron
That remains true, but weve gotten to the point where companies
are now fully priced, and its hard to see that
theres going to be good surprises on the upside. We have a whole
litany of things that can be bad surprises on the
downside. Those remain true.
Tony
Let me sum that up. You were talking about on average. For
example, I cant tell you that you can Buy the market or
the sectors we like, but within the market, within sectors, were
looking for companies that are, in fact, doing better
than average, selling for less than theyre worth. Where were
finding them, we have opportunities to invest.
Ron
We always look for that stock pickers market. Its just that were
finding fewer opportunities than we did.
It was easy six years ago. It was a stomach problem six years
ago; it wasnt a head problem. You find all sorts of
opportunities and people say, Oh, but everythings going to h*ll
in a hand basket because they were extrapolating
what happened in the prior couple of years. Today, the head
problem says; its getting tough to find companies.
-
February 19, 2015 Conference Call Page 13 One shareholder asked
us about bonds. Well, the ten-year [Treasury] is up 2 percent.5 The
only reason to own bonds
is if you think interest rates are going downand we dont think
they areand the Fed has just told us that theyre
probably going to start raising interest rates in mid-year. So
if you dont trust stocks, put the money in cash. Weve
got more cash than weve had in some time. And its probably going
to build. We dont own bonds here because we
dont think theyre good value. People think bonds are safe
because theyre guaranteed; well bonds are only safe
when interest rates dont go up. If interest rates go up, bond
prices go down. Thats an arithmetic certainty.
Tony
So with here in the U.S. [with stocks] being fully priced, Jeff,
what are we seeing overseas? Are there opportunities
there? Is there an overlay there? How is that impacting?
Jeff
Well start with the opportunity. Mario Draghi, who is the head
of the European Central Bank [ECB], just
announced a quantitative easing program6a program where the ECB
is going to buy European bonds. Thats very
similar to what Japan has done, and to what the United States
has done. In both Japan and the United States, it
didnt seem to help the economy much, but it did seem to goose
the stock market pretty well. So thats interesting to
us.
The European economy remains fairly stagnant. They have a debt
problem, particularly in the southern countries in
Europe. Right now, Greece is back in the headlines. The new
Greek government ran on a platform of essentially
repudiating their debt, [that is] refusing to pay it. They have
made that case to their lenders. The lenders have said
thats nice, but we wont lend you any more money if you do that.
And so theyre going through a bit of a difficult
negotiation right now; its hard to predict what the outcome is
going to be. It looks to me like the markets are
assuming that that gets resolvedand thats probably the odds-on
bet, but that doesnt make it a certainty. And it
doesnt mean that if Greece, in fact, defaults on its debts, that
that doesnt create a problem outside of Europe. We
think thats possible, if not probable.
The other thing that youve seen, of course, with the price of
crude oil coming down Anybody who produces
crude oil is now getting dramatically less in revenue than they
used to. The poster child for that is Russia. Russia is a
5 On February 19, 2015, the interest rate on the 10-Year
Treasury was 2.11%; source: www.treasury.gov. 6 Quantitative Easing
(QE) is a government monetary policy used to increase the money
supply by buying government securities or other securities from the
market. Quantitative easing increases the money supply by flooding
financial institutions with capital in an effort to promote
increased lending and liquidity. Central banks tend to use
quantitative easing when interest rates have already been lowered
to near 0% levels and have failed to produce the desired effect.
The major risk of quantitative easing is that although more money
is floating around, there is still a fixed amount of goods for
sale. This may eventually lead to higher prices or inflation.
-
February 19, 2015 Conference Call Page 14 big exporter of crude
oil. Theyre also a big borrower of dollars. So when they were
selling their crude oil for $100 a
barrel, they were easily able to meet the interest payments on
their loans, on their dollar loans. At $50 a barrel, that
gets a little tougher.
When you throw in that theyre engaged in a shooting war in the
Ukraine, which has prompted the western
countries to sanction themwhich means nobodys allowed to lend
them money againnot only are they having
difficulties paying their existing interest, but they also can't
rollover their debt. So Russia and the ruble have been
out of the headlines for about three weeks, but frankly, the
problem remains, and we may see that resurface.
