The Second Great

Economic
Experiment…
How’s It Going?
June 3, 2014

Ron Muhlenkamp
Muhlenkamp & Company, Inc.

Intelligent Investment Management

© 2014. All rights reserved.

1980-1982
•Slow growth & high inflation = stagflation
•Reagan & Volcker
–Cut taxes & Regulations
–Slowed growth of the money supply

2008
•Financial panic triggered by bad loans in housing
•Fed lowered interest rates & kept them low
•Government spending to replace consumer spending
•Raised taxes & increased regulations

HUD’s 2004 regulation increased the housing goals levels for
2005-2008, and created new home purchase sub-goals.

* HUD’s increase of the Underserved Areas housing goal from 31% to 37% incorporates the effects of 2000 census data. The
31% Underserved Area housing goal for 2001-2004 was based on the 1990 census data. However, this same housing goal
would equal 36% if it had been based on the 2000 census data. HUD used the 2000 census data to create the housing goal
for 2005-2008.
Source: U.S. Department of Housing and Urban Development; http://www.hud.gov/offices/hsg/gse/gse.pdf

Real Gross Domestic Product
1945-2013
(Quarterly)

18,000

14,000
12,000
10,000
8,000
6,000
4,000
2,000

Year
Source: Bureau of Economics Analysis

2013

2009

2005

2001

1997

1993

1989

1985

1981

1977

1973

1969

1965

1961

1957

1953

1949

0
1945

Billions of Chained (2009) Dollars .

16,000

Source: Bureau of Economics Analysis; U.S. Department of Commerce
NOTE: In 1996, the U.S. Department of Commerce introduced the chained-dollar measure. The new measure is based on the average weights of goods and services
in successive pairs of years. It is "chained" because the second year in each pair, with its weights, becomes the first year of the next pair. The advantage of using
the chained-dollar measure is that it is more closely related to any given period covered and is therefore subject to less distortion over time.

Real Gross Domestic Product per Capita
1945-2013
(Yearly)

Recession

40,000

30,000

20,000

10,000

Year
Source: Bureau of Economics Analysis

2014

2009

2004

1999

1994

1989

1984

1979

1974

1969

1964

1959

1954

1949

0
1945

Chained (2009) Dollars

50,000

Three Month U.S. Treasury Bill Rate
1945-May2014 (Monthly)
18%
16%
14%
12%
10%
8%

It does not get
much lower than this!

6%
4%
2%

Year
Source: Bloomberg

2014

2011

2008

2005

2002

1999

1996

1993

1990

1987

1984

1981

1978

1975

1972

1969

1966

1963

1960

1957

1954

1951

1948

1945

0%

Source: Conference Board

Year
2014

2011

2008

2005

2002

1999

165

1996

1993

1990

1987

1984

1981

1978

1975

1972

1969

1966

1963

1960

1957

1954

1951

1948

1945

Index Value

U.S. Consumer Confidence
1945-Apr2014 (Monthly)
Recessions

145

125

105

85

65

45

25

U.S. Personal Savings Rate
% of Disposable Personal Income
1959-Apr2014 (Monthly)

18
16
14

10
8
6
4
2

Year
Source – Bureau of Economic Analysis

2013
2014

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

1973

1971

1969

1967

1965

1963

1961

0
1959

Percent

12

30-Year Mortgage Rate
1952-May2014
(Yearly)

18%
16%
14%
12%
10%
8%
6%
4%
2%

Year
Source: Bloomberg

2012
2014

2008

2004

2000

1996

1992

1988

1984

1980

1976

1972

1968

1964

1960

1956

1952

0%

Housing Affordability Index
1970-Feb2014 (Yearly)

210

150

120

When the Housing Affordability Index measures 100,
a family earning the median income has exactly the amount
needed to purchase a median-price resale home using
conventional financing. An increase in the Index means that a
family is more likely to be able to afford the median-priced house.

90

Year
Source: National Association of Realtors; 2014 Quarterly Data

2014

2010

2005

2000

1995

1990

1985

1980

1975

60
1970

Index Value

180

Total U.S. New Privately Owned Housing Units Started
Seasonally Adjusted
1990-Mar2014 (Monthly)
2.5

"Normal" is
probably
somewhere
between
1 mn and
1.5 mn starts

}

1.5

1.0

0.5

Year
Source: U.S. Census Bureau

2014

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

0.0
1990

Units (Millions)

2.0

10-Year U.S. Treasury Note Rate
1953-Apr2014
(Monthly)

