QUARTERLY LETTER
Published First Quarter 1990
Muhlenkamp
Memorandum 12
The Fourth Quarter of 1989 was largely a
wait-and-see period. The trends in economic data we discussed
in Issue 11 continued, with the Gross National Product growing
at a modest rate and interest rates declining slightly. We
won't repeat the comments of Issue 11 here, but we do encourage
you to reread them, as they remain valid and timely. In sum,
the economy is on a slow growth path which the Federal Reserve
Board desires. A serious recession or inflation above 5% is
becoming less and less likely. What this gradual approach
will continue to require is patience.
Wall Street is very short on patience and
long on hopes and fears, which is one reason why prices are
often volatile on a short-term basis. On Friday October 13th,
United Air Lines announced that it was unable to get financing
for a leveraged buyout, and its stock lost its "takeover
premium." Other stocks, which had been bid up on hopes
of similar deals, also declined. In our opinion, this move
was justified.
In early December, Wall Street turned fearful
of real estate and anything related to it, including the shares
of commercial banks and savings and loans. We have sizable
positions in several which were hit hard on fears that any
real estate loan is a bad real estate loan. We have done a
lot of work in choosing issues with good balance sheets, low
exposure to commercial real estate and diverse markets. In
early December, being choosy didn't help - prices of the good
declined with the bad. We don't think the blanket sell off
was justified, so we doubled checked our numbers and bought
some more.
We have been wary of real estate, especially
commercial real estate, ever since mortgage rates climbed
well above inflation in 1982. We have also warned that a big
house with a big mortgage is no longer the financial bonanza
it was in the 1970s, but this does not mean that people will
quit paying on their mortgages.
Read our quarterly newsletter, Muhlenkamp
Memorandum, for more by Ron Muhlenkamp.
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