| Issue 72 |
Published Fourth Quarter |
October 2004 |
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Quarterly
Letter BACK
The
economy continues to expand. Consumer spending,
business investment and employment are growing
at decent rates.
Inflation remains under control at less than 2%. Short-term interest
rates, heavily influenced by the Federal Reserve Board, are moving up
at a “measured” pace, but are still below their fair value of about
1% over inflation. Folks, short-term rates should be moving up.
Long-term interest rates, which normally exceed
inflation by 3%, are where they should be.Early
this year, when the Fed began raising short
rates, long rates (which are determined in the
marketplace) jumped over 80 basis points (8/10
of a percent). They have since declined 60 basis
points or 75% of the move. Long-term mortgage
rates have moved in concert. We find it telling
that the move up received a lot of commentary
in the press; the move back down received very
little. We judge long-term rates, and therefore
bond prices, to be fair. We judge stock prices,
on average, to be fair with some a bit cheap
and some a bit expensive. This is normal.
Corporate earnings and balance sheets continue
to improve. We expect the stock prices of individual
companies to reflect the results of those companies.
So far, our selections are doing well.
The media continues
to focus on the negatives: things that could
go wrong versus things that are going right.
That’s their prerogative. We’ll point out that
there were no successful terrorist acts at the
Olympics or our political conventions.
In Afghanistan, over 90% of the people eligible
to vote have registered, (and probably voted
by the time you read this). That election should
help set a precedent for Iraq.
Our own elections are just a few weeks away.
I like elections because they provide a direct
read on the mood of the American public, without
the filters of the pundits. So, within a month,
one more uncertainty should be resolved, giving
us some guidelines to the government policies
for the next four years.
—
Ron Muhlenkamp
Treasurer’s
Corner
BACK
We recently mailed the Semi-Annual Report of
the Muhlenkamp Fund to our shareholders. Since
then, a few shareholders have questioned whether
the Fund is likely to declare a dividend at
year-end. We would like to review the sources
of mutual fund dividends.
There are two primary sources
of mutual fund dividends: income and capital
gains. There is no direct relationship between
income dividends and capital gain dividends.
Income dividends are the result
of net investment income i.e. investment income
minus expenses. The easiest way to understand
this is to refer to the Statement of Operations
on page 5 of the Semi-Annual Report. The Fund
earned total investment income (dividends and
interest) amounting to $8,502,832 for the six-month
period. From this figure we then deduct the
operating expenses associated with the Fund.
These expenses include investment advisory fees,
plus all of the costs associated with Fund administration,
custody, transfer agency, accounting, directors
and other professional fees and expenses, etc.
The total of these operating expenses for the
period amounted to $6,972,059, leaving “Net
Investment Income:” in this case $1,530,773.
Income per share can be calculated by then dividing
net investment income by the number of Fund
shares outstanding at the end of the period.
The Statement of Assets & Liabilities on
page 4 of the Semi-Annual Report indicates a
total of 18,668,957 shares as of June 30, 2004.
The operating expense components
of a mutual fund are both fixed and variable
in nature. This fact generally means that the
overall operating expenses of a fund, in percentage
terms, diminish as the overall assets of the
fund increase. In short, there are “economies
of scale” built into the operation of most funds.
The Muhlenkamp Fund is no exception to this
generality: the ratio of operating expenses
to average net assets has decreased from 1.35%
in 1999 to 1.13% (annualized) at June 30, 2004
as the Fund has increased in size. Likewise,
the probability of generating positive net investment
income increases as the net assets of a fund
increase. Future increases in the overall asset
size of the Muhlenkamp Fund should continue
to produce positive net investment income in
the years ahead.
IRS regulations govern both
the size and frequency of income dividends paid
from the net investment income of a mutual fund.
The general practice of the Muhlenkamp Fund
is to distribute 100% of investment company
taxable income by December 31st of the calendar
year, thereby satisfying the IRS requirements.
For the Fiscal Year ending December 31, 2004,
Muhlenkamp & Company anticipates the payment
of an income dividend equal to between five
and fifteen cents per Muhlenkamp Fund share.
