Sunday, June 9, 2024

Transactional Signals - Weekly Blog # 840

 

         


Mike Lipper’s Monday Morning Musings

 

Transactional Signals

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

  

When my term as President of the New York Society of Security Analysts (NYSSA) expired, I turned down staying on the Board feeling that comments by the former President may not be welcomed. I offered to provide inputs privately when asked. I made a similar offer when I moved on from my position as a USMC officer. With that as a background, I found myself in a somewhat analogous position as a member of the Finance Committee of the Board of the Stevens Institute, where I review an extensive report containing the student managed investment fund. 

 

While the other trustees were highly complementary as to the work of the students, I thought they should get a real education from this exercise. I felt the analysis was lacking any discussion of management and its expected retirement. This was logical, as their time period was the length of the current academic term. To me this was trading, as it was not long enough for an investment period. To me, investment periods begin with five years (roughly the average length of many CEOs). I suggested there was a reasonable chance of a new CEO over the 5-year period.  

 

With this as background, I noted with interest the Barron’s article titled “A Trio of Transitions Will Rock Wall Street”. The three are Larry Fink, Jaime Dimon, and Stephen Schwarzman. The article would have been more useful if it had discussed the likely cause of the retirements: recession, unfavorable regulation, stronger competition, new products/services, shrinking internal political support. With aspects of technology and finance coming closer together, changes in the management of Apple, Microsoft, and the Stock/Commodity exchanges, among others, should be expected within the next five years.

 

I will briefly discuss some of the characteristic changes that may impact stock prices within five years.

 

Possible Recession Risk

Any student of economic and financial history knows that there will be periodic recessions caused by the mistakes of leaders and others. If one looks carefully there is usually a small signal that most ignore. One may be what is happening with the ISM data on the manufacturing side of the economy.

 

The ISM Manufacturing PMI survey for May had a reading of 48.7, a contraction from the April reading of 49.2, a fall of 0.5. The survey for new orders fell to 45.4 from 49.1 in April, a sharp drop of 3.7.

 

Manufacturing employment on the other hand went up to 51.1 from 48.5 in April!!! A possible explanation could be manufacturers hiring younger and cheaper people to replace older and more expensive people. Or perhaps there is a miscommunication between the different functions.

 

Two Positive Signals

In May the S&P 600 small-cap index grew 4.87%, slightly better than the S&P 500, both without dividends. If the market continues to rise on speculation, the 600 will be the leader. In May, seven of eleven sectors in the 600 did better than the 500.

 

Small banks, contrary to their larger brethren, sharply increased their purchases of mortgages on commercial real estate. Local banks quite possibly have a better feel for local real estate value than larger banks, which are hundreds to thousands of miles away.

 

Some Investment Managers Can Repeat Being First among Peers.

The London Stock Exchange Group has continued the Lipper Analytical practice of tracking the best performing mutual funds for periods as short as one month through 10 years.

 

This weekend I reviewed what is usually the toughest competition for the eight periods. Eight is listed as the denominator to the extent the category existed for all eight periods, otherwise a smaller number is listed.  (Year to date, 1 & 3 months, 1, 2, 3, 5, and 10 years). I then looked for fund houses that had two or more entries. The data below shows the results of the major peer groups.

                   # of Repeaters

Peer Groups       Winners   Losers

Large-Cap Growth    6/8       6/8   

Large-Cap Core      4/8       4/8        

Large-Cap Value     6/8       5/8

Multi-Cap Growth    3/8       7/8

Multi-Cap Core      5/8       2/8

Multi-Cap Value     5/7       0/7

Mid-Cap Growth      4/8       3/8

Mid-Cap Core        5/8       4/8

Mid-Cap Value       7/8       2/8

Small-Cap Growth    5/7       4/7

Small-Cap Core      6/8       6/8

Small-Cap Value     8/8       3/8

 

Remember, I was looking for repeaters in terms of fund management companies, as there are fund name changes and portfolio manager changes over 10 years. Additionally, portfolio managers can manage two or more funds. The winners tend to stay with their portfolios, although markets rotate. The losers change portfolios in an attempt to get off the bottom, if they still have a job.

 

A Sign of the Times

Due to a money shortage, the Department of Labor announced it is planning to reduce the number of inputs to their surveys starting in 2025.

 

 

Question: What should we be watching?        

 

Did you miss my blog last week? Click here to read.

Mike Lipper's Blog: Investment Markets are Fragmenting - Weekly Blog # 839

Mike Lipper's Blog: The Rhyme Curse -Weekly Blog # 838

Mike Lipper's Blog: The Most Dangerous Message - Weekly Blog # 837

 

 

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Michael Lipper, CFA

 

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