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| Chart 1 Elaine Garzarelli's buy and sell signals vs. the S&P500 from 1981 through today |
| 31-Dec-11 | 01/13/12 | 14-Jan-12 | Results[up/(down)] |
| $470,378 | $488,546 | 3.9% | = Kirk's Explore (*) Stock Portfolio % YTD |
| 125.50 | $128.84 | 2.7% | = SPY % YTD |
| 1,257.60 | $1,289.09 | 2.50% | = S&P500 YTD |
| 55.83 | $58.18 | 4.2% | = QQQ % YTD |
| 12,217.56 | $12,422.06 | 1.7% | = DJIA % YTD |
| 121.85 | $124.16 | 1.9% | = DIA % YTD |
| 73.75 | $76.39 | 3.6% | = iShares Russell 2000 IWM % YTD |
| 64.30 | $66.15 | 2.9% | = VTI % YTD |
| 31.29 | $32.17 | 2.8% | = VTSMX % YTD |
| 114,755 | $116,520.00 | 1.5% | = BRKA % YTD |
TOM HUDSON (NBR Host): What makes you so confident in higher stock prices with all the uncertainty that remains?
GARZARELLI: Well, basically, my indicators for the stock market are bullish. They`re at a 76 percent level. And they need to go down to 30 percent for a major bear market. We`re down below 43 percent for 10 to 15 percent correction. And basically there are economic cycle, monetary valuations and sentiment. And those are the four categories of my indicators. So it`s fundamental for the most part.
HUDSON: I want to ask you about oil in a moment. Last fall the last time you were on with us you were bullish and your indicators were as well. You were looking at the time for S&P 500 at 1300. We`re above that now. So do you have a price target in mind?
GARZARELLI: For earnings for this year and this is assuming that oil prices stay where they are now, which is pretty high, I have 94 for S&P earnings and for next year I have 102.50. So if you just multiply a 15 multiple by that, which is conservative, our models say 17 would be better based on the BAA bond rate. You get up to 1500 on next year`s earnings, 2012 earnings.
HUDSON: Give me real quick on oil, what price is going to start to concern you?
GARZARELLI: I would say $128, $130. We`d have to change our forecast for much slower growth.
HUDSON: Kind of a valuation play as well. We`ve talked about oil a little bit and you do like the major integrated oils with the XLE, the energy exchange-traded fund. If oil prices don`t move up to your concern level of $128 or so, where do you go from here for the XLE?
GARZARELLI: Well, no, this is based on where oil prices are today. I would recommend XLE at current prices, which is about $113 but this one should outperform the market by two times. It`s been the best leader in the last six months of all the sectors and in there we`ve got Exxon, Chevron (NYSE: CVX), Schlumberger (NYSE: SLB), Conoco and Halliburton (NYSE: HAL) as the top ones.
HUDSON: You new picks, you like materials, we`ll begin with the XLB materials sector, exchange-traded funded. It clearly has been benefiting from the weak dollar, strong commodity. What do you see ahead?
GARZARELLI: Well, I think that the materials will outperform the stock market by about two times. So that`s a pretty good leverage. The stocks, some of them are Dupont, Freeport, Dow, Alcoa (NYSE: AA), Nucor (NYSE: NUE).
HUDSON: All real household names certainly in that kind of global industry. You also like financials, which is an interesting pick and clearly there`s been a lot of focus on the finance sector and banks especially. We`re ahead of earnings season, and the spider financial exchange-traded fund has yet to break out to post recession highs.
GARZARELLI: Yes, but I think it will. It was lagging a little bit. Now it`s starting to lead for the last couple of weeks and I think it`s the cheapest of all my sectors actually. The stocks in there would be JPMorgan, Wells Fargo (NYSE: WFC), B of A, Citi, U.S. Bancorp (NYSE: USB).
| Index | Sept 17, 2010 | YTD % |
| DJIA | 10,607.85 | 1.7 |
| Nasdaq | 2,315.61 | 2.0 |
| S&P 500 | 1,125.59 | 0.9 |
Her overall view, as exemplified in a commentary she just fired off to clients: it's still a go-go market.The chart below shows the S&P500 is currently at 1208.64 so reaching Elaine Garzarelli's target of 1315 would be a gain of 8.8%.