IRS Forms 1099-DIV will be issued during January
2005 for all taxable accounts that received
an income dividend payment. The income dividend
distribution rate will be posted on the Muhlenkamp
& Company website at www.muhlenkamp.com,
and via the January 2005 Muhlenkamp Memorandum.
Capital gains dividends are
the result of realizing capital gains i.e. selling
securities at a gain over the price originally
paid for them. Capital gains distributions result
from “Net Realized Gains.” The Statement of
Operations on page 5 of the Semi-Annual Report
indicates a “Net Realized Loss” for the six-month
period amounting to $6,828,391. The statement
also shows “Net Unrealized Gains” amounting
to $68,516,739. Unrealized gains remain in the
Fund until the related securities are sold at
a profit. Muhlenkamp & Company does not
currently anticipate a capital gain distribution
for the Fiscal Year ending December 31, 2004.
Capital gains will be discussed in detail in
a forthcoming edition of the Muhlenkamp Memorandum.
— Jim Head
...Of
Personal Interest
Consumer
Spending* BACK
On the facing page is a
copy of a table that I’ve been carrying in
my briefcase for several years. Taken directly
from the U.S. Bureau of Economic Analysis,
the most recent edition lists Personal
Consumption Expenditures (PCE) in the
U.S. for the past fifty years. It then breaks
down overall spending as a percentage of the
total for broad categories of spending. We’ve
added three lines near the top of the table.
- First we adjusted the PCE
for inflation, bringing all numbers to year
2000 dollar values.
- Next, we listed the U.S.
population for each year.
- Finally, we calculated
PCE per capita.
The table says a number
of things to me. The first thing is the huge
growth in the U.S. economy. Personal
spending went from less than $200 billion
to over $6,600 billion ($6.60 trillion) in
fifty years. That’s a multiple of 33 times.
When we adjust for inflation of 7 times,
we’re left with a growth in spending in real
dollars of 5 times. When we adjust
for population, personal consumption expenditure
per capita multiplied 2.7 times. Net, we are
2.7 times as prosperous as our grandparents.
But there have also been
some interesting shifts in the makeup of that
spending. Since the rest of the table
lists categories of spending as a percent
of the total, we can peruse the shifts in
spending simply by following a row of numbers
across the page.
Let me start with Nondurable
Goods, specifically food. The percentage
of consumer disposable income spent on food
has been cut in half (from 28% to 14%) in
the past fifty years. This is despite the
fact that half the money we currently spend
on food is outside the home and, therefore,
includes preparation. To me, the interesting
thing about food is that, try as we might,
we can’t consume much more of it per person
than our grandparents did. So if we treat
food as stable in its consumption, we are
now twice as prosperous (relative to the amount
spent on food) as our grandparents were. This
confirms the above conclusion — we are more
prosperous than those consumers of the 1950s.
The next line, clothing
and shoes, also confirms this. Although we
each have much more clothing than our grandparents
had (for a rough measure, check the closet
space in a new house versus an old one), the
amount we spend on clothing as a percentage
of our income has also been cut in half.
Durable Goods —
motor vehicles, parts, furniture and household
equipment — have declined (as a percentage)
despite our having more of each per capita
than our grandparents did.
In Services, housing
has been stable (in percentage terms) since
1960. However, today, new houses average 2,000
square feet. In 1960, they averaged about
1,000 square feet. So our houses are
twice the size, even though our families are
smaller. Similarly, housing operation and
transportation have remained stable (as a
percentage).
Four items in the family
budget have grown dramatically over the last
fifty years — all Service items.
First is medical care,
which has grown from 4% to 15%. The fact that
medical care has grown doesn’t surprise anybody,
but the degree of growth often does.
Second is recreation,
which helps explain why Las Vegas is the fastest
growing city in the country. Third is personal
business, which is primarily personal
financial business — think in terms of brokers
and mutual funds growing on a base of banks
and insurance companies. While I suspect that
the year 2000 might have had an increment
due to the Wall Street fad of the time, it’s
been a steady up-trend for fifty years.
