QUARTERLY LETTER

Published Third Quarter 2000
Muhlenkamp Memorandum 55

The trends we wrote about three months ago continue.

Inflation remains under control.

The economy, while still expanding nicely, is moderating from the growth rates of the Fourth Quarter of 1999 and the First Quarter of 2000. This allows the Fed to adopt a "wait and see" attitude and makes further hikes in short-term interest rates questionable.

Long-term treasury rates peaked at 6.7% in January and are now at 6%. Long-term corporate rates peaked in May and they, too, have rolled over; so the bond market has bottomed. Historically, after the bond market bottoms, financial stocks (especially the big banks and big brokers) outperform bonds which is why we own financial stocks instead of bonds. This pattern is holding true this year.

The "hype" stocks (internet, telecom, and biotech) peaked in March and suffered a severe correction. Since then, stocks of the best of these companies have rallied. Everything else remains decimated. As examples, the two stocks we mentioned in January (Muhlenkamp Memorandum 53), Freemarkets and Qualcomm are now at $54 and $64, down from peaks of $370 and $200, respectively.

With the decline in "hype" stocks, the market has begun to look elsewhere for ideas. A broader list of stocks is doing better, some of which we own. We have been benefiting from owning leading financials and certain energy related stocks. We expect the strength in financials to gradually rotate to smaller companies, and a broader list of stocks to do well as the fears of higher inflation and/or a hard landing dissipate. We expect the markets to be selective and expect the high daily market volatility to continue. We think it is a very good opportunity to put money to work.

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