So youve got some threats out of Europe; youve got some
potential opportunities in Europe. When you look over
on the other side of the globe, frankly, I think Japan remains
in a hazardous position. Theyre trying to solve their
debt problem by printing money. It hasnt worked for them yet. I
dont expect it will. The risk is that it enters a rapid
decline in terms of the people starting to flee the yen because
they dont think it holds its value very well.
And in China, theyre trying to restructure their economy. The
drivers of their growth in the last ten years have pretty
much run their course. Theyre looking to reorient, letting the
consumer drive their growth going forward. So that
gives them a period of transition, and the risk is that some of
the debts theyve incurred internally become
unsupportable and they end up defaulting. That has repercussions
outside of the country.
China remains an interesting place from the perspective of you
have a billion people moving up the prosperity
ladder at a pretty good clip. It remains a hazardous place
because theyve incurred a lot of debt recently, which they
havent quite digested yet.
Thats how I would characterize things on a global basis, what
Ive seen in terms of threats and opportunities.
Ron
Mixed bag.
Tony
Let me shift gears for a little bit here and ask you to talk
about one or two of the companies that are in our portfolio.
Lets remain focused on what we call our top-ten holdings,
recognizing first of all, the way they got there was theyve
done well. So its not necessarily were out buying these
[companies] todayIve got to qualify this for the people
on the line.
-
February 19, 2015 Conference Call Page 15 Plus, every now and
then, we get an email or a phone call from someone asking about X,
Y, and Z company that was
mentioned at a seminarI bought it and its either done great or
done badly, but what should I do with it now?
So were always a little hesitant to get sucked into that because
we build portfolios knowing that some percentage of
what we do is not going to work. But, Id like to illustrate the
process of how the research and the method led to
some names that have, in fact, worked their way up into our
portfolio.
Jeff
To begin, at least four times a year, we scan through 3,000
companies. Thats our primary idea-generating activity.
So, we periodically take a pretty decent look at almost every
public company in the United States and then, in
addition to that, there are any number of inquiries into other
companies that arent on that listwhether theyre
international, or simply not contained in that kind of database.
Were continually scanning in a very methodical
fashion for companies that look interesting. And when I say they
look interesting, were really looking at the
fundamental data. Were looking at what are their earnings? What
is their price to book7? What do their revenues
look like? What are projections for those things? Those sorts of
things.
When you find one that looks interesting, then you start
digging, because you have to understand whats going on
behind the numbers. You dont select a company simply because the
numbers look good; they dont paint the full
picture of whats going on. Its really just a start that piques
your attention, and then you start digging to see what
youve really got.
In 2014, two companies that we have released [to the SEC] that
we owned, but are not in the top ten, include Arris
and ON Semiconductors.
Arris makes communications equipment primarily for the telecoms
and the cable companies. For instance, your
cable box on top of your TVthat may well be an Arris product.
Theres a new product cycle where now theyre
allowing you to receive the Internet over top of that box, over
top of your cable service.
When we were scanning, Arris looked interesting. It was selling
at about 12 times earnings and it had roughly an
18% ROE [return on shareholder equity]8, which meets our
screening criteria. So we started digging: Where are they
7 Price-to-Book (P/B) is the market capitalization divided by
the owners equity in the business. Note that P/B equals the
price-to-earnings ratio (P/E) x (times) return on equity (ROE). 8
Return on Equity (ROE) is a companys net income (earnings) divided
by the owners equity in the business (Book Value); ROE =
Earnings/Book Value. This percentage indicates company
profitability or how efficiently a company is using its equity
capital.
-
February 19, 2015 Conference Call Page 16 at in their product
cycle? Whats going on with their customers? What do we think the
near-term or mid-term
prospects for their business are? And, frankly, those all looked
pretty good.
So, Arris caught our attention. We did some additional research.
To find out exactly whats happening with a
company that looked interesting to us, we bought some Arris
stock back in May and, frankly, it hasnt done much
for us one way or the other just yet. Its not in our top ten,
but it is a holding of ours.