The fourth item, which
the government doesn’t include in expenditures
but which we’ve added at the bottom of the
table, is Government Receipts from Social
Insurance (including Social Security and
Medicare) — which is up three times since
1950.
Those are the messages
I get from the table. As investors, we have
a bias toward those areas where the long-term
trends are up. But we’re aware that it’s also
possible to make good money in the areas that
are shrinking on a percentage basis. Think
food stocks in the 1980s, or Wal-Mart since
1972.
— Ron Muhlenkamp
Consumer
Debt* BACK
We’re also hearing that
the consumer is borrowed to the hilt, and
therefore can’t sustain the current level
of spending. We often see charts (like the
one to the right) showing growth in consumer
debt to income. But such a chart comparing
debt (a balance sheet item) to income (an
income statement item) ignores any changes
in interest rates.
When we compare debt to
assets, we find that the ratios are on the
gradually rising trendline which we’ve seen
since WWII. Frankly this is what we’d expect
to see as home ownership and credit card usage
become increasingly widespread. When the payments
on this debt are compared to disposable income,
you get the chart below.
Because interest rates
are now lower, the higher current debt levels
are less 
burdensome
to the consumer. The chart says the household
debt service burden has ranged between 12%
and 14% for twenty years. Some believe that
interest rates can only go up from here, (we
don’t), but most mortgages are fixed-rate,
meaning the debt burden for most homeowners
won’t increase involuntarily even if mortgage
rates do increase.
Folks, the consumer is
not tapped out.
— Ron Muhlenkamp
*This essay was first written in January 2003.
Investment
Insights
BACK
In ‘Memorandum
#71', I commented on the need for financial
education in an article entitled “The Importance
of Saving for Retirement.” Writing that article
got me to thinking about what kind of learning
tools and programs are actually out there.
Although there are many adult education programs
available, I believe that having financial education
programs in the schools is beneficial to all
concerned.
I was unpleasantly surprised to learn that “only
six states require some sort of financial literacy
or money management course for high school graduation!
These states are: Kansas, Louisiana, New York,
North Carolina, South Carolina and Utah.” (Source:
www.themoneycamp.com)
How can it be that something as vital to everyday
living is not mandated by the vast majority
of our educational systems? I can now better
understand the horror stories my son repeated
to me from his college days. He told me about
some of his friends getting into so much trouble
with managing their money and then believing
that credit cards would be the answer. Needless
to say, the outcome was not pretty. If courses
in financial literacy were required, many would
avoid these types of costly mistakes.
Fortunately, there are several organizations
that have developed financial literacy courses,
complete with lesson plans that can easily be
adopted by school districts.
One very effective program is the National Endowment
for Financial Education High School Financial
Planning Program. This program is “based on
the philosophy that learning about money is
as important as earning it – and that effective
money management results from a disciplined
behavior, which is most easily mastered if learned
early in life.” This program teaches everything
from how to establish a budget, balance a checkbook,
understand how credit works, insurance, investments
and much more. It is available to all high schools
throughout the country. More detailed information
about the curriculum can be found on their website
www.nefe.org.
Another similar resource is www.practicalmoneyskills.com.
This organization has come about through the
partnership of Visa and various consumer advocates,
educators and financial institutions. Their
program is designed to “launch a national program
to improve the nation’s financial skills.” This
program is also available to school districts
free of charge.
The Jump$tart Coalition for Personal Financial
Literacy (www.jumpstart.org)
is also interested in bringing financial education
to the schools. Membership consists of various
state government agencies, private companies
and nonprofit organizations. This Coalition
has chapters in every state of the Union and
believes that their “direct objective is to
encourage curriculum enrichment to insure that
basic personal financial management skills are
attained during the kindergarten through 12th
grade educational experience. The wheels of
education do not need to be reinvented, they
simply require balance.” Although this group
does not provide specific lesson plans, they
have established a series of benchmarks that
they feel school programs should strive to attain.
An activity I was involved with during high
school is Junior Achievement. Junior
Achievement (JA) is interested in providing
financial literacy programs to schools around
the world. The group operates a little differently
than the JA that I attended many years ago.
