by Ron Muhlenkamp   

 

In our Quarterly Letter of three months ago (#90), we addressed the topics of deleveraging and forced selling which we believe drove market prices down in 2008 and early 2009.  We concluded that the deleveraging and forced selling were probably over.  Since then, bond prices have increased and stock prices have bounced very nicely.

In this “conversation,” we discussed our observations that the consumer had taken a “step down” in spending (or a “step up” in saving) in the fourth quarter of 2008 and appeared to have leveled off at the new lower level since the first of the year.

It is now late June and we continue to see this pattern in a broad range of economic statistics, including:

•     Consumer Spending;
•     Home Sales;
•     Capital Goods Orders;
•     Freight Volume; and
•     World Trade.

Our summary description is that the participants in the U.S. economy seem to be setting a new lower base on which (slower) growth can build.

At our May 7 seminar, we discussed these topics, coming to the same conclusions.  We also discussed the liquidity crunch in the financial markets in late 2008.  This liquidity crunch appears to be largely alleviated at this time.  But most financial firms have very different structures from what they had before.  Some are out of business; several have been merged; some have changed their charters; and some are directly controlled by the federal government. So there will be many aftereffects and unintended consequences.  These will be ongoing and must be monitored.

We also expect sizeable changes in financial and corporate regulations, as well as corporate and individual taxes.
In all of this, there are enough moving parts that predictions of corporate profitability levels are yet to be determined.  For example, with ample capacity in every industry, maybe corporate ROE (return on shareholder equity) averages 11% instead of the historic average of 13 percent.  While we believe the crunch is over, we don’t yet have conviction in what the new norm will be.   

The comments made by Ron Muhlenkamp in this article are his opinion and are not intended to be investment advice or a forecast of future events. Copies of past newsletters are available at www.muhlenkamp.com.