QUARTERLY LETTER

Published Third Quarter 2002
Muhlenkamp Memorandum 63

The economy continues to expand.

Those items which track the economy directly—such as retail sales, manufacturing output and capacity utilization—are moving up. Economists call these "coincident indicators." Those items which normally lag economic turns—such as employment and capital spending—have not yet turned (which is why economists call them "lagging indicators"). One way to think about these lagging items is that they are dependent on decisions by businessmen who are reluctant to spend money until after they see firm signs that they will receive money from their customers. Hence, the lag.

The markets continue to be volatile.

Since late in 2001, I’ve been saying that the market fad of 1999 is over except for the tax-loss selling. With no little amazement, I’ve observed that the great stock market fad, which began in the fall of 1998, has round tripped in only three years. The following chart illustrates this point.

Click here to view the current performance.

The "fad" stocks spent roughly 18 months on the rise and 18 months giving it back. I do hope I’ve made it plain that tax-loss selling will be a major consideration in those stocks directly affected by the fad mentality, meaning many of these stocks are still vulnerable. Most will have to go through two "tax-loss selling" seasons before they’re sold out.

Last quarter I mentioned the fears of a spread of "Enron-itis." These fears have now moved front and center. Much of the media and many people, who chose to look for and believed only the good news three years ago, are now choosing to look for and believe only the bad news. And any news (or rumor) will suffice. Meanwhile, these people are looking for someone else to blame for the losses they incurred on their choices of three years ago. And, of course, the politicians are willing to help them find someone (else) to blame.

A case in point is the charge that Wall Street analysts have a conflict of interest. Folks, Wall Street analysts have no more conflict of interest than the people selling you a new car or a new set of clothes. The job of an analyst at Morgan Stanley is not to make money for you; it is to make money for Morgan Stanley. If in 1999 an analyst or broker or money manager didn’t recommend (or buy) tech stocks, the client went to someone else who did. We know; we lost clients because we were unwilling to join the fad.

The current negative psychology will simply have to work its way through. Because we have confidence in the economy (and our assessments have been pretty good), we believe the current psychology presents us with the chance to buy some very good companies at good or great prices. We plan to do just that!

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