QUARTERLY LETTER

Published Fourth Quarter 2000
Muhlenkamp Memorandum 56

The trends we wrote about three and six 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 unlikely.

Long-term Treasury bond rates peaked at 6.7% in January and are now at 6%. Long-term corporate bond 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 acted better than their weaker competitors. This simply means that the stocks of the best companies remain vulnerable. Stocks of the weaker companies remain decimated.

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, including consumer cyclicals, 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.