Jubak's Journal
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Get ready for a nice growth surprise
(Page 2) of 2
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This is actually the second piece of unexpected good news on the economy delivered in the last few days. On May 11, Commerce (again) released numbers showing that the March trade deficit was much lower than expected, if still a whopping $55 billion. Economists had been expecting a deficit near $61 billion. (The February deficit was revised slightly lower, too, to $60.6 billion from $61 billion.) The unexpectedly small gap was a result of a drop in imports of 2.5% and an increase in exports of 1.5%. The export number was lead by a 3% jump in capital goods, a category that is often a key indicator of the level of growth in the economy.
But, to me, the best part of the trade-deficit numbers is that they just about guarantee that the growth rate for the economy in the first quarter will be revised upward when the Commerce Department issues a more complete report on May 26. The numbers on economic growth reported on April 28 were only the "advance" estimate. Since data from different parts of the economy flow in at different speeds, the number crunchers at the Commerce have to make estimates of economic activity when they issue their first report. More exact data goes into the "preliminary" estimate announced about a month later. (The final, final figures on first-quarter growth will come out at about the time the department reports advance estimates for the second quarter in July.)
In their advance report, the statisticians used an estimate for the March trade deficit of $61.3 billion. When they do their revisions for the preliminary report on May 26, they'll use the actual March numbers (and the revised February data). The lower deficit, the smaller level of imports and the higher level of exports will all work to push the growth rate for the first quarter higher than the initial 3.1% estimate.
Watch for the May 26 report
So May 26 is almost certain to produce a growth surprise. If it's a big enough surprise, it will get investors' attention. If it's big enough, it will end the worries about slower growth, at least for a while, and investors will decide that, as in 2004, the economy merely hit a minor soft spot. And if it's big enough, investors might actually notice that stocks are now a relative bargain.
On May 12, 2004, the Standard & Poor's 500 ($INX) stock index traded at 1,097. Operating earnings for the trailing 12 months at the end of the first quarter of 2004 for the 500 S&P stocks came to $58.08, giving the index a price-to-earnings ratio of 18.9.
On May 12, 2005, the S&P 500 closed at 1,159. Operating earnings for the trailing 12 months at the end of the first quarter of 2005 are estimated at $69.74 by Standard & Poor's. That puts the price-to-earnings ratio of the index at just 16.5.
What's happened, of course, in the year between May 12, 2004, and May 12, 2005, is that operating earnings have climbed better than 20%, while the price of stocks has gone up just 6%.
And we all know what happened in 2004 after May 12, don't we? From that date to the end of the year, the S&P 500 index gained better than 10% -- before dividends.
A caveat
There's only one thing stopping me from turning all this analysis into a loud cry to load up the truck right now.
I don't know if the growth surprise I expect on May 26 is going to be big enough to get currently worried investors' attention. If not, we could replay a less pleasant aspect of the market history of 2004. May 12 didn't mark the low for 2004. The market didn't put that in until Aug. 12 at 1,063. In between May 12 and Aug. 12, the market rallied to a high of 1,144 on June 23 before slumping back to the August low.
I don't expect history to repeat itself exactly in 2005 -- as Mark Twain reportedly said, history doesn't repeat itself, but it sometimes rhymes. It's quite possible that the derivative scares of this spring are serious enough to put some serious hurt on the financial markets from current levels.
So I think an investor needs to build a portfolio that's balanced between stocks that will go up strongly if things get even dicier from here and stocks that will climb strongly if the growth surprise comes in strong.
I've got a fair dose of the first kind of stock in Jubak's Picks. Gold stocks go up when fear rules the markets. If we're headed for a financial dust-up over derivatives, I want to be in gold -- and cash.
But I'm short on classic growth stocks of the kind that go up most strongly when the market shifts from worrying about growth to cheerleading about growth. (Oh, sure, energy and oil-drilling stocks will do well if growth picks up, so I'm not dumping that sector, one of my favorites for the long-term. But I think I can find a kind of growth stock that will do even better.) In my next column, I'll give you a benchmark for finding that kind of stock, pick five that fit the bill and add one or more to the Jubak's Picks portfolio.
New developments on past columns
A "safe" investment turns dangerous
In my May 13 column I argued that 10-year Treasury notes were no bargain because the yield of 4.22% on that date didn't pay enough to compensate for the risk in the bonds. The risk, I said, was a result of investors who were seeking safety even if the yield was low. Since I wrote that column, the yield has dipped even lower--to 4.13% at the close on May 13. And investors know a little more about who has been buying. International investors bought $45.7 billion in U.S. financial assets in March, down from $84.1 billion in February. Looking just at Treasury holdings by both public and private entities, Japanese holdings of U.S. Treasuries fell by $800 million in March, and Chinese holdings dropped by $1.4 billion. So who has been buying? Public and private investors in Caribbean nations where Treasury holdings rose by $32.5 billion, making the region the third largest holder of U.S. Treasuries. Many of those Treasuries undoubtedly found their way into the portfolios of the off-shore hedge funds and asset managers based in the Caribbean. This is traditionally "hot" money that moves with great speed in short-term trades. To me, this data is yet another sign of the rising risk in the long-term Treasury market.
Time is ripe for these 7 biotechs
Decent news from Cell Genesys (CEGE, news, msgs) at the annual meeting of the American Society of Clinical Oncology on May 16. An ongoing Phase 2 trial of GVAX vaccine for acute myelogenous leukemia showed that the vaccine is well tolerate and may reduce leukemic cancer cells that persists after chemotherapy. In the trial 69% of patients showed post-GAVX declines in the levels of WT-1, a marker for leukemia. These results are certainly positive, but the trials were small and the results expected so I don't think they'll move the stock. (Negative news out of these trials would have killed the shares, on the other hand.) Investors will have to wait for results from larger trials that should start being showing up in conference papers later this year or in early 2006.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Apache and Microsoft. He does not own short positions in any stock mentioned in this column.
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