QUARTERLY LETTER

Published First Quarter 2003
Muhlenkamp Memorandum 65

December 2002

The economy continues to expand. Growth in Gross Domestic Product (GDP) for the past twelve months is 3%. This is "normal" growth, roughly equaling the long-term trends in population and productivity. But it is not the "catch-up" growth we’ve come to expect after a recession, which is why the unemployment rate has not yet begun to decline. As we said for the past year, we believe we’re recovering from a "normal cyclical recession." We haven’t made the governmental policy mistakes that would give us a depression or revived inflation. Nor do we see much risk of a "double-dip" back into recession. In many respects, the economy is acting much like it did after the 1990 recession which recovery was also somewhat "half-speed."

Stock prices continue to be volatile while seeking fair values. Fair value for most stocks is increasing as the economy expands, profits recover, and inflation continues to subside. We’re concentrating on owning those companies whose stocks are currently priced below fair value. We’re finding enough of these companies that we want to be fully invested and believe it’s a good opportunity to add to our stockholdings.

We do expect market and individual stock prices to remain quite volatile. Most investors don’t know value, they only know price, and they’re fixated on the prices of a few years ago. Those prices, particularly for the stocks caught up in the hope and hype of 1999-2000, were, and are, irrelevant. We expect it to take some time to squeeze out the remaining hope reflected in many of these prices. For the most part, we intend to avoid this psychological "game," while concentrating on owning good companies at good prices.

Sincerely,
Ron Muhlenkamp

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