March 21, 2001
Heard on the Street
Fed Move Fails to Break
Pessimism Over 'Growth'
By KEN BROWN
Staff Reporter of THE WALL STREET JOURNAL
When the Fed first cut interest rates in January, the market took off like a rocket. Tuesday, it looked like the doomed space station Mir.
The difference between the two reactions says a lot about the mood among professional money managers, especially those who had bet on a quick rebound after the first rate cut. This group, still smarting from a six-week drubbing, is now gun-shy, wary of making any big bets.
Managers who focus on fast-growing companies and technology stocks are among the most gloomy, saying that they aren't seeing the growth in revenue or sales that will get them excited -- and that there is little evidence that growth will resume anytime soon.
"We've acknowledged the reality in the marketplace that probably 90% of tech companies will eventually be hurt by the economic slowdown and inventory correction," says Robert Turner, chairman and chief investment officer of Turner Investment Partners, who had boosted his firm's tech holdings on Jan. 3, the date of this year's first rate cut. His funds have paid for the move.
Turner Technology Fund, for example, is down 41% this year and 71% over the past 12 months. Now Turner's funds have a more defensive tilt. "Certainly the surprise to our viewpoint was how dramatically the economy slowed," Mr. Turner says.
"We resigned ourselves to having more bad news before good news on earnings," he says. "But we're also keeping in mind that stocks will move prior to earnings bottoming. What we've definitely started to see are the early-cycle stocks exhibiting better relative performance."
On Jan. 3, his funds sold some energy stocks to beef up tech holdings, buying shares of Ciena, Cisco Systems and JDS Uniphase, all of which are down sharply. But his current defensive stance has two elements. First, he is buying stocks that do well during a rebound: retailer, advertising and broadcasting stocks. On the tech side he is buying semiconductor and computer stocks, which historically are the first to bounce back. And he is holding onto his favorite names, even though they have been whacked.
While pessimism grows among growth managers, some investors who buy cheap "value" stocks, especially those of industrial companies that rise and fall with the economy, are getting more bullish, slowly shedding the more-cautious stance they took in January.
"I just think you do have the Fed as your friend," says John Schneider, who invests in value stocks for Pimco. "There's this tug of war between earnings cuts on the one side and improving valuations and the Fed on the other side."
Mr. Schneider, who stayed on the defensive in January, saying he expected a recession, now believes we are in one. That view had put him in the minority at the time, but now he has lots of company. He is also getting more bullish, mainly because the average recession lasts for 11 months and the stock market looks ahead six months.
"I'm guessing the market starts to turn midyear, [and] the economy starts to turn year end," he says. "I've gone from being very defensive to being more neutral and starting to buy some cyclicals."
While many growth managers are worried that the immediate future is pretty murky, their value counterparts say that the outlook six to 12 months from now is far clearer: Things will generally be better. That is because lower interest rates have nearly always boosted stocks.
"The ultimate outcome is probably pretty clear. The market has had a significant bear market and the traditional tools will remedy that," says Rick White, who co-manages the value-oriented Neuberger Berman Guardian fund. "The question is how long does it take, and there are straws in the wind that say we're well through that corrective process."
With that in mind, Mr. White, like any good value manager, is focusing on price, assuming that extremely cheap stocks will rebound when the environment improves. "Admit what you don't know, which is how long the cycle is going to last, and then let price be your friend," he says.
He readily confesses that the economic slowdown is "deeper than most people expected, including myself." He notes that in January, "there was some hope in the market that you would have a relatively brief pause, that would be shallow in character," with a rebound by the end of this year.
On Jan. 3, Mr. White approached the market cautiously, but he did snap up names that he thought would do well while interest rates were falling, including Compaq Computer, Carnival, Gap, AT&T, WorldCom, auto-parts maker Lear and semiconductor-equipment maker KLA-Tencor -- all of which have risen in the meantime, though several have given back some of their gains.
He is betting that a combination of defensive names and an increasing number of aggressive stocks will carry him through the year. "What you need to do is have a part of your portfolio built to float if business conditions continue to be choppy," he says. "Then you want part of your portfolio built for speed as the water gets calmer."
Besides Mr. Turner, growth managers taking a cautionary stance now include Bruce Bartlett, who specializes mostly in the stocks of fast-growing companies at OppenheimerFunds. "We could see a rebound later this year as the market starts to discount a turn in overall growth, but we don't invest in companies until they begin to exhibit superior levels of growth," he says.
Mr. Bartlett, who had a third of his assets in cash in January, is still holding more than 20% cash, largely because he can't find stocks he wants to buy. While he agrees the market will react in anticipation of better times, he wants to see real numbers to prove the good times have returned.
"What we said back in January was a cut in rates was not really going to solve many of the problems the companies are experiencing," he says. "Operationally, their growth is slowing. If anything, things have continued to deteriorate." |