A similar portfolio holding is ON Semiconductors. Theyre
interested in producing semiconductors that facilitate
machine vision. So, as you automate production lines, and
machines become more like computers and less like a
couple of hydraulic arms and simple mechanical devices, the
machine needs to be aware of its surroundings. Thats
kind of like what machine vision is. ON Semiconductor wants to
dominate that space, and theyve made a couple of
acquisitions to enable them to do that.
At the time we picked up on them back in August, they were
selling at about 11 times earnings, and had an ROE a
little bit north of 20 percent. As we dug into what their
business looked like, what the near- and mid-term prospects
for the business looked like was that getting better or worsewe
concluded it was likely to get better and, so far,
that ones worked out pretty well for us. Were up something like
20% since weve bought ON Semiconductor six
months ago.
Im going to shift gears a little bit from how we decided on some
of last years buys, to how we decided on some of
last years sales. Youve probably heard us talk about Alliance
Data Systems [ADS] in the past. It is one of our largest
holdings, and has done extraordinarily well for us. What
Alliance Data does, is they run private label credit cards,
and they run rewards systems for different companies. They take
the data that they accumulate by doing those
activities and turn it into focused marketing campaigns for the
very same customers. So its a vertically integrated
data acquisition and use company. We picked them up back in
2009. Ron, you want to talk about ADS?
Ron
Well, ADS was doing good things as a company, and they were also
doing good things in terms of managing their
own assets. When [stock] prices got cheap, we talked with the
chief executive. He said, Everything we can see looks
pretty good, so they bought in a third of their own stock at the
bottom. We always look for people who are good at
running the companies. If you can find someone whos also pretty
good at allocating capitalis buying it when its
cheapthat helps you big time. Its done wondrous things for us
and simply became a very large holding.
Tony
As a percentage of our portfolio.
-
February 19, 2015 Conference Call Page 17 Ron
Yes, as a percentage of our portfolio. We can no longer on the
numbers call it [ADS stock] cheap. Everything theyre
doing is fine, so were happy to ride it. But, we cut back on the
ownership of it to some extent last year, just because
we no longer wanted to make an outsized bet that they were
cheap. They were still good; they were just no longer
cheap.
Jeff
There were some unique things about what was happening in ADS
early in the year. They had a fairly high short
interest9 that cleared itself up by about mid-year and we wanted
to wait until the short was covered. We thought it
would be beneficial. It worked out for us. So about the time the
shorts covered their positions, we reduced our
holdings a little bit. Thats one of the ways in which we
sell.
The other company I would like to mention is Asbury Automotive
Group, an auto retailer. We bought Asbury in the
middle of the recession when, in the U.S., about nine million
cars a year were being sold annually. We thought
normal was more like 15 million to 17 million cars a year, so
Asbury was selling quite cheaply.
Our expectation was that the sales of autos would return to 15
million to 17 million cars [annually]. That happened.
Our expectation was that the profitability of those auto
retailers would improve, not only because theyre selling
more carsand that returns to normal, but also because there are
fewer auto retailers. The OEMs [original
equipment manufacturers]10 shut down some of their franchises.
That, in fact, has happened.
So the things that we expected to happen when we bought Asbury
Automotive have come to fruition. Were not
seeing a follow-on that will generate the kind of outsized
returns going forward that we saw when we first bought it,
so weve been reducing that position a little bit. Again, the
idea was: the sale of the cars got hit [during the
recession]; that would recover, and auto retailers would recover
with it. Thats happened, but we dont see the kinds
of outsized returns going forward, so weve begun to harvest that
holding.
Ron
Just as a summary, of the four stocks that Jeff has mentioned,
each of the four companies does about a 20% ROE.
The two we bought recently are selling about 11 times earnings
[Arris and ON Semiconductors]. The two weve
9 Short selling is the opposite of buying stocks. It is the
selling of a security that the seller does not own, done in the
hope that the price will fall. 10 OEMs are companies that buy a
product and then incorporate or re-brand it into a new product
under its own name.
-
February 19, 2015 Conference Call Page 18 lightened up on
recently are selling about 20 times earnings [ADS and Asbury
Automotive]. All are good companies,
but theres a price at which well be heavy, and another price at
which well lighten up.
Tony
Theres a price at which well buy and a price at which well
sell.
Ron
Amen.
Tony
And on that note Im going to ask the Moderator to see if theres
anyone that has questions for us.
