QUARTERLY LETTER

Published First Quarter 1998
Muhlenkamp Memorandum 45

Another Good Year — Selectively

1997 has been a good year. Financially, it's been a very good year. This fact alone has some people nervous.

The three sentences above are a repeat of our opening comments one and two years ago. During 1997, the U. S. economy continued to grow at a healthy rate and inflation continued to decline. This combination resulted in lower long-term interest rates and continued gains in consumer confidence, corporate profits, and stock prices. It has also resulted in confusion among Keynesian economists, some of whom still maintain that it can't happen.

Domestically, we see nothing that would reverse these current trends, although we do expect each of them to moderate. Given no major outside influences, the U.S. economy is likely to continue to grow, but at a slower rate. Inflation is likely to continue a gradual decline and corporate profits are likely to continue to grow, but at a slower rate. Each of these trends are positive for stock prices, which are currently at fair values.

But the real difference is that the Far East has the potential to become a major influence. Since our one page note of October 30, 1997, South Korea has joined the list of Asian countries suffering currency devaluation and liquidity crises. The economies of Thailand, Malaysia, Indonesia and the Philippines are too small to have a major impact on the world economy, but the addition of South Korea to the list, along with the vulnerability of Japan, creates a potential risk to the world and American economies.

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