Muhlenkamp Fund

FOR THE PERIOD ENDED 09/30/13

INVESTMENT ADVISER
Muhlenkamp & Company, Inc. 5000 Stonewood Drive, Suite 300 Wexford, PA 15090-8395 (877)935-5520 www.muhlenkamp.com

OBJECTIVE

Seeks to maximize total return to its shareholders through capital appreciation, and income from dividends and interest, consistent with reasonable risk.

STRATEGY

Invest in the common stock of highly profitable companies, as measured by Return on Equity (ROE), that sell at value prices, as measured by Price-to-Earnings Ratios (P/E).

GENERAL INFORMATION
Style All-Cap Inception Date 11/1988 Ticker Symbol MUHLX CUSIP 962096103 Minimum Initial Investment $1,500.00 † Sales Charge None †† Expense Ratio 1.26%
† Or

PORTFOLIO MANAGER

Ronald H. Muhlenkamp, CFA, has been active in professional investment management since 1968. He is a graduate of both M.I.T. and the Harvard Business School.

VESTED INTEREST

The majority of Mr. Muhlenkamp’s long-term investment assets are invested in the Muhlenkamp Fund.

TOP TEN HOLDINGS
Company Industry % of Net Assets Industry % of Portfolio

$200 if the Automatic Investment Plan (AIP) is chosen. Automatic Investment Plans do not assure a profit and do not protect against a loss in declining markets. Although the Fund is no-load, investment management fees and other expenses still apply. Please refer to the prospectus for further details.

Alliance Data Systems Corporation Sonic Automotive, Inc. - Class A JPMorgan Chase & Co. Philip Morris International, Inc. Microsoft Corporation Celgene Corporation State Street Corporation Rex Energy Corporation Oracle Corporation American International Group, Inc.

IT Services Specialty Retail Diversified Financial Services Tobacco Software Biotechnology Capital Markets Oil, Gas & Consumable Fuels Software Insurance

7.35 4.79 4.57 4.53 4.27 4.18 4.15 3.63 3.60 3.43

7.4 7.1 7.7 4.5 7.9 8.8 4.1 4.7 7.9 8.7

††

FUND FACTS
Number of Equity Holdings 43 Total Net Assets $460,196,804.00 Average ROE 15.77% ‡ Long-Term Earnings Growth 16.75% ‡ Average P/E 18.44‡ Portfolio Turnover (2012) 38.09% ‡‡ ‡ Source: Bloomberg as of 09/30/13 Note: Average ROE and P/E have been adjusted to provide a more meaningful valuation. ‡‡ Audited Return on Equity (ROE) is a company’s net income (earnings), divided by the owner’s equity in the business (book value). Price-to-Earnings Ratio (P/E) is the current stock price divided by the earnings per share. Long-Term Earnings Growth is not a forecast of the Fund’s future performance.

Fund holdings are subject to change and are not recommendations to buy or sell any security.

AVERAGE ANNUAL RETURNS AS OF SEPTEMBER 30, 2013
Year to One Past 3 Date Year Years Return Before Taxes 23.19% 25.27% 12.39% Return After Taxes (1) 23.19% 23.52% 11.85% Return After Taxes (2) 13.13% 16.78% 9.75% S&P 500*
(1) Return (2) Return

Past 5 Years 7.56% 7.23% 5.98%

Past 10 Past 15 Years Years 4.88% 7.17% 4.42% 6.75% 4.07% 6.07% 7.57% 5.33%

19.79% 19.34% 16.27% 10.02%

after taxes on distributions** after taxes on distributions and sale of Fund shares**

Performance data quoted, before and after taxes, represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the fund may be lower or higher than the performance quoted. Performance data shown is current to the most recent quarter end. * The S&P 500 is a widely recognized, unmanaged index of common stock prices. The figures for the S&P 500 reflect all dividends reinvested but do not reflect any deductions for fees, expenses, or taxes. One cannot invest directly in an index.