Moderator
Thank you. Our first question comes from Mr. Hunter. Please go
ahead.
Mr. Hunter
Hi Ron and team. I noticed that weve got some financial holdings
and wondering, in general, what you think about
bank profitability.
Ron
Im trying to remember when it was that Draghi in Europe said
they would do whatever was necessary.
Jeff
The bumblebee speech in 201211.
Ron
Yes.
11 The euro is like a bumblebee. This is a mystery of nature
because it shouldnt fly but instead it does. So the euro was a
bumblebee that flew very well for several years. And nowand I think
people ask how come?probably there was something in the atmosphere,
in the air, that made the bumblebee fly. Now something must have
changed in the air, and we know what, after the financial crisis.
The bumblebee would have to graduate to a real bee. And thats what
its doing Within our mandate, the ECB is ready to do whatever it
takes to preserve the euro. And believe me, it will be enough.
Speech by Mario Draghi at the Global Investment Conference in
London on July 26, 2012.
-
February 19, 2015 Conference Call Page 19 Coming off of 2009,
much of the contagion was through the financial markets. And,
frankly, our fear in going
forward was that the way Europe might affect the U.S. would be
financialfar more than I would call trade or
fundamentals. When Draghi said the ECB would do whatever was
necessary, we thought things are no longer getting
worse in Europe. The leveraged bet or the aggressive bet would
have been to buy European banks. We didnt have
the guts to do that. We did buy JP Morgan and Citigroup.
Weve recently sold Citigroup because [among international banks]
there will be less leverage than there used to be.
The regs say they have to keep more assets and equity for their
stock. So, we are no longer buyers of international
banks. Domestic banks we really dont own because we havent found
enough value there to do it. We had moved
into international banks; were now net moving away We still own
some in JP Morgan.
We own some financials like State Street, which is a custodian
bank, and Lincoln National, which is on the
insurance side. So we own financials on the custodian or
insurance side, not the banking side.
Tony
Are you still bullish on insurance companies because they did
such a splendid job of selling annuities? Now, Im not
a proponent of my clients buying them but, is that a factor
still?
Ron
An insurance company is basically a holder of bonds. So far,
thats been a pretty good business. In fact, one of the
groupswe always monitor who does better in earnings than
expected. The re-insurance companies had a great year
last year because there were fewer catastrophes, property
casualty catastrophes, than normal.
Tony
They collected the premiums and didnt have to make a payout.
Ron
Yes. So, thats got our attention. But its also a big swingif you
have a snowstorm or a hurricane, it can reverse that
big time. But the short answer to Mr. Hunters question is: we
own less financials then we did, and were finding
fewer values there than we had several years ago.
Mr. Hunter
Ron, along that same vein, could you speak just for a moment to
your heavier cash exposureand I appreciate you
looking to buy Cadillacs at Chevy prices and that its harder to
do, and I would agree with you on that. Whats your
-
February 19, 2015 Conference Call Page 20 thought on dividends
in that interim, in terms of at least putting the cash to more
productive use than a money
market rate?
Ron
Well, the difficulty with dividends I didnt get to the Money
Show in Florida this year, but the last two years, the
public was asking, How can we get more yield out of our
portfolio? I can find zero utilities that are cheap.
Everything that is sold on the basis of providing income, with
the possible exception of muni bonds If I had
someone who insisted they needed it, what the IRS calls income,
there may be room there [among municial
bonds]. But man, I cant find it among the people who talk about
having yields.
We mentioned a little bit earlier that we didnt particularly
like bonds. You probably noticed in the last few months,
both Apple and Microsoft, which are cash flow machines, are
selling bonds to buy in their own stock. At current
interest rates, theyre literally selling bonds to buy in their
own stock. What Ive learned over the years is, when the
corporate management is selling bonds to buy their own stock,
you want to be on the side of the management, not
the public.
Obviously somebody out there is willing to sell their stock back
to them and is buying their bonds. My guess is, its
pension funds. But, at current interest rates, companies that
have the choice; they dont need to raise money in any
case, but theyve raised billions by selling bonds and buying in
stock. These are not dumb people. Wed rather be on
their side of the equation than the opposite side.
