October, 2021 | Slack Investor

Ask and ye shall receive … and October 2021 – End of Month Update

This is a beautiful detail from an impressive sculpture sitting under a fully-robed Athena (Goddess of War and Wisdom) from the Pallas Athena Fountain in the front of the Austrian Parliament in Vienna. In Slack Investor’s favourite story of the month – which brought great delight for it’s ludicrous starting point, this wonderful sculpture is in the news as it is part of a new “genius” Vienna Board of tourism promotion to supposedly defeat censorship by social media providers.

Vienna and its art institutions are among the casualties of this new wave of prudishness – with nude statues and famous artworks blacklisted under social media guidelines, and repeat offenders even finding their accounts temporarily suspended. That’s why we decided to put the capital’s world-famous “explicit” artworks on OnlyFans
From the Vienna Board of Tourism

But I digress, the figure (above) representing the Inn River is depicted asking the Danube River for some leniency on her home loan rate – This conversation is something I highly recommend to all with a mortgage.

Not for the first time, I did a bit of a review of Slack outgoings this month. Starting with the large fruit first, loans and insurances. We have a small loan remaining on our house because I have used the home equity to buy some shares in the past. We could pay the loan off by selling the investments but, while home loan interest rates are low ( 2-3%), I am happy to keep this money in shares and hopefully gain a return more than my interest costs.

I noticed that the rate my bank charges me on my loan (2.7%) is higher than that offered to new customers (2.35%). A quick internet search revealed a few loan operators offering loans close to the 2% mark. An informed phone call to Bank Australia provided a quick revision of my rates downwards. Confirming that loyalty is only rewarded – when you nag the institution.

Regardless, I am happy with the saving of $8000 for the life of the loan that this phone call achieved. Those with higher loan balances should be rewarded more significantly for a painless phone call to your lender.

New Fintech loans

Beyond the traditional banks there is an emerging FinTech solution to loans. There are too many to mention but they all seem to be willing to lend you money for all sorts of reasons. In a further erosion of “old banks” business, Slack Investor was shocked to count over a hundred of these new enterprises. Each with their own “catchy – but cool” names. I would be very wary about investing any Slack funds in these new businesses as there seems to be a lot of competition in this space.

However, taking money from them … where they are assuming all the risk – and offering very competitive rates – sign me up! Providing, of course, that I know all of the conditions of the loan contract up front.

There are a number of new home loan providers Yard, Athena, Nano , Bluestone, Well, etc. Each are offering products at about the 1.99% rate for home loans with a high amount of equity. In the event of of a loan provider collapse, they offer the assurance that another loan provider will takeover the loan under the same conditions that you originally signed.

Athena Home Loans

There a range of home loan providers that are offering no-fee loans at around the 1.99% comparison rate. I have no affiliation with Athena. The only reason that I am focusing on Athena rather than the other excellent home loan providers is that I like their sustainable philosophy of trying to obtain their funds from super funds who need the stability of a fixed income for a portion of their portfolios. It is also a good marketing link to a lot of people. They also have a reputation of quickly passing on any reserve bank interest rate cuts.

We’re working on providing industry super funds a way to access the Australian mortgage market directly and aim to be the first in Australia to do it!
From Athena

I am happy to go through the loan application process with Athena. They have streamlined applications so that it is mostly online. Their 1.99% rate will give me a further saving of around $8000 in total interest payments on my current loan. However, I note that I will incur discharge fees on my current loan of about $370. This does not trouble me as I would have eventually incurred these discharge fees when I fully pay off my home loan – and the further joy of the Athena loan is – No application fees. No ongoing fees. No discharge fees.

October 2021 – End of Month Update

Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100.

The Australian market remained flat -0.1%. Overseas markets seem on the move with the FTSE 100 up 2.1% and the S&P 500 rising an incredible 6.9%. The optimistic Americans seem impressed with a swathe of good earnings reports and have had the best monthly return this year. Slack Investor remains watchful with stop losses in place.

All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).

