Go-Go Garz Gambling on a Go-Go Market

With more than 2,500 hedge funds going belly up over the past three years, in the process decimating investors with many billions of dollars in losses, the last thing the investment community needs -- or wants to hear about -- is another hedge fund.

Indicative of this disenchantment, investors have been dumping them like crazy, evident by a whopping $26.2 billion worth of hedge fund investments that were redeemed in July alone. Further, with these funds still holding huge assets (more than $1.5 trillion) in the face of lots of worries about the vigor of next year's widely anticipated economic recovery, the redemption process hardly seems over.

Stock market guru Elaine Garzarelli, or Go-Go Garz as she's known in some Wall Street quarters, doesn't go along with the pessimists. Nor does she buy the idea that the investor's once hot romance with hedge funds is on the rocks. In fact, she's so convinced it isn't that come next month, she will unveil her own hedge fund, the Sector Analysis Fund, whose goal is to generate positive returns in a bear market. Initial investment is $500,000.

Back in the 1980s and early 1990s, Garzarelli wowed Wall Street with a series of uncanny on-the-money market calls, predominantly bullish, which is what earned her the nickname Go-Go. Wall Street at the time hung on here every word. She is currently skipper of Garzarelli Capital, a New York advisory firm which doles out market advice to more than 100 institutional investors with assets in excess of $1 trillion.

That Go-Go reference continues to be quite appropriate as Garzarelli is once again bullish as the dickens. Though reluctant to talk about her hedge fund, Garzarelli had no reluctance to discuss her latest thinking and the advice she's dispelling to her institutional clients.

All told, Garzarelli tracks 13 indicators, such as economic activity, valuations and monetary policy. As of now, 12 of them are flashing bullish readings. The lone holdout is the sentiment indicator, which shows too many bullish investment advisors. For Garzarelli to be bullish, more than 65% of her indicators must throw off favorable readings. Currently, 83% of them are doing just that, which means, Garzarelli tells me, "I'm very bullish."

Much of her sunny posture is also linked to an outbreak of economic thunder. For example, the Index of Leading Economic Indicators has risen 4 consecutive months, suggesting, Garzarelli says, that the recession has probably ended. Some other factors supporting this view, she notes, are rising home sales, low inflation and a sharp rise in consumer net worth due a combination of climbing home and equity prices.

Yet another plus: the economy is picking up around the world. Garzarelli notes 9 countries reported second-quarter GDP growth, 5 of them double-digit.

To Garzarelli, it all adds to a peppier U.S. economy, with her models suggesting 3% GDP growth in the second half of 2009 and more than a 4% rise in all of 2010. Her outlook for next year's earnings: up 25% or more. It all suggests, she says, that fair value for the S&P 500 is 1,300, versus its current level of 1028.

As far as stock prices go, Garzarelli sees them ballooning about 25% over the next 6 to 12 months. Importantly, she sees minimal risk from current levels even though the market has ballooned more than 50% from its March lows. At worst, she sees periodic sideways corrections of say 4% to 7% as stock prices steadily work their way higher. "The risk-reward here highly favors the investor," she says.

Where are the best places to put your equity money to work? Garzarelli strongly favors exchange-traded funds that focus on 4 industry sectors that cater to areas she expects will outpace her projected 4% GDP growth next year. They are:

• Financials (ETF symbol, XLF): This group, down about 60% from its all-time high, versus a 35% decline in the S&P 500, is expected to recover nicely due to increased business and consumer spending.
• Industrials (XLI): Down around 41% from its all-time high, this sector is seen reaping the benefits from the recovery in global economies, solid infrastructure spending abroad and exports to Asian and other developing economies.
• Homebuilding (XHB): Off 65% from its peak, this group is recovering due to record low mortgage rates, a growing 20-29 population, which is creating robust new home formations, favorable housing affordability trends and rising consumer confidence.
• Semiconductors (USD): This ETF is down 71% from its all-time


• high, but the industry has a lot going for it. North American semi equipment orders have increased 43% and the New York Federal Reserve tech survey shows multiple months of gains. In addition, tech is expected to be the fastest growing part of the 2010 economy, aided by strong foreign economic and export demand.

Our Go-Go would-be hedge fund manager also has high hopes for the consumer discretionary sector (XLY) because of the replacement demand cycle and new household formations. Likewise, the higher savings rate in July suggests more available funds to purchase goods. Yet other plusses are gains in consumer confidence and consumer wealth (up 6% since the housing and stock market bottoms).

Go- Garz's wrapup: "It's just the wrong time to be a wimp."

Write to Dan Dorfman at [e-mail]

Comments

[DuganS1]

Most money redeemed from hedge funds just gets deposited back into other ones. Mutual funds saw large redemptions too.

"Financials (XLF): down 60% from all-time high, versus 35% decline in S&P 500, expected to recover nicely due to increased business and consumer spending."

It doesn't matter how far it is from its high. Several companies in XLF have been taken over by the govt. Many others have sold large amounts of stock just to stay in business, which reduces earnings per share because there are now more shares. So even if they end up making the same amount of revenue they did before the bust, which is incredibly unlikely over the next 10-20 years, they will still make far less earnings per share than they did before.

"Homebuilding (XHB): Off 65% from peak, recovering due to record low mortgage rates, growing 20-29 population, (low prices) and rising consumer confidence."

This year the Federal Reserve is buying $1.25 trillion worth of mortgage backed securities, which is keeping mortgage rates artificially low (50 year lows). This year there is an $8000 first time buyer incentive. This year demand has gone up only a trickle with both huge housing stimulus programs. What happens next year when there are none? Rates could go up a point or two easily.

[metalpipe]

I figure June of next year is the time to buy XHB, when the bad news is undeniable and it tanks for real.

[olephart]

I believe the sell/buy ratio for corporate insiders is about 4 or 5 to 1. That means those in the know are bailing at this altitude.

[grateful4thedead]

olephart....the ration right now is 30.6 to 1.