Predictor of '87 crash calls '96 market a 'sell' Swoon isn't finished, Elaine Garzarelli advises her clients


NEW YORK -- Elaine Garzarelli, a former Lehman Brothers strategist best known for calling the 1987 stock market crash, told clients yesterday that she expects further declines in the value of U.S. stocks.

Stock prices may fall 15 percent to 25 percent from their peaks in May and June, Garzarelli said, according to one money manager who was on a conference call she held with the clients.

Since May, the Standard & Poor's 500 Index has fallen about 9 percent and the Dow Jones industrial average by about 6.7 percent. The Nasdaq composite index is down 13.4 percent since June.

Garzarelli expects corporate profits to slow later this year and in 1997, largely because companies' cash flow is deteriorating, said David Rolfe, chief investment officer at Wedgewood Partners Inc. in St. Louis.

If her 15 percent prediction is correct, "we're about halfway there, and if it's 25 percent, we still have a ways to go," Rolfe said.

Garzarelli told the clients that a proprietary model she uses to assess the health of the U.S. stock market signaled "sell" because of the worsening outlook for companies' cash flow. "That bespeaks worsening corporate earnings for the rest of 1996, and into 1997," Rolfe said.

The model has been either bullish or neutral about the outlook for U.S. stocks since 1990. It last signaled that stocks should be sold in 1989.

Garzarelli analyzes the stock market using 14 indicators, ranging from interest rates to earnings to investor sentiment.

"Early in the year, her model was positive, then it deteriorated," Rolfe said. "While her indicators have been slowly deteriorating, this [cash flow] one threw it into a 'sell' zone. Her 'sell' signals have come within 4 percent to 6 percent of the ultimate top."

U.S. traders differed on the significance of Garzarelli's change of heart.

"Could there be a reaction to Garzarelli? Yes. Would it be significant? No," said Richard Ciardullo, head trader at Liberty Investment Management in St. Petersburg, Fla., which has $6 billion in assets.

"It would certainly be a noteworthy change," said Steve Mindnich, a senior trader at Jefferies & Co. in Short Hills, New Jersey.

A partner of Garzarelli's predicted that she would have an important impact on the way investors view U.S. stocks.

"If she says sell, we go to cash," said Leonard Zacks, president of Zacks Investment Research in Chicago, which manages $50 million and distributes Garzarelli's investment research to institutional investors. "She's got a very wide following."

Garzarelli founded Garzarelli Capital Management after leaving Lehman Brothers, where she had headed sector analysis, in October 1994.

Lehman said it fired Garzarelli, whose annual salary was more than $1 million, because she and the operation she led were too expensive.

After calling the 1987 crash, Garzarelli appeared in pantyhose advertisements and spoke at the Securities Industry Association's annual convention in Boca Raton, Fla. She also ran her own mutual fund at Smith Barney Shearson Inc.

The Sector Analysis Portfolio's performance flagged and was closed by Smith Barney Inc. in August 1994. Smith Barney had acquired Shearson from American Express Co. Over its seven-year life, the fund had an average annual return of 4.7 bTC percent, below the 5.8 percent average of the S&P 500.

Pub Date: 7/24/96

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