The Times They Are A-Changin’

And you better start swimmin’
Or you’ll sink like a stone
For the times they are a-changin’
The Times They Are A-Changin’ – Bob Dylan

That old troubadour Bob Dylan released this back in 1964 …on vinyl … I might add! Bob’s lyrics were written almost 60 years ago about the cultural and political divide that existed way back in the early 1960’s. His message to “start swimmin’ or you’ll sink like a stone” continues to have relevance – even to investors.

Music has been an important part of Slack Investor’s life and starting with my first “record” vinyl purchase in high school, I then went through the cassette phase. Cassettes were always a bit dodgy, but they did have their moments – who can forget the sublime “mix tape” given to you by a friend. The gradual degradation of cassette musical quality as they lost their magnetism and, the ultimate tragedy when your precious “mix tape” starts unravelling in the car. All this made me glad when CD’s were introduced in 1982. Aaahh … the beautiful world of the CD – Digital quality and a format that I thought would live forever. Only in hindsight do we see that “Peak CD” was in 1999 and this was also the peak of recorded music revenue for artists. I could look at the below chart for hours.

The changing shape of revenues from recorded music delivery 1980 – 2020. – This incredible graphic is from Statista

Despite the recent uptick in vinyl sales, it seems obvious that the days of owning music are numbered. It is also sad to note that revenues from recorded music in 2014 sank to a third of those in 1999. Revenues are on the increase but royalties from streaming remain pitifully low and artists can be paid as little as 13% of the streaming income generated. The recording artists must resort to touring and merchandising to provide the bulk of their income. The highest grossing act of 2017 was U2. According to Billboard – their streaming income was only just over 1% of their total revenue of 54.4 million USD.

Spotify generally pays between $US.003 and $US.005 per stream, meaning you’ll need about 250 streams to make a dollar.
Business Insider Australia

In an unbelievable turn of events for all “Boomers”, streaming is now the way to access recorded music and now accounts for 83 percent of music industry revenues in the U.S. Physical CD’s and even music downloads are in major decline.

Streaming revenue percentage from 2005 till 2020 – Another great chart from Statista.

Music Delivery Change … and Investing

All of that music stuff was just to provide an example about how unexpected change can happen in just a few decades. Slack Investor had built up an impressive CD collection over the past 30 years and, he thought he was set up for life. This collection is now in a box as I now tend to now use digital versions for my musical pleasures. To the great dismay of my children, I am still hanging on to ownership of my music – they tell me this is typical “boomer” behaviour and are urging me to get on board the streaming train.

We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.
Bill Gates

Bill has pointed to a bit of a weakness in the vision of investors … and Slack Investor obviously cherishes his moments of inaction – but will act if he has to. He has already made a few tweaks in his portfolio

I have been thinking of relatively safe investments lately … and this is tricky in these weird times as, besides precious metals, it is difficult to name a sector that would be unaffected by an inevitable downturn in the markets. Will bricks and mortar retail be the same? Will CBD office real estate be the same? Will banks be the same with the new competition from Neobanks?

With the exception of consumer staples, safety may not be found in traditional industries. Technology is such a large part of our lives now – and this is where growth will happen. I keep returning to the utility of an Index like the NASDAQ 100. It has the beautiful self correcting mechanism where dud technologies get shuffled out of the bottom of the index and the companies that are still making money tend to stay in.

Weekly chart of the Betashares NASDAQ 100 ETF (NDQ) showing 2 1/2 years of solid growth – From IncredibleCharts.com

I have been a buyer of this ETF along the way and a recent dip in price (perhaps due to the recent Facebook revelations) point to an increasing mood for more regulation in some of the tech stocks. Barrons have the current PE at 34.5 which does not make it cheap but the PE based upon the forward 12-mth earnings forecast is a bit more reasonable for the growth sector at 28.0. In this changing world, the one thing that you can bank on is that the technology industry will be an important part of it. Not advice … but I think I will buy some more.

