Garzarelli on the market, from friday's NBR:
<<PAUL KANGAS: My guest market monitor this week is Elaine Garzarelli, President of Garzarelli Capital. And welcome back. It?s good to see you again, Elaine.
ELAINE GARZARELLI, PRESIDENT, GARZARELLI CAPITAL: Nice to see you, Paul.
KANGAS: First, Wall Street?s big blue chips had a 10 to 11 percent downturn from record highs then they began to come back into favor as the NASDAQ market came down an average of 10 to 11 percent and now they?re both back on the upswing. Does this mean stocks in general have had a standard correction and the bull market is ready to go on and set new highs?
GARZARELLI: Well, I think as long as we have seen the peak in the 30 year bond and 10 year bond rate, which I think we have, the high was 670 and now we?re between 600 an 620 on the 10 and 30 year bond, if we have seen the peaks, which I believe we have, then the market?s headed higher.
KANGAS: Well, this week?s Producer Price Index and Consumer Price Index figures virtually assure a quarter point hike in interest rates by the Fed next week. Will that be the last one?
GARZARELLI: Well, really it?s not the inflation rate that Greenspan is worried about as much as he?s worried about GDP growth. GDP growth has been six to 7 percent which he believes is too high. He wants the growth down to a more normal level, which he thinks is 3 1/2 to 4 percent, the new potential growth that we can have without igniting inflation. So that?s what he wants to do. And when he gets the economy down to that kind of growth rate, then I think he?ll stop tightening.
KANGAS: Well, how is that going to affect corporate profits? We want to see them do better than that, don?t we?
GARZARELLI: Yes, you?re right. For the second half of the year, I think that GDP growth in real terms will probably get down to around three to four percent, the reason being we have an increase in oil prices that?s knocking a half a percent or more off GDP growth. There are tightenings around the world. That?s going to slow our exports down. We?re seeing housing being affected by permits slowing down. So I think that profits can still hold up about 10 percent this year but that?s down from the growth rate we had last year, which was 14 percent for the S&P.
KANGAS: Can those types of profits support the markets at this level or higher levels?
GARZARELLI: I think it can as long as the interest rates don?t go up on the long bond. The short rates can go up. It doesn?t matter. In the last 10 years before the last one or two tightenings and the short rates went up, the long rates actually came down because the bond market is such a discounting mechanism these days.
KANGAS: Yes. Elaine, your last visit with us as a market monitor was July 30th of last year. The Dow was at 10,655. You were bullish. You liked BellSouth (BLS). It?s about the same, 48, it?s been higher. And Merck (MRK) is the only other clinker. That?s only down about a point or two. Do you stay with those?
GARZARELLI: Absolutely.
KANGAS: And the ones you did very well on are AT&T (T), New York Times (NYT), Citigroup and Chase Manhattan (CMB) . The bankers have done very well. Are you taking money off the table there?
GARZARELLI: Actually, no, Paul. All of those still look very attractive from our work.
KANGAS: OK, stay with those. What?s on your shopping list now? What are you buying?
GARZARELLI: Oh, boy.
KANGAS: What aren?t you buying?
GARZARELLI: The shopping list has never been larger and I brought it with me just because I don?t want to miss anything.
KANGAS: OK.
GARZARELLI: The home building industry had earnings growth of 40 percent last year. The stocks were down 33 percent last year where the S&P 500 was up 20. Sentex (SXS) is down 47 percent from its high.
KANGAS: You like it?
GARZARELLI: Oh, yes.
KANGAS: And a good move yesterday, incidentally.
GARZARELLI: Just the beginning. It?s still down 47 percent as of today.
KANGAS: OK.
GARZARELLI: Major regional banks earnings up 30 percent last year. The prices were down 13 percent. Camerica down 40 percent. Bank Boston down 30 percent. Oil, domestic 60 percent earnings growth last year, under performed. We have Atlantic Richfield (ARC) and Occidental Petroleum (OXY) down 25 percent from their highs.
KANGAS: OK.
GARZARELLI: And one more, the drugs, 25 percent earnings growth last year.
KANGAS: Your favorite?
GARZARELLI: Minus 13 and Pfizer (PFE) is down 30 percent.
KANGAS: And that?s your favorite in the group?
GARZARELLI: All, yeah, in the group. But all of those have 100 percent out performance potential.
KANGAS: And where are the high tech choices? I don?t hear any of those.
GARZARELLI: We have a few. Adobe Systems (ADBE) and we still like Dell (DELL) and Intel (INTC) will probably come back after a short-term correction. But I think that last year with the S&P 500 up 20 percent, if you had taken tech out of there, it would have been up only 2 percent. So I think this year you?re going to get a more broadening out in these other industries that didn?t do well.
KANGAS: OK. You like the broadening out. So you?re bullish.
GARZARELLI: I love it.
KANGAS: Still bullish. Elaine, thanks very much. It?s great to see you again. >>
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