QUARTERLY LETTER

Published Fourth Quarter 1994
Muhlenkamp Memorandum 32

The Third Quarter of 1994 witnessed a continuation of the choppy markets we have seen since last fall. Those who look for patterns in stock or bond prices can find almost any pattern they want, simply by choosing the appropriate index. Of the Dow Jones Indices, the industrials are up for the quarter and the year, the transports are down for the quarter and the year and utilities are flat for the quarter and down dramatically for the year. Long-term interest rates are up for the quarter and the year, which has driven bond prices down and put downward pressure on stocks.

Meanwhile, in the real economy, the expansion continues at a healthy rate. Companies are adding value at an 8-10% annual rate. Once the markets absorb the near-term uncertainties, we expect stock prices to reflect these values.

We find it interesting that stock and bond prices worked their way higher during most of the third quarter, only to drop in the last two weeks of September. In the first and second quarters of 1994, the last two weeks of the quarter were the weakest periods as well. In March, the decline was triggered by margin calls in the bond market, in June by the weakness in the dollar, and in September, by fears of inflation because of the strength in the economy. We have discussed these topics in the last three newsletters (29, 30, 31), which we encourage you to reread.

1994 has also seen more than normal political uncertainty ranging from the health care bill to concerns about Haiti and Iraq and the upcoming elections. Each of these concerns fed the fears of the investing public. Meanwhile, many of the promised negatives of the Clinton administration are no longer a threat. The health care bill is dead; whether you were pro or con, you must be impressed by the thoroughness of the debate. So far, Haiti and Iraq are working out okay, and uncertainties about the election will be resolved in a few weeks (probably followed by uncertainty about what the new Congress will do). The American public continues to push our politicians toward the "none of the above" category we wrote about two years ago. We now have Congress people running against Congress, the President, and Congressional spending. I recently received a newsletter from my local Congressman. The entire newsletter is a list of items where Congress has cut its plans for spending (not necessarily cutting spending, of course). This is a man who usually votes for more spending, but he is now campaigning on budget cuts. Folks, this is great progress! The current U. S. Senate race in Pennsylvania is a dramatic choice between Senator Wofford, who consistently votes for more government, or Representative Santorum, who consistently votes for less government. The past 30 years have affirmed our founding fathers conclusions that the populace prospers best when the powers of government are limited. I do not often tell you how to cast your ballot, but I strongly recommend that our Pennsylvania readers vote for Representative Santorum in the current election.

The markets may remain choppy through mid-December, reflecting first the uncertainties of the election and then the effects of tax swaps and tax loss selling. Although the public, and therefore the markets, can always find new negatives when it really wants to, 1994 has already absorbed a pretty full menu of fears. We are finding good companies at good prices and, therefore, believe that now is a good time to be putting your money to work.

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