18
16
14

10
8
6
4
2

Year
Source: Bloomberg

2013
2014

2009

2005

2001

1997

1993

1989

1985

1981

1977

1973

1969

1965

1961

1957

0
1953

Percent

12

Moody's Corporate Bond BAA
2005-May2014
10
9

7
6
5

Year
Source: Bloomberg

2014

2013

2012

2011

2010

2009

2008

2007

2006

4
2005

Rate %

8

U.S. Industrial Production
1945-Mar2014 (Monthly)
2007=100
120

Recessions

80

60

40

20

Source: Bloomberg

2010

2005

2000

1995

1990

Mar-2014

Year

1985

1980

1975

1970

1965

1960

1955

1950

0
1945

Percent of 2007 Base Year

100

Source: Bloomberg

Date
Jan-13

Jan-11

Jan-09

Jan-07

Jan-05

Jan-03

Jan-01

Jan-99

Jan-97

Jan-95

Jan-93

Jan-91

Jan-89

Jan-87

Jan-85

Jan-83

Jan-81

Jan-79

Jan-77

Jan-75

Jan-73

Jan-71

Jan-69

Jan-67

Percent (%)

Capacity Utilization: Total Industry
1967-May2014
(Monthly)

95

90

85

80

75

70

65

60

New Orders for Durable Goods
$ Billion - Seasonally Adjusted
1993-Mar2014 (Monthly)

Recessions

240
220
200
180
160
140
120

Year
Source: Bloomberg

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

100
1993

$ Billion (Seasonally Adjusted)

260

U.S.
Investment as % of GDP

Corporate Profits as % of GDP

1947-Mar2014
25%

20%

15%

10%

5%

Year
Source: Bloomberg

2013

2010

2007

2004

2001

1998

1995

1992

1989

1986

1983

1980

1977

1974

1971

1968

1965

1962

1959

1956

1953

1950

1947

0%

Unemployment Rate
Total in Labor Force
1948-Apr2014
(Quarterly)

12%
10%
8%
6%
4%
2%

2014

2011

2008

2005

2002

1999

1996

1993

1990

1987

1984

1981

1978

1975

1972

1969

1966

1963

1960

1957

1954

1951

1948

0%

Year
Data from U-3 report is seasonally adjusted: Official unemployment rate per the International Labor Organization definition occurs when people are without
jobs and they have actively looked for work within the past four weeks. Source: Bureau of Labor Statistics

U.S. Employment - Total Full Time
1945-2013 (Yearly)
Recessions
160,000

120,000
100,000
80,000
60,000
40,000
20,000

Year
Source: U.S. Bureau of Labor Statistics
Survey includes persons 16 years of age and over

2011
2013

2008

2005

2002

1999

1996

1993

1990

1987

1984

1981

1978

1975

1972

1969

1966

1963

1960

1957

1954

1951

1948

0
1945

Thousands of People

140,000

Total Employment Population Ratio
1947-May2014

Recessions

66%

64%

62%

60%

58%

56%

Year

2014

2008

2002

1996

1990

1984

1978

1972

1965

1959

1953

1947

54%

Are we on the Road to
‘Japan’ ?
Ronald H. Muhlenkamp

Muhlenkamp & Company, Inc.

Intelligent Investment Management

© 2014. All rights reserved.

Japan
Government Spending as a % of GDP & Japanese Structural Growth Rate
0.139

5.0

4.0

0.153
Ratio

3.0

2.0
0.168
1.0

0.0
0.185

-1.0
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Year
Government Spending as a % of GDP Left Scale [ma 4]
Structural Growth Rate of the Japanese Economy [c.o.p 4 quarters, ma 28]

Source: Reuters EcoWin
Compliments of GaveKal Research. Used with permission.

Japan
Government Spending & Long Rates in Japan
0.1
0.13

The living proof that the
crowding out theory does not
work

7.2000

3.6000

Ratio

0.16

1.8000

0.19

0.9000
87

88

89

90

91

92

93

94

95

96

97

98

99 00 01 02
Year
Japan, Government Benchmarks, Bid, 10 Year, Yield, End of Period, JPY [ma 4]

Compliments of GaveKal Research. Used with permission.

03

04

05

06

07

08

09

10

11

Central Gvt / GDP Inverted Left Axis
Source: Reuters EcoWin

France
France: Ratio of Public Sector to Private Sector & Structural Growth Rate
Ratio Public Sector to Private Sector & Structural Growth Rate
0.68

4.0

0.67
0.66

3.5

0.64
0.63

3.0
Percent

Ratio

0.65

2.5
0.62
0.61

2.0

0.60
0.59

1.5

0.58
0.57

1.0
78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Year
Right Scale: Structural Growth Rate
Ratio
Source: GaveKal Research
Compliments of GaveKal Research. Used with permission.

France
Ratio Public Sector to Private Sector & Unemployment in France
0.43

11

0.42
10
0.41
0.40

9

Ratio

0.39
8

0.38
0.37

7

0.36
6

0.35
0.34

5
0.33
0.32

4
78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Year
France Unemployment rate Right Scale
Ratio Public Sector to Private Sector
Source: Reuters EcoWin

Compliments of GaveKal Research. Used with permission.

