Here's another party popper, I think.
Exclusive!
Garzarelli: Economy starting to slow
Money manager says 10-20% correction is 'nothing'
By Elaine Garzarelli, CBS MarketWatch
Last Update: 5:38 PM ET Aug 11, 1999
NEW YORK (CBS.MW) -- With Fed policy makers scheduled to meet again later this month, each piece of economic data is a fresh clue about the course they may take, and Elaine Garzarelli is among the Wall Street detectives on the case.
There's too much uncertainty.
The economy is starting to slow, but it's not really in the numbers where everybody could see it yet.
Elaine Garzarelli
In an exclusive interview with Frank Barnako of CBS.MarketWatch.com, the president of Garzarelli Capital said she believes the Fed will raise rates -- how much is the question.
She also said a stock market correction of 10 percent to 20 percent "is nothing" considering where the market has been over the past few months. Here's a transcript of their conversation:
When we talked two weeks ago, you were pretty confident that when the Fed meets, that they will raise rates. Has anything changed in your opinion?
Garzarelli: No. I still believe that they will raise rates at the next meeting and the reason being that the employment report came out. And our leading inflation index is up again for the fifth consecutive month, at a 5.7 percent rate. And you know, the National Association of Purchasing Managers' diffusion indexes were all up. And the Journal of Commerce Index of Industrial Materials prices rose 3.3 percent in July, after three years of negative readings.
And this is something that Greenspan watches very carefully. And I think that he'll do what he did in the past. The last several times he tightened; he didn't stop tightening until this index improved. So I think we'll see another hike and maybe another one down the road after that. I think he'll stop tightening when we have a GDP growth rate at 2.5 (percent) to 3 percent, which would be around potential. And I think that would then satisfy him and feel like he nipped inflation pretty much.
Is this rise likely to be a quarter (percent), or is it more likely a half (percent) now?
Garzarelli: I think it's going to be a quarter (percent); I mean, I don't think they want to upset the market. Last time when they raised rates, they said they went to a neutral policy not to upset the markets. But of course that means nothing; they have done that many, many times and still tightened again anyway.
I am looking at the market today (8/10). And we have got the Dow at -- for a change, it's up a bit today -- and I am trying to get the number here -- at 10,764. And you know, when we talked last time, which was July 28th, the Dow was maybe a hundred or 200 points higher. And I think the Nasdaq is down about 10 percent since we talked.
Garzarelli: Right.
Wall Street seems real, real concerned.
Garzarelli: Well, I don't think that a 10-percent correction is very bad at all. Actually, the last three times the Fed tightened, the correction in the stock markets have only been 10 percent.
I think the worst case is 10 (percent) to 20 percent from the peaks that we reached before. So that's not bad. I mean, we did that in 1998. Last year, we had a fast 20 percent correction in the S&P, and then it was over.
I think what would make any correction worse would be if the Fed raised rates maybe another 120 basis points and that caused some sort of a slight recession; and then, as a result, downed earnings. And then maybe we'd go into some sort of a bear market.
But 10 (percent) to 20 percent is really nothing after where we have come from. And I think pretty soon, the long bond will be saturated and begin to roll over and come down because I do see a continued budget surplus. I don't see inflation exceeding 2.5 percent.
And on a valuation basis, although the market looks 30 percent overvalued based on interest rates, I think interest rates -- real rates are much too high. And the real indicator to look at is the earnings yield to the inflation rate, which suggests at this point the market still has 20 percent to go before we'd be strained. And as we go into time and earnings get better, then that will improve, as well. But I am saying, at this point in time, if earnings were not to grow anymore, we still are not at a point where we were before the 1987 crash, where the inflation indicator as well as the interest-rate indicator both suggested overvaluation of over 30 percent. This time it's not the case.
What color are you flashing on your traffic light about stocks and buying and selling?
Garzarelli: I would say it's yellow. I think when groups really correct, like the autos and appliances and housing-related groups that never do well or rarely do well when the Fed tightens, you might want to be looking at opportunities in those areas over the next several months, to buy those stocks and hold them. And also, I think the Internet stocks that have really taken a very large hit over the next several months would be good ones to look at, something like AT&T (T: news, msgs) and AOL (AOL: news, msgs), or CitiGroup (C: news, msgs), DLJ (DLJ: news, msgs), or Merrill Lynch (MER: news, msgs), all involved in some sort of information infrastructure.
Well, boy, they've been beaten up.
Garzarelli: Yes. Right.
Bloody.
Garzarelli: Yeah. And that's when I like to buy -- (chuckling) -- when there's blood in the streets.
The stock Centex, the home builder (CTX: news, msgs), of course, you know, with interest rates going up, that always corrects. It's down 36 percent from its high, you know, and as interest rates then start coming down sometime in the next six months, that'll probably be an excellent, fast performer. This is an early cyclical and -- usually when the Fed stops tightening -- one of the top performers usually, coming out of this.
Before we go, I'd like to ask one last question: Whether you've got a take right now on the IPO market. Some Internets came, and my gosh, last week they didn't close above their openings. Today we had Blockbuster come at the low end of its range, and it's been treading below its offering price today (Eds note: It closed flat at 15). Is that a lack of interest on the Street? Is there too much money already in the markets?
Garzarelli: Yes. I think that, you know, with the Fed tightening, you never get much of a market move upwards. I mean, it just doesn't happen. There's too much uncertainty. The economy is starting to slow, but it's not really in the numbers where everybody could see it yet. So the fear alone, you know, will keep investors from getting into anything new right now. So it's just a little bit of an uncertain period, and we just have to wait to see slowness develop in the economy, which will change everything. I mean, it'll change Alan Greenspan from tightening. It'll help the bond market.
And you know, for my indicators, I look at shipping companies' revenues. That has been down the last two weeks. Airline revenues surveys are down. Home builder sales surveys are down. Refinancing is at a record low. Oil prices are at 20. So there are signs that we're cooling off, but by the time that gets in the actual numbers, it may be several months.
Elaine Garzarelli, president of Garzarelli Capital, is a columnist for CBS MarketWatch. You can get more information at her Web site.
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