QUARTERLY LETTER

Published Second Quarter 1995
Muhlenkamp Memorandum 34

We said in January (Newsletter #33) that declines in the Bond Market and the value of the dollar appeared to have reversed in November 1994. We also concluded that US Long-bonds were compelling buys and that many stocks were even better buys. Since November U.S. Treasury Bonds are up 8%, recovering one-third of their prior year' s decline. Stocks are up over 10%, with the major averages setting new highs. The U.S. economy continues on an almost ideal path of decent growth and low inflation.

The remaining question is the value of the U.S. dollar, particularly relative to the German D-Mark and the Japanese Yen. Actually, it is not so much a case of weakness in the dollar (which is stable to up versus nearly all other currencies) as it is strength in the D-Mark and the Yen. We believe such strength reflects greater confidence by international investors in the fiscal discipline of Germany and Japan, relative to that of the U.S. Very simply, Germany and Japan do a much better job of controlling government spending, so the international investment community (people like me) have greater confidence that they won' t inflate away the value of their money. The best way for our government to strengthen the dollar would be for our legislators to vote cuts in government spending.

We expect this to happen, but only as a last resort. Our fear is that Congress will initiate other actions in attempts to shore up the dollar. We would view such actions as attempts to avoid fiscal discipline. If the markets agree with us, such actions would backfire, driving the dollar still lower. Putting that fear aside, we believe that Long-term Treasuries at yields of 7.4% are attractive, and many stocks are more attractive. Frankly, we like the current circumstances. The economy is good, bond yields are good. Stock values are good, and there' s enough change and uncertainty to give the news media something to worry about and to try to keep the investing public off balance. The time to be fearful is when the public is not. So we're continuing to research and buy stocks of good companies in the current market.

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