Mr. Hunter
My fear is, sitting on cash. Im looking for value. You and Ive
metand I believe in you guys. Its just a case of really
wanting to make sure Im not missing out while youre looking.
Even if the market goes up say 5% instead of 10%
and I agree with you on the fact that its an unsustainable
growthI dont want to miss out on that while were on
the sidelines waiting to find the values.
Ron
Historically, if you cant find something good to buy, if you
keep your money in your pocket, it will come along
fairly soon.
Mr. Hunter
I count on you, Ron
-
February 19, 2015 Conference Call Page 21 Ron
The reason to own cash is not to make money. The reason to own
cash is to have it available whenever somebody
else wants it. That is when forced selling takes place, which
means prices are cheaper.
Jeff
And having said that, were probably about 10% cash position.
Ron
Right about 10%.
Ron
If I can find a company with a 20% ROE, selling at 11 times
earningsand we think it can sustain the
profitabilitywe will spend some cash.
Mr. Hunter
Perfect.
Ron
That list is getting shorter than it used to be.
Tony
Do we have anyone else in queue?
Moderator
Yes. Our next question comes from Mr. Johnson.
Mr. Johnson
In light of the prices on airline stocks, which have run up in
2014, how do you see airline stocks in 2015? Are you
buying, are you selling, are you holding, or are you reducing?
And, in 2015, how do you see Boeing, BA symbol?
Ron
Boeing we dont own. Historically, Boeing stock is tracked with
the backlogand the backlog is no longer growing.
In recent months, we added some American Airlines, which is on
the swing end of airlines, and we lightened up,
somewhat, on Delta because, frankly, theyve gotten heavy. If the
managements remained disciplined about not
-
February 19, 2015 Conference Call Page 22 adding capacity, as
long as theyre doing that, my guess is well probably hold the
stocks. Jeff, do you want to add to
that?
Jeff
For Delta and American Airlines, the story is really about
generating cash flow and doing useful things with it. It has
been true for probably 2 1/2 years for Delta. American Airlines
has been a little bit behind that. I would echo what
you say. As long as they, a) continue to generate the cash flow;
and, b) invest it wisely, as opposed to expanding
capacity, which drives down pricingI think they probably
continue to provide good value and good returns to
their shareholders.
There are two other airlines that we own, Allegiant and Spirit,
that are, frankly, growth stories. Spirit, of course, is an
ultra-low cost carrier. Allegiant isIm not even sure how you
would characterize it. They both have very different
models for how they operate their business. Theyre both very
profitable, and they both appear to have quite a few
years of growth yet ahead of them. They do not operate on the
same models that the large carriers follow, either
traditionally, or are operating now.
So, these airlines are a little bit different. We bought them
for different reasons, and were watching different things
with them. Im not disappointed yet by anything that either
Allegiant or Spirit has said theyre going to do or, in fact,
currently doing. Does that help you, sir?
Mr. Johnson
Yes, thank you.
Moderator
Our next question comes from Mr. Ferguson.
Mr. Ferguson
Hello. You said earlier that you thought the biotech sector had
been good recently, and you imply that thats going
to continue for a while. Do you see anything else is going to
get good?
Tony
The phrase stock pickers market comes to mind.
-
February 19, 2015 Conference Call Page 23 Ron
If you want to get me bullish on a five- to ten-year horizon, we
can talk about energy. If you look around you,
everything you see is just organized energy. We can talk biotech
We can talk robotics Sometimes you see
different pieces that look together, and you wake up in the
morning and you say, Son of a gun, those three different
industries are all feeding into a common theme which seems to be
going on.
Computer power has become a commodity, which is why IBM sells
dirt cheap. Ten years or fifteen years ago, we
were taught we had to own Ciscoand everybody loved it at 60
times earnings. Nobody likes it at ten times
earnings. What has been happening is the consumerkids now
running around with iPhones; who would have
thought that even ten years ago? Those types of products have
gotten so cheap that the consumer is going to find
ways of buying. If we pay attention correctly, hopefully, we can
latch onto those trends while theyre still fairly
young and have a ways to go. I can get very excited about all
those things.
