Ron Muhlenkamp: Cadillac is selling cheaper than Chevy

The National Bureau of Economic Research (NBER) has now told us that the U.S. recession ended in June 2009. (In Muhlenkamp Memorandum #92 of October ’09, we said “The current recession is probably over.”) This is, of course, by NBER's own definition—which isn’t necessarily the same definition used by the public or investors.


Gross Domestic Product (GDP) growth in the U.S. has been positive since mid-2009, but is at a subdued rate as U.S. consumers continue to save 4%-5% more of their incomes than they did in the 2005-2008 period. We expect this to continue.


In the U.S., credit markets continue to mend after the seize-up in 2008-09 and, in Europe, while credit markets appear to have stabilized, we can’t yet say the crisis is over. Interestingly, while the U.S. reaction has been for the federal government to spend more money, in Europe, governments have chosen to spend less money. Both actions are resulting in public backlash, with strikes in some European countries, and political repercussions likely in the November elections in the U.S.


We’re always faced with the question, “Could something else hit the fan?” and the answer is, “Of course!” A natural candidate today is the state and local government budgets and their pension plans. Harrisburg Pennsylvania is flirting with bankruptcy which, of course, has implications for the city’s municipal bonds. Most state and local pension plans are seriously underfunded—and the funded assets they hold are largely in stocks and bonds. Yes, our pension plans own stocks and bonds. Politically, we still argue about “us” versus “them.” In reality, it is now “us” versus “us.”


So far this year, companies have continued to report good earnings and cash flows, but their stocks have shown little net gain. Investors (both individuals and pension funds) have continued to sell stocks and buy bonds, driving many stocks to bargain prices relative to interest rates. As investors, we monitor the relative attractiveness of stocks and bonds, not only from an investor perspective but from a company perspective. And the relative values are now wide enough that a number of companies are now selling bonds with the purpose of buying in their own stock. We’ve begun buying some stocks as well.


As you know, a lot of issues remain in flux. We noted a few above and will cover these and more in greater detail at our November 15 seminar.


The comments made by Ron Muhlenkamp are his opinion and are not intended to be investment advice or a forecast of future events.