UK
UK:Ratio Central Government Expenditures to GDP

& Valuation of Shares
0.17

40
Government as a Solution

0.18

Supply Side

35

0.19
30
0.20
25
0.21
20
0.22
15

0.23
Government as a Solution

0.24

10
70

72

74

76

78

80

82

84

86

88

90

92

94

Year
Stock Market Value vs UK Companies Gross Operating Surplus (PE Ratio)

Compliments of GaveKal Research. Used with permission.

96

98

00

02

04

06

08

10

12

Ratio Central Government to GDP
Source: Reuters EcoWin

U.S.
Government Spending as a % of GDP & Structural Growth Rate
0.16

5.0

4.5

4.0
0.19

Ratio

3.5

3.0

0.23

2.5

2.0

1.5
68

70

72

74

76

78

80

82

84

86

88

90
92
94
Year
United States, GDP, Overall, Total, Constant Prices, AR, SA, Chg Y/Y [ma 40]
Gvt Spending as a % of GDP, Left Scale, Inverted

96

98

00

02

04

06

08

10

12

Source: Reuters EcoWin
Compliments of GaveKal Research. Used with permission.

Government Spending, Percent of GDP
1980-2013
60%
55%
50%

Canada
United States
Japan

45%
40%
35%
30%

Source: Bloomberg

Year

2013

2008

2002

1997

1991

1986

1980

25%

Gross Domestic Product
Canada, U.S. and Japan
(Current Dollars)
1960-2012 (Yearly)

14,000

U.S. (Left Axis)
Japan (Left Axis)
Canada (Right Axis)

1600

12,000
1100

10,000
8,000

600

6,000
4,000

100

2,000
0

-400
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012

Billions of Current U.S. Dollars.

16,000

Year
Source: World Bank

Billions of Current U.S. Dollars.

2100

18,000

Source: http://federalreserve.gov

S&P 500 Index
1945-May2014
3.5

1000000

Recessions
900000

3

800000

49%

700000

52%

2.5

600000

34%

2

20%
500000
400000

28%
20%
26%

1.5

22% 36%

300000

48%

200000

20%

100000

At least 20% correction in S&P 500 Index

NOTE: The S&P 500 Index is a widely recognized, unmanaged index of common stock prices. You cannot invest directly in an index.

Source: Bloomberg

2014

2010

2005

2000

1995

1990

Year

1985

1980

1975

1970

1965

1960

0

1955

1950

27%

1
1945

Base 10 Log

23%

S&P 500 Index vs. S&P 500 Index Earnings per Share (EPS)
1945-May2014
2.2
3.5

S&P 500 Index (Left Axis)
S&P 500 Index EPS (Right Axis)

1.7

3

52%
1.2

2.5

20%
34%
0.7

2

28%
22% 36%
26%

1.5

20%
48%
0.2

20%

At least 20% correction in S&P 500 Index

Year
NOTE: The S&P 500 Index is a widely recognized, unmanaged index of common stock prices. You cannot invest directly in an index.

Source: Bloomberg

2013
2014

2009

2005

2001

1997

1993

1989

1985

1981

1977

1973

1969

1965

1961

1957

-0.3

1953

1949

27%

1

1945

Base 10 Log

49%

Base 10 Log

23%

The Middle Class Tax Target
Total taxable income for all filers
by adjusted gross income
2008

Source: Internal Revenue Service

The Middle Class Tax Target
Total taxable income for all filers
by adjusted gross income
2011

1.6
1.4

$1.14 Trillion

1.0
0.8
0.6
0.4

.34

0.2

.27
.14

.20
.08

.11

Adjusted Gross Income ($)
Source: Internal Revenue Service

>10 mil.

5-10 mil.

2-5 mil.

1.5-2 mil.

1-1.5 mil.

500-1 mil.

200-500K

100-200K

75-100K

50-75K

40-50K

30-40K

25-30K

20-25K

15-20K

10-15K

5K-10K

1-5K

0.0
$0

Dollars (Trillion)

1.2

Natural Gas:
An Energy Game Changer
- An Update
Ron Muhlenkamp
Muhlenkamp & Company, Inc.

Intelligent Investment Management

© 2014. All rights reserved.

Working Gas in Underground Storage Compared with 5-year Range
Week ending May 23, 2014

Last 24 Months
5-year average

Note: The shaded area indicates the 5-year range between the minimum and maximum values for the weekly series,
between 2009-2013.
Source: U.S. Energy Information Administration; Form EIA-912, “Weekly Underground Natural Gas Storage Report.”

