QUARTERLY LETTER
Published First Quarter 1997
Muhlenkamp
Memorandum 41
1996 has been a good year. Financially it
has been a very good year. This fact alone has some people
nervous.
The three sentences above are a repeat of
our opening comments one year ago.
We went on to say, "The current headlines on the budget
debate and Bosnia enhance this nervousness." Since then,
we have had elections in which the American public appeared
to vote for continuing political debates, our troops in Bosnia
remain unshot, and our president remains unindicted. So a
number of negative shocks, which could have hit the markets,
haven't happened - at least not yet.
Evaluation
Stock prices are fair.
Long–Term Picture
A year ago we concluded that economically,
"The big picture is very positive." This remains
true today.
Intermediate Picture
A year ago we wrote, "The U.S. economy
shows few excesses and is likely to continue a gradual expansion.
Americans have become conservative spenders and aggressive
savers. Our politicians are arguing about how much to throttle
back spending, not whether or not to spend less. The Federal
Reserve has room to lower interest rates and their most recent
two moves have been downward." Since then, the economy
did better than we expected, which is one reason many stocks
did better than expected. This raised a fear of inflation,
which we think is unwarranted (and which we recently discussed
in Memorandum
40). For 1997, we expect a continued economic expansion,
but the increases in corporate earnings are likely to be considerably
less than in 1996, limiting the increase in corporate values.
Short–Term Picture
Since mid-July, the bond market has improved
and the major stock market averages are up 14-20%. We have
received 18 months worth of returns in 6 months. This fact
alone makes us a bit nervous. Logically, the markets could
move sideways while the economy catches up, but markets seldom
move sideways. It would disappoint too many commentators who
crave the dramatic. In short, we expect choppy markets for
the next few months, probably with a downward bias.
But our bigger point is that the focus
on the market is the wrong focus. When aggregate values are
fair, the focus needs to be on individual companies where
values are good. This focus has served us well in the 1990-1996
period and we will continue to pursue it.
Read our quarterly newsletter, Muhlenkamp
Memorandum, for more by Ron Muhlenkamp.
|