<font color=green>Commentary</font>--Elaine Garzarelli for August 18, 2000...
garzarelli.com
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Edited for ease of reading.
>>>Stock market analysis for August 18
We continue to see signs of the slowdown including global central bank tightenings and higher energy prices.
Although the Fed may be finished raising rates, globally central banks are still tightening. Most recently Australia's central bank signaled it will raise interest rates again to slow inflation and cool the economy which is in its tenth year of expansion. This, of course, helps to slow our economy with less demand for our exports. In addition, our Garzarelli-Online subscribers know the FIBER leading inflation index (we believe Greenspan's favorite inflation indicator) actually declined 3.3% which is the largest decline in about two years.
Given the above, we believe it is unlikely the Fed will raise rates again. We expect to see a rally before the year is over and recommend buying on any further DIPS.
As we mentioned previously, our indicators have been at 28.3% for quite sometime, indicating a cautious market environment (below 30% is considered a cautious level).
We believe the S&P 500 is overvalued by about 20%, which is why it is important to stay away from certain sectors that will have down earnings next year. We believe our model will improve from here as the economy slows and the Fed stays on hold.
Our quantitative computer models (developed and used over 20 years) determine industry earnings and valuations. We then recommend the groups whose earnings growth is better than the S&P 500's and whose valuations are below their normal ranges. That way we are sure to choose good value groups with strong earnings. This methodology is what we use for our fund Forward Garzarelli Equity (FFDEX) which has had excellent performance.
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Interest rate/bond market analysis for August 18
Overall favorable supply dynamics, the likelihood of a slowing economy, and the volatile stock market have supported the rise in Treasury bond prices.
We have been forecasting the 10-year bond to decline to 5.6% -- now it is close at 5.83%. We re-ran our quantitative bond model with our new forecasts of low inflation and a continued budget surplus. The model forecasts bond yields to continue to decline; we now expect the 10-year bond to reach 5.2% over the next 6 to 12 months.
As we often mention, we like BAA corporates -- now yielding 8.25% compared to their May 18th peak of 9.08%.<<< |
