Market Monitor- Elaine Garzarelli, President of Garzarelli Capital

TOM HUDSON: The winter swoon for stocks is over, at least so says tonight's "Market Monitor." She's Elaine Garzarelli, president of Garzarelli Capital joining us tonight from the NASDAQ. Welcome back to NBR, Elaine. Nice see you.

ELAINE GARZARELLI, PRESIDENT, GARZARELLI CAPITAL: Nice to see you, too.

HUDSON: What makes you think that this dip in stock prices we've seen since the middle of January is over now?

GARZARELLI: Well, the S&P 500 declined about 8 percent and the Russell 2000 by 10 percent, and preceding that decline, the sentiment among investment advisors was very bullish at 76 percent. Anything above 70 percent is bearish. And that has since dropped to only 60 percent bulls. In addition to that, junk bonds have rallied and the BAA, 10-year bond yield ratio has declined. So both of those things have increased our indicators to 73 percent from below 65.

HUDSON: So that's telling you that in fact there ought to be more buyers than there are in this market. What's interesting--

GARZARELLI: Yes.

HUDSON: The swoon kind of corresponds with the earnings seasons that is just about completed. Earning came out generally better than expected. The outlooks were out there, but the market sold off on the news.

GARZARELLI: Yes, it's because the sentiment was too bullish and a lot of it was already built into the market and then we had the problem with Greece and then the major thing that kicked it off was that China started tightening and that really bothered the markets, in addition to everything else.

HUDSON: Speaking of tightening, the Federal Reserve in the past couple of weeks has taken its first tightening measure, that discount rate, just the emergency lending rate for banks. Does this change your outlook at all or your time period for the stock rally?

GARZARELLI: Well, I really don't think they're likely to raise the Fed funds rate and that's the most important thing, for another three meetings or maybe six months from now. Evan said that today at noon and some other members have said that. So if that's the case, I'm not worried about it. Now in 2004 when the Fed tightened, the leading inflation index rose for eight consecutive months. Now the same leading inflation index is up for 10 months, so it seems scary, but the point is, even with this rise, you're still down 12 percent from the prior peak. In 2004 you were up 5 percent from the prior peak. So inflation is still not a problem.

HUDSON: We have seen, however, basic materials commodity stocks perform, generally speaking, pretty well. Let's take a look at your previous picks you had on NBR back last fall, in September as a matter of fact. You were looking at home builders, the exchange-traded fund (XHB) up by better than 5 percent. Industrial exchange-traded fund (XLI), 14 percent rise. And speaking of some of the other areas you were put something money to work, materials (XLB) up by 5 percent almost and emerging markets (EEM) 7 percent. Do you like any of these quartets, still?

GARZARELLI: They're fair. The one I really like though and continue to like is the industrial area of the economy.

HUDSON: What is it about the XLI, that exchange-traded fund, and the companies included in it, that you still put your money to work?

GARZARELLI: Because I think the economy is growing in the export area and in cap-ex, that's capital spending. So it's a business-led recovery. It's not really a consumer-led recovery and that should continue. Actually, with the Chicago PMI that came out yesterday, it's very, very strong and in the GDP accounts, last quarter 18 percent rise in real capital spending versus 6 percent for the GDP.

HUDSON: You mentioned exports. We have seen the dollar stabilize to some degree. Could that derail any of that export profitability that you see in 2010?

GARZARELLI: Well, slightly, but not-- not enough to derail it. I think you can still have a good 12 percent growth, even with a stronger dollar.

HUDSON: Earlier you mentioned a search for yield and that has led a lot of people to take what's called credit risk, basically the IOU risk of high yield or junk bonds. You've got a couple of picks that play in the exchange-traded fund area. JNK one of the ETFs that invests in junk bonds and then also a high-yield exchange-traded fund (BHYG). What do you like about this area of fixed income?

GARZARELLI: After the Fed tightens, generally you would think fixed income would sell off. You don't want to be in long-term government bonds and most people say stay away from fixed income. But with junk bonds, the Fed doesn't tighten unless the economy is really doing well. And that means there's less out there for these bonds and they're still yielding around 12 percent and the JNK is 70 percent, 70 percent of the holdings are in the industrial area (INAUDIBLE) over 12.

HUDSON: We just have 20 seconds here left. Annaly Mortgage, the ticker symbol NLY on this one. What are your hopes for this stock in the upper teens?

GARZARELLI: It's yielding 17 percent. You can't beat that. And I don't think you have to worry about it until the Fed raises the Fed funds rate.

HUDSON: Any disclosures, Elaine?

GARZARELLI: I own all of these in my sector analysis fund and personally as well.

HUDSON: Our "Market Monitor" tonight from the NASDAQ, Elaine Garzarelli, president of Garzarelli Capital.

Originally aired on PBS Nightly News.

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