Back then, students from various schools went
to a central location in the evening and went
through the process of starting a company; making,
marketing and selling a product; and then determining
profit, etc. Local businesses provided sponsorship
and mentoring for each JA company. Now, through
its business volunteer network, JA provides
a wide variety of in-school courses K-12, as
well as after-school programs affiliated with
4-H, Afterschool Alliance, Boys & Girls
Clubs of America and the YMCA.
In addition to the above organizations that
can work through the schools, there are others
that provide financial literacy to children
in non-school settings.
There are many financial literacy websites available
on the Internet. One such example is www.KidsBank.com
sponsored by Sovereign Bank. This website is
designed for young children to teach them about
money and banking through stories and interactive
games.The Money Camp (www.themoneycamp.com)
is yet another organization that provides financial
education to school children through both its
day camp program and a curriculum that can also
be adopted by schools.
There are also other groups such as the National
Association of Investors Corporation (NAIC)
which educates investors through investment
clubs, seminars and other functions. The NAIC
also permits the establishment of junior investment
clubs for those under the age of 18. These juniors
are also welcome at many of the NAIC-sponsored
events.
I am sure I am only touching
the tip of the iceberg as far as the avail-
ability of resources providing financial literacy.
It is reassuring to know that there are programs
out there, and this is a good starting point
for those interested in a more extensive search.
As parents and grandparents,
there are several things we can do to be proactive
and insure the financial literacy of our children:
-
Call your state legislators and demand that
some sort of personal finance course be a requirement for high school
graduation in your state.
-
Urge your children to take advantage of any
optional courses offered through their school or any other organizations.
-
Visit websites such as www.foreverfamilies.net
or
www.practicalmoneyskills.com
for ideas on how to teach financial responsibility. These sites
have great tips on getting children involved at home.
-
Contact others about establishing a junior
investment club
through NAIC for your child and his/her friends.
-
Volunteer to be a mentor for groups like
Junior Achievement
and others.
— Susen Friday
Cost
Basis Beatitudes
BACK
Blessed are they who
keep good records. We STRONGLY encourage you
to keep the December 31st statement each year
for each account. This statement shows all of
the transactions for the past calendar year,
including reinvested interest, dividends, and
capital gains. This is the official record of
your cost basis, and is what the IRS will want
to see if there are ever any questions. So we
suggest keeping a folder for each account you
have, and in each folder a December 31st statement
for each year you have that account.
Blessed are they
who use the specific-share identification method
for calculating their cost basis. We STRONGLY
encourage you to learn about the different methods
of calculating the cost basis of your shares.
The four different methods are:
1) average basis
single-category;
2) average basis double-category;
3) specific-share identification method; and
4) first-in, first-out (FIFO).
Out of the four different
methods we recommend using the specific-share
identification method because it gives you the
most flexibility in how you pay taxes. Many
people don’t use the specific-share identification
method because it is “too much work,” but we
want you to learn the methods, learn how to
use them, and make your own decision. Entering
your purchases and redemptions into Quicken,
Excel, or some other software package can reduce
the work. (Refer to the article by Michelle
Orphall in Muhlenkamp Memorandum #60 from November
2001.)
Blessed are they who hold their shares for more
than one year. The IRS capital gains tax rate
for assets held for more than one year is less
than the rate for assets held for one year or
less. Though the primary goal to investing is
to increase your assets – buy low and sell high,
another thing to have in mind is the amount
of taxes you will pay. You may arrive at significant
tax savings by holding your assets for more
than one year.
Blessed are they who do not rely on custodian
banks and transfer agents to keep complete account
histories. If you haven’t been keeping your
account statements or at least the December
31st statement of each year for each account,
it’s a good idea to start now. Some transfer
agents charge a fee for past account statements.
This can add up depending on the fee and the
number of years that they have to go back. In
some situations, the transfer agent may not
even be able to provide you with a complete
history. Since transfer agencies update their
database systems from time-to-time and companies
switch transfer agencies occasionally, account
histories may be lost in the conversions. For
example, Muhlenkamp Fund has switched transfer
agencies twice since inception. We are able
to print a complete history of your account
but for older accounts sometimes the descriptions
on the transactions aren’t consistent due to
different database systems. And if you transferred
shares of the Fund to us from another custodian
(like Fidelity or Schwab) then we won’t have
any cost information on those shares at all.