Don’t stand in the doorway
Don’t block up the hall
For he that gets hurt
Will be he who has stalled
The Times They Are A-Changin’ – Bob Dylan

Are CAPEs back in fashion? … and September 2021 – End of Month Update

Superhero Capes That Had A Purpose Vs Those That Didn’t — Photo:© Marvel Studios

Slack Investor is often “banging on” about Price to Earnings (PE) ratios. The economist Robert Shiller designed the even sexier Cyclically Adjusted Price to Earnings ratios (CAPE) which use ten-year average inflation-adjusted earnings to take out some of some of the volatility of annual earnings. The details on how to calculate the Shiller CAPE Ratio can be extracted from Seeking Alpha.

Relationship of annual market returns (over 10-yr period) to current CAPE. From Research Affiliates – based upon Shiller Data

Professors Shiller and Campbell found that, the higher the CAPE, the lower the likely annual return from equities over the following 5-20 years. The current US CAPE is at one of its highest levels since the 1880’s. GuruFocus provide current information on the S&P 500 CAPE and market return predictions based on Shiller’s work.

What originally started me thinking of CAPE is this excellent visualization prepared by John Kingham of Seeking Alpha for the UK FTSE 100. This chart shows how the current FTSE rates with fair value at a glance. John uses a “Fair Value” UK CAPE of 16 -just a bit below its recent average of 17.5. The UK CAPE black line seems still in “fair value” territory – according to Shiller, this is generally OK for a buyer in terms of long-term returns.

This chart of the UK FTSE 100 CAPE from Seeking Alpha. The FTSE CAPE is the black line and John Kingham has prepared the CAPE zones to indicate GREEN = cheap, YELLOW = fair value, RED = expensive (75% above the mean) – Click for higher resolution

There have been a few criticisms of the use of CAPE as a predictor, as it has consistently underforecast returns for the past 25 years. Since the original research, new accountancy rules have brought significant changes to the way that company earnings are calculated. There are also arguments that CAPE values are structurally much higher now as the result of cheap money from the 40-yr decline in bond yields.

Graph B1: 10-year Government Bond Yields — Cheap money has changed things – From the Reserve Bank Australia

We are also in times of high government stimulus and, with interest rates so low, there is more than the usual amount of money in the share market. It is a case of no other alternative – perhaps, with the exception of residential property.

Slack Investor has no idea whether the extremely high US S&P 500 CAPE values may continue for a while … It is a complicated market at the moment. With the US Market at 38 times the 10-year average earnings … the US Market Is Not Cheap and, I am glad that my stop losses for index funds are set tightly within 10% of recent highs in the share price.

The rich data on CAPE ratios for a range of countries is prepared lovingly by Barclays each month. The CAPE values of the US S&P 500 CAPE, ASX 200 CAPE and the FTSE CAPE are respectively, 61%, 19% and 0% above their 39-yr averages. Interestingly, the US market CAPE (24.5) has a far higher mean than Australia (20.4) or the UK (17.5). This may be due to higher earnings growth prospects in the US.

Historic CAPE Ratios for the S&P 500, ASX 200 and FTSE 100 together with their 39-year averages – Developed with data from Barclays

Is CAPE a good predictor of a market correction/crash

In the below chart I mapped the US S&P 500 against the S&P 500 CAPE to see if the CAPE is useful for determining market turning points.

The CAPE indicator does not seem to be a good predictor of short-term share market prices – as high CAPE values have been at sustained high levels for many years. CAPE trends seem to immediately mirror the trends in the share price. However, Professor Shiller’s established relationship with high CAPEs and lower forward returns in the longer term is hard to ignore. Interest rates will not stay low forever. Regardless of the unusual circumstances of todays stock market, the US market at 61% above its 39-yr average, looks expensive.

September 2021 – End of Month Update

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Slack Investor remains IN for Australian index shares (ASX 200), the US Index (S&P 500) and the UK Index (FTSE 100).

After 11 months in a row of monthly stock rises for the ASX 200, things are starting to get a little jittery in the stock markets. This is just normal behaviour. Decent monthly falls for the ASX 200 (-2.7%) and S&P 500 (-4.8%), the FTSE 100 flat at -0.2%.

All Index pages and charts have been updated to reflect the monthly changes – ASX Index, UK Index, US Index. The quarterly updates to the Slack Portfolio have also been recalculated.