** After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on your situation and may differ from those shown. Furthermore, the after-tax returns shown are not relevant to those who hold their shares through taxdeferred arrangements such as 401(k) plans or IRAs. Quasar Distributors, LLC., Distributor 10/13

Amended Transcript
Muhlenkamp and Company
October 17, 2013/ 4:15 p.m. ET SPEAKERS Ron Muhlenkamp Tony Muhlenkamp PRESENTATION T. Muhlenkamp Good afternoon, everyone. We appreciate you joining us for today’s conference call. I’m Tony Muhlenkamp and I’ll be guiding the discussion as we pick Ron’s brain. Before we get started, we are hosting a seminar in Western Pennsylvania, north of Pittsburgh, on Thursday, November 7. It will be broadcast live over the Internet at the same time as we’re holding it in an auditorium. The times are 2:00 p.m. and 7:00 p.m. Eastern Time. In the next 45 minutes, we’re going to cover a number of topics and ideas, a lot of which will be fleshed out and expanded upon at the seminar. The topic of the seminar is Natural Gas: An Energy Game Changer, which I suspect we’ll touch on a little bit today, but elaborate on November 7. With that being said, Ron, why don’t you get us started by telling us what you find most interesting going on right now. R. Muhlenkamp Well, it’s been an interesting summer. The Federal Reserve (Fed) set things up to begin a tapering process and then decided not to do it. My real fear is that going into the Fed’s management of interest rates and quantitative easing, I viewed it (and I hope they viewed it) as being temporary—that it was an emergency measure to avoid a meltdown back in 2008. It’s now five years later, and the Fed seems to be afraid of allowing the markets to work and believing they have to keep their thumb (actually, their whole arm) on the scale. I’ve been hoping over the last five years that we would get back to investing based on a reading of the economy and that, over time, politics or government mandates out of D.C. would become less prevalent. It’s apparent that that’s going to continue for quite some period of time. Our reading is that the economy has been growing on the order of 2%; we don’t see anything that changes that. We continue to penalize businessmen, particularly small businessmen, with various kinds of regulations. I think businesses are reluctant to hire—and reluctant to invest capital, so we continue to see slow growth. The fear a lot of folks have about the money the Fed has been printing is that it would be inflationary. Over time, it probably would be, but the conditions are not yet to the point where that’s likely, so we’re

seeing inflation of 2% or less. When we put those two together, we think that, on average, in the aggregate, stocks are now fairly priced. Going forward, it’s going to be almost purely a stock picker’s market, where you can find companies whose revenues grow a bit faster than the economy. If the economy grows at 2%, for instance, any company whose revenues are growing at 6% or 7% or better, we think will get attention. Actually, that’s been true for the last year or so. Those companies whose revenues have grown, and whose earnings have grown, have done quite nicely to the extent that some of them are at prices that, frankly, we think are quite full. On average, as we said, we think stock prices are fair, but that the economy will continue to grow slowly. That means that it’ll be a stock picker’s market. If the Fed continues to print money, as it pretty much has said it would, our fear is that a year or two or three down the road, we will have created another bubble to follow on the three or four that we’ve had in the last decade. So, it becomes a more treacherous market than normal, because economics tend to change fairly slowly. Politics give you the kind of drama that we’ve just gone through, which, hopefully, washes out in a fairly short period of time. The drama [government shutdown] that we had—all we’ve done is to move the calendar another few weeks down the road, which suggests to me that the current rules will remain enforced. Last November, when we reelected Mr. Obama and we set up how the House and Senate were represented, we ended up putting very close to all of our money in the market just because we thought the clarification of the rules would help. To some extent, the clarification of the rules now helps. Unfortunately, it helps big investors and people who are borrowing money far more than it helps the little guy, the guy with savings, or the pension plans that get killed by the low interest rates. T. Muhlenkamp Is it fair to say that the rules are helping Wall Street at the expense of Main Street, or something along those lines? R. Muhlenkamp It’s certainly not helping Main Street. On Wall Street, it depends on how nimble you are and whether you can play the game while holding your nose. Stanley Druckenmiller, founder of Duquesne Capital, was on CNBC’s Squawk Box a week or so ago, and said something like, “Well, I’m doing fine. It’s my kids I’m worried about.” I share that completely. [Druckenmiller interview took place on September 19, 2013.] T. Muhlenkamp There’s a misperception that you can separate Wall Street from Main Street—that somehow Wall Street can do well when Main Street doesn’t. That may be true temporarily, but that’s not a sustainable scenario. Is that fair? R. Muhlenkamp I think I mentioned in ‘Memorandum #108 that the Fed has a mandate to keep inflation under control. Inflation is currently under control. Following World War II, the Employment Act added the goal of promising maximum employment to the list of the Fed’s responsibilities. Employment is not increasing. 2

