The New Bull Market

Larry Kudlow: Joining me now is the famed market analyst Elaine Garzarelli, President at Garzarelli Research. Hello Elaine, welcome back to the show.

Elaine Garzarelli: Thank You.

Kudlow: Now I Don't know if we can get the retail sales chart up on the full screen or not. We sort of lost it betwixt and between but I want to ask you: the retail sales numbers came in pretty disappointing and actually core retail sales that feeds into GDP have fallen basically, really the last four or five months. Elaine, A: does that puncture a hole in the economic recovery story?

Garzarelli: Not at all. As a matter of fact that's one of my favorite sectors, the retail sector at this point. You know consumer net wealth is up 6 percent since the stock market bought them and consumers are getting a lot more interested in purchasing. The major thing that I see is the household formation data through 2015 is going to be very strong because of demographics. The 20-29 year old age group is really growing substantially. The same thing happened in 1983 when consumption appeared to be growing very slowly.

Kudlow: But Elaine we have a lot of job creation in 83 and 84 and a lot of income creation and even I, I'm optimistic about something like 2-3 percent growth in the next few quarters. I acknowledge to you that jobs are the Achilles heel of the recovery story. Incomes continue to fall and I worry about retail sales Elaine. The retailing index is up 60 percent since early march.

Garzarelli: Yea, but the markets only up 15 (percent). Generally in new bull markets the retail sector will go up two times more than the stock market so it should be up close to 100 percent by now.

Kudlow: So you're not selling the retailers?

Garzarelli: No, I'm buying them. Actually, they were down a little bit today. XLY and the UCC were down so it's an opportunity. I would buy them tomorrow.

Kudlow: And Wal-Mart, Wal-Mart went up today but their guidance for school sales was lousy. Would you play Wal-Mart?

Garzarelli: I would play Wal-Mart too because its lagged the whole market upturn, its going up about 6-7 percent.

Kudlow: All right, stay right there. We're coming back to talk more with Elaine Garzarelli. She's going to stand tough on the retailers; I've got to ask her about the rest of the stock market strategy. And is the Fed going to give us an easy money commodity bubble, and maybe that is the investment play.

Kudlow: All right and we are back with famed investment strategist Elaine Garzarelli who is standing tough on the retailers despite today's lousy retail sales report. Elaine, what are your other big favorite sectors right now?

Garzarelli: Well I like the industrials because since the beginning of the year that industry has really lagged. It's lagged with the healthcare and the utilities, the ones that, you know, don't usually do well in a new bull market in the early stages. I also like technology and financials. For the financials to get back to where they were would require about a 200 percent increase in stock prices from here and with the technology it would require a little over a 200 percent increase. So I like those two sectors and you know in the technology area, the software area looks very good which would be Microsoft and Oracle. But the other thing I wanted to say was with retail: The data on the GDP was revised back four years in July, and we found that the savings rate was actually two times higher than we actually thought it was and income was growing much stronger than we thought it was too.

Kudlow: All right, so the (blank) is worried about the saving rate. Let me just ask you we were talking banks and financials earlier. Are you worried about punitive regulations from the FASB accounting nerds that might force new mark to market for loans and investments?

Garzarelli: That's the reason everything happened to begin with. No, I would short tomorrow if that were to come back.

Kudlow: You would get out, ok. Fair enough.

Garzarelli: Absolutely.

Kudlow: Is industrials a world economy play? I've noticed today Elaine, lets see, France and Germany positive GDP in the second quarter, that's good news.

Garzarelli: That's right, Asia too.

Kudlow: The Canadian central bank has already said that they are out of recession. Are you into the world play along with China and Asia?

Garzarelli: O absolutely. I think that the developed countries like Europe are the next to go. Their stock market is up much less than ours and that would be an excellent area to go into.

Kudlow: What about the bond store? We had very good auctions today. The 30-year bond rallied almost 2 full points and closed at 442; It was well bought. The 10-year rallied by a point today, they're at 360. Now a lot of people would say this is good. Good participation but also low inflation fears. Do you buy it?

Garzarelli: Yes, I do think we're not going to have much inflation for a very, very long time. The (capitalization) rate is 68%. The Fed generally does not tighten until that utilization rate gets up to 80%. And in a deflationary environment or low inflationary environment, they generally don't tighten until a year or year and a half after the recession ends. So I'm not worried about a big correction in the stock market, which could be 10-15 percent, if the short-term rates get up near the S&P 500 dividend yield at two and a half percent.

Kudlow: How high? S&P closed over a thousand today, how high can the S&P 500 go? Can we get back to 1200 pre-Lehman?

Garzarelli: Oh yea.

Kudlow: Oh yea, even higher?

Garzarelli: I've got 73 for S&P earnings for next year and a 17.5 multiple based on interest rates & productivity, so just multiply that out.

Kudlow: Where are the best earnings going to come from in the next year, in your judgment? The best earnings.

Garzarelli: Going to come from consumer discretionary and materials.

Kudlow: Materials. We saw the big coal move today, you like the materials?

Garzarelli: I like materials; I like aluminum; I like paper…all the basic materials because of China and Asian countries continuing to grow. Infrastructure plays, that's why I like the industrials too, and those two areas should continue to do well for the next 6-12 months, at least. Any…

Kudlow: On the way out, Elaine, what's your biggest risk to this scenario?

Garzarelli: The biggest risk is if the BAA bond yield goes up and interest rates spreads widen. That would be a real problem for correction, that could give us a nice correction, or if the fed would raise rates close to the dividend yield. That could give us a big correction.

Kudlow: Just real fast, when would you expect any sort of correction or pullback that's meaningful?

Garzarelli: Well, we could have a sideways correction; we could have a 4-7 percent correction at anytime. Sentiments pretty high, so it could go sideways for a while.

Kudlow: All right, but it wouldn't bother you.

Garzarelli: But nothing big.

Kudlow: It wouldn't bother you.

Garzarelli: 4-7% is all I could see.

Kudlow: All right, thank you Elaine Garzarelli, very optimistic. We appreciate it.

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