Elaine Garzarelli : Re: 6/13/03 Wall Street Week with Fortune

» SteveT - Re: 6/13/03 Wall Street Week with Fortune

In response to message posted by Kirk:

Rally or speculation

GIBBS: And you could write a book about the bad rap short sellers get. They're accused of being greedy to being downright unpatriotic. In their defense, you could say they're just trying to keep a check on "irrational exuberance."

Noted short seller Bill Fleckenstein says batten down the hatches because this rally is a head fake. Bill joins us from Seattle. And Elaine Garzarelli does what many people say is impossible. She successfully times the market and says right now is the time to stock up on stocks, but forget about buying and holding…that strategy will no longer work. Bill, Elaine, thanks for joining us. Elaine, tell me about this market timing stuff. Is it real, or is it, as some people say, just a case of a broken clock being right twice a day?

ELAINE GARZARELLI: No. This is definitely a market-timing market, and we really haven't seen anything like this since the period of 1967 to 1982. Within that period we had three bull markets that saw 70 percent gains and then bear markets. And every low was a lower low. So during that period of time, if you didn't market time and you bought in 1967, you would have lost money by 1982.

GIBBS: So couldn't this be a bear market rally?

GARZARELLI: Well, it probably, I think it's a rally, and it's a cyclical bull market within a flat trend. I don't think the stock market...

GIBBS: Okay, wait a minute. What's that mean? Cyclical bull market?

GARZARELLI: The stock market went up like this from 1982 to 2000. Now it's going to be like this, but you're going to have movements around this axis. You want to sell when you're at the top, like you did in 2000, and you want to buy when you're at the bottom. And you want to ride it up, and then you want to get out again so you don't have to give everything up. Because if you go up 100 percent and then you go down 50 percent, it takes you 100 percent to get back to even.

Even if you look at the Nasdaq right now, we're still down 70 percent, and it would take a 200 percent increase in the Nasdaq for the people that bought and held just to break even, and 53 percent on the S&P.

GIBBS: Bill, what do you think about that? You're probably not the most popular guy at the party saying sell or at least don't buy stocks. Why?

BILL FLECKENSTEIN: Well, I actually believe that Elaine's thesis is correct, that over the course of the next whatever it's going to be, five years, 10 years, the people that are going to be, the majority of the people that will be successful will be those that buy at opportune times and sell at opportune times. Unfortunately, we don't know ahead of time exactly when those opportune moments are.

I think the rally that began in February and March was rather predictable. I, myself, was constructive that the market was going to have a rally for a variety of reasons. That did not mean that the risks were low then, and I think the risks are even higher now. And I think this particular rally that's been going on is probably going to end sometime in the next month or so. So I don't think it's a particularly good time for folks to load up on stocks. I think we're at the part, the phase where it might be a better idea to be a seller than a buyer. I don't think folks at home should contemplate short selling that.

GARZARELLI: No, I totally disagree with that. There's a big difference between now and the last rally we had from September 21st to April of '02, and that was a 40 percent rally in the Russell. We have corporate bond rates that have come down substantially. We have long-term interest rates that have come down. And we have operating profits up 26 percent from their trough. We have reported earnings up 46 percent. We have six consecutive quarters of real GDP growth.

GIBBS: So what do you think about those low interest...

FLECKENSTEIN: OK. Well, listen, listen, listen. We've had 12 rate cuts since the top of the market. None of them have done much good. The tax cut this time is smaller than last time. The fact of the matter is, is we still have too much capacity. People are still being laid off. We've had a rally, and because we've had a rally, now people are taking a few statistics and saying it's the start of something big. I don't believe that's the case. In fact, after every rally we've had, people have gotten all excited, and it's been the wrong thing. I could be right and Elaine might be...

GARZARELLI: Yeah, but this is different. It's not the same as the other rallies that we had. We already had three rallies since the year 2000. Not one of them was accompanied by a decline in the B, AA bond rate, and with the increase in lending by banks and with GDP growth at 4 percent. After 9/11 we had two quarters with 4 percent real GDP growth. Consumer sentiment is up 20 percent since the war ended. A little drop today of 5 percent, that happens every time at a major cyclical bear market bottom, in '82 and again in 1990.

