Ron Olsen: Basic Investing Themes for 1993 and Beyond   9 Jul 93 02:28
Robert Farrell, recently retired chief market analyst for Merrill 
Lynch, has been named by his peers as the top market timer in the 
nation for 16 of the past 17 years in an annual survey by 
Institutional Investor magazine. 

Here are excerpts from a speech titled "Basic Investing Themes for 
1993 and Beyond", which he gave at the last ISI Florida Money Show. 

These ideas should prove useful to investors who are wary of current 
market conditions, but who nevertheless want to maintain a position in 
equities. 

                Ron Olsen
                Boulder Colorado
                r.g.olsen@att.com

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A major basic assumption I have for the stock market over the coming 
decade is that consumers reached a generational peak in the 1980s in 
their ability to spend and take on debt.  They will be much more 
price- and value-conscious in the 1990s and will ultimately save more. 
Corporations are being forced into reviewing how they do business. 
They know it's less likely they will grow through raising prices. They 
will have to be low-cost producers.  Here is a list of basic themes 
for 1993 and beyond: 

1)  My one basic premise is that consumer growth will be much more 
selective, as spending shifts to producer growth.  Capital goods and 
technology will benefit, while many consumer industries will lag. 

2) Second, problem solvers will benefit, while those who are a source 
of problems will be penalized.  The best example of this is health 
care, in which companies providing lower-cost drugs and services 
benefit, and those raising prices or the cost of services are hurt.  
The drug companies will probably underperform for a fairly significant 
time after being the best stocks to own in the last 10 years.  HMOs, 
nursing homes, generic drug producers, on the other hand, will be the 
beneficiaries of this change in the health care industry.  Other 
problem solvers include environmental companies, infrastructure 
rebuilders, and firms that do educational retraining for people who've 
been let off jobs. 

3) Cost-cutting and increased productivity will be every company's 
goal, because global competition, slow economic growth, and a newly 
price-conscious consumer will make it nearly impossible to expand 
profitability through price increases.  This means more investment in 
computer equipment, information technology, outsourcing of services, 
modernization of plants, and less investment in people, which 
perpetuates this cycle in which we have less consumer dominance.  
Outsourcing of services would be done by companies such as the 
computer firms that do the accounts payable work for a large company 
such as General Motors, or a smaller firm that performs many services 
for corporations that don't want to spend money on staffs of their 
own. 

4) Consumer companies that do well will be the low-cost providers. 
They're going to appeal to the consumer's need to find the best price, 
and those companies are likely to be the ones that gain in market 
share, especially in discount retailing, manufactured housing, 
specialty restaurants, and financial services. 

5) Rapid technological change and increased productivity will favor 
computer-software networking and service firms; telecommunications 
service and equipment companies, including cellular, cable, fiber-
optics; medical technology; electronic components; semiconductors; and 
automation systems. This theme is already well-recognized in the 
market, and many of these stocks are up considerably.  But I think it 
is a long-term theme. It's an emerging theme that will be repeated in 
this decade, so I think temporary sell-off periods, such as what went 
on recently in cellular stocks because of the health scare, are likely 
to prove to be a buying opportunity. 

6) There will be rewards in capital-goods firms and small industrial 
companies with global markets and increased efficiency.  Once low-cost 
producers start experiencing unit-volume growth, profitability will 
soar. This is likely to benefit machinery companies, construction-
engineering firms, specialty chemicals companies, and specialty steel 
firms, where you can see that already happening.  We are very 
competitive in the world market. Railroads are supplying the lowest-
cost way of transporting goods. Machine-tool companies are beginning 
to pick up.  Those stocks are performing the best they have in the 
last 10 years. 

7) I think you should always look for companies in industries well out 
of favor or that haven't done well.  And groups that have done poorest 
in the last two years -- such as energy, gold and other non-ferrous 
metals, and airlines -- could be candidates for a turnaround in 1993. 
The most interesting energy areas, in my opinion, are oil drilling, 
oil service, and natural gas, in particular. 

8) Higher-than-average yields are still going to be important as a 
theme, where the companies have  a dividend growth record.  But 
there's still the need for recapturing lost income.  This would 
suggest favorable total return for some of the electric utilities, 
phone stocks, and natural gas distributors. 

9) You should pay attention to the emerging-country international 
investing theme that will continue to develop in 1993.  These emerging 
countries are likely to grow much faster than the mature countries.  
If it's too complicated to do yourself, then find funds that invest in 
such areas as South America and the Pacific Rim.  Positions in those 
areas should be part of your overall investment program. 

10) The small-stock area will continue as a positive theme.  You've 
heard a lot about it, but it is a major change; it is a change that's 
going to endure for a good part of this decade.  That's where there is 
the better value case, and while they are extended now, I think you 
should take a look at thoses areas that have a value case, not just 
the emerging-growth stocks.  So, stocks in the industrial sectors, 
some insurance stocks, and the banking field are areas I think are 
most interesting.  For those who are investing in mutual funds, a 
combination of a growth fund, a value-oriented fund, a small-cap fund, 
and a global or emerging-country fund, depending on your need for 
yield in a balanced or income fund, pretty much covers many of the 
potential changes that might occur in the coming environment. 

In conclusion, I have to emphasize that there will be great changes in 
the 1990s.  The changes will be political, economic, technological, 
and in the markets, and the changes will assure that the key to 
investment success will be far different from what worked in the 
1980s. Volatility will increase with  the rapidity of change.  If 1993 
turns out to be a negative-return year for the averages, as we 
suspect, it should be a great opportunity to purchase the new-theme 
beneficiaries. Meanwhile, as the speculative juices heat up in this 
aging bull market, it may be best to keep in mind what Will Rogers 
said: "It's not the return ON the money that worries me; it's the 
return OF the money." 
