QUARTERLY LETTER

Published Second Quarter 1998
Muhlenkamp Memorandum 46

The First Quarter of 1998 witnessed another strong gain in stock prices. The strength included a broad array of mid-cap and small-cap companies (market breadth was good), unlike some periods in the recent past when price strength was limited to big-cap stocks. The strength also included a number of foreign markets as Europe moves to a common currency and as South Korea takes appropriate and aggressive action to open its markets and to put its finances on a competitive basis. The major problem remains Japan, which is moving very, very timidly to address its problems.

At year-end, we judged U.S. stock prices to be fair based on 1997 earnings. We now judge prices to be fair based on 1998 estimated earnings. Since it's only April, there is ample time for a normal (5-10%) market correction this year. We don't expect a decline greater than 10%, because the trends in GDP and inflation remain positive. In summary, prices are fair; the long-term and intermediate-term trends are positive; in the short-term we expect prices to be volatile. Investors have three choices for their investment funds: short-term debt, long-term debt and equity. Today the prospects for each are:

According to a study by Ibbotson Associates, which show returns since 1925, the average returns over that period have been:

Folks, after a thirty-year digression, we are back to normal.

If you would like our explanation of the how's and why's of the digression and the return to normal, we encourage you to attend our seminar or purchase our video.

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