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Ron Muhlenkamp's First Quarter Letter to Investors

April 22, 2014 | About:
Canadian Value

Canadian Value

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Ron's Quarterly Letter, April 2014

Russia’s action in the Ukraine / Crimea may have long-term implications, particularly for Europe, but the near-term economic implications are modest. It remains to be seen whether this gets added to our long-term worry list or not.

Japan’s version of “Quantitative Easing,” after helping its market last year, is now running out of gas. A few days ago, Japan raised its consumption tax; the last time they did that, it triggered a recession. We remain baffled by the logic Japan is following; i.e. attempting to spur growth via government spending, which requires an increase in taxes and borrowing to achieve. We are not optimistic about the outcome.

Various countries in Europe continue to flirt with recession or default. Sovereign bond rates remain very low, and the European Central Bank’s commitment to do “whatever it takes” has not been tested. Very little has changed in Europe.

The Chinese economy and other “emerging” countries continue to slow. China continues to try to unwind a credit binge in a controlled manner, which is working so far. Dramatic currency shifts in Turkey and other emerging markets, which started when the Fed started “tapering,” have subsided. It isn’t clear if continued tapering will create other dislocations and shifts going forward.

In the U.S., we continue on a slow growth path. Our government continues to squeeze employers, resulting in only modest gains in employment. The U.S. Federal Reserve is proceeding with tapering of its buying of U.S. Treasury and mortgage bonds. The bond market responded to the change in direction last summer by upping interest rates in long bonds. Since then, long rates have fluctuated in a range consistent with contained inflation and continued slow growth in the economy. Short rates remain near zero, driving individual and pension investors elsewhere.

Stocks rose last year to a level consistent with current earnings levels and very modest inflation. Company earnings have actually been aided by management reluctance to build plants or hire people in the face of slow economic growth and added regulations. (Have you noticed that corporate annual reports are twice as thick as they used to be, but with no additional information?) Currently, we see no relief from these pressures.

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