One of her indicators, though, a contrary indicator that focuses on sentiment, is flashing a distress signal. In brief, the number of bullish investment advisers has been rising steadily, a development that often precedes a market sell-off). Accordingly, Garzarelli says she wouldn't be surprised to see a consolidation or a normal 4% to 7% correction at any point. But such a correction, she observes, would be an opportunity for investors to add to their stock positions.This contrary sentiment indicator she is talking about the Investors' Intelligence Bull Bear Survey. I track this in my newsletter and used it to buy equities in February when the market made its last correction then took some good profits last week when the sentiment indicator flashed "take profits." If the market pulls back enough to hit some of my newsletter "auto buy" levels then we will buy the shares back. My "Auto Buy Levels" are prices for limit orders my subscribers can set ahead of time with our broker so they execute during the day if price targets are reached.
For all of 2010, Garzarelli expects a 28% increase in S&P 500 operating earnings, spurred by easy comparisons, company cost-cutting, recovering economies around the globe, low interest rates and low unit labor costs.On Interest Rates
Her GDP outlook calls for 4% growth this year, which she thinks should enable the S&P 500 to realize its fair value of 1315 before year end. Such a showing would represent about an 8% gain from the index's current level of around 1217.
While fears of rising interest rates are mounting on Wall Street, Garzarelli pooh-poohs such concerns. She reckons that financial nervousness and lofty unemployment will likely keep the Federal Funds rate--now in a range of zero to 0.25%--stable at least till the summer.Summer is only two months away.
KANGAS: Because you have a Ph.D. in economics, Elaine, who could be better to ask as to whether these massive Obama rescue plans for the economy and the banks are going to work out.
GARZARELLI: Well, I think it's a little late. I think it's more of a 2010 deal than it is 2009. In both years it will be about 2 to 3 percent of GDP. But 38 percent of it is a tax cut and consumers right now, with the unemployment rate probably getting up to 10 percent, are more likely to save than to spend that money. And the other spending has to do with infrastructure projects. A lot of it goes to state and local governments and their budgets are so bad, they're likely to keep it rather than spend it.
KANGAS: On your last visit with us in early August, you were correctly bearish on the stock market mainly because you thought corporate earnings estimates from Wall Street analysts were far too high, about 42 percent too high. How about now?
GARZARELLI: Now they're 44 percent too high.
KANGAS: Oh, boy.
GARZARELLI: Because we had to lower our estimates again from 55 to 46 for the S&P 500 operating earnings. And that's because we see a peak to trough decline in real GDP of about 4 to 4 1/2 percent, which is the worst post-World War II recession that we have ever had.
KANGAS: Your 14 market indicators back in August were at the 50 mark. 30 is the sell signal, 65 a buy and so they were kind of bearish. Where do they stand now?
GARZARELLI: They're at 38 percent now and they need to go to 65 percent for a new cyclical bull market to begin. So they're still on a sell signal, still in a bear market. We might be getting near the end of it. It all depends really on credit spreads and how fast the BAA bond will come down.
| Ticker | Change | Wt | Final |
| BAC | (82.3%) | 0.25 | 0.04415 |
| UUP | 14.8% | 0.25 | 0.2869 |
| MO | (18.8%) | 0.25 | 0.2029 |
| SH | 30.2% | 0.25 | 0.3256 |
| Weighted Total | 0.85955 | ||
| Change | (14.0%) | ||
| S&P500 | (33.8%) | ||
Elaine's Picks Beat the market by | 19.8% | ||
KANGAS: Do you have some new recommendations, Elaine?
GARZARELLI: Yes, I do. I have some good ones. Now, I think we might be in a trading range from 750 to maybe 950 on the S&P 500, so in that range you want to un-hedge at the bottom of the range and then you want to hedge at the top end of the range or you could keep hedges on all the time, which is what I do.
GARZARELLI: OK. The first one is (HNW) and that's 19 percent yield. And that is the--
KANGAS: Unbelievable.
GARZARELLI: That is the Pioneer high-yield income trust. Another one, municipal bonds I think are a great bargain right here. We're getting a 7.4 percent yield and that's MUA, Blackrock muni asset fund.
KANGAS: Very good.
GARZARELLI: And I also like the dividend fund which is (RYU), that's the Ryder, the equal weighted utilities index where most of it is in utilities and then telecom about 20 percent. And then the last one is the same thing I did before but it's a double weight and that's (SDS), which is a short, which gets you 75 percent hedged, 25 percent exposure to the market. That should give you a dividend of about 12 percent.
"Put 25 percent in iShares Dow Jones Transportation Average (IYT), 25 percent in Financial Select Sector SPDR (XLF), 25 percent in iShares MSCI Emerging Markets Index (EEM) and 25 percent in Consumer Discretionary SPDR (XLY)."This graph shows how Garzarelli's picks performed compared to the S&P500:
