Mike Lipper’s Monday Morning Musings
Understanding the Universe May Help
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
How can High Growth Stocks Co-Habitat with Flat Value
stocks?
Well-known commentators have recognized that stocks with
radically different investments attractions can co-habitat without the more
enthusiastic followers driving out less ebullient investors. Although from
time-to-time the dominant species kill off weaker ones.
As is often the case, earth bound investors have too limited
a view. My exposure to the Jet Propulsion Laboratory managed by Caltech suggests
a broader view, including other planets and similar elements. So far, we have
not found any planetary bodies possessing a similar atmosphere to earth, so war
between them seems unlikely.
This suggests to me that growth and value can co-exist. The
high price to earnings for extreme growth is neither a threat nor an inducement
to own single digit p/e stocks. Extreme growth “planets” will move to
their own rhythm and will not usually be impacted by value-oriented bodies,
despite attempts at colonization.
To show the difference we can look at the current
year-to-date investment performance of two funds managed by Vanguard.
Their S&P 500 index fund has gained +15.51% this year, while their Total
Bond II Institutional fund has fallen -0.20% for the same period. The S&P 500
has fellow travelers like the NASDAQ Composite, with a +18.65% return. The
performance gap between the S&P 500 and the NASDAQ may be closing. This past
week saw stocks on “The “Big Board” decline 44% vs 53% for the NASDAQ.
Trading liquidity could be a contributor, with small and
mid-cap stocks dropping for the past 13 weeks. Another factor could be the lack
of dividends. The 30 stocks in the Dow Jones Industrial Average (DJIA) have
3 non-dividend payers, or 10%. There are twice as many non-dividend payers in
the Dow Jones Transportation Index, with one-third less positions, representing
30%.
Market Structures are Changing
Large Multi-Product/Service Financial firms have reacted to
the slowdown in their revenue growth by forcing their various product/services
silos to work to expand the firms’ sales base. Their model is similar to department
stores which are closing or becoming depots for orders placed online. Another
issue is good department store salespeople believing the customers are theirs, not
the stores.
One attraction for sales teams leaving “wire houses” is Raymond
James’* belief that customers belong to the brokers, not to their firms. They offer
three alternative ways to join Raymond James. I believe there is a natural peak
of good customers for every trade, after which new efforts will lead to lower
margins.
An example of a smart move is Morningstar’s sale of their
TAMP business, which recognizes that the number of fund distribution points is shrinking.
T. Rowe Price stated in their mid-year outlook that the risk
of recession is now lower. That is possible, but history suggests the higher
securities prices go for a narrow segment of the general market, the more risks
rise.
Other Brief Comments and Observations
The US and China agree that they prefer seniors stay in the countryside
rather than come into the cities. They also both want more babies produced. The
rich country replacement rate is currently 1.5% vs. a neutral rate of 2.1%.
In a period where national productivity
is low, the idea of creating holidays like Juneteenth and Labor Day looks politically
motivated. Each day of lower productivity increases the risk that lower income
jobs will be replaced by machines that can work 24/7, 365 days a year.
Institutional investment sentiment was lower in June than
May and April. Currently, 53% of the surveyed institutions believe a recession
is not expected for the next 18 months. (I suspect there is a bias at work in
their projections. Many, if not most of the respondents are primarily employees
rather than owners of their businesses.)
The big four accounting firms are laying people off.
There is a somewhat useful Walmart Recession index of future
risk, which increases when store sales are higher than the movement of their
stock price.
The standing military in Russia, Ukraine, and China are
finding that they are not properly equipped to accomplish their mission. They point
to corruption as the cause. (I suggest corruption is something of global
problem. Perhaps Dr Spock or his replacement can solve the issue during an
intergalactic conflict.)
Did you miss my blog last week? Click here to read.
Mike
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