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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
                [e-mail]

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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."