QUARTERLY LETTER

Published Third Quarter 1992
Muhlenkamp Memorandum 23

The first quarter of 1992 witnessed an increasing confidence in a rebounding U.S. economy. During the second quarter much of that confidence was dissipated. Consequently, while the first quarter saw an increase in long-term interest rates and in the price of cyclical stocks, the second quarter saw an offsetting decline in long-term rates and in many of those same stocks. Although the DJIA is up 3% for the first half of 1992, most other market averages are down, some rather significantly. Of a broad list of 5000 stocks, over 2000, or 40%, have declined 30% or more in price from their January/February highs. Thus we are getting the market correction that we asked for in our April newsletter. Of course, like most corrections, it has been less full than we had hoped because it includes some of our stocks. While stocks have been correcting, bond prices have appreciated modestly as interest rates have trended lower. Both have occurred for much the same reason, the economy is expanding, but at a very modest rate.

The American public continues to be cautious in it's spending, preferring to pay down debt rather than purchase ever more goods and services. We have discussed the likelihood of this happening at length in recent newsletters, but still have no idea how far the public will extend the trend. As a result of the public's desire to pay down debt, the economic recovery remains lackluster and interest rates continue to decline. From a long-term perspective, these are positive developments, but short-term they add uncertainty to the financial markets and make our politicians nervous. Effectively both investors and politicians are responding to the changing habits of the spending public, but have no more idea than we do how far the trend will go. In his testimony before Congress on July 21, Alan Greenspan made this same point.

For our part we are monitoring the flow of investment dollars (out of CD's and into _?) to get a handle on the pattern of interest rates, and we are monitoring the flow of political pressures (and votes in November) to get a handle on changes in the legislative and tax climate. As we get conviction in these areas, we will invest our money accordingly. On average, stocks are fairly priced, but we are seeing more companies at price levels we find attractive than we did early in the year. Consequently, we are currently adding to our stock holdings. If you are considering adding funds to your managed account, we think that now is a good time to do so.

Read our quarterly newsletter, Muhlenkamp Memorandum, for more by Ron Muhlenkamp.