For Money Managers, a Daily Search for Signs of Trouble - WSJ
3/25/15, 10:01 AM
For Money Managers, a Daily Search for Trouble
ENLARGE
David Kotok reads research reports early in the morning on his stationary bike at his Florida home. He
calls the hour on his bike ‘some of the best time of my day.’ Photo: Edward Linsmier for The Wall Street
Journal
By
E.S. Browning
March 23, 2015 5:15 p.m. ET
SARASOTA, Fla.—Most mornings at 5:45, David Kotok hops on his exercise bike, straps a small miner’s
lamp to his forehead to read in the twilight and begins scouring research reports for signs the stock market
could crumble.
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For Money Managers, a Daily Search for Signs of Trouble - WSJ
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The Florida money manager, who is 72 years old, is bullish, but things can change suddenly. This month,
he moved heavily to cash amid signs of trouble, but soon returned to stocks. So he pedals onward, reading
reports and shifting two smartphones and a sheaf of papers to avoid drops of sweat.
In Minneapolis, Doug Ramsey’s daily ritual involves tracking 130 indicators on subjects from corporate
performance to investor mood. He isn’t as bullish and has reduced his stockholdings.
“I think about it hourly. It really keeps me up,” said Mr. Ramsey, chief investment officer at Leuthold
Group, which oversees $1.6 billion.
Across the country, other money managers go through their own rituals, trying to anticipate trouble. The
S&P 500 has more than tripled and the Dow Jones Industrial Average is up 177% since their 2009
financial-crisis lows, and stocks are expensive. Stock collapses in 2000 and 2008 are fresh in investors’
minds.
The stock market stumbled in early March after big February gains, and money managers still are divided
on how serious the trouble could be. Mr. Ramsey’s indicators fell back to almost neutral recently and he
cut his holdings in stocks to 55% from 58%. “What we have today is a broadly overvalued market,” he said.
The more expensive stocks are, the harder it is for them to rise.
Mr. Kotok said the strong dollar will pull investment into the U.S., helping the economy and stock market,
but Mr. Ramsey said “the evidence is still pretty clear we could be in the last few innings of this thing.”
The S&P 500 trades at more than 20 times its companies’ net profits for the past 12 months, well above its
historical average of 15.5 and the highest since 2004, before the financial crisis, according to research and
money-management firm Birinyi Associates.
Sooner or later, stocks will suffer a bear market, meaning a decline of 20% or more. World economic
growth has slowed, pulling oil down 56% since June 20. Continental Europe is struggling to avoid
recession.
“You are always concerned there could be some kind of setback because the world is a volatile place,” said
former New Jersey Gov. Thomas Kean, a client of Mr. Kotok’s. Like Mr. Kotok, however, Gov. Kean still is
bullish.
Money managers come in types. Fundamentalists base decisions on the economy, interest rates and
earnings expectations. Stock pickers select preferred stocks or sectors. Momentum investors ride fast-
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For Money Managers, a Daily Search for Signs of Trouble - WSJ
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growing stocks. Technical analysts track charts and trends.
Mr. Kotok, chairman of Cumberland Advisors, which oversees $2.3 billion, looks at all these factors but, as
an economist by training, he emphasizes economic fundamentals.
‘We aren’t seeing the signals you would see prior to a major top.’
—Richard Dickson, senior market strategist at Lowry Research Corp.
One morning recently, as the sun prepared to rise, he pedaled while reading a Federal Reserve paper, an
interest-rate study and a report on the European Central Bank. He gets analyses from a long list of
research services and receives email alerts from his staff of 38.
“When I get up in the morning there is a series of things that have been emailed to me,” he said. “I use as
many measures around the world as I can.”
He calls the hour on his bike “some of the best time of my day,” although he has plenty of reading left
when it ends.
Mr. Kotok boosted cash holdings early this month as the European Central Bank prepared a program to
stimulate the region’s stagnant economy. The ECB hadn’t released details of its plans, which would affect
the dollar. Momentum indicators showed U.S. stock gains slowing. Mr. Kotok sold shares in multinational
companies, whose international sales would be hurt by a strong dollar, and boosted cash. Then, after
research persuaded him Europe’s moves would hurt multinationals but push investment into the U.S., and
after the market pulled back a bit, he put the money into the stocks of smaller companies not dependent
on foreign business.
“This market in our view is headed higher, maybe much higher,” Mr. Kotok said. “Money flows into the
dollar are extraordinary and in my view they will become even more extraordinary.” He did a similar
analysis when oil prices collapsed last year, and again when it seemed Greece might exit the countries that
use the euro, concluding both times that stocks would weather the storm.
Mr. Ramsey focuses heavily on market trends, as well as economics. Every Monday by noon he updates his
firm’s “major trend index,” tracking U.S. and foreign stock indicators. He often works weekends on it.
Leuthold Group’s indicators fall into five categories: economics, valuation, investor sentiment, momentum
and supply and demand. The economics look strong and stock demand has been all right. But high stock
prices have stretched valuations, and investor sentiment lacks skepticism. Momentum has weakened as
groups including transportation and financial companies haven’t kept up with indexes. When sectors fall
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For Money Managers, a Daily Search for Signs of Trouble - WSJ
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by the wayside, it can be a sign of trouble. Mr. Ramsey isn’t persuaded that the overall market has peaked,
however. “Some of the divergences I have described can go on a long time,” he said.
Richard Dickson, senior market strategist at Lowry Research Corp. in North Palm Beach, Fla., uses his
own large databases, focusing particularly on the supply and demand forces Lowry believes lie at the heart
of market action. As indexes rise, Mr. Dickson sees an increasing number of individual small-company
stocks down by 20% or more, a red flag.
He has advised clients to be careful about buying small stocks and focus mainly on midsize and larger
companies. But he said it can be months before the broader market is affected.
“We aren’t seeing the signals you would see prior to a major top,” when many larger stocks would be
falling, he said. “We are saying there are a lot of land mines in the small-stock area so you want to be very
careful about any buying you do there.”
Write to E.S. Browning at jim.browning@wsj.com
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