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TOM HUDSON: Not the threat of a government shut down, nor high energy prices will knock down the bull market in stocks. That`s the prediction at least from tonight`s "Market Monitor" guest. Elaine Garzarelli back with us, president of Garzarelli Capital. Elaine, welcome back, always nice to see you.
ELAINE GARZARELLI, PRESIDENT, GARZARELLI CAPITAL: Nice to be here.
HUDSON: What makes you so confident in higher stock prices with all the uncertainty that remains?
GARZARELLI: Well, basically, my indicators for the stock market are bullish. They`re at a 76 percent level. And they need to go down to 30 percent for a major bear market. We`re down below 43 percent for 10 to 15 percent correction. And basically there are economic cycle, monetary valuations and sentiment. And those are the four categories of my indicators. So it`s fundamental for the most part.
HUDSON: I want to ask you about oil in a moment. Last fall the last time you were on with us you were bullish and your indicators were as well. You were looking at the time for S&P 500 at 1300. We`re above that now. So do you have a price target in mind?
GARZARELLI: For earnings for this year and this is assuming that oil prices stay where they are now, which is pretty high, I have 94 for S&P earnings and for next year I have 102.50. So if you just multiply a 15 multiple by that, which is conservative, our models say 17 would be better based on the BAA bond rate. You get up to 1500 on next year`s earnings, 2012 earnings.
HUDSON: Give me real quick on oil, what price is going to start to concern you?
GARZARELLI: I would say $128, $130. We`d have to change our forecast for much slower growth.
HUDSON: You new picks, you like materials, we`ll begin with the XLB materials sector, exchange-traded funded. It clearly has been benefiting from the weak dollar, strong commodity. What do you see ahead?
GARZARELLI: Well, I think that the materials will outperform the stock market by about two times. So that`s a pretty good leverage. The stocks, some of them are Dupont, Freeport, Dow, Alcoa (NYSE: AA), Nucor (NYSE: NUE).
HUDSON: All real household names certainly in that kind of global industry. You also like financials, which is an interesting pick and clearly there`s been a lot of focus on the finance sector and banks especially. We`re ahead of earnings season, and the spider financial exchange-traded fund has yet to break out to post recession highs.
GARZARELLI: Yes, but I think it will. It was lagging a little bit. Now it`s starting to lead for the last couple of weeks and I think it`s the cheapest of all my sectors actually. The stocks in there would be JPMorgan, Wells Fargo (NYSE: WFC), B of A, Citi, U.S. Bancorp (NYSE: USB).
HUDSON: Kind of a valuation play as well. We`ve talked about oil a little bit and you do like the major integrated oils with the XLE, the energy exchange-traded fund. If oil prices don`t move up to your concern level of $128 or so, where do you go from here for the XLE?
GARZARELLI: Well, no, this is based on where oil prices are today. I would recommend XLE at current prices, which is about $113 but this one should outperform the market by two times. It`s been the best leader in the last six months of all the sectors and in there we`ve got Exxon, Chevron (NYSE: CVX), Schlumberger (NYSE: SLB), Conoco and Halliburton (NYSE: HAL) as the top ones.
HUDSON: You also liked some fixed income, but you`re going at it through a closed-end fund, the ticker here on this one, EAD. It`s a Wells Fargo (NYSE: WFC) advantaged income fund, focuses on junk bonds, so you`re getting a yield of almost 10 percent. Does that concern you though, as Europe is raising interest rates and elsewhere?
GARZARELLI: No. The junk bond market should do the same as the S&P 500 stocks. And the reason is because we`re in part of the economic cycle where the default rate is the lowest we`ve seen in many, many, many years. And it should continue unless we go into a recession. If oil prices go to $130, that could be a problem, because it could be recessionary.
HUDSON: As I mentioned September 17 was the last time you were here. Let`s go through your four picks back then, the performance also showing double digit returns, beginning with the industrials exchange-traded fund, up almost 22 percent, the consumer discretionary fund moving up nicely as well. Technology the laggard up only 15 percent Elaine, but the home builders, how about that, 23 percent. Do you still like this quartet?
GARZARELLI: Oh, yes, I still do.
HUDSON: Any disclosures, ownership of all these funds we mentioned?
GARZARELLI: I have a sector analysis fund that I run and I own all of these, all the ones I mentioned and all the ones from last time.
HUDSON: There we go, full disclosure, from our "Market Monitor" this Friday night, Elaine Garzarelli with Garzarelli Capital.