During our August 27, 2015 conference call, Tony Muhlenkamp, President, and Jeff Muhlenkamp, Investment Analyst and Co-Manager, discussed what’s been going on this past quarter in the U.S. and abroad.
Jeff talks about Japan’s quantitative easing, Greece’s debt problem, China’s growth challenges, and price changes in crude oil and other commodities. He also shares his thoughts on ETF’s, earnings of U.S. companies, and the value of the U.S. dollar. Visit our website at www.muhlenkamp.com for an archive of our August 27, 2015 conference call, where an audio recording is available, as well as a printable PDF of the amended transcription.
Following are some excerpts:
Implications of Crude Oil Pricing
Jeff Muhlenkamp: About a year and a half ago, crude oil, which had been at $100 [per barrel], started declining; it dropped all the way to $40 [per barrel] by about January of this year. It moved back up to $60 a barrel by, call it May, and it’s back at $40 a barrel. Oil and the decline in energy prices have continued to be a significant event on a global basis. Part of the reason is because that is one of the ways that the United States gets dollars overseas to be used for international trade…it’s the international currency. China buys oil in dollars, China buys copper in dollars, and everybody buys iron ore internationally in dollars. So dollars are important to the world economy. The fact that the price of a barrel of crude has dropped is a benefit, of course, to everybody who consumes oil, but it reduces the revenue stream of everybody who produces oil. If that oil producer has debts in dollars, now he’s got a problem. If he had borrowed in dollars to match his revenues in dollars, his revenues just got cut in half—and that may give him, depending on how long it lasts, a real problem paying off his dollar debt. That’s something that is creeping back into the market’s awareness I believe.
The first drop [in the price of oil] to $40 got everybody’s attention. The bounce to $60, everybody kind of breathed a sigh of relief. I think conventional wisdom is that long-term oil prices are $70 or $80, but now that it’s back at $40, I think everybody is rethinking that assumption, asking, “What if oil is $40 long term… what if oil is $50 long term…what does that mean? What does that mean to my company? What does that mean to the sustainability of some debts? How does that rearrange the picture?” To a degree, that’s been driven by domestic oil production. Certainly the U.S. is a much bigger producer of oil than we were five years ago. To a degree, that’s been driven by a willingness of Saudi Arabia to produce, regardless of the consequences to the price. About Thanksgiving last year, Saudi Arabia announced that they were not going to cut back production to maintain pricing power, and they have not come off that. It’s not just a U.S. story, it’s also at least half driven by what Saudi Arabia’s doing and we don’t see any—I hesitate to try and predict a change in that, but it’s meaningful and it’s making a difference around the world in a number of ways.
China’s Growth Challenges
Jeff Muhlenkamp: China had been one of the last places where there was strong growth in the world. I distinctly remember three or four years ago during some of the quarterly conference calls, listening to some industrial companies…paint companies, auto parts manufacturers—these kind of companies…and they were all talking at the time that there was no growth in the U.S. They had adequate capacity, they had plenty of stores, and they had plenty of plants in the U.S. They were not putting any more capital into the U.S., but China—China was where the growth was. And they’re going to open up a store, and they’re going to open up a plant, and they’re going to expand— and that’s where the capital expenditures were going. That’s where the expansion— you know they were all interested in growing their company—and they asked, “Where can we grow? Where is there a demand for our product?”
Tony Muhlenkamp: And the one place to go is China.
Jeff Muhlenkamp: Three or four years later, about the time you would expect all those things to come online and start working,China isn’t growing as much as people had expected. It will be interesting to see if those same companies start writing off the value of assets…start talking about disappointment in China. Certainly, they’ve been talking about reduced revenue because of the strong dollar. So what’s going on in China is having a number of impacts on the globe. I’m not sure the coincidence between what’s going on in China and the 10% drop we’ve had in the last 10 market days or so in the U.S. is very close. (Reminder: Conference Call took place on August 27, 2015.) I’m not sure it’s as causal as people think, but it’s certainly coincident.
To learn more, please visit our website to view an archive of the August 27 conference call.
Nothing contained in this communication constitutes tax, legal, or investment advice. Investors must consult their tax advisor or legal counsel for advice and information concerning their particular situation.