ECONOMIC RECOVERY PLAYS

  • “We’re looking for a V-shaped recovery,” says Moffatt, citing the Federal Reserve’s timely and dramatic easing of short-term interest rates. He expects a turnaround in the fourth quarter.
Moffatt’s Picks
Consumer Cyclicals:
    Retailers, Autos

A play on continued consumer spending
Paper
Chemicals
Basic Metals		 A stronger economy will enhance the prospects for these cyclical industries, while a more inflationary environment will boost their pricing power
Energy  
Benefits from a supply shortage and greater inflation
Pans
Foods
 In a stronger economy, the group’s stability is less attractive
Electrical Utilities
A recession play that peaked with the bond market
Health Care
    Pharmaceuticals 		Another defensive sector, inflation is a negative
Banks
 Personal bankruptcies rising; telecom lending issues yet to be resolved
Neutral-to-Negative
Technology Capital spending outlook is poor, and “death toll” of non-viable companies is mounting.
In the next year, Moffatt expects measures of inflation, such as the consumer price index, producer price index and GDP deflator, to play key roles in determining stock performance. That’s because “inflation is already a bugger problem than people think,” he says.
    In his most recent newsletter, Moffatt observes that while the economy slumped dramatically in April and May, inflationary pressure remains. Weighing changes in other factors, such as the dollar, interest rates, inventories and the general economic climate, he concludes that consumer cyclical's are now the best investments.
    Moffatt also is keen on paper, chemicals and basic materials stocks, as he believes a more inflationary environment will boost their pricing power. Too, energy-related stocks are bound to benefit from a nationwide power shortage.
    Conversely, Moffatt recommends that investors avoid food, consumer growth, electric utility, insurance and health-care stocks. These groups perform best when the economy begins to slow significantly, he explains.
    Like any market seer, Moffatt has made his share of misguided pronouncements. His macroeconomic indicators pointed mistakenly to a recession in 1995.
    He also steered clients clear of the run-up in technology stocks in the late 1990s. And, he was right to call techmania a bubble long before the rest of the world came to view it that way.
    Yet, Moffatt’s clients have stood by him, and appreciate his early-warning system. “He has been 75% right with his calls, which is an unbelievably great batting average in this business,” says Dan Szente , chief investment officer for the California Public Employees’ Retirement System.
    If Moffatt’s current call on the economy proves correct, chances are he won’t be the only Texan smiling.
sought from Moffatt since he hung out his shingle in New England 19 years ago.
    After graduating from the University of Texas and obtaining a masters in engineering from New York University in 1968, Moffatt, now 60 years old, headed for Wall Street, where he worked for a time as an analyst and portfolio manager under George Soros , at Arnold and S. Bleichroder . Later, as a technology analyst at Blythe Eastman Dillon , he experienced firsthand the dark side of Wall Street’s research machine; he says he was fired for writing a negative report on IBM , recommending that the firm’s clients sell the stock.
    Moffatt claims that the price of virtually 		any common stock is attributable to three factors: 25% is due to the macroeconomic backdrop, 25% to the fundamentals unique to that company and 50% to market influences. Accordingly, his quantitative research model relates changes in 20 macroeconomic factors to the universe of Russell 2000 stocks, with the aim of determining which industry groups are likely to perform best over the coming six months to a year.
    Every May, Analytic Systems selects those 20 factors from the wide world of economic data that Moffatt expects will be relevant in picking winning stocks in the next year. The company then follows the  monthly  trends  in    the    factors    andupdates the impact on specific industries.
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