NEW YORK, Oct. 15, 2013 /PRNewswire/ -- This week, Elaine Garzarelli comments on Janet Yellen's nomination, the government shutdown and debt ceiling talks, and her 30-year track record. Following is an excerpt from the Garzarelli Capital Client Letter we thought might be of interest to you:
Fed Chair Nominated
"President Obama nominated Janet Yellen to be the Fed chair starting next year and as the first female chair, her tenure would mark a historic milestone. Markets are pleased with the nomination as it removes uncertainty and represents stability and continuity in monetary policy. We believe Yellen will be good for stocks as well as rate-sensitive housing, autos, and consumer durables. She had been a supporter of unconventional policy such as QE. Yellen will likely be a dovish Fed chairperson like Bernanke, and would likely proceed slowly and cautiously, but would not necessarily delay the start of tapering. We do not anticipate that inflation will run higher than 2.0 percent during her tenure.
Economy - The Shutdown Continues
"The minutes from September's FOMC meeting indicate that tapering may be close. The minutes indicate the Fed should 'await more evidence that progress would be sustained before adjusting the pace of asset purchases.' The FOMC decision is data-dependent and they are looking at more data than the labor market. They monitor a broad set of data including income, spending, and inflation. We would need to see the strength in GDP reports before the Fed can confidently end tapering. We believe the shutdown will delay the Fed's tapering of QE.
"The government shutdown continues. Economic stats have been poor and it is likely the shutdown has had somewhat of an impact. Since the shutdown, Rasmussen's daily survey of consumer confidence has been declining. Over the last year, mortgage applications to purchase are down about 6.0 percent and unemployment claims rose this week with the four week moving average up to 325,000. The furloughed workers can apply for unemployment insurance, but they are tallied separately and are not counted in the headline report. The payroll employment report is key and it is not yet clear when that data will be released given the shutdown.
"Indeed, the impact on economic activity due to the shutdown is lower than previously estimated. This is because the House passed a bill that would guarantee back-dating of pay for all furloughed workers when the shutdown ends. Therefore, the expected decline in consumption by federal government workers, which economists believe is the largest component of the overall economic impact, has been reduced. Also, furloughed defense department workers will return, somewhat lessening the impact that a longer shutdown might have. The shutdown's effect should be much smaller than it would have been without these developments. Because the shutdown began on October 1(st) and is expected to end before the end of the quarter, its economic impact will be almost entirely in the fourth quarter.
"The second part to this political issue is the debt ceiling that will be reached October 17(th). The government's outflows exceed its inflows by 20.0 percent in fiscal 2014 (about 4.3 percent of GDP). If the debt ceiling is reached, those that are owed money by the government will see only partial or late payments. The mere possibility of this will cause consumer and business uncertainty. Those affected include holders of treasury notes or bonds, social security recipients, government employees, or firms providing services to the government. The disruption would cause cash flow and employment problems among those firms that work as contractors or suppliers to the government. We believe it is unlikely this point will come and believe the ceiling will be raised before this happens.
"Our proprietary stock market indicator composite rose to 71.5 percent from 68.5 percent as we upgraded the Bloomberg financial conditions index. Our composite is made up of several time-tested and weighted indicators.
"A level for our composite above 65.0 percent is a buy signal after a sell signal. A sell signal is 30.0 percent and a correction signal is 42.0 percent. We still recommend an unhedged position and believe declines, if any, will be limited to 4.0 to 7.0 percent. To date, the S&P 500 has declined 4.0 percent. We believe declines due to the uncertainty of the debt ceiling or shutdown are good buying opportunities.
"For the third quarter so far, 48.0 percent of the companies that have reported earnings have beaten expectations. This is lower than the normal run rate. Our model projects a 17.5 P/E and our earnings forecast for the S&P 500 is 105.00 this year and 111.00 next year, compared to S&P's forecast of 108.00 and 122.25, respectively. Our forecast for S&P 500 earnings remains conservative relative to S&P's and still we look for a 14.0 percent gain in the S&P 500 to a level of 1943 for the S&P 500 over the next six to twelve months.
"This week one of our contrarian indicators - the number of bullish investment advisors became slightly less bullish as this indicator declined to 45.4 percent from 46.4 percent. The lower the number of bullish advisors, the better it is for stocks. This indicator is still ranked neutral-minus since a level above 53.0 percent is bearish. The shutdown and deficit were cited as reasons for the decline in bullishness from advisors.
"The Bloomberg financial conditions index turned around and rose over the last couple of days and therefore we upgrade it to neutral. This indicator measures stress in the markets by combining money-market rates, yields on government and corporate bonds, and volatility in equities.
"The economic cycle research institute weekly index (ECRI) gives a leading indication of cyclical turns in U.S. economic activity. After an uptrend for three months, the index declined this week and we believe it is due to the shutdown. We continue to rank it neutral.
"Our junk bond yield to 10-year T-bond yield indicator has been declining over the last week. This ratio has an inverse relationship with the S&P 500 and a decline is favorable for stocks. We rank this indicator neutral and watch it for a continued downturn.
Clients Request Our Track Record
"A few weeks ago, we wrote about our 30(th) anniversary of stock market calls, listing all the signals our stock market indicator composite made since 1981. However, many clients have requested our track record in a chart format, as well. Chart 1, shows our composite's buy and sell signals since 1981, based on our published reports. Thank you for your interest."
CHART 1 - S&P 500
(See Chart 1)
In 1996, our indicators turned negative several months before Greenspan's "irrational exuberance" speech due to our forecast of Commerce Department's tax-return earnings turning down (see Chart 2). Tax-return earnings declined from 1997 to 2001, while S&P 500 shareholders earnings advanced. The stock market followed shareholders earnings higher, which were falsely inflated by phantom profits and fraudulent practices. This was finally brought to a head with Enron and S&P issuing a "core earnings" measure a few years later. Six months after our cautious call, we realized investors were ignoring income-tax profits, and we became bullish by substituting S&P shareholders earnings instead of tax-return earnings into our models. The market created a bubble that eventually burst.
(See Chart 2)
About Elaine Garzarelli
Elaine Garzarelli, President of Garzarelli Capital, Inc., is an economist with a doctorate from Drexel University in economics and statistics. She worked for major institutional brokerage firms for over 15 years while perfecting her market and industry econometric timing models, and was ranked #1 for 11 consecutive years on Institutional Investor's "All-Star" team for Quantitative Analysis and was recently inducted into the Hall of Fame. She started her own companies in 1994, and currently runs the "Sector Analysis" fund.
The Ralph and Elaine Garzarelli scholarship is available at Drexel University for women majoring in economics.
Garzarelli Capital does not warrant or guarantee the accuracy or completeness of this report nor does Garzarelli Capital assume any liability for loss of any nature that may result from reliance by any person or institution upon any such information or opinions contained herein. Such information and opinions are subject to change without notice and are for general information only.
For further information, to receive this week's entire Garzarelli Capital Weekly Investment Letter, or to speak with Dr. Garzarelli, please contact Temin and Company at 212-588-8788 or email@example.com.
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