QUARTERLY LETTER

Published First Quarter 1993
Muhlenkamp Memorandum 25

The Fourth Quarter of 1992 witnessed a strong rally in the stock market led by financial stocks, cyclicals and technology, many of which were mid-size. We participated rather well, resulting in a very good year. Once again, the public's uncertainty has allowed us to earn a good return. We continue to see signs of a strengthening economy. The shopping public is coming back, albeit gradually and with an orientation toward value. During the Christmas season, some stores and manufacturers ran out of merchandise.

Yet the media focuses on the layoffs and retrenchment at General Motors (GM) and IBM, usually concluding that things must really be bad if retrenchment is hitting the biggest and the strongest. They miss the point. The changes of the last 30 years have affected all companies. Most have changed and improved their operations in response. Only the richest have been able to defer responding for so long. The fact that it is finally hitting GM and IBM means that the retrenchment is nearing completion. Chrysler and Ford got their acts together (by necessity) 10 years ago. That is why, over the last ten years, while the average stock quadrupled, Ford and Chrysler were up nine times while GM is up less than 100%. When we bought Ford in 1982, people feared it was going bankrupt. We sold it too early, after it had tripled.

The point is that it is easy to change when you've been unsuccessful. The most successful are the most reluctant to change. After Chrysler and Ford negotiated wage concessions, the U.A.W.'s chief negotiator with GM was interviewed on nationwide television and was asked whether the U.A.W. would give GM wage concessions. She replied, "No - because our people don't think GM is in trouble." That was 10 years (and $12 billion in losses) ago. Today, Ford's labor cost per car is $500 less than GMs and GM's Board of Directors have finally recognized the problem. GM finally has a car, the Saturn, the public wants. Yet the U.A.W., rather than viewing a successful car as a way to secure jobs for its members, seems to view it as a lever to hobble the company. Every time the union has a "beef" with GM, it finds a way to shut down the Saturn plant.

When the biggest, wealthiest and most hidebound start rethinking what they are doing, I think it is time to rejoice. In 1992, we saw Congressmen running against Congress, General Motor's Board of Directors demote their chief executive twice, and the U.A.W. call off a strike at Caterpillar. All this occurred after watching the Communist Party implode in 1991. I find it hard to ask for much more than that. Yet we are also seeing the American public and industry intent on paying down its debt. Even politicians are discussing it, and they're always the last to get any message! It looks to me like, having defused inflation ten years ago, we are finally winding down the inflation psychology that followed it.

We recently visited the model train layout at Pittsburgh's Science Museum. It depicts daily life in the Pittsburgh area in the 1920s. It is a fascinating display and very well done, but it occurred to me that there were very few jobs in the '20s that I would care to work. I have no desire to work 40+ hours a week filling freight cars with a shovel and wheelbarrow or to cut stone with a hand saw. The only jobs depicted that I would like to have are train engineer (except in the summer) or mill crane operator (except in the winter). It is also apparent that in the 1920s, the railroads and the steel mills were the most mechanized (high tech) industries. Yet in 1968, when I asked the president of Yellow Freight how truckers had taken so much freight from the railroads after W.W. II, his one sentence reply was, "The Teamsters don't 'featherbed." Today, J.B. Hunt is shipping semi-trailers by rail because the company can't find enough truck drivers.

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