The Economic Data Refuse to Come Along Quietly

Once again, the stock market was reacting to economic news, which once again proved troublesome.

Major averages fell from their morning highs after the 10 a.m. release of the factory orders data for March. The 0.4% headline rise in orders was better than the expectation of a flat month, but capital goods orders (excluding defense and aircraft) fell 3.6% after modest gains in January and February.

Nondefense capital goods orders "are an indicator for future business capital spending" and the drop in March suggests "an absence of momentum" going into the second quarter, commented Susan E. Polatz, associate economist at Banc of America Securities.

Once as high as 10,117.54, the Dow Jones Industrial Average was recently flat at around 10,060.04. The S&P 500 was down 0.4% to 1082.08 vs. its intraday best of 1091.42 while the Nasdaq Composite was recently down 28% to 1649.51 after trading as high as 1695.07.

Managers and Stocks

Yesterday, I quoted two money managers about issues other than the nitty-gritty of their jobs. Here then, is that side of the story.

Brett Gallagher, who oversees about $4 billion as head of U.S. equities at Julius Baer Asset Management, remains "fairly defensively positioned," with cash representing about 9% of the portfolio. Given that, he expected the fund would have outperformed the S&P 500 by a wider margin "given the degree of the selloff."

Unofficially, Julius Baer's U.S. equity portfolio was down about 4.7% year to date vs. a decline of 6.2% for the S&P 500.

The portfolio suffered from "two big problems," Gallagher said: Compuware (CPWR Quote) and Tyco International (TYC Quote), which were down 33.5% and 68.7% year to date, respectively, through April 30.

Julius Baer remains long both stocks, although it has reduced its positions.

The fund also still owns shares of Calpine (CPN Quote), which Gallagher defended here in mid-February; Calpine is down 34.5% year to date through April.

Julius Baer did swap some of its Calpine shares for the firm's convertible bonds in early April, which limited some of the pain of last month's decline. "Since we made the switch, the stock is down 15% and the bond is down 3%, so it was a timely switch," Gallagher said. "We still like the stock and still like the story very much, but we're looking to reduce" exposure.

Midday today, Calpine shares were down 3.8% after reporting a first-quarter loss of 24 cents a share vs. a gain of 36 cents a year ago. (Gallagher wasn't available this morning to comment on the report.)

Given its holdings in Compuware, Tyco and Calpine, it's pretty surprising that Julius Baer's year-to-date performance isn't worse. Gallagher said the outperformance of the S&P 500 (you can't buy food with relative outperformance, but it is how many managers are measured) was accomplished through prudent sector calls, namely:

An underweight position in technology;

A focus on nonbrokerage financials such as FleetBoston Financial (FBF Quote), Comerica (CMA Quote), Chubb (CB Quote) and Washington Mutual (WM Quote);

A focus on nonpharma health care names such as Tenet Healthcare (THC Quote) and AmerisourceBergen (ABC Quote), and;

Consumer cyclicals, such as Hilton Hotels (HLT Quote).

"We have a number of names that have done well, but they've been entirely outweighed by a couple of big negatives," Gallagher conceded.

Still, there's a lesson here about the benefits of diversification and the need to cut your losses.

Managers and Stocks, Part 2

Brad Ruderman, managing partner at RCM Partners, a Los Angeles-based hedge fund, declined to discuss the fund's performance or its total assets, although he hinted it's about $100 million. So the lessons to be gleaned from his comments aren't of the same ilk as Gallagher's.

Still, Ruderman has a unique vantage point in being a partner at Whitenberg Investments, a broker/dealer that counts some of the biggest arbitrage funds as its clients.

"What we've gotten of late [from those funds] is selected nibbling in the most beaten-up sectors -- [including] the dreck of the dreck in telecom, software and semiconductors," Ruderman said. "And nothing noticeable from the short side."

Notably, our conversation took place before yesterday's rally.

As for his own hedge fund, Ruderman described himself as "market agnostic," with a recent allocation breakdown of 20% cash, 25% short and 55% long. "It's very difficult right now to make an absolute market call," he said. "Anyone who does is cheating themselves and the people who listen to them."

Presuming the market is a discounting mechanism, its recent message is that "big-cap growth stocks don't have enough growth to justify prices, and value stocks aren't really value anymore," Ruderman continued. "That's why you get this running in place," and "it's very probably you could have a trading range-[bound] market for years."

Still, he is "fairly positive near term" and has been making recent picks that are "the opposite of momentum investing."

RCM Partners has recently purchased shares of several beaten-up names, including Tyco, Dynegy (DYN Quote), Citigroup (C Quote) and Western Digital (WDC Quote).

The fund has also bought cable companies Comcast (CMCSK Quote) (which had a big gain yesterday after posting better-than-expected earnings), Charter (CHTR Quote) and Cablevision Systems (CVC Quote), believing they were unfairly tarred by the implosion at Adelphia (ADLAE Quote), which Ruderman described as a "special situation." ("Special" in the very non-politically correct sense, that is.)

Recent short positions included PolyMedica (PLMD Quote), which recently rallied sharply after the Securities and Exchange Commission ended its investigation, and restaurant stocks such as Ruby Tuesday (RI Quote). The chain's "aggressive financial agreements with franchisees" echo those employed by Boston Chicken, he said.

Additionally, Ruderman recommended shorting a basket of consumer lenders, such as Providian (PVN Quote), Capital One Financial (COF Quote) and Household Financial (HI Quote). "You've got to be really ambitious to buy stocks like those," he said. "If the economy dips, those stocks are going to be crucified."

Finally, he expressed skepticism about housing stocks, suggesting earnings comparisons are "going to get brutal" in upcoming quarters. "I don't see a bubble, but I think these stocks are overbought, overowned, and I can't make a case for multiple expansion there," he said. "I don't see it."