This is why it is so important that you keep
your own complete set of records. Remember,
the IRS holds the shareholder responsible for
accurately reporting capital gains and losses.
We do what we can to help you, and we will help
as much as we can, but the final responsibility
is yours.
— Anthony W. Muhlenkamp
and Michelle Orphall
2004
Forbes Honor Roll
The Muhlenkamp
Fund was named to the 2004 Forbes Honor
Roll* for the fourth consecutive year.
“Funds earning a place on this select
list are like Olympic marathoners, not
sprinters. They must display stamina
and endurance.” You can read the article
in the September 20, 2004 issue.
*Forbes
magazine’s rating criteria for earning
a place on the Forbes Mutual Fund Honor
Roll include:
1) strong
relative performance in up and down
markets,
2) a manager tenure of at least six
years,
3) diversification,
4) accessibility, and
5) strong, long-term after-tax performance.
2004
Distributions
The Muhlenkamp
Fund anticipates payment of an income
dividend in late December of approximately
$0.05 to $0.15 per share. As a direct
shareholder, you will receive IRS form
1099-DIV from our transfer agent, U.S.
Bancorp. (See Treasurer’s Corner article.)
The Muhlenkamp Fund
does not anticipate any capital gains
distributions for 2004.
IRA
Account Maintenance Fee
The annual IRA
maintenance fee is $15 per IRA account
(this includes Traditional, Roth, Simple,
SEP IRAs and Coverdell Education Savings
Account), capped at $30 per Social Security
Number. You can pay this fee by November
1st by submitting a check made payable
to the Muhlenkamp Fund. Please include
your IRA account number on your check.
If you decide not to prepay the fee,
it will be deducted from your account
following the cut-off date.
The address to mail the check is:
Muhlenkamp Fund
U.S. Bancorp Fund Services, LLC
PO Box 701 Milwaukee, WI 53201-0701
Minimum
Balance Maintenance
By November 30th
of each year, all accounts must have
net investments (purchases less redemptions)
totaling $1,500 or more; an account
value greater than $1,500, or be enrolled
in the Automatic Investment Program
(AIP). Accounts that do not meet one
of these three criteria will be charged
a $15 fee. Such fees will be used to
lower fund expenses.
Automatic Investment
Plans do not assure a profit and do
not protect against a loss in declining
markets.
Fund
Availability
The Muhlenkamp Fund is now available
to 401(k) plans through the following
providers:
-
American Express Retirement Services
-
Federated Retirement Plan Solutions
-
Invesmart
-
Schwab Retirement Plan Services
-
Various third party administrators throughout
the country who trade through Charles Schwab, Fidelity, TD Waterhouse
and First Trust (FISERV)
If your 401(k) plan
is administered by any of the above
recordkeepers and you are a participant,
you can request that your plan sponsor
add the Muhlenkamp Fund to your plan.
Plan sponsors should
contact these providers about including
the Muhlenkamp Fund in their plan’s
list of investment options. Plan sponsors
can learn more about the Muhlenkamp
Fund by visiting the website at www.muhlenkamp.com.
|
Events
| Location |
Date |
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Year-End
Seminar, Pittsburgh
Join Ron Muhlenkamp and Company
at the Four Points Sheraton North
in Warrendale, PA on Thursday, December 2, 2004.
Click Here
to Register
or or call (877)935-5520 extension 4 for more information. |
Thursday,
December 2, 2004 |
|
In addition to our exhibit activities,
both Ron and Tony Muhlenkamp
will be conducting workshops at
the upcoming 2nd Annual World
Money Show at the Gaylord Palms Resort in
Orlando, FL.
Click the image to Register
or call (877)935-5520 extension 4 for more information.
|
February
2-5, 2005 |
|
Published
October, 2004.
© 2004. All rights reserved.
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