http://www.muhlenkamp.com/investment/memorandum/issue_100#section_1
Stock prices were down in the third quarter. Lack of confidence in European government finance and in the U.S. government actions—combined with signs of slowing in China—drove down prices of stocks and, by the quarter end, of commodities, as well. During the quarter, we consistently sold cyclical stocks and held increasing amounts of cash, but it wasn’t enough to protect us.
When sitting down to write this Quarterly Letter, I reread prior letters to see what has changed. I now fear I am sounding like a broken record.
In the U.S., the economy is expanding, but at a modest rate. Consumers continue to save more and to be cautious in their spending. This behavior is necessary and proper to rebuild their balance sheets. Businesses continue to run lean and to hoard cash. With modest sales growth—and facing increased taxes, regulations, and healthcare costs—businesses are reluctant to hire people, so unemployment remains high.
The following chart (Figure 1) of month-over-month employment shows that businesses were hiring until our government passed the Patient Protection and Affordable Care Act (Obamacare) on March 23, 2010, which knocked employment below the zero line. It stayed below zero until the prospect of a new Congress promised to extend current tax rates for two more years. income.” The people near retirement are cutting back on spending because, at lower interest rates, the amount of assets they need to retire is increased. The Fed is betting that extended low interest rates will encourage homeowners to refinance their mortgages and to spend the money. We expect them to refinance the mortgage and save the money as they have done recently.
In Europe, it’s been 15 months since the debt problems of Greece, Ireland, and other countries hit the headlines. Most of these countries have promised to spend less in return for “bailout” money, but with widely diverse levels of follow-through.
To date, actions taken by Ireland and Spain are being met with credibility in the bond markets; (people are willing to lend them money at reasonable rates). Actions (or promises of action) taken in Greece and Portugal are not. Figure 2, a chart of bond prices in various European countries, is a good illustration. inflation, using methods largely similar to those used by the U.S. Federal Reserve a dozen times since WW II. The U.S. Fed managed to finesse a soft landing just once; in the other cases, we had recessions of various intensities. Frankly, we doubt that China can engineer a soft landing, and we expect the parts of the world economy heavily influenced by China (like commodities and heavy machinery) to experience a slowdown or recession. One fear is that a slowdown or recession in China will drag the slow-growth U.S. economy into recession as well.
Two items that were big at the time, but which are likely to make little impact on long-term world economics are the earthquake/tsunami in Japan, and the revolutions in the Mideast, including Libya. I must say that, while I believe this statement to be true, I find it rather amazing.
One area where we are seeing significant progress is in the spending discipline of a number of U.S. states. As these states continue to get their spending more in line with revenues, this should result in a greater belief that spending disciplines can be successful—and should allow these states to serve as models for their neighbors. But this will take time.
Stock prices were down in the third quarter. Lack of confidence in European government finance and in the U.S. government actions—combined with signs of slowing in China—drove down prices of stocks and, by the quarter end, of commodities, as well. During the quarter, we consistently sold cyclical stocks and held increasing amounts of cash, but it wasn’t enough to protect us.
When sitting down to write this Quarterly Letter, I reread prior letters to see what has changed. I now fear I am sounding like a broken record.
In the U.S., the economy is expanding, but at a modest rate. Consumers continue to save more and to be cautious in their spending. This behavior is necessary and proper to rebuild their balance sheets. Businesses continue to run lean and to hoard cash. With modest sales growth—and facing increased taxes, regulations, and healthcare costs—businesses are reluctant to hire people, so unemployment remains high.
The following chart (Figure 1) of month-over-month employment shows that businesses were hiring until our government passed the Patient Protection and Affordable Care Act (Obamacare) on March 23, 2010, which knocked employment below the zero line. It stayed below zero until the prospect of a new Congress promised to extend current tax rates for two more years. income.” The people near retirement are cutting back on spending because, at lower interest rates, the amount of assets they need to retire is increased. The Fed is betting that extended low interest rates will encourage homeowners to refinance their mortgages and to spend the money. We expect them to refinance the mortgage and save the money as they have done recently.
In Europe, it’s been 15 months since the debt problems of Greece, Ireland, and other countries hit the headlines. Most of these countries have promised to spend less in return for “bailout” money, but with widely diverse levels of follow-through.
To date, actions taken by Ireland and Spain are being met with credibility in the bond markets; (people are willing to lend them money at reasonable rates). Actions (or promises of action) taken in Greece and Portugal are not. Figure 2, a chart of bond prices in various European countries, is a good illustration. inflation, using methods largely similar to those used by the U.S. Federal Reserve a dozen times since WW II. The U.S. Fed managed to finesse a soft landing just once; in the other cases, we had recessions of various intensities. Frankly, we doubt that China can engineer a soft landing, and we expect the parts of the world economy heavily influenced by China (like commodities and heavy machinery) to experience a slowdown or recession. One fear is that a slowdown or recession in China will drag the slow-growth U.S. economy into recession as well.
Two items that were big at the time, but which are likely to make little impact on long-term world economics are the earthquake/tsunami in Japan, and the revolutions in the Mideast, including Libya. I must say that, while I believe this statement to be true, I find it rather amazing.
One area where we are seeing significant progress is in the spending discipline of a number of U.S. states. As these states continue to get their spending more in line with revenues, this should result in a greater belief that spending disciplines can be successful—and should allow these states to serve as models for their neighbors. But this will take time.
