Irregular Roundup, 25th September 2023

We begin today’s Weekly Roundup with UK interest rates.

UK interest rate peak

BoE Governor Bailey told the Treasury Select Committee of MPs that there were signs UK inflation would fall dramatically by the end of 2023, which would mean that the long sequence of interest rate hikes (14 months in a row) could stop. He said:

There was a period where it seems to me it was clear that rates needed to rise . . . and the question for us was how much and over what timeframe, but we’re not I think in that phase any more I think we are much nearer now to the top of the [interest rate] cycle.

Markets have interpreted the comments to mean that there will be one last hike in September, and then a pause.

• The chances of a 0.25% hike in September softened to 80%.

Of course, when/if the softer inflation data arrives, everyone will be interested in whether it reflects a slowdown in the economy and potential recession.

• So while the remarks were good news for UK stocks in the short term, the long-term picture could be more negative.

In the FT, Alphaville pointed out that the recent upward data revision of historic UK GDP just means that the future outlook is more mediocre, and quoted TS Lombard’s Konstantinos Venetis:

…the positive output “level effect” does not translate into a commensurate boost to the tax take and therefore does not make the UK’s increasingly difficult fiscal arithmetic any easier as the prospect of “high(er) for longer” interest rates exposes the public sector’s rising debt burden. Nor does it alter what is a souring cyclical picture.

PMI surveys are signalling a downturn, but many commentators think that the UK might get away with it (and avoid a recession).

Pausing after a September hike could help.

Earnings calls

Joachim Klement looked at the use of AI language models like chatGPT to analyse corporate earnings calls.

The way they did this is to ask chatGPT to answer the questions analysts pose on an earnings call and then compared the answers of the AI to the answers given by the executives.

Since the models only know what has already been published, they will regurgitate boilerplate answers

The researchers could create a measure they call Human AI Difference (HAID). Effectively, a higher HAID indicates that executives provide additional insights to analysts that have not been disclosed in official company filings.

A low HAID meant that the executive also gave a boilerplate answer.

The research found that executives tend to hide behind boilerplate answers more when they are delivering bad news. If they are discussing problems at their business, they obviously don’t want to go into too much detail about how bad the situation really is.

Furthermore, a high HAID (additional insights) lead to better analyst forecasts.

• Trading volume also increased as investors found the information easier to digest and they had more confidence in it, which meant that excess returns from the stock increased.

Positive news disclosed increased abnormal share price returns by some 2.6% which is quite a big reward for being transparent and informative in an earnings call, if you ask me.

Finfluencers

Prompted by the pending release of Dumb Money, the film about the GameStop short squeeze less than three years ago, John Authers looked at the role of influencers.

• GameStop was the first time most of us had come across a meme stock, and even though I’d been on Reddit for close to 15 years at that point, I hadn’t spent any time in r/WallStreetBets with the “apes”.

As the Redditors were fired more by rage than greed, it seemed to portend a new world in which young investors could act as a police force for capitalism, or perhapsmore specifically for a financial system many regarded as morally bankrupt.

Of course, that didn’t happen, and apart from a couple of meme squeezes soon after GameStop (AMC and Bed, Bath & Beyond), we haven’t seen much more overtly coordinated investor behaviour.

• Even with GameStop, you had to be in the trade by 2020, rather than by Jan 2021 (when the price spike occurred) to come out ahead.

The launch of a MEME ETF meant that the top was close, and BBB went bankrupt in April.

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One consequence of GameStop has been more research into “finfluencers”.

• John looked at one paper which analysed investment advice tweets on the Stocktwits platform, using the subsequent performance of the advice as a proxy for skill.

Orthodox financial theory would predict that they would be normally distributed with few showing genuine repeated ability to beat the market. It would also suggest that investors would over time tend to crowd around those who appeared most gifted — a form of “return-chasing” [as seen with mutual fund managers in the UK].

It didn’t turn out quite like that:

28% of finfluencers provide valuable investment advice that leads to monthly abnormal returns of 2.6% on average, while 16% of them are unskilled. The majority of finfluencers, 56%, are antiskilled, and following their investment advice yields monthly abnormal returns of -2.3%.