Tony
The driver, as youve said before, in a relatively free economy,
the consumer is king. What we try not to do is predict
what the consumer is going to latch onto or how or why, but pay
attention enough, and recognize it as its
happening. You dont have to predict it if you can catch it
early, and you dont have to be there at the turn.
Ron
Mr. Ferguson, what youve just asked is what we spend our time
doing.
Tony
Who else do we have on the line?
Moderator
We have Mr. Brightman on the line.
Ron
Mr. Brightman, how are you doing?
Mr. Brightman
Hi, everybody. Ive got a quick question. I listened to what you
said about things getting to the point of being fully
priced. As you look forward in 2015, and maybe even into 16,
what type of yearly return would you think we could
expect on our investments with you?
-
February 19, 2015 Conference Call Page 24 Ron
When I say stocks are fully priced, the way I get to that is: If
inflation is at 2%which is what the Fed is trying to
dothen, interest rates Lets say, the long bonds should be on the
order of 4-5 percent. Its not there. For me to
put up equity money, I need to see 7-8 percent. And 7-8%, if
everything else were equal, would imply a 12 to 14 P/E
and with a little bit of growth in there. So, on average, over a
ten-year period, I would say things are priced to do
about 7-8 percent.
Historically the markets have done 7-8%, but [annualized] that
might be a plus 30 and then a minus 20. There is so
much going onand so much of the short-term market is
psychologicalthat its easier for me to put a number on
a five- to ten-year basis, than it is a one- or two-year basis.
Its like saying, In Boston, on average, they get a foot of
snow a year. That wasnt too pertinent this year.
I think its counterproductive to try to say what the price of
goods will be on a one-year basis. Over time, prices
make sense. Long-term, the markets a weighing machineI think
Warren Buffet said once upon a timewhich
means it comes out in ways that make sense. Short-term, the
markets a voting machineits a psychological
process. And, right now, there is so much going on that the
short-term changes are politicalnot economic, which
makes them harder to peg.
Ive said for years, if you can tell me what the consumer will
do, the rest of the job is pretty easy. I still dont know
whether the consumer is going to spend or save what theyre
saving on buying gasoline. Youre asking me a question
I dont have an answer forand I am also trying to warn you, if
somebody gives you an answer, dont trust it.
Tony
Lets wrap it upFinal thoughts.
Ron
Most of the big questions are the same as theyve been for five
years. I cant find any that have been solved.
The incentive for the powers that beand I dont care if its
American politicians, or European, or Asian, or whatever
they areis to continue current trends as long as possible. Part
of the problem that weve been having We had
such a serious recession in 08 and 09 because they tried not to
have one in 05 and 06. And by trying to prevent a
recession, we ended up with a bigger one. It got delayed, but it
was bigger. I hope the Fed moves back toward
economic interest rates, as opposed to political interest
rates.
-
February 19, 2015 Conference Call Page 25 Much of economicsand a
certain amount of investingis trading the short-term for the
long-term, but the
political pressure is always to avoid pain in the near-term. Ive
never seen it happen where you could avoid it
indefinitely. So far, politicians have been pretty good at
pushing it out into the future. Because of the business were
in, we sort of have to participate as long as, who was it at
Citigroup said, As long as the musics playing you have to
dance.12 Well, there comes a point where the dance isnt worth
it.
Tony
Thank you, everybody for joining us. If we raised more questions
than we answered, or didnt get to your question,
shoot us an email, give us a call, well be happy to address it,
and we look forward to hearing from you.
The opinions expressed are those of Muhlenkamp & Co. and are
not intended to be a forecast of future events, a guarantee of
future results, nor investment advice. Any tax or legal information
provided is merely a summary of our understanding and
interpretation of some of the current
income tax regulations and is not exhaustive. Investors must
consult their tax adviser or legal counsel for advice and
information concerning their particular situation. Neither the
Fund nor any of its representatives may give legal or tax
advice.
12 As long as the music is playing, youve got to get up and
dance Were still dancing. Charles O. Prince, CEO, Citigroup;
Financial Times; July 9, 2007.
Tony Muhlenkamp, PresidentRon Muhlenkamp, Founder and Portfolio
ManagerJeff Muhlenkamp, Investment Analyst and Co-Manager