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Saturday, September 18, 2010

Elaine Garzarelli Bullish - 1300 S&P500 Target

Elaine Garzarelli, President, Garzarelli Capital was the Friday Market Monitor guest on "Nightly Business Report."

Elaine was quite bullish with an S&P500 target of 1300 based on 2011 earnings. Below are excerpts from her interview with PBS host Tom Hudson.

HUDSON: In February, you were saying the winter swoon was over and we did see prices climb through April and since then we`ve seen some volatility. What makes you think that higher stock prices are coming?

"GARZARELLI: Well, we`ve been in a trading range for five or six months. Usually after the initial surge in a new bull market -- the market went up 70 percent for the S&P 500 after a recession -- the usual case is that the stock market goes into a trading range for six to 12 months. So that is normal. And every time that happens, there is talk about double dips. And I don`t see a double dip, therefore I think we`re going to come out of this trading range, which has been 1050 to 1150 for five or six months.

HUDSON: OK. So how high and how fast do you think this rally could come?

GARZARELLI: Well, my indicators have gone up from 67 percent to 82 percent which is quite bullish. The 100 percent is the maximum, so 82 percent is fairly good. Thirty percent would be a new bear market. I have earnings for 2011 at 86. The consensus now is at 95. So I`m way below the consensus and with the P/E normal of about 15, that gets us to 1300 on the S&P 500. What`s that, 15 percent?"

HUDSON: A very bullish move, yeah.

GARZARELLI: That is only based on `11, not based on 2012 earnings.

HUDSON: Now you were here back in February as I mentioned and at the time, you were looking for dividend plays, including a couple of high-yield junk bond ETFs, which are up about 2 percent and that does not include any dividends. Do you still like this area?

GARZARELLI: Absolutely. I love junk bonds.

Garzarelli recommended the Industrial Select Sector SPDR XLI, the Home builder SPDR XHB and the Technology Select Sector SPDR XLK.

HUDSON: Would you rather buy the XHB than a new home?


HUDSON: OK, any disclosures for these funds?

GARZARELLI: I own everything I`ve mentioned tonight in my sector analysis fund.

IndexSept 17, 2010YTD %
S&P 5001,125.590.9
 YTD does not include dividends.

Saturday, September 04, 2010

Bob Brinker Muni, GO and Bond Fund Advice

Many callers have asked Bob Brinker about the potential to lose money in bond funds when interest rates "normalize" from historically low rates. For example, on April 5, 2010 the 10-year US Treasury Bond had a yield of 3.99%. (move the cursor over the chart here for TNX to April 5 to see the rate quoted as a "price").   Much of this year's gains in bonds are due to the yield falling to 2.70% as investors have fled stocks while pouring money into bond funds.  See:
Brinker says if you hold a bond fund the simple thing to do is use a mental stop loss as I explain in the article Bob Brinker's GNMA Advice.
Brinker also points out another way to avoid losing money is to buy bonds directly and hold them to maturity. If you buy US Treasuries or GNMAs directly, then you are guaranteed to get your interest payments plus principle back since the government can borrow money from the Federal Reserve which will turn on the printing press if there are not enough interested in the low rates.
If you own municipal bond funds to lower your taxes, then Brinker says you can buy tax exempt Municipal Bonds directly from your broker. Buy NEW ISSUES to get the lowest fees. If you were worried about the quality of municipal bonds, then Brinker says you could purchase high quality state general obligations (GO Bonds) which have had no failures in over a century.  (As a Californian, I find little relief in that fact given the circus we have in Sacramento giving huge raises and pension benefits to unions that support the people in government that keep spending while the state circles the drain of insolvency.  End of digression.)

My Warning: You need to be careful with Muni bonds because some cities, struggling with the recession, have missed payments and could default. Harrisburg, the capital of of Pennsylvania, is the latest to miss a payment and potentially default.
Pennsylvania capital, Harrisburg, skips payment, may move closer to bankruptcy
Harrisburg Mayor Linda D. Thompson has adamantly opposed declaring bankruptcy, while the move has been been advocated by the city controller and a growing bloc on the City Council. 
The city's bond insurance company is expected to cover its upcoming $3.3 million bond payment. But some analysts say relying on that backstop could add to the mounting pressure on firms that provide insurance for the $2.8 trillion municipal bond market.
The good news for investors is the insurance company will make the payments but if enough cities and states like California (even with with insurance) miss payments, it could get nasty.
Seeking Yield for Income Is Risky 
Currently, if you need yield, it means you are taking significant interest rate risk.  Buying bonds directly is fine if your goal is to not lose money but if there is high inflation, then you will lose purchasing power to inflation whereas someone in money funds, TIPS, Ibonds or savings accounts will do much better since we will get higher returns as rates normalize (go up.)  Everyone should be aware that the Federal Reserve is again buying US Treasuries to help keep rates low and nudge investors to take more risk to help the economy grow again.  Rates could surge again when (not if) the Fed stops buying US Treasuries.

Vanguard's GNMA fund, VFIIX, currently has an average duration of 1.7%.  That means if interest rates were to jump 1% overnight, you could expect VFIIX to lose 1.7% in net asset value, NAV.  If they jump 3%, expect NAV to fall by 5.1%, 3 times 1.7%.
I am lucky. I have enough cash flow from my Two Investment Letters, people clicking ads on my blogs and websites plus commissions for products I recommend that I don't need yield to live on.  Thus, I take very little interest rate risk.  I've sold all my bonds and bond funds not indexed to inflation with my own money and in  "Kirk Lindstrom's Investment Letter." 

My personal iBond portfolio currently yields 5.43% (Majority are from Oct. 2001) but of course, I only get the interest at maturity, a great way to defer taxes.  The TIPS fund I got for my Vanguard ROTH by selling the GNMA fund is up 18.4% in under 2 years.  I also hold individual TIPS and a significant holding in the TIPS fund at Fidelity, FINPX, that is up 25.8%.  I suspect those TIPS funds will give back some when rates normalize, but rates probably won't normalize without a significant inflation component so I expect they will do better than bond funds not indexed to inflation.

Many of the stocks in "Kirk's Newsletter Explore Portfolio" are paying a great dividend while selling at very low price to earnings multiples.  My portfolios are up significantly over the past 10 years while the index funds are down.   I expect equities to significantly out perform bonds and probably CDs over the next decade and my "core plus explore" portfolio approach should do even better.
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