"There is No Bubble in Sight," Says Elaine Garzarelli

NEW YORK, Nov. 12, 2013 /PRNewswire/ -- "If you have any cash, get into the market now," says investment advisor Elaine Garzarelli, President of Garzarelli Capital, Inc. "The stock market is 10% undervalued; there is no bubble in stocks."  

"The economy is slowly chugging along. We have earnings estimates at 111 for the S&P 500 for next year. That's 10% below the consensus. And the model we have for the price to earnings ratio, put on those earnings, is 17.5 times earnings, at current interest rates. So the stock market is 10% undervalued. I don't know where anybody gets the idea that we're in a bubble. And even if we were, you don't come down and have a bear market until the Fed tightens and we get an inverted yield curve, which means short-term rates are above long-term rates, and currently, short-term rates are close to zero. And long-term rates are 2.7%. So the Fed would not only have to taper, they would have to raise interest rates by 25 basis points every meeting, which means you're talking about two years from now before we can even have a problem with a bubble."

"The stock market goes by the fundamentals. It may fluctuate here and there, every day a little bit, but the long-term trend is always determined by the fundamentals, by earnings, interest rates, and Fed policy," Ms. Garzarelli continues. "Our indicators say we could have a correction in the stock market, but it would be limited to 4-7% because our overall indicators suggest a bull market. They're not at 30% which suggests a bear market, or 42%, which suggests a correction of 10-15%. Instead, our indicators are at 76.5%, down from 82%. So because they have declined, we could have a little correction, maybe 4-7% but nothing more than that. And, I don't even think that will happen."

Following are excerpts from Garzarelli Capital's Weekly Client Letter:

Indicators: 76.5% bullish

Portfolio: Unhedged 

No Bubble in Stocks
The payroll employment report for October was better than expected, rising +204,000 and the prior two months were revised up +60,000. The unemployment rate rose to 7.3 percent due to the shutdown's influence on household labor markets. The jobs gains were broad based. It is likely the rate will decline next month since the dip this month was temporary. This report raises the odds of tapering in December.

Our Indicators 
Our proprietary stock market indicator composite declined to 76.5 percent from 82.0 percent due to more bullish advisors (contrarian indicator) and a decline in the ECRI index. Stock corrections should be limited to 4.0 to 7.0 percent and, we believe, stocks are currently the best investment asset class. An indicator level of 30.0 percent is a bear market signal. The increase in the Fed's balance sheet of another +$150 billion by year end will continue to provide support to stocks this year.  

With the rally in stocks this year, clients have inquired if valuation is yet bubbly. We look at various valuation measures everyday along with our P/E model, which projects a 17.5 P/E as normal at current long-term rates. With our conservative earnings outlook for the S&P 500 (105.00 for this year and 111.00 for 2014), we look for an S&P 500 of 1943 over the next six to twelve months, a 10.0 percent undervaluation currently.

With almost 75.0 percent of the companies in the S&P 500 having reported, third quarter earnings are holding onto a 1.6 percent gain over the second quarter and up 11.5 percent (y/y). Margins remain near their record high at 9.5 percent (the record was 9.6 percent in the third quarter of 2006). So far 68.0 percent of the companies that have reported beat earnings estimates, with the information technology and consumer discretionary sectors leading. The utilities sector had the most earnings misses.

The number of bullish investment advisors rose again this week and is now in bearish territory. This indicator is considered a contrarian one since the more bullish advisors are, the worse it is for stocks. It signifies there is less cash on the sidelines to further fuel stocks. The number of bulls currently stands at 55.2 percent, up from 52.6 percent last week. We downgrade this indicator to bearish from neutral-minus, removing two points from our composite.

Our economic cycle indicators are worth 20.0 percent in our composite. They include the year-over-year change in industrial production and the leading economic indicators. Although their momentum is modest, both those indicators are ranked neutral since they are not near their danger levels of -1.0 percent. The index of leading indicators is up 4.2 percent year-to-year and industrial production is up +3.2 percent, all far from their -1.0 percent danger level.

Our monetary indicators (worth 24.0 percent in our composite) remain bullish. They include the three-month bill rate, interest rate momentum, the yield curve, and money supply. The Fed's easing policies have helped keep these indicators bullish.

The Bloomberg U.S. financial conditions index provides a measure of the relative strength of the U.S. money markets, bond markets, and equity markets, and is considered a good gauge of the overall conditions in U.S. financial and credit markets. Although it declined a bit recently, it has surged upwards, setting an all-time high from when the index started in 1994. This bodes well for stocks and, therefore, we rank this indicator bullish....  

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 protected].  

SOURCE Garzarelli Capital, Inc.