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Following economics correspondent Paul Solman's look into a day in the life of a money manager, Margaret Warner leads a discussion.

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MARGARET WARNER: In Washington today the jobs picture looked good, with new figures showing the lowest unemployment in 24 years. On Wall Street the news was not so good. Those same figures, as well as tumbling stock markets in Asia, were cited as causes for a U.S. market drop today of almost 102 points. With all the recent market turmoil we asked economics correspondent Paul Solman to help explain how money managers, the people who watch the market most closely and have the most money to invest, make the decisions they do. Earlier this week Paul spent the day with one fund manager and here is Paul's report.

PAUL SOLMAN: Tuesday morning at Capital Growth Management, eight days after the dive of ‘97, Ken Heebner runs the show here, managing about $3 billion spread over six mutual funds in which more than 100,000 shareholders have put their money, on average some $15,000 per investor. Not married, Heebner seems to live for his work. The market would open in a few minutes. Heebner headed for the trading room where he'd spend most of the day. Under the proud gave of Lenin, among others, the market opened promptly at 9:30 and promptly started to drop.

PAUL SOLMAN: Now, it's down 24. You don't have that feeling, a sinking feeling when it--

KEN HEEBNER, Capital Growth Management: No. A hundred down or two hundred down I get the sinking feeling but not twenty because percentage-wise twenty points is insignificant.

PAUL SOLMAN: A nearby plaque served to place such fluctuations in perception. A report from a Merrill Lynch stock analyst had just been handed to Heebner about Boeing, the airplane maker.

KEN HEEBNER: And the weakness in Asia may cause the Asian airlines to reduce their ordering from Boeing in the next several years.

PAUL SOLMAN: Heebner said this report might prompt him to buy Boeing for one or more of his funds.

PAUL SOLMAN: But, wait a second. Buy? Why wouldn't you sell if they were cutting their earnings?

KEN HEEBNER: Because the bad news will immediately be in the price. A stock like Boeing, which everybody follows, the stock will quickly incorporate all the new information into the price.

PAUL SOLMAN: So it'll drop.

KEN HEEBNER: That's right.

PAUL SOLMAN: And then you will buy because it'll be a bargain?

KEN HEEBNER: Well, maybe--no--I don't know. I'll look at it. I'll investigate it.

PAUL SOLMAN: But you might--you might buy.

KEN HEEBNER: Might.

PAUL SOLMAN: Pardon our stock response to illustrating points like the following with stock footage, but in addition to more than 20,000 money managers like Heebner there are millions of individual investors in the U.S. alone. It is their differences of opinion over seemingly minute differences in the prospects for companies that drives each of America's 10,000 or so stocks up and down in price. When something unexpectedly positive occurs, more want to buy than sell at the current price and the stock goes up, like the Mexican oil drill pipe maker Tubose.

KEN HEEBNER: Okay. Elise, what have you got?

ELISE: On B-4 in the Journal there was a positive article on the drillers saying they must pay the pipers to keep the petroleum pumping, and that would be a positive for Tubose.

KEN HEEBNER: Well, that's good because we own a lot of Tubose De Ceros. And the stock's been weak. We could use some good news on that one.

PAUL SOLMAN: What money managers try to do, of course, is anticipate the news and, thus, outperform the market as a whole. Otherwise, why hire them? In fact, though, as is often pointed out, most money managers underperform the market because they're constantly buying and selling and paying commissions in the process. Heebner, however, has more than tripled the performance of the Dow over the past 20 years. Things were quiet, in part because Heebner couldn't buy much stock without selling some, that is, his mutual funds were all pretty fully invested, though he did have some reserve cash in each--short-term IOU's, the equivalent of money in the bank.

KEN HEEBNER: And we've got a little bit of cash in the Capital Development Fund and the CGM Mutual Fund.

PAUL SOLMAN: A little bit--how much is that? That's a lot of numbers.

KEN HEEBNER: Well, I should say--this is a $1.3 billion fund, so $2 million is small.

PAUL SOLMAN: Of course, money managers like Heebner don't just buy on the latest news. Sometimes they sell.

KEN HEEBNER: Lightening up on a few positions here that are overvalued.

PAUL SOLMAN: But it was time for a call with Merrill Lynch stock analyst Bob Malloy, following up on the news about Boeing and Asia.

KEN HEEBNER: Morning, Bob. What's new today?

BOB MALLOY: Morning. How are you doing?

KEN HEEBNER: Very good.

BOB MALLOY: Byron is reacting to the impact of weaker economies in Asia will have on orders, and he has taken some production out of both the 747 and the 777.

