Quarterly
Letter
The economy
continues to expand. Consumer spending, business investment
and employment are growing at decent rates.
Inflation remains under control at less than 2%. Short-term
interest rates, heavily influenced by the Federal Reserve
Board, are moving up at a “measured” pace, but are still
below their fair value of about 1% over inflation. Folks,
short-term rates should be moving up.
Long-term interest rates, which normally exceed inflation
by 3%, are where they should be.Early this year, when
the Fed began raising short rates, long rates (which are
determined in the marketplace) jumped over 80 basis points
(8/10 of a percent). They have since declined 60 basis
points or 75% of the move. Long-term mortgage rates have
moved in concert. We find it telling that the move up
received a lot of commentary in the press; the move back
down received very little. We judge long-term rates, and
therefore bond prices, to be fair. We judge stock prices,
on average, to be fair with some a bit cheap and some
a bit expensive. This is normal.
Corporate earnings and balance sheets continue to improve.
We expect the stock prices of individual companies to
reflect the results of those companies. So far, our selections
are doing well.
The media continues to focus
on the negatives: things that could go wrong versus things
that are going right. That’s their prerogative. We’ll
point out that there were no successful terrorist acts
at the Olympics or our political conventions.
In Afghanistan, over 90% of the people eligible to vote
have registered, (and probably voted by the time you read
this). That election should help set a precedent for Iraq.
Our own elections are just a few weeks away. I like elections
because they provide a direct read on the mood of the
American public, without the filters of the pundits. So,
within a month, one more uncertainty should be resolved,
giving us some guidelines to the government policies for
the next four years.
— Ron Muhlenkamp
The information
in this article represents the opinions of the Fund Manager,
is
subject to change, and any forecasts cannot be guaranteed.