Brokers are getting jittery: Is the market about to dive?


November 06, 1995|By Bill Atkinson

LUNCH THESE days at the local brokerage firms is a sandwich, chips and a Rolaids chaser.

Just ask J. Eric Leo, chief investment officer with Legg Mason Capital Management Inc., who is a little jittery because the market hasn't dropped by more than 10 percent in three years.

"Everyone is uptight about it," says Mr. Leo, who manages a $300 million equities portfolio, a mutual fund, and oversees a $1.3 billion bond portfolio for Legg Mason. "You can feel it in the way the market reponds to disappointment. There is no mercy."

Portfolio managers are nervous because they are having trouble reading the market. On the one hand, inflation and unemployment are low, and corporate earnings have been strong, so in that respect, they are comfortable.

But the market is an irrational place, and that's causing angst. These days, a company gets hammered if it reports earnings that are a penny off, while Wall Street cheers when a firm fires workers. Mexico's political strife and worries that the U.S. government will default on its debt cause the market to sail downward. But the next day, it bubbles back to new highs as if all is forgotten.

These factors make the market impossible to read.

"I feel like a long-tailed cat in a room full of rocking chairs," Mr. Leo says. "When the correction comes, it will be a surprise to everybody."

Mr. Leo, 52, is a conservative investor. He manages money for wealthy individuals, pension funds and tax-exempt foundations such as hospitals. His clients typically look for steady gains over the long term. He puts their money in a core group of stocks, such as Diebold Inc., AMP Inc. and Albany International Corp., that aren't flashy, but have a lot of promise

He doesn't use hedge funds or short stocks because those aggressive strategies take too much manpower. They can also be dangerous if a manager isn't vigilant.

"We're plain vanilla," he says.

But by midyear Mr. Leo thought the market was too frothy, so he backed off a bit. He bought Colgate- Palmolive Co. and Avon Products Inc. because more of their earnings are coming from overseas markets, making them less sensitive to downturns in the U.S. economy.

Then he added more shares of Aetna Life & Casualty and McCormick & Co., reasoning that both companies are straightening out problems and will rebound with strong earnings. And he sold more volatile stocks such as Woolworth Corp. and Pfizer Inc.

If there is a significant drop in the market and the economy starts limping, Mr. Leo says he'll shift out of the conservative companies and buy stocks that have been beaten down, such as steel and paper companies, on the assumption they will rise again with the economy.

"There are a lot of irrational things that can happen," Mr. Leo says. "We think we have a lot of quality companies."

Robert S. Killebrew Jr., 56-year-old managing director and co-chairman of Alex. Brown Inc.'s investment committee, isn't popping Rolaids like the others. He, too, sees a drop coming, but it doesn't much matter.

"You have to have the lining in your stomach to go through them," he says. "If I woke up Monday morning and had this extraordinarily strong sense that the market was going to go down by more than 10 to 20 percent, I'd probably take a cold shower and forget about it because I'd probably be wrong."

Like Mr. Leo, he is a conservative investor. One of Mr. Killebrew's favorite sayings, which he swiped from his dentist, is: "We cater to cowards."

"If clients are swinging for the fences they haven't selected me," he says.

Mr. Killebrew manages a $60 million portfolio for wealthy clients, pension and profit-sharing plans and foundations.

He puts most of the money in companies that are big and stable, such as Coca-Cola Co., Norwest Corp., Johnson & Johnson and Motorola Inc. He buys smaller firms, too, that are young and grow briskly. They should crank out earnings for years to come. He's also got money in riskier areas such as trucking, insurance companies and real estate investment trusts.

"I am buying them to sell them," he says. "You are buying them when they are extremely undervalued."

He hasn't altered his strategy much since the market got jumpy, but he looks for ways to reduce his clients' risk through hedge funds, private placements, overseas investments and by "selling short against the box," a tactic used to protect the value of the security in a declining market.

If the market tanks, he'll sell stock to build up cash, then he'll be ready to buy solid companies at bargain prices.

Bear markets are gloomy times for most portfolio managers. Mr. Killebrew recalls the funk the market was in in 1973 and 1974. Everything he invested in seemed to go down -- for two years straight, he says.

"It was awful," he said.

But bear markets are inevitable, and Mr. Killebrew is hardly philosophical when he thinks about confronting the next one.

"It is no fun to be in the middle of a time when the market is going down," Mr. Killebrew said. "It just happens every three or four years. It is like getting a cold."

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