THE NEWS THAT U.S. THIRD-QUARTER PRODUCTIVITY surged to its highest level in six years suggests better-than-expected corporate earnings and business expansion ahead.

Those prospects have Howard Ward, portfolio manager at the $552.2 million GAMCO Growth Fund (ticker: GABGX), salivating. "During the darkest moments of fourth-quarter 2008, we started adding to stocks in the energy, materials and tech sectors," he says. "That's paying a lot of dividends this year because it's a good year to be in growth, coming off the bottom."



compnies, many with strong international operations.


In raw-materials, Ward likes Freeport McMoRan Copper & Gold (FCX); its earnings were up more than 60% year-over-year in the third quarter. Oil and gas producer Apache (APA), with record production in the third quarter, is also a favorite. Most commodities' prices have rebounded this year, after a brutal selloff in the fourth quarter of 2008. Oil bottomed in the low-$30s per barrel in December, but now fetches $80. Earnings comparisons for producers will be much easier in the quarter that started Oct. 1, Ward says.

The increase in commodities prices has been fanned by inflation fears, he says, noting that bond yields are likely to rise. The government is printing and borrowing dollars "like there's no tomorrow," Ward says.

That's one reason he is staying away from financials. "They're problematic because of lingering questions about credit," he says. Plus, the dollar is down 43% since 2001, and "that doesn't mean it can't go lower."

Nor is Ward impressed by consumer-staples shares. Earnings will drive this market, and he expects staples producers like drug companies and Coca-Cola (KO) to lag on that basis.

Ward says investors need to increase their appetite for risk. "There's $3.4 trillion in money markets yielding 15 basis points," or a fifteenth of a percentage point, he says. Some investors are buying U.S.-dollar-denominated bond funds "when it is clear that interest rates are headed north within the next 12 months," even if the Federal Reserve's policy makers indicated the current near-zero-percent federal-funds rate will continue for some time.