To the extent unemployment is going down, it’s because people are dropping out of the labor force. In recent weeks and months, the Fed has cited getting the stock market up as an accomplishment. Well, that’s fine, but that’s not its mandate. I think the Fed believes that getting the stock market up will help the economy. So far, it’s hard to say if that has occurred. In some instances, it helps the guys on top who have a lot of assets in the market. But, if the way you get the market up is to hold interest rates down— squeezing retirees and pension funds—that does not help the broader economy. My real fear is that the Fed is working on theory, rather than fact—and may continue to do so. If so, it’s going to require us to be even more nimble than during the last few years. T. Muhlenkamp In terms of being “nimble,” how do you address that as a portfolio manager? What does that mean for you in practical terms? R. Muhlenkamp In terms of what we have done, to some extent, we’ve been hurt the last five years because we didn’t go all the way out to the end of the limb. I still want to own companies with rock-solid balance sheets. We own bigger, more rock-solid companies than I ever would have three or four years into— T. Muhlenkamp … a recovery. R. Muhlenkamp What should be a recovery. R. Muhlenkamp We want to be sure that the companies we own are in great shape—that the earnings and cash flows are in good shape. To some extent, I think that earnings have been strong because companies are reluctant to invest money. For example, when Intel announced it was building a new plant, the stock went down. Coming out of 1980, a serious recession, people asked me whether they should expand their business. I replied, “If Reagan and Volcker can get inflation under control, we’ll have a good decade in the economy and in the stock market.” Today, I can’t tell any company that I’m confident of what the rules will be two or three years down the road. I do know they’re going to be tighter than they were three or four years ago. Most of the Dodd-Frank rules haven’t been written yet. With the Affordable Care Act (“Obamacare”), we really don’t know what the rules are going to be. We fear—I fear what they’re going to be, but I really don’t know. It’s hard to either build plants or hire people when you don’t know what the rules are going to be down the road. In some respects, however, that’s probably helped. Companies have been running lean and mean, and not investing for the future. Short term, that helps you; long term, that hurts you. As you’ve heard me say any number of times, many things in economics are a tradeoff between today and tomorrow. When you run things out of Washington, which has a horizon usually measured in two years, sometimes four, sometimes six—the reelection cycles—the focus tends to be on today and not tomorrow. The whole “continuing resolution” is just an attempt to extend today and not really deal with the problems we’ll have 3

tomorrow. And tomorrow is starting pretty soon! Entitlement programs like Social Security and Medicare are going bankrupt, and it’s starting right now. T. Muhlenkamp You had mentioned the employer, the manufacturer… Last May, you gave a talk on the “big squeeze.” You discussed how employers are being squeezed by taxes, regulations, healthcare…Has any of that pressure come off? R. Muhlenkamp None of it has changed, and we’ve just gone through an exercise saying it doesn’t look like it’s going to change. So the rules have been clarified, but it remains more of the same. T. Muhlenkamp The squeeze on retirees through interest rates remains? R. Muhlenkamp Remains in effect. T. Muhlenkamp And the squeeze on the taxpayers remains? R. Muhlenkamp In effect. T. Muhlenkamp And the squeeze on the consumer through unemployment and inflation of 2% remains? R. Muhlenkamp In effect. T. Muhlenkamp I guess I’ll throw in another commercial. We produced a booklet from the “Big Squeeze” seminar, complete with slides. So, if you are interested in the meat and potatoes, give us a call and we will send a copy to you. What else do you want to say about the U.S. economy and politics before I ask a few more questions? R. Muhlenkamp When Mr. Obama says, “Tax the rich,” the more I think about that, the more it translates into “tax the employers.” In many cases, it’s the same thing. The long and short of it is, as long as the focus is on squeezing the employer, they’re not going to employ people. This translates into a slow-growing economy. Over the last couple of years, we’ve covered what’s going on in China and what’s going on in Europe. Europe may have passed the worst of its crunch, so that may become a— 4

