Garzarelli joins the crowd

February 3, 1997: 9:22 p.m. ET

Analyst famous for going against the trend actually agrees with the bulls

NEW YORK (CNNfn) -- After Elaine Garzarelli predicted the 1987 stock market crash, she was catapulted to celebrity status. No longer just a respected analyst, she became Wall Street's chief prognosticator, always sought after for her crystal-ball insights on the direction of the markets.
     She gained such prominence that in 1994, after 10 years with Lehman Brothers, she decided to start her own investment firm. She opened Garzarelli Investment Management a year later.
     But as an independent broker, her crystal ball wasn't as clear.
     After six years as a bull, Garzarelli turned bearish in July 1996, when the Dow Jones industrial average stood at 5,390. Seven months later, with the Dow 25 percent higher, she is back in the corral.
     Losing out on such a profitable run would make most analysts cringe. But Garzarelli proves her mettle by admitting she was wrong and hoping it won't happen again.
     "It's the first time that we failed to call a major (market) top or bottom within 4 to 8 percent," she told CNN's Moneyline with Lou Dobbs. "So when the market didn't peak at 8 percent, I knew something was wrong. It was either the market was wrong or we were wrong. When the market went up 20 percent, we went back to the computers."
     It took Garzarelli and her staff three months to figure out their mistake. She blamed companies for not reporting their cash flow earnings, which she used as her major indicator. Now she focuses on operating earnings.
     "We were concentrating on a cash flow measure and that gave us the signal to sell." She said. "But the companies are no longer reporting that data on a timely basis."
     Famous for going against the popular predictions on Wall Street, Garzarelli is in the unusual position of agreeing with the current theory that the market's bull run has plenty of steam left.
     "I don't know how long it will last. Right now the economic cycle is near the bottom in the earnings cycle and the gross domestic product cycle, and since we went right through without a correction, it's really too late for the cycle to give us one for a couple of years unless inflation comes back or interest rates go up."
     She predicts the market will rise 10 to 15 percent this year, and another 8 to 10 percent if bond yields fall. (121K WAV) or (121K AIFF)
     To reap the benefits of the next run up, Garzarelli advises investors to look into banking, insurance, health care and restaurant sectors, and to avoid homebuilding and retailing stocks.
     She said the economy should grow flat as the year moves on, forcing the Federal Reserve to loosen interest rates. All of which should make her investments very profitable -- if the crystal ball is working again.