Quarterly Letter    

We’re at an interesting point in the economic/investing landscape.

The economy, as measured by GDP growth and unemployment, has recovered from the 2001 recession. Short-term, long-term, and mortgage interest rates are at reasonable levels, given a core inflation rate of 2%. On average, we think stock prices are at reasonable levels given the above.

Most industries in the world economy have ample capacity with the exception of oil production and refining. Tightness in these markets has driven up the cost of fuel for the past two years, resulting in widespread consumer complaints but no visible (to us) changes in the daily consumption. The recent hurricanes in the Gulf of Mexico and the damage they’ve done to energy infrastructure may have changed that.

Over the years, our observation has been that people hate to change their daily habits and will only do so when the current pattern becomes too painful. So far, changes in the gasoline market have been in price. Shortages occurred only locally when too many people topped off their tanks or spent a lot of time on an interstate parking lot. Whether TV pictures of these shortages (along with the current price of fuel) will result in a change in daily habits, we simply don’t know yet. But if the refineries which were shut down for or by the hurricanes are too slow coming back up to full capacity, we may have shortages of gasoline for a period measured in weeks. We believe this would cause people to change their habits, possibly for an extended period.

In the meantime, the higher spending on fuel must come from other areas of each family’s budget. Recent surveys have identified eating out, movies and clothing as areas susceptible to cutbacks. We’re not confident in being able to predict which areas will be most affected, so we’re watching the data. The next two months should provide useful clues. In the meantime, we will continue to research good companies selling at reasonable prices.

— Ron Muhlenkamp

The information in this article represents the opinions of the Fund Manager, is subject to change and any forecasts cannot be guaranteed. Copies of past newsletters are available on our website at www.muhlenkamp.com.