Market Monitor - Elaine Garzarelli, President, Garzarelli Capital

TOM HUDSON: The number of failed U.S. banks now stands at 124 this year, after regulators took over five banks just this afternoon. They include New Jersey`s ISM Bank, (INAUDIBLE) savings bank in Ohio and three others in Georgia. FDIC officials have repeatedly said they expect this year`s failures to exceed last year`s and they may be right. At this point last year, just 93 banks had failed. Stocks have been creeping higher this month and tonight`s "Market Monitor" says get ready for a new rally. She`s Elaine Garzarelli, president of Garzarelli Capital and she joins us tonight from Philadelphia. Elaine, welcome back to NIGHTLY BUSINESS REPORT. Nice to see you.

ELAINE GARZARELLI, PRESIDENT, GARZARELLI CAPITAL: Nice to be here, thank you.

HUDSON: In February, you were saying the winter swoon was over and we did see prices climb through April and since then we`ve seen some volatility. What makes you think that higher stock prices are coming?

GARZARELLI: Well, we`ve been in a trading range for five or six months. Usually after the initial surge in a new bull market -- the market went up 70 percent for the S&P 500 after a recession -- the usual case is that the stock market goes into a trading range for six to 12 months. So that is normal. And every time that happens, there is talk about double dips. And I don`t see a double dip, therefore I think we`re going to come out of this trading range, which has been 1050 to 1150 for five or six months.

HUDSON: OK. So how high and how fast do you think this rally could come?

GARZARELLI: Well, my indicators have gone up from 67 percent to 82 percent which is quite bullish. The 100 percent is the maximum, so 82 percent is fairly good. Thirty percent would be a new bear market. I have earnings for 2011 at 86. The consensus now is at 95. So I`m way below the consensus and with the P/E normal of about 15, that gets us to 1300 on the S&P 500. What`s that, 15 percent --

HUDSON: A very bullish move, yeah.

GARZARELLI: That is only based on `11, not based on 2012 earnings.

HUDSON: Now you were here back in February as I mentioned and at the time, you were looking for dividend plays, including a couple of high-yield junk bond ETFs, which are up about 2 percent and that does not include any dividends. Do you still like this area?

GARZARELLI: Absolutely. I love junk bonds.

HUDSON: All right. You also liked a mortgage company, Annaly Management which is down 2.5 percent but again, that does not account for any dividends paid out and the industrial fund exchange-traded fund, here is your winner, up almost 6.5 percent, better than two or three times what the market has performed since February and you`d still put new money into XLI. Why now?

GARZARELLI: I would Annaly`s up about 5.5 percent with the dividends. XLI, because the growth in the economy in 2011 and 2012 are going to be in four areas, going to be consumer durables, business equipment spending, exports and residential construction. And they`re still going to have a very, very large amount of industrial purchases and that`s going to be because of exports and business replacement equipment. So I still like XLI. Even though it`s moved a bit, I think we can do two times better than the gain in the S&P 500.

HUDSON: You mentioned consumers and you also like discretionary stocks as you mentioned. There is an ETF (XLY) here, XLY. It again has been in this trading range that you mentioned in the low 30s now. What is fueling the consumer even as it pays off its debts?

GARZARELLI: Paying off its debt, basically replacement demand and paying off debt gives you more income and more faith that things will get better and it is time to spend again. I don`t know how many of my friends just bought new TV sets and cars. There is a strong demand for automobiles in next year and into 2012 as well for housing. McDonald`s is in there, Disney, Home Depot, Ford.

HUDSON: All household names. We have less than a minute left and I want to get to the other two, including technology. We`ve seen merger and acquisition activity heat up here. Is this part of your play here?

GARZARELLI: The XLK, no it`s mostly just tech equipment spending for replacement and for new equipment and productivity -- Microsoft, IBM, Intel and Cisco.

HUDSON: And you also like home builders, XHB. Are you calling a bottom in house prices?

GARZARELLI: We`ve got 40 percent increase in 2011 and housing starts in 1.2 million in 2012, just based on demographics. So the XHB includes a lot of home building stocks like Lennox, Ryland and Lennar.

HUDSON: Would you rather buy the XHB than a new home?

GARZARELLI: Yes.

HUDSON: OK, any disclosures for these funds?

GARZARELLI: I own everything I`ve mentioned tonight in my sector analysis fund.

HUDSON: We always appreciate the insights, certainly a lot of bullishness here from our "Market Monitor" tonight, Elaine Garzarelli, great to see you again. She is president of Garzarelli Capital.

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