PAUL SOLMAN: It was 10 o'clock. Heebner was on to another call, this one an hour-long press conference of sorts with Parkway, a Mississippi real estate investment trust, or REIT, pushing its stock and its dedication to the four F's.

PARKWAY SPOKESMAN: Our properties are well run. We're continuously upgrading major systems, components in our buildings, as well as making four F improvements: flags, flowers, fixtures, and fellowship.

PAUL SOLMAN: Heebner has been growing a new mutual fund that invests in real estate trusts like Parkway.

KEN HEEBNER: Back to the trading room.

PAUL SOLMAN: 10:15 back in the trading room. Heebner was selling shares in one real estate trust to buy shares in another, due to announce its earnings in a few days.

PAUL SOLMAN: Now, do you have inside information on the fact that their earnings are going to be better than people are expecting?

KEN HEEBNER: No, no, no. It's just a continuation of a trend because I think the trend that's been recently demonstrated will continue.

PAUL SOLMAN: But why doesn't everybody else think that? I mean, why are you thinking something different than other people?

KEN HEEBNER: You know, I honestly don't know. I think that--you know what--when you get the kind of weakness we had in the market last week, it scares a lot of people, and a lot of stocks get sold for no reason that I can see, outside of people are scared, and they're dumping stocks. So after you had a market weakness like that, you'll have some stocks that are down for no reason at all.

PAUL SOLMAN: One of Heebner's associates, Diane Krause, continued to hear out Parkway. Heebner was on to checking the time for his TV appearance a few hours hence.

PAUL SOLMAN: You're going to CNBC to do an interview this afternoon?

KEN HEEBNER: That's right.

PAUL SOLMAN: And why do you do that?

KEN HEEBNER: To make people aware of our funds I will go out and talk about investment issues on their show. And we advertise extensively on CNBC also.

PAUL SOLMAN: It was now 11:03.

KEN HEEBNER: We're down 37 points.

PAUL SOLMAN: Dow's down 37. So that's nothing with nothing?

KEN HEEBNER: Look, here's some of our--our REITS are going up.

PAUL SOLMAN: Okay. Time for a lunch break. For Ken Heebner, however, that meant a quick trip to the financial district's Boston Harbor Hotel, where one of today's twelve stock analysts' luncheons was taking place just for Boston money managers like Heebner. This one, hosted by the brokerage firm DLJ, was touting energy stocks.

PAUL SOLMAN: I mean, one of the oldest saws in economics is there is no free lunch, but apparently this would a free lunch, so what am I missing?

KEN HEEBNER: Well, no, we have a longstanding relationship with this brokerage firm, and we do business with them.

PAUL SOLMAN: Oh, you mean, so you give them trades; you pay the commissions on the trades.

KEN HEEBNER: It's for the information. There just happens to be so much hanging around.

SPOKESMAN: But I think it's important to differentiate between emerging markets and submerging markets.

PAUL SOLMAN: Now, though I've covered business for 20 years, I was still struck by the enormous investment we make in picking stocks--all the listening, the analysis, the digestion. But it did remind me of the argument for the U.S. stock market. But with so many people checking out so many companies capital is likely to flow to those with the best prospects. And that's a constant impetus to keep the economy growing.

SPOKESMAN: There have been stocks that you've wanted to and, in fact, needed to own.

PAUL SOLMAN: Thus goes the argument America's Ken Heebners are vehicles for shifting our money from one business to another based on the very latest and finest distinctions among them. Admittedly, economy-wide events like the dive last week can cause these people to stampede. Sure, there's a casino-like quality to it all, but from new entrepreneurs with wild ideas to old firms with tame ones thousands upon thousands of American businesses get a hearing. Back at the trading room it was 2:20. The Dow was down 19. It was time to buy.

PAUL SOLMAN: So you're buying Northwestern Continental?

KEN HEEBNER: Yes, right.

SPOKESPERSON: The ticket and the program, yes.

PAUL SOLMAN: Thirty thousand shares.

KEN HEEBNER: Okay. That's $1.2 million.

SPOKESPERSON: Yes.

KEN HEEBNER: And that's about $1.3 million. So we're spending $2 1/2 million. There they go. Watch them.

PAUL SOLMAN: At 3 o'clock Heebner had arrived for his TV interview, coincidentally at our PBS studio in Boston.

SPOKESPERSON: Ken, your segment is at 20 after, and we will black the monitor for you. But you can watch the program up until that time on the prompter.

PAUL SOLMAN: WGBH rents itself out for live hook-ups on shows like CNBC's "Daily Streetsides."

HOST: Ken, good to see you. Thanks for being with us.

KEN HEEBNER: Glad to be here.