T. Muhlenkamp How so? Any ideas? R. Muhlenkamp If you don’t blow up over a certain period of time, people start to believe that you’ll continue not to blow up going forward… I didn’t say Europe was getting better. As an investor, you want to invest when things are no longer getting worse—on the premise that one of the new surprises will be a plus. There are always surprises out there, but if you expect the worst, most of the surprises are on the plus side; but if you expect the best, most of the surprises are on the down side. One of the questions that came in before this conference call was “what do we think of minerals?” Well, you’d have to split it between base metals and precious metals. Base metals had a huge push in the last decade because China was building infrastructure. I read a report in the last week that China has built everything—there’s no more building left to do. That’s not quite true, but China has certainly built ahead on a lot of things. Over the years, my read on things like mining is that when the price of minerals runs up, people open new mines, and this additional supply drives prices down. Once the mine is open, they’ll keep producing as long as they’re covering their variable costs, which, on mines, are a lot smaller than their total costs. Unless you get a new source of demand, the next 10-20 years means that the price of minerals goes down, not up. So, about once a generation, you get a nice move on mining stocks, and then you wait another 10 or 20 years, or, sometimes, almost a generation for that to happen again. Unless you find a new China or some country doing a similar structural build-out, such as China did in the last ten years, we probably have ample capacity of just about everything. T. Muhlenkamp You’ve commented that China has been transitioning from building infrastructure to a consumer-oriented — R. Muhlenkamp …Toward a consumer economy. T. Muhlenkamp Are they on track for that? R. Muhlenkamp Yes, but at a third the speed—it takes a whole lot longer. Most turnarounds take about three times what you thought they would going in.

T. Muhlenkamp And cost twice as much. 5

R. Muhlenkamp In many cases, that, too. We nibbled at China a little bit; it looks like it [the transition] has been stretched out. I’m not nibbling at the present time. T. Muhlenkamp What about Europe? R. Muhlenkamp Again, Europe may have passed the worst of its crunch; I’m not looking for great growth. We haven’t yet nibbled there—but we’re trying to keep our vision not just narrowed to the United States. I do want to say a word about precious metals, particularly gold and, to some extent, silver, along side it. Again, China is one of the players here. Up until recently, if you were a Chinese citizen and wanted to invest your money, there were limited places that you could do it. Real estate was one place during China’s real estate boom. Gold was another—for the most part, you really couldn’t buy stocks. Gold was the sum of its exclusivity in places for citizens to put money. To some extent, China and India were huge buyers of physical gold. India was not quite as strong as China in terms of the economy. Be aware that I never made money playing gold, partly because I never played gold. Gold is nonproductive—and I always prefer productive assets to nonproductive assets. There have been times when gold’s been a good hedge, mostly in the ‘70s, when it was inflationary—and in the last decade, there were times when it ran. I think that was helped by places like India and China. I think some of that exclusivity is coming off in China, in terms of the limited number of options people can invest their money. T. Muhlenkamp So the drivers behind gold have dissipated. R. Muhlenkamp I’m saying base metals are over. Don’t rely on me to call the turns in the gold and silver markets, because I have no expertise in doing that. T. Muhlenkamp But you have observed a couple drivers behind the price of precious metals, and it looks like those drivers have dissipated; i.e., China and India. R. Muhlenkamp Yes, exactly.

T. Muhlenkamp Before we get into some of the things that you are nibbling at, or excited about, tell me about what you’re 6

avoiding. In this climate, it’s almost easier to talk about what you don’t want to own, rather than what you do, so let’s repeat that. R. Muhlenkamp I continue to own no bonds because interest rates are below where they should be in an economic environment. The bet on bonds is purely that the Fed… If you want own bonds, the bet would be that the Fed could hold interest rates below economic levels indefinitely in the future. T. Muhlenkamp Well, it certainly has for the last five years… So, for the last five years, that’s been a fair bet. R. Muhlenkamp Except in the last six months, the 10-year Treasury went from 1.6% to 3%, right? And my guess is now— I haven’t looked lately—it’s probably 2.6% or 2.7 percent. T. Muhlenkamp Okay. R. Muhlenkamp Initially, the stock market went down in response to the increase [in interest rates]. Then, it came back. T. Muhlenkamp What did the bond market do? R. Muhlenkamp Well, the bond market, as I said, went from 1.6% to 3%; then, it scaled back a bit from that. Over the course of a couple months, bonds have moved probably two-thirds to three-quarters of what I thought they should to get to on economic levels—and the stock market absorbed that very well. To me, that gave the Fed a beautiful window to pull back on its buying of securities. If interest rates went from 1.6% to 3% and, economically, they should be somewhere between 3.25% and 3.5%, you’ve done 80% of the damage. If the stock market absorbed that, the Fed should’ve been able to pull back. Apparently, however, the Fed didn’t trust the economy to do that [absorb the rate increase], so it’s keeping its arm on the scale, which means that, going forward, every once in awhile, you’re going to get an economic blip like that. But, if the Fed keeps its arm on the scale, it’s going to be a battle between the economic value of bonds and the Fed’s purchase of bonds. There are also studies that show what the Fed has been purchasing has been flowing into European banks, instead of American banks. The European banks…they’re the folks that now need the capital. Most of our banks fixed their capital issues three years ago. The European banks now need the capital, so, in an international sense, that’s a good thing. It probably means that we’ll have less inflation coming out of all this, than if you just look at what the Fed balance sheet has done— T. Muhlenkamp The money... 7

