Published Third Quarter 2006
Muhlenkamp Memorandum 79

by Ron Muhlenkamp   
Economic trends of the past year continue. The economy is growing nicely in the 3% – 3½% range and inflation remains contained in the 2%+ range. If you monitor these numbers, you might think I’m crazy because the GDP in the fourth quarter was about 1.7% (largely due to the hurricanes) and in the first quarter was about 5.7% (largely due to the rebound after the hurricanes). Similarly, inflation numbers have been higher, particularly when food and energy (always volatile) are included. So, reported numbers in GDP and inflation have been quite volatile. Similarly, the stock and bond markets (both domestic and foreign) have become quite volatile. Some parts of it we foresaw; some we
didn’t. (See the following essays “Looking for a Rich Harvest,” “Questions and Responses” and the “Muhlenkamp Minute.”) Suffice it to say that part of our job is to shield your assets when markets turn volatile on the downside, and we haven’t done that to our standard in the recent months.

I have frequently been asked to compare the current economy and markets to prior periods. In this vein, I believe the following:
• The economic and investment climate is most similar to the early 1960s; good GDP growth and contained inflation.
• The current stage of the business cycle looks most like 1994-1995 —
a soft landing or slowdown after a nice recovery from recession.
• The current psychology and market action are volatile. There is so much money, managed both professionally and privately, which is seeking to latch onto the latest fad or trend and then to be the first
one off (which is the hard part) that the markets will remain quite volatile. We think this will continue.

Many think that volatility is a bad thing. We think it is a good thing, allowing us to buy cheap or sell dear.

Because we like the climate and the seasons and, most importantly, we think we’re finding good companies at cheap prices (some of
which we own — and have gotten cheaper), we think it’s an opportune time to be investing money in our companies’ stocks.

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 web site at


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