The Post--Robert O'Harrow Jr. : "Finding Rock Bottom"
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>>>Finding Rock Bottom
By Robert O'Harrow Jr.
Washington Post Staff Writer
Thursday, January 25, 2001 ; Page E01
For some, the truth is buried in spiky graphs and long tables of financial data. Others search for it like a psychologist looking for improvement in a shaky patient.
Whatever their method, money managers everywhere pine for the same thing these days: signs that Wall Street has hit bottom and that stocks are poised for another sustained rise.
Like so much market analysis, such predictions are an inexact mix of hard math and intuitive guesswork. Sometimes the bottom doesn't become clear until much later. But after one of Wall Street's worst years in recent history, professional money managers are intensely debating whether the market is bouncing around the bottom.
Investors with accurate timing can not only enrich themselves, they also can earn bragging rights for years to come. That's what happened to Fred Kobrick after the Persian Gulf War. With stocks floundering, he decided they had hit bottom. A quick adjustment in investment strategy paid off handsomely. "I just sat there and we became the Lipper fund of the year," said Kobrick, a market veteran who manages about $1 billion.
Ashi Parikh likens finding the bottom to identifying good terrain before a military skirmish. "You can switch your strategy," said Parikh, a manager who oversees about $3 billion in growth funds for Eagle Asset Management.
Henry Herrmann, the top manager at Waddell & Reed, considers the process an elaborate "psychology test."
Here are some of the divergent ways money managers try to zero in on the bottom. They agree that picking the moment when the direction on Wall Street changes is only one aspect of investing. It's also harder than it seems; consider how few money managers anticipated last year's catastrophe.
There's no question, though, that good timing in tough times helps satisfy a greedy soul.
Positive Pessimism
Kobrick is a stock picker from way back. He believes that investor emotions and behavior offer some of the BEST indicators of where the market is going.
"People tend to forget that stock market cycles and financial cycles are reflections of human behavior cycles," said Kobrick, who runs his own funds, including one that focuses on emerging growth.
Often, Kobrick said, investor sentiment is opposite of what the market's future holds. Consider the end of last year. Even a peep of bad news about one company sent stocks in the entire sector tumbling. That in turn brought the entire market down several times.
Extreme pessimism can be, in times like these, a sign that the market is nearing its bottom, Kobrick said. That's because a falling market can bring down otherwise outstanding companies, something Kobrick and others call "leader capitulation." Microsoft Corp. and Cisco Systems Inc., for example, both have great prospects. But they got hammered repeatedly last month. Cisco fell $14, losing 24 percent of its value. Microsoft, which ended 2000 at $38.25, lost 20 percent of its value in December.
Investors seem unsure in such times which companies will lead the market up. They bemoan their chances of getting any solid returns. Analysts begin issuing "cookie cutter" gloom-and-doom forecasts about the economy and corporate earnings, Kobrick said.
"There's no creativity to it, and nobody's trying to put the pieces together," Kobrick said of market watchers. "Classic bottoms are caused by all the selling having been done."
Sound familiar? Kobrick noted that today few investors seem optimistic.
"Nobody's walking about saying, 'I'm going to get there. I'm going to make a fortune,' " he said. That's part of the reason he thinks the market is bottoming out. "It's counterintuitive. That's part of the art of the game."
Direction Is Everything
James Paulsen, chief investment officer of Wells Capital Management, is a numbers guy.
Among other things, he likes to track whether more stocks are going up than going down over time. And for this, he charts a rolling ratio for the New York Stock Exchange. Starting in 1993, that line hit a peak in April 1998 and a valley last October. Since then, stocks have shown daily gains 8,600 times more than losses, he said.
"More important in this isn't the level. It's the DIRECTION," said Paulsen, an economist who helps manage about $80 billion. "It keeps getting better every day."
He's constantly measuring the growth of the money supply to the growth in the economy.
... When the two rates converge, it leaves little extra money for investing, he said.
On the other hand, the Fed's recent easing of interest rates could lead banks to lend more easily.
...That, he said, will increase the supply of money for investing, among other things, and spur investors to expect a rise in stock prices.
... "That is an extremely good positive for creating a bottom," Paulsen said.
For other signs, Paulsen is keeping a close watch on the performance of companies that historically have been very sensitive to changing interest rates, such as Alcoa and DuPont, along with consumer cyclicals such as Wal-Mart and Ford. "Those areas will be early indicators the economy is expecting an upturn," Paulsen said.
No Big Deal
Like many money managers, Ashi Parikh uses a variety of methods in his search for key moments in the market: data analysis, psychology, a bit of intuition. His approach differs depending on the sector, since some industries might already have hit bottom while others continue to slide.
In recent weeks, Parikh figured that he was watching the technology sector bottom out when he saw the market's reaction to a glum announcement by Cisco about prospects for the year. Analysts quickly downgraded the stock and cut earnings estimates.
But instead of panicking, the market was passive.
To Parikh, that's a sign of the bottom, when sellers are blase about bad news that might have decimated the same stock a month earlier. "The day the news came out, it was almost a relief," he said. "The market shrugged it off."
Another important indicator was the fact that companies were starting to beat earnings estimates. IBM and Intel, for example, met earnings expectations. "Not only was it not as bad as people thought, it was pretty good," Parikh said.
The neon sign of indicators, of course, was the interest rate cut by the Federal Reserve. "Obviously, the lowering of interest rates tells us the Federal Reserve monetary policy will be very friendly to the markets," he said. "Most investors know the old axiom: Don't fight the Fed."
Parikh also watches the flow of money in and out of the market. When there is a cash buildup in money-market funds, he figures that large amounts of money could flow into stocks.
More than $54 billion flowed into money market funds in the week before Jan. 10 -- the most ever in a week's time, according to US Bancorp's Piper Jaffray.
"It's a good sign because money that's going into money markets is waiting to go into equity funds," Parikh said.
Parikh also said declining oil prices will help. "I think we're in the bottoming process," he said. "I don't think we're off to the races yet."
Too Early to Say
Henry Herrmann, of Waddell & Reed, said his approach mixes data with gut feelings. "Bottoms sort of pop into your head in different ways and different times," said Herrmann, who helps oversee about $37 billion. For example, he recalls the day in December when something like 900 companies on the New York Stock Exchange hit 52-week lows. "It was like 10 to 1 on the downside," he said.
That was just too extreme, given the state of the economy and corporate earnings. Among the big losers were companies such as Cisco, Microsoft and other blue-chip technology stocks that had long sustained the market by serving as refuge for nervous investors. "All of a sudden, the defensive names start running out of steam," Herrmann said.
That oddly served as a sign that the worst of the market's nine-month tumble was over,, he said.
Herrmann often considers the credit spread -- the difference in interest rates offered by the Treasury and corporations -- a good sign of investor sentiment and whether the market is over its misery. Herrmann noted that that spread has narrowed considerbly in recent months.
"It was telling you at the same time the market was imploding, the outlook for the future was improving," he said.
Herrmann listens closely to the predictions of market mavens. During downturns on Wall Street, he's especially alert to "extremely negative sentiment." He reckons that he needs to become more aggressive as an investor when the commentary becomes apocalyptic.
"It also says human psychology has done it again," he said. "The pendulum always swings back."
As for prediction, Herrmann is cautious. He's telling his investors that it won't be clear what kind of bottom this is -- short-lived or long-lasting -- until late winter. "It could be a saucer, or it could be a V," he said referring to how it will look as a graph. "School's still out on that."
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