R. Muhlenkamp Some people get upset—that it’s not helping our economy; it’s helping theirs. T. Muhlenkamp We’ve learned, I think, over the last... R. Muhlenkamp We’ve learned we’re no longer in our own silo and— T. Muhlenkamp And the correlations have gotten a lot higher than they used to be across markets. Is that fair? R. Muhlenkamp Yes. Money flows across the ocean a whole lot easier than any other good. It’s just a key on a computer. T. Muhlenkamp What about muni’s or corporate’s [bonds]? Are there any values? R. Muhlenkamp To me, it’s a muni picker’s market; a stock picker’s market. Corporate bonds…I still find more value in corporate bonds with 3% yields and 30% payouts, than I do in corporate bonds yielding 5% or 6%, and 70% or 80% payouts. You can probably get a 5.5% dividend yield with an 80% payout—or a 3.5% yield with a 30% payout. I would rather have a 3.5% yield where they have the flexibility of raising it, than have the higher yield where they have no flexibility. T. Muhlenkamp But if it’s a 30% payout, the risk with cash… R. Muhlenkamp As long as the company is doing useful things with the rest of the cash flow and not pouring it down a rat hole—which some managements do, but that’s always a… T. Muhlenkamp So it’s a stock picker’s market—and the question with any given company is: “would I rather lend it money, or own a piece of it and why?” R. Muhlenkamp If I don’t like the company, I sure don’t want to lend it money.

T. Muhlenkamp 8

And if you do like the company? R. Muhlenkamp If I do like the company, and it’s appropriately priced, I’d rather own a piece of it. T. Muhlenkamp One of the things with muni’s… If you can name a municipality you’d be willing to lend money to today —even if the answer is yes—go ahead and do your homework. R. Muhlenkamp …Noting there’s also a difference between a general-obligation bond and a sewage bond, or a revenue facility. Remember: There are no guarantees, there are only guarantors. If you’re buying a guarantee, make sure that the economics are behind it, so that it can pay the guarantee. T. Muhlenkamp We can’t just say, “buy muni’s or avoid muni’s.” [It boils down to] which muni—and what do you know about it? What type of obligation is it? …That’s been true—and remains true? R. Muhlenkamp Yes. T. Muhlenkamp It sounds like you’re avoiding most commodities, both base and precious metals? R. Muhlenkamp Yes. I see no value in utilities. T. Muhlenkamp No value? Tell me about that, with everything going on in energy right now… R. Muhlenkamp Have you seen the ads stating that you can save money on your electric bill? With utilities, when the costs of raw materials go down, they have to lower their rates because they’re a regulated industry. T. Muhlenkamp They get no margin boost? R. Muhlenkamp They get no margin boost. The consumer, however, can benefit. I can see the consumer benefitting over a period of 10 or 20 years, as a result of the transition from crude oil based energy to natural gas based energy. 9

T. Muhlenkamp You’ve said talking about energy, biotech, and education gets you excited. Elaborate on the energy a little bit more. R. Muhlenkamp I think we have a decent shot at cutting the cost of energy in this country in half during the current decade. We’ve already done it with home heating. T. Muhlenkamp This is as a result of the natural gas resources we’re finding in Marcellus, Utica, Barnett [Shales]. Run down the list... R. Muhlenkamp I’ve identified that I’m saving $700 to $800 a year on my heating bill. The IEA [International Energy Agency] has estimated the average homeowner is saving more like $1,000 or $1,100. The point is—I look at my heating bill and I can find the $700. But most people don’t know this… The reason the utilities are advertising cheaper electricity is because the price of natural gas is cheaper than they allowed for, and it’s now competitive with coal. Right now, we’re at the cusp of shifting a fair amount of transportation to where it has the option of going either way. I would say that if you can get 20% of over-the-road trucks to either burn diesel or natural gas, the price of diesel will probably collapse. This is because a lot of the diesel fuel that we burn comes out of the Middle East—and their cost of production comes nowhere close to $80 or $100 a barrel of crude. If you get that option of going one way or the other… We are now at the cusp of that being available. The engines are now available, and the fuel is now available, in ways they weren’t even one year ago. T. Muhlenkamp You’ve talked about looking for opportunities to play the [price] spread between natural gas and crude oil. Have any of those worked their way up into our top ten holdings? R. Muhlenkamp Rex Energy produces natural gas; it’s in the top ten. Frankly, I don’t like to focus on the top ten. The top ten is a list of companies that have doubled and tripled for us—that doesn’t mean they’re necessarily good values today. But, in terms of energy, we’re looking to play the transportation shift towards natural gas every way we can. We’re looking to play the engines. We’re looking to play the fuel. We’re looking to play the tanks. We’re looking to play the companies that produce the gas. I don’t, for instance, own companies that only produce crude oil, because it’s subject to being replaced by natural gas. So, we’re looking to play that theme every way we can, and we’ll talk more about that at our November 7 investment seminar.