HOST: What was it about Real Estate Investment Trusts that allowed them to avoid the deepest portion of that sell-off last week?

KEN HEEBNER: Well, you--first of all, you have yield protection.

PAUL SOLMAN: Heebner is using this occasion to promote real estate and, thus, is Real Estate Investment Trust funds.

KEN HEEBNER: So the market at 20 times earnings has got a lot more room to fall than something at 12 times cash flow with a 5 or 6 percent yield.

PAUL SOLMAN: It was 4 PM. The Dow had closed up 15. The real estate fund had received $3 million in new cash, and Ken Heebner was in the counting room counting up his money.

PAUL SOLMAN: The Dow is up .2 on the day; S&P is up .2 on the day; and what are you up?

KEN HEEBNER: Okay. Realty fund is up .3. The growth fund is up .2. The capital development fund is .2. The mutual fund is up .4, and the focus fund is up .7.

PAUL SOLMAN: So you beat the Dow today?

KEN HEEBNER: Yes. Not by much, but we gained ground.

PAUL SOLMAN: So you're happy?

KEN HEEBNER: Yes. I've been happier, but I'll take it.

MARGARET WARNER: Ken Heebner is back in the WGBH studio in Boston now to talk to us. So, Mr. Heebner, why did the market do what it did today?

KEN HEEBNER, Capital Growth Management Funds: Well, there were a number of factors. We have increasing tensions over Iraq. We had the weakness in the Asian markets before the opening, and then we had an employment report raise some concerns about too much inflation and Fed action.

MARGARET WARNER: All right. Explain that last factor a little more. I mean, explain to people why good news on the unemployment front could actually make money managers nervous.

KEN HEEBNER: Well, when the economy is pressing up against its limits, capacity, and that can create inflationary pressures--and it's an issue that the Fed has been closely examining--up till now they've been very relaxed--I shouldn't say relaxed, but they've shown not to raise interest rates in this environment.

MARGARET WARNER: All right. Now did you share the general market assessment of today? In other words, were you out there doing more selling than you were doing buying?

KEN HEEBNER: No. I didn't really raise cash or commit cash. It was a net even position. Frankly, when something like this happens, we've got three different factors that are negative. You can't really tell which are the ones that are driving it down. And I don't think weakness in Asian markets or tensions in Iraq are a reason to sell stocks.

MARGARET WARNER: Explain that a little more because so many of your colleagues do.

KEN HEEBNER: Well, the reason--the problem is Asia is that the currencies are weak; the central banks are raising rates. We're going to see reduced growth in Asia. Some countries are going to have recessions there. Some people fear that's going to spread to this country. I don't think so. The American economy is very strong, as the employment report today showed.

MARGARET WARNER: All right. And then on the unemployment, what's your personal view of that? I gathered the Fed Open Market Committee meets this coming week, doesn't it?

KEN HEEBNER: I don't think they're going to tighten next week. Alan Greenspan has been flirting with the idea that we can continue to operate at very unemployment rates in full capacity without inflationary consequences because of restructurings, because computers are making our resources more efficient, and because we can out source in other countries. And as long as he continues to feel that way, we're not going to have an interest rate problem.

MARGARET WARNER: But didn't he also give a speech earlier--I guess in October--talking about the danger of a tight labor market?

KEN HEEBNER: Well, Greenspan always presents a balanced argument. He says, here are the risks, and then he said, but on the other hand, we have a positive scenario. He never commits himself. He always gives himself flexibility to either tighten or not tighten in subsequent meetings.

MARGARET WARNER: Now, did you have any calls today from any of your investors kind of nervous, looking for reassurance?

KEN HEEBNER: Throughout this decline we haven't had any concerned calls from shareholders.

MARGARET WARNER: How do you explain that?

KEN HEEBNER: You know, I really don't know. We always--in talking about our funds--make it clear that we think the markets can go down, and it's not a one-way street to the up-side. If people listen to us, they won't be surprised in a declining market.

MARGARET WARNER: All right. But if they had called you today, what would you have told them as sort of your expectations, say for the medium term, the next few months? I mean, we're going to see a lot of these hundred point up and down days, do you really think it's headed down for a while? What's your assessment?

KEN HEEBNER: You know, I honestly don't know what the market's going to do. The point I would focus on is over time it's stock selection that makes the difference. If you--I never pretend to know what the market's going to do for one month, three months, but the money we've made over the years has been done by finding individual companies. So what I would tell shareholders is, we're looking at stocks that have significant potential and on an interim basis you could lose money or be under water with us because if the market moves down three or four hundred points, we're not going to go up. But over time we make money with individual stock selection.

MARGARET WARNER: All right. Well, good luck. Thanks so much for helping us out.

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