Quarterly Letter    

In preparing to write this letter to you each quarter, I review my letters from prior quarters. It helps my perspective. I recommend that you do the same. In particular, I’d suggest you read the letters since April 2003 (Muhlenkamp
Memorandum #66).

In Memorandum #66 we explained the methodology we use in determining fair values for bonds and stocks. Since then, we’ve maintained that inflation in the U.S. is on the order of 2%. Hence, we believe that short-term interest rates should move up to a 3% range and the long-term treasuries (the 30-year) are appropriately priced to yield about 5%. We also concluded that, on average, common stocks were/are priced to return about 8%-9%, which we view as fair.

We have further argued that the economy was/is recovering from a “normal cyclical recession” and that the litany of problems which are featured on the news would not throw it off track. Much of this has come to pass; we think the trend continues.

We have been able to benefi t from the uncertainties in the marketplace. Emotional moves such as we witnessed in 1999 (up) and 2002 (down) often result in a lot of stocks being mispriced: some priced much too high, others priced much too low. We’ve been able to benefi t as many of these stocks have trended toward fair value. The bad news is that we’re finding fewer and smaller bargains than we did two years ago.

A few months ago, I was asked what it would take to turn me bearish. I replied, “Give me something to worry about that we aren’t already worried about.”

In the meantime, the economy continues to expand, interest rates are doing what they should and our companies continue to do well. We expect to do well along with them.

— Ron Muhlenkamp

The comments made by Ron Muhlenkamp in this article are his opinion and are not intended to be investment advice or a forecast of future events. Copies of past newsletters are available on our website at www.muhlenkamp.com.