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WHAT MADE ELAINE SHOUT 'SELL'

Her model turned down days after she forecast a 6400 Dow

An old Wall Street adage says that you're only as good as your last market call. Nobody knows that better than Elaine M. Garzarelli, who as a Shearson Lehman Brothers investment strategist turned bearish a month before the 1987 crash. That endeared her to the firm's brokers and clients and made her the best-known and perhaps highest-paid woman on the Street.

So when Garzarelli, who now has her own firm, Garzarelli Capital Inc., told her clients to get out of the market on July 23, traders paid heed. The Dow Jones industrial average had been up more than 40 points but had lost half of that by 12:45 p.m. when Bloomberg Business News flashed a one-line notice of her bearish turn. By 4 p.m., the Dow was down 44, with news reports giving Garzarelli a good part of the credit, or, depending on your view, the blame for the day's downturn.

In the week since, she's been getting neither credit nor blame but derision. The market has rebounded--``a good selling opportunity,'' she says. And the media and analysts pointed out that her bearish call came only a few days after she predicted in The New York Times that the Dow was heading for 6400.

SERIOUS SEER? Garzarelli says she ``was as surprised as anyone'' when, in a data revision, the 14 indicators registered only 23.5% positive, well below the 30% sell trigger. Her market model (table) of monetary, economic, valuation, and sentiment indicators, had held around 80% positive for most of 1996 but had begun to deteriorate recently. In her July report, the indicators were only 48.5% positive. Still, Garzarelli remained bullish. Now, she says the market will fall 15% to 25% from the peak, which could take the Dow down to 4300.

Should you take this seer seriously? Garzarelli was right on the money for the 1990s bull market, having turned bullish in the fall of 1990. The post-1987 showing, however, was mixed. She says her indicators turned bullish in early 1988, which was published in her reports. But she waited too long to buy stocks for a mutual fund she was running. The fund never regained its edge and was shuttered in 1994.

Garzarelli's bear turn, like that of other market analysts, began in July. But not because of the day-to-day swings of the Dow. First, the coincident-to-lagging indicator ratio, a measure of economic strength, turned south. But that in itself was not fatal, since it has a small weighting in her overall system. More troublesome were rising interest rates for three-month Treasury bills. When the bill rate rises above the discount rate, it's bad news for stocks. ``That tells you the Fed has room to tighten,'' she says. That indicator, which counts 10% in her model, further weakened the bullish case.

The indicator that broke the bull's back was corporate cash flow. That turned down on July 22, when Garzarelli's assistant, Alida Melkonian, received revisions on first-quarter corporate cash flow. Melkonian faxed them to Garzarelli at her home in the East Hampton, N.Y., woods. Cash flow plunged from the fourth quarter, as depreciation fell off 4% and deferred taxes sank 70%. The newly lowered cash flow yield could not stand up to higher interest rates, and that indicator turned negative. So she scheduled a conference call with her institutional clients for 11:30 a.m. the next day. These clients pay thousands a year for such calls, consultations, and reports.

Garzarelli planned to notify the 55,000 subscribers to the $149-a-year The Garzarelli Outlook by hot line and fax, but word had already gotten out, as a money manager--one of about 60 in on the conference call--told Bloomberg. An hour later, CNBC reported the item as well. The leak, she admits, probably angered many subscribers, though her publisher says 35,000 on her ``alert'' service had been reached by 6 p.m. ``Next time, I'll make my calls after the market closes,'' she says.

Garzarelli's fans needn't expect a bullish call soon. That's because some indicators depend on data that changes only monthly or quarterly. So, she says, it will be at least three months before the model can turn bullish. Of course, if the market turns decisively northward in the meantime, there'll be fewer people waiting for that call.

By Jeffrey M. Laderman in New York


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Updated June 14, 1997 by bwwebmaster
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