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T. Muhlenkamp The other night when I was watching TV, I saw an Infiniti ad. The Q50 is now a hybrid; I said, “I can go green now,” but when you’ve got a luxury vehicle— R. Muhlenkamp Today’s paper says Chevy is going to produce an Impala that burns natural gas. Currently, T. Boone Pickens drives a Honda Civic, along with his Mercedes 600. Until now, the Honda Civic was the only car you could buy with natural gas as a fuel. This year, unlike last year, you can now get pickup trucks from General Motors, Ford, and Dodge; so we’re on the cusp of this right now. T. Muhlenkamp Tell me about biotech. It’s another area you say you can get excited about. R. Muhlenkamp Regarding biotech, you should probably talk to Tammy Neff [Muhlenkamp & Company Investment Analyst]. But, yes, we’ve made good money on some biotech companies. What’s happening in healthcare is just humongous… T. Muhlenkamp Again, I’m going to emphasize, your investment selections are subject to profitability, cash flows, economic pressures— R. Muhlenkamp Always. T. Muhlenkamp You don’t get so excited, as to ignore what you have to pay? R. Muhlenkamp No. T. Muhlenkamp How about education? Are there any ways of where you see that— R. Muhlenkamp Find me a way to invest in Kahn Academy. Today, I don’t know of any. T. Muhlenkamp There are some for-profit educators. R. Muhlenkamp But the government jumped all over them the last few years. What had been a secular growth industry— that is all being changed. I’m sure there are some [education] companies that have come out of this in 11

decent shape. So far, I’m not sure they’re public. What’s happening in education has been true for a couple of years… Every course unit given at MIT, you and I can participate in online, for free. T. Muhlenkamp MIT’s a pretty good school. R. Muhlenkamp It’s a pretty good school. Somebody once asked me whether it was tough getting into it. I said, “It was a whole lot tougher getting out of it. Getting in was fairly easy; getting out of it was what was tough.” But it’s now available to anybody who wants to go through that process. T. Muhlenkamp Well, I’m hearing from employers that, by-and-large, college degrees are irrelevant. A lot of employers are moving towards having their own entrance exam—for lack of a better phrase—which means if you can demonstrate the knowledge, however you came by it… If that means taking MIT courses for free online…If you can sit down and pass the test, then, they get interested. R. Muhlenkamp Yes. After going through a bunch of resumes from high school students who can’t write a sentence, and college students who can’t write a paragraph, you come to that fairly quickly. T. Muhlenkamp I’d like to return to the topic of the Shale boom. A shareholder had recently asked about the Shale boom in this country being short lived, i.e., 10 to 20 years. Well, it’s interesting to note that 10 to 20 years is considered “short lived.” R. Muhlenkamp First of all, there’s a Shale boom that includes gas and one that includes oil. The two are a bit different. If you really want to have some fun, check out [online] pictures of the U.S. at night, where all the cities show up as bright lights. If you go northwest from Chicago, you arrive at the Twin Cities. If you go northwest from there, you’ll find a huge patch of light where there is nothing [no city]. It’s lit up because they’re flaring the natural gas that comes with the Bakken Shale, where the focus is on drilling oil. The point being… If you go to North Dakota, you can get natural gas for free. They flare it; they burn it off— that says to me that natural gas is going to be cheap for a long time. In this area, we’re sitting on top of Marcellus Shale. There’s enough here to last 100 years—and that is the driver for cutting the cost of energy in half. I’m not sure how you define the Shale boom. There was an early boom of people signing up the…

