QUARTERLY LETTER
Published Third Quarter 1994
Muhlenkamp
Memorandum 31
The second quarter of 1994 witnessed sharp
price moves in a number of markets. Various stocks, bonds,
commodities and currencies had interesting swings. Some moved
in concert with others in ways investors have come to expect,
while others acted (or reacted) in ways that were surprising.
We have consistently said that a 10% price
correction in the stock market (actually in any market) can
occur at any time. Last fall we said such a correction, if
started at that time, would most likely be triggered by a
correction in the bond market. We have had such a correction:
stocks have declined roughly 10%, bonds have declined 20%
and utilities have declined 30%. The additional 20% decline
in utility stocks occurred because our Federal government
changed the rules for electric utilities, forcing them to
compete with one another in the production and sale of power.
The decline in the bond market was exacerbated
by the recent decline in the dollar and the leveraged positions
that some investors had taken in the bond market itself. Margin
calls on these positions resulted in forced selling of bonds,
which appears to have climaxed in March of 1994. The falling
dollar and currency fears resulted in an additional round
of selling in late June. At this point, the selling pressures
seem to have abated, but another shoe can always drop. So
we can’t say with certainty that the decline is over.
Meanwhile, most companies are increasing
in economic value at a rate of 8-10% per year. We do not see
inflation getting much worse or the U.S. economy declining
anytime soon, so investment values have increased. Some analysts
are looking for a larger decline and better values, which
may or may not happen. Frankly, the best description of markets
that I have seen lately was a column by Mike Royko titled,
"Economics 101." Mr. Royko concluded that: almost
anything can happen; most things probably won’t (happen);
and if you prepare for just one thing, you are vulnerable
to another. Bottom line, we judge current values to be good
enough to be buying stocks and adding to our holdings.
Read our quarterly newsletter, Muhlenkamp
Memorandum, for more by Ron Muhlenkamp.
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