Natural Gas
Crude Oil
1995–6/2/2014

(Daily)

Source: Bloomberg; Oil; Generic 1st 'CO' Future, Natural
Gas; Generic 1st 'NG' Future delivery to Henry Hub

Source: Bloomberg

U.S. Carbon Dioxide Emissions from Coal
1972-Feb2014 (Monthly)
250

150

100

50

Year
Source: U.S. Energy Information Administration, Monthly Energy Review.
Note: Reflects total carbon dioxide emissions in metric tons by month.

2014

2013

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1990

1988

1986

1984

1982

1980

1978

1976

1974

0
1972

Million Metric Tons

200

U.S. energy-related CO2 emissions in early 2012 lowest since 1992
U.S. Total Carbon Dioxide Emissions from Energy Demand
1973-Feb2014 (Monthly)
600

Million Metric Tons

550
500
450
400
350
300

Year
Source: U.S. Energy Information Administration, Monthly Energy Review.
Note: Reflects total carbon dioxide emissions in metric tons by quarter.

2013

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

Ron Muhlenkamp & Company

1985

1983

1981

1979

1977

1975

1973

250

Analysts’ Presentations

Muhlenkamp & Company, Inc.

Intelligent Investment Management

© 2014. All rights reserved.

Direct TV
Purchased in June 2013
At purchase:
Forward P/E
10.5
Return on equity N/A
Free cash flow 6%

Source: Bloomberg

Rationale for purchase: if business
remained stable expected returns next
2 years about 15%/yr as FCF and
additional debt bought back shares.
Risks: increasing cost of content,
inability to retain US customers, poor
profitability in South America.
May 2014 AT+T announced offer to buy
DTV at $95/shr.
Gains to date ~ 25%

Oracle
Financial Metrics
ROE
Trailing PE Forward PE
>20%
17.5X
14.4X
Bloomberg data as of 6/2/2014

Revenue By Segment, $ Billions
Segment
Software
Hardware
Services

2011 2012 2013 Est. 2014* Est. 2015*
24.0 26.1 27.5
29.0
30.8
6.9 6.3 5.3
5.4
5.5
4.6 4.7 4.4
4.2
4.2

Total Revenue
35.6 37.1 37.2
YoY Sales Growth
4.2% 0.2%
*Credit Suisse forecast, 5/31 Year End

38.5
3.7%

40.5
5.2%

Catalysts



12C database launch; last major release in 2007
Optimized software/hardware solutions
Recent positive hardware sales comps
Strong balance sheet, cash flows, and share repurchases

Total U.S. New Privately Owned Housing Units Started
Seasonally Adjusted
1959-Mar2014 (Monthly)
3.0

2.0
1.5
1.0
0.5

Year
Source: U.S. Census Bureau

2013

2010

2007

2004

2001

1998

1995

1992

1989

1986

1983

1980

1977

1974

1971

1968

1965

1962

0.0
1959

Units (Millions)

2.5

HanesBrands






“Innovate to Elevate”
Dominant Global Brands
World Class Manufacturing
Distribution
Stock Valuation
Management Team

Top Holdings 3/31/14
Company

Industry

% of Assets

Industry % of
Assets

IT Services

8.7

8.1

Diversified Financial Services

5.2

10.2

Airlines

4.6

8.0

SONIC AUTOMOTIVE

Specialty Retail

4.3

5.3

STATE STREET

Capital Markets

4.2

4.0

Software

4.2

7.0

Biotechnology

3.7

6.0

AMER INT'L GROUP

Insurance

3.4

6.0

LINCOLN NATIONAL

Insurance

3.2

6.0

MICROSOFT

Software

3.0

7.0

ALLIANCE DATA SYS
JPMORGAN CHASE Co.
DELTA AIR LINES

ORACLE
CELGENE CORP

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

Questions and
Responses

Muhlenkamp & Company, Inc.

Intelligent Investment Management

(ROE) is a company’s net income (earnings) divided by the owner’s equity in the business (Book Value); ROE = Earnings/Book Value. This percentage indicates company profitability or how efficiently a c

Glossary
Return on Equity
(ROE) is a company’s net income (earnings) divided by the owner’s equity in the business (Book
Value); ROE = Earnings/Book Value. This percentage indicates company profitability or how
efficiently a company is using its equity capital.

Trailing Price-To-Earnings Ratio
Calculated by taking the current stock price and dividing it by the trailing earnings per share for
the past four quarters.

Forward Price-To-Earnings Ratio
Calculated by taking the current stock price and dividing it by the earnings estimates for the next
four quarters.

Free Cash Flow
Represents the cash a company is able to generate after paying out the money required to
maintain or expand its business

The comments made by
Muhlenkamp & Company are
opinions and are not intended to
be investment advice or a forecast
of future events.

Muhlenkamp & Company, Inc.

Intelligent Investment Management