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T. Muhlenkamp Leases. R. Muhlenkamp …The leases. That company was Chesapeake Energy, once headed by Aubrey McClendon, who was a billionaire twice and bankrupt twice. While gearing up to get enough capacity, there was the boom in the companies that were drilling; then, there was the boom in the companies that were fracking. Once at capacity, the normal thing happens, prices get squeezed down. That is now happening. Natural gas sells for a third of the price for the Btu equivalent, i.e., for the energy equivalent of crude oil. That will work its way through all the things that we use energy for—or that we use crude oil or natural gas as the raw material for. So, however long that boom lasts, it will be a long time. T. Muhlenkamp The consumer is going to benefit for a long time? R. Muhlenkamp To the extent that this is a free market, the consumer will benefit. The nexus of where that’s happening, I think, will change, as it always does. First, it’ll be a specific area. Then, that’ll be overbuilt and the prices will drop. That will feed the next area, and the next area… So, the repercussions of this will go on for a long time, but it will change character. I was a pup when I began in this business and I worked for a guy in his 70s. He thought the blue chips were only named Standard Oil, General Motors, and DuPont. My generation thought it was— T. Muhlenkamp IBM. R. Muhlenkamp Yes; IBM and Xerox. Jack Kunkle and Ken Dupre [Muhlenkamp & Company Investment Analysts] tell me that IBM is an old fogey. The point being, these things change, and, frankly, the faster they change, the more the consumer benefits. So we have the potential—and the only thing I can see that screws this up is regulation—of cutting the cost of energy in half in this country. Of course, everything is simply a compilation of human energy, innovation, and the energy that comes out of the ground. And we’ve got some perspectives (on the energy that comes out of the ground) that we haven’t seen from anybody else. We’ll cover that at our November 7 seminar. T. Muhlenkamp We’ve talked about the U.S. economy and politics… Anything to add? R. Muhlenkamp Just that it looks like more of the same—and more of the same means it’s going to be tough on the 13

employer. So, expect employment to stay contained going forward.

T. Muhlenkamp And, economic growth? R. Muhlenkamp Probably on the order of 2 percent. T. Muhlenkamp Contained because of everything we’ve talked about… Europe and China: Europe is no longer getting worse; China is on track, but will take three times as long [to transition]. R. Muhlenkamp Yes. [As a result], we’re looking for good companies with good balance sheets. If we can find those that are growing by 6% or 7% or more and can hold their margins, we think that’s a good place to put some money. So far, we’ve been finding enough that we’re nearly fully invested. T. Muhlenkamp It’s a stock picker’s and a bond picker’s market. Where we’re finding companies we want to own, we’d rather own them than lend them money— R. Muhlenkamp Yes. T. Muhlenkamp That’s where the returns are right now? R. Muhlenkamp Yes. T. Muhlenkamp Is there anything interesting in the top ten holdings that you want to discuss? R. Muhlenkamp Most the names people know… There’s an outfit called Alliance Data Systems (ADS); it sponsors credit cards with private labels, and massages the data. If you have a credit card—and don’t hold me to this, but—they’ll know more about you than you may know about yourself, as a result of mining the data. ADS tells the stores who their customers are and how to approach them. ADS is in the midst of all of this, and doing beautifully. Its stock has nearly tripled for us. On today’s numbers, it looks fully priced. T. Muhlenkamp 14

As a portfolio manager, when you have a company’s stock that’s tripled for you and it’s become a big position, how do you manage that? R. Muhlenkamp Well, we always look for good companies at cheap prices. When we can find them, we buy them. Ideally, what happens is the cheap prices become fair prices to full prices, at which point, we’ll sell it down to a normal position. We don’t want to be in a position where any one company can kill us. But, as long as the earning’s momentum is holding up, and, to some extent, the stock price momentum is holding up, we’re willing to ride that from a reduced position, if you will. T. Muhlenkamp Is it fair to say that fundamental research gets overlaid by some technical analysis? R. Muhlenkamp My phrase is: “we buy fundamentally; we sell technically.” T. Muhlenkamp Better yet. R. Muhlenkamp …Because the bad news always shows up in the stock price, before it shows up anywhere else. If the things that you believe fundamentally appear to be true, but the stock isn’t acting right, you start to get nervous. …Maybe somebody knows something you don’t. When that happens, you sell it down—so it’s no longer a heavy position; or, you write calls. T. Muhlenkamp So we’re willing and able to hedge that position with some options’ calls? R. Muhlenkamp It looks like this year’s options will help us convert some short-term gains into long-term gains—which we always like to do. But, what you really like to do, is identify a company and, then, if it fulfills your expectations, own it for 20 years. So far, we’re three years into owning ADS. T. Muhlenkamp What else on the top ten? R. Muhlenkamp Sonic Automotive is an automotive retailer; we’ve talked about it before [during conference calls]. When General Motors went bankrupt—and Chrysler, they closed about a third of their dealerships. So, as the cars [car purchases] gradually come back, the existing dealers look to be in pretty good shape. J.P. Morgan, I don’t think is a question—everybody knows it. Phillip Morris and Microsoft… T. Muhlenkamp 15

