Cutting Through the Macro With a Micro Focus: One Hedgie's Take

Now seems a good time to avoid Biggsian moments -- those urges to encapsulate "the market" in some global theory. It might be more useful (i.e., profitable) to focus on the micro, not the macro.

It's not as if tech were as obviously overvalued as in early March. It's not as if the Fed were clearly going to keep raising rates. It's not as if we were obviously headed for recession, which is the real butcher of bull markets. The elves are not screaming, "Sell!" Instead, the economy and corporate earnings seem to be slowing nicely, or not-so-nicely, depending on your viewpoint. (TheStreet.com takes a look at the second-quarter earnings picture in a story today.)

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At this moment when people seem more inclined to buy than sell, the question facing all investors is this: Is now a good time to leap in? You could ask the strategists and economists on Wall Street. But most of those folks have been shown by history to be second-rate market timers. (The great investment analyst and counselor Philip A. Fisher wrote wisely on the difficulty of using economic data to time the market in his classic book Common Stocks and Uncommon Profits).

In that spirit, here are impressions of "the market" from a hedge fund manager on the front lines. No, he doesn't get paid to opine on "the market." But he does get paid to make money, which after all is the point of the exercise.

Our hedgie is a thirtysomething veteran of one of the top global hedge funds, one you've probably read hundreds of column inches about. He admits that he's hopeless on "the stock market," but he's pretty great on picking stocks that go up.

Now out on his own, this guy takes a "growth-at-a-reasonable-price" approach to stock investing. (Yes, he owns some Cisco (CSCO Quote - Cramer on CSCO - Stock Picks), but he owned a lot more in the mid-'90s, when you could snag the stock at 14 times earnings.) He's made his real money in recent years in beaten-down health-care stocks, some of which have nearly doubled this year.

"It's incredible to me how good other people are at trading a stock like Cisco," he says. "That stock has become the ultimate trading vehicle. It's unlikely to disappoint on earnings, so you have taken out much of the company risk. It trades now more on human emotions, money flows, things like that. I know people who can trade that well, but that's not my game."

Instead, he's finding value in radio.

Tuning In and Betting on Baubles

He likes Infinity Broadcasting (INF Quote - Cramer on INF - Stock Picks), which owns radio stations in most states and also has a big billboard ad business. He knows that dot-com ads, a big source of radio's growth in the past year, are off and headed lower. But he doesn't seem too worried. He's been investing in radio stocks since 1996 and still likes the way radio competes well with other media.

"Radio generates a huge amount of free cash flow," he says. "It has a wonderful ability to hit a target audience, to reach consumers cheaply, to allow advertisers to reach their markets quickly and with short lead times. If Infinity declines from here, which it could, I will buy more." Infinity topped out six months ago at about 41 and today traded up 3/16 to 35 3/16.

He also likes the Social Register's favorite retailer -- Tiffany (TIF Quote - Cramer on TIF - Stock Picks). Now there is a counter-intuitive play -- retailing in a slowing economy. What's that about?

"The shorts say that the reverse wealth effect since March will cause people not to buy as much high-end jewelry and silver and stuff," he says. "And it is a reasonably expensive retailer at about 22 times next year's earnings. But I say that Tiffany will always have a unique franchise. Quick, how many competitors can you name?"

He says that he would buy more if the stock traded lower. Tiffany peaked at 90 a share at the end of last year and is trading now in the mid-60s, around where it was in early November. It has lately enjoyed a pop on its addition to the S&P 500 , which happened after yesterday's close.

"This is a great business," he says. "This is a business Warren Buffett [who already owns Midwest jeweler Borsheims through Berkshire Hathaway (BRK.A Quote - Cramer on BRK.A - Stock Picks)] would love to own. Of course, it's too expensive for him."

So is this stock picker worried about "the market?" Not really. He has hedged his portfolio so that he can focus on stocks, not on "the market."

"I'm really bad at guessing where the market is going," he says. "So, I figure all my longs can get cut in half. That's why I like to own real good businesses. And that is why I am short as much as I am long. I am 90% short and 90% long."

By the way, he's long Morgan Stanley Dean Witter (MWD Quote - Cramer on MWD - Stock Picks), home of the aforementioned market encapsulator Barton Biggs. (Biggs owns a huge chunk of the investment bank and is consequently one of its richest executives.)

Now there's something this guy and Barton have in common.