GIBBS: Let's hear what Bill has to say. Bill, what do you have to say to that?

FLECKENSTEIN: Well, look, I could cite five inside baseball statistics that say that there's no change. I mean there's always going to be some change anytime the market goes up. You can find a few statistics. But we'll see whether or not this rally's different. All I'm suggesting is it's not the start of something big, and we'll find out. And I suggest it's very dangerous. There's been no real traction in the economy from jobs creation, or retail sales haven't really bounced since after the war. So I just think it's a very risky time to try to be an investor.

GIBBS: Bill, what about the housing market and consumer spending? Those things seem to be what we're pinning the hopes on the economy for.

FLECKENSTEIN: Well, right. I think this is what's kept people from recognizing the fact that we had the biggest bubble in the history of the world, and the workout process from bubbles is usually about a decade. It hasn't been as severe as it might have been because of the fact that we've been able to collapse rates has allowed people to take their debt up against their house, which has appreciated in value because rates have come down. And they've been able to live beyond their means and borrow from the future in terms of spending. But we notice that 0 percent loans aren't really helping the auto market. And so I think all of it's been, all we've been doing is borrowing from the future a little bit, and I don't think it's particularly sound because of the debt that's been taken on against the rising housing prices. So I think it's all very dangerous.

GIBBS: You don't think it's dangerous, and you're willing to wade in the water saying stock up on stocks.

GARZARELLI: May real retail sales were up 5 percent, in real terms, that is.

GIBBS: So what are you buying?

GARZARELLI: And equipment spending for the first time in the post World War II period. Businesses are wearing out equipment more than they're purchasing that equipment. So we think in 2004 with the tax cut and everything else, equipment spending in real terms could be up close to 11 percent. You're talking about 4.5 to 5 percent real GDP growth in '04; the second half of this year, close to 4 percent to 5 percent.

GIBBS: So the industrials, the basic materials area, you see attractive stocks?

GARZARELLI: Well, not the basic materials as much as the industrials.

GIBBS: Give me some names.

GARZARELLI: Well, gosh, I love McDonald's. That's not an industrial, but that's a dollar play. I like General Electric. That is definitely an industrial. And all these stocks that I'm mentioning here are down 50 percent. The S&P 500 is still down 53 percent, and these are all down much more than that.

GIBBS: With crude oil jumping over 30 bucks a barrel, would you buy any of the energy, the...

GARZARELLI: I would buy Chevron, and I think because it's a good dividend yield and the earnings should be better than the S&P next year. I like that oil stock. I like the oil service stocks like Schlumberger and Halliburton, and I also like Sears. Sears is down 55 percent, and I don't see why consumer spending isn't going to continue to rise. I think one of the things that people are afraid about is that we did have a bubble, and there is a problem with GDP growth reaching potential, which is about 3.5 percent over the long term. But this cyclical move here is good for the next year or year and a half, and then you may have to sell again. That's the part about market timing.

GIBBS: Bill, you don't think so. What about this dividend play? Do you think that's a reason to buy stocks at all?

FLECKENSTEIN: Well, that's the pretty interesting irony. A lot of people have been chirping about the dividend tax cut as a reason to buy stocks, and then you look and see what stocks have been going up the most, and it's been technology stocks and speculative stocks like Internet stocks and smaller, broken companies that can't possibly be paying dividends. So it's another of the speculative battle cries, but I don't think it's the reason why stocks have been going up. We're simply having a rally in a bear market. I want to say one thing about, Elaine, when you use a lot of these real, I think nominal data is a little more interesting right now. Because the hedonic adjustments that have gotten into the system have warped some of the real data, so I think that a lot of times the nominal data makes more sense than the real data.

GIBBS: Where should I put my money, Bill?

FLECKENSTEIN: Well, I think that if a person has the skills, I think foreign currencies and non-dollar assets. Foreign currencies, precious metals look pretty interesting. Other than that, I think it's a good time to try not to lose money, because the risk/reward ratio is not attractive now, and I think stocks and the economy are not going to do well in the second half.

GIBBS: All right, Bill. You've got the last word on it. Thank you very much, Bill Fleckenstein. Elaine Garzarelli, thank so much. Good to see you again.

-- posted by SteveT