Conference nyoss1::market_investing

524.0. "Robert Farrell on Investing themes for the 90's" by BRASS::KRIEGER (Think positive, make a difference every day) Tue Jul 13 1993 16:10

    The following was pulled of the Internet - Posted without permission.
    
    What do you think about Robert Farrell's investing theme's for the 90's ? 
    
    I think the themes and concepts have merit ... Not clear how to trade
    on them yet.  What do the readers think ...
    
    jim ...
    
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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.

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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."