Isn’t J.P. Morgan having legal fits? Isn’t the Fed trying to take it out of business, right now? R. Muhlenkamp The federal government, not the Fed [Federal Reserve]… is finding a source of funds, so it’s suing them; that’s ongoing.

T. Muhlenkamp Any surprises, then? R. Muhlenkamp No. J. P. Morgan is a well-run bank that we still think is fairly cheap. Celgene, a biotech company, is just coming up gangbusters. It’s become fairly priced, but, as long as it fulfills our expectations, we’ll own some. State Street, Oracle, American International Group… I don’t think are mysteries to anybody. The difference this time versus prior times… I made a whole lot of money over the last 40 years playing the business cycles, which were signaled by the Fed. This time around, frankly, we were preparing for a recession starting in about ’06, when the Fed was raising interest rates. Then, the Fed stopped raising interest rates. Most of the bad loans that came back to haunt us in the mortgage business were written in ‘06 and ‘07, some within what people called the shadow banking community. The Fed technically didn’t lose control of the money supply, but, it sure lost control of the velocity of money. Now, the Fed has decided it wants to play a theory, rather than the economy itself. Well, everybody wants the Fed to fix what it can’t fix; i.e., the pressures being put on business men through regulation, through taxes, and through healthcare. These pressures are squeezing businessmen, so they’re not hiring. The Fed is trying to boost hiring through lowering interest rates—akin to trying to drive a nail with a screwdriver. The fact is you can’t do it; that it will not work. But…it’s the only tool the Fed’s got. As an investor who has spent a whole lot of time studying the economy—and I get to spend a fair amount of time also studying politics… I’ve learned economics is not a science; political science, certainly, isn’t a science. I do think that with the Fed printing money, the bias to the markets is the upside—but, if its goes very far, we’re just setting ourselves up for another bubble. Now, I feel good at playing that sort of game. As Druckenmiller says, “I’m doing fine.” But, I think that, over time, you simply wear out the confidence of the public and the confidence of businessmen. We’ve got 5% more unemployment than we should have. We’ve got huge amounts of money sitting on corporate balance sheets, so we’re hugely underperforming what we could do, because nobody know what the rules are—and they fear what they’re going to be. The folks who are at the nexus of hiring people and building plants are called businessmen. They’re reluctant to put their neck out. T. Muhlenkamp Mary [Moderator], let’s open it up to see if we have any questions from anybody, and we’ll do our best to answer them. 16

Moderator I show we don’t have any questions at this time, but if we do, I will be sure to announce it.

T. Muhlenkamp Well, with that being said, Ron, we’re just about at the end. Is there any last comment or wrap-up you want to make? R. Muhlenkamp We gave our thoughts on most of this at the seminar last spring. We published it in a booklet called, The Big Squeeze. If anybody wants to go through it in great detail and tell us where we’re crazy… I’d love to be wrong on some of these things. Please give us a call, and we’ll be happy to send you a booklet. On November 7, we’re going to talk about natural gas drilling from the point of view of the consumer, from the point of view of the environmentalist, the point of view of the landowner (which I happen to be one), as well as the point of view of the investor. It occurred to me, to the extent that we have a free economy, if the consumer doesn’t benefit, the product is not going to go very far. In fact, if the consumer doesn’t benefit, the only way to get your product to go (like ethanol), is to get it mandated by the federal government. If the consumer is allowed to benefit, that’s what really drives successful products in a free market. T. Muhlenkamp We’re at the end of our time. Thanks, everyone, for joining us. If you do have questions, please give us a call, or send us an email; we’ll be happy to help or answer the best we can. R. Muhlenkamp So far this is working pretty well for us. We’re having a good year. T. Muhlenkamp We are having a good year. Thank you for that, Ron.

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