QUARTERLY LETTER

Published Third Quarter 1998
Muhlenkamp Memorandum 47

The Second Quarter of 1998 witnessed a continuing drama, but few real surprises. In May and June, the U. S. stock market digested the strong up move of February through April. As it did so, the economic effects of the Asian problems began to be visible in the U.S. economy. These effects are most visible in import-export data, but are also starting to be visible in areas such as plans for hiring and capital spending.

We are also getting a better reading on which individual U.S. firms are most affected by the Asian problem, as well as which may be largely immune. Individual stock prices have begun to reflect these differences, a process which we expect to accelerate with the current reporting of second quarter earnings. As a result, stock prices are almost certain to remain quite volatile and large companies that appear unaffected may well receive a continuing "security blanket" premium.

Meanwhile, you can add Russia to the list of basket-case economies that are now seeking help from the I.M.F. (and ultimately, the U.S. taxpayer). Our judgment concerning Russia is similar to the smaller Southeast Asian economies. It is obviously a negative but not sufficient to reverse the strong economic trends in the U.S. and Western Europe. Still, the effects are cumulative and every bit hurts.

The linchpin in all of this remains Japan. Japan continues to do very little toward solving its problems. Despite a new Prime Minister, we expect Japan to continue to do very little. We do expect these events will slow the U.S. economy and squeeze corporate profits. There also remains the risk that an additional problem or two could coalesce into a worldwide recession. Obviously, we will monitor this closely.

Barring such an outcome, we expect the U.S. stock market to remain quite volatile, with a focus on individual stocks. Some stocks will do well and some will do poorly.

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