Where's Garzarelli Going?

By John Greenwald

What a to-do over a guru. in recent weeks Institutional Investor magazine rated Elaine Garzarelli the top stock picker in her field for the 11th year in a row. But no sooner had the magazine hit the stands than Garzarelli abruptly became the most famous person to join the ranks of Wall Street's unemployed. With investment firms contracting -- 2,000 layoffs have been reported so far this year, and an additional 8,000 could follow in the next 12 months -- Garzarelli's bosses at Lehman Bros. announced last Tuesday that they could no longer afford her nearly $2 million salary and her staff of two full-time assistants.

The ouster derailed, at least temporarily, one of the most influential and < flamboyant careers in recent Wall Street memory. Garzarelli won instant fame in 1987 for warning investors to bail out of the stock market just before the October Crash. While she never flatly prophesied the collapse, she did tell a television interviewer one week before Black Monday that she was no longer buying stocks or bonds and had put all her money in CDs. That was enough to secure Garzarelli a reputation for having all but predicted the 508-point market drop. Her stature increased in 1990 when she urged clients to buy stocks shortly before the new bull market started.

But while legions of individuals continued to follow Garzarelli's forecasts, Lehman Bros. sold its retail brokerage to Smith Barney last year and now concentrates on institutional investors. With the brokerage went the thousands of small clients whom Garzarelli had attracted. That made her expendable to Lehman, which went public last May and posted just $22 million in second- quarter earnings, down 79% from a year earlier. The firm has cut 800 jobs, or 8.5% of its work force, so far this year.

Lehman had also wearied of Garzarelli's independence. The star analyst insisted on working out of her Greenwich Village apartment, and issued bullish forecasts that clashed with the more bearish opinions of Katherine Hensel, the firm's chief market strategist. Garzarelli overestimated the strength of this year's market rally, for example, predicting that the Dow Jones average would hit 4600 by the end of 1994. The indicator has failed to top 4000.

Guessing wrong on the market's direction is a hazard of the job. But Garzarelli also raised questions about her judgment when in a 1989 television appearance she recommended her firm's own stock, only to say a few days later she didn't know that was against the rules. And last August police in East Hampton, New York, arrested her on suspicion of drunken driving as she drove a male friend home from an all-night bout of champagne drinking. Garzarelli has pleaded not guilty to the charges.

Many Wall Street watchers have no doubt that even in a lean environment, Garzarelli will soon be snapped up. Traders and underwriters have suffered losses of$623 million in the second quarter (after earning $2.35 billion in profits the same quarter last year), so a record of good prognostication is sure to be worth something.

With reporting by John Moody/New York