Ron Muhlenkamp Fourth Quarter Letter: All About The Fed

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Ron Muhlenkamp Fourth Quarter Letter to shareholders

As reported, we had a good year in 2013.

Some of the things we’ve been talking/warning you about in recent years came to fruition in 2013. Specifically, medium- and long-term interest rates rose and commodity prices declined.

While the U.S. Federal Reserve (Fed) continues to hold short-term interest rates near zero, rates in the intermediate to longer term, (5-30 year) increased substantially during the year, driving bond prices down. Ten-Year Treasuries now yield 3% and 30-Year Treasuries now yield 4 percent.1 We do think most of the damage to bond prices has now been done, at least unless and until inflation picks up (which is a goal of the Fed).

As the Fed has held interest rates below economic levels, many investors have sought (and demanded) other sources of “income” from their investments. In Muhlenkamp Memorandum #106, we warned you about “creative sources of yield” that Wall Street was—and is—marketing in response to these demands. Some of these products confuse payout (of capital) with yield (on capital). Our warning remains current: generally speaking, yield securities did poorly in 2013, in concert with bonds.

The increase in U.S. interest rates, along with weak commodity prices and other factors, also limited gains in emerging markets, making it tough to make money there, as well. While we had not specifically warned you about this risk, we avoided the area to your (and our) benefit.

Employers continue to be squeezed by taxes, regulations, and healthcare costs; hence, potential employees continue to have trouble getting hired. Retirees and pension plans continued to be squeezed by below-normal interest rates; (refer to The Big Squeeze, available on our website).

Europe has not fixed their fundamental problems (although the passage of time helps dissipate the fears).

China continues to try to transition from a capital-driven to a consumer-driven economy, but it’s taking longer than planned. (It always does.) The China transition helps our conviction that the commodity cycle peaked a year ago.

So where does that leave us? We continue to expect slow growth in the U.S. economy, but good values are getting harder to find. We do think that long-term trends remain positive in select financials, natural gas-based energy, biotech, and some areas of U.S. manufacturing (largely based on natural gas prices). We are investing your money (and ours) accordingly.

1 As of January 6, 2014, the 10-Year Treasury yield was 2.98%; the 30-Year Treasury yield was 3.90%.  Source:

The comments made by Ron Muhlenkamp in this commentary are opinions and are not intended to be investment advice or a forecast of future events.

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