Surprisingly, unskilled and antiskilled finfluencers have more followers, more activity, and more influence on retail trading than skilled finfluencers. The more antiskilled a finfluencer was, the more followers they would gain, while the relationship was exactly the opposite for skilled finfluencers, with followers reducing as skill levels increased.

This might surprise the researchers (and John) but it aligns with my experience of retail Twitter and AIM discussion boards in the UK.

• A less surprising result was that negative finfluencers (the equivalent of short-sellers) were more likely to be skilled, though of course, people prefer to follow boosters.

The theory behind this is “siloing”:

Social media users follow finfluencers with similar beliefs. As a result, they “live in their own bubbles,” and get all their information from the same silo.

This confirmatory information leads to underperformance.

• John thinks that it has more to do with finding people with similar traits and behaviour than with belief confirmation.

And this can turn a crowd from wise to dumb, as Cliff Assess explains:

“Crowds” are either super-wise or dangerously dumb. The key variable is whether the crowd is made up of independent decision makers (think “poll the crowd” in Who Wants to Be A Millionaire) or coordinated (think about a mob with pitchforks and torches).

Internet crowds are usually dumb.

Dividends

In the FT, John Lee professed his love of dividends.

I have always been a lover of dividends. I like businesses in which I’m invested to at least maintain dividend rates in a difficult period, if at all possible, as reducing or passing dividends always leave a scar on a company’s record which can never be erased.

The compounding of reinvested dividends is indeed an important factor in the growth of a portfolio

• But the spurious distinction made by many investors between money withdrawn from an account manually (by selling some shares) and money sent to you automatically (as dividends)  will always amaze me.

You should try to avoid withdrawing capital from your account when markets are down, but how is that easier with dividends than manual selling?

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John likes the yields on offer in the current markets and has been moving money into Aviva and Legal & General.

• He’s also built an income-focused portfolio for a family charity:

I selected 16 stocks with a weighting to large caps, all offering a dividend yield of 5 per cent or more. As a “core” there was a three-unit holding in each of Aviva, Legal & General and M&G, all on yields of at least 8 per cent. Then five two-unit holdings — British American Tobacco, Phoenix, Primary Health Properties, Secure Trust and Taylor Wimpey — again juicy
yields averaging about 7 per cent.

Finally, we bought eight small-cap single unit holdings — all committed and consistent dividend payers: Anpario, Chesnara, Duke Royalty, MP Evans, Hollywood Bowl, STV, Workspace and VP. This group has a probable 6 per cent overall yield with the potential for a significant share price recovery and perhaps a takeover candidate from time to time.

The overall yield is close to 8% pa.

Mortgages

Buttonwood looked at the various national structures for mortgages.

• In the US and Denmark, long-term fixes are common, but here in the UK (and Canada and southern Europe) fixes last just a few years.

A long-term fix means that a homeowner can ignore rising interest rates, but it also means that the housing market will lock up when rates rise, as people don’t want to give up the good deal they already have.

And a long-term fix will be expensive – the rate reflects your lender’s expected cost of providing the money over the duration of the loan, plus a profit margin.

The catch is that you might want to repay your mortgage early—to move house, for
instance. On a floating rate, the lender is unlikely to mind.

But if you have a fix, you are more likely to cash in when the floating rate is lower, which means the lender can’t lend the money out at the same rate.

• Funding this loss can either mean an early repayment fee, or a higher rate to begin with.

The Americans and Danes use the latter system, and in Denmark, you can even cash in a mortgage at a profit if rates have risen.

The average rate on a new, 30-year American mortgage stands at 7.2%, whereas the 30-year Treasury rate is just 4.4%. In Denmark, the equivalent rates are 5.3% and 2.9%. In Britain, meanwhile, borrowing costs for mortgage-holders and the government are broadly similar.

In other words, long-term fixes increase monthly payments by a third.

Song royalty funds

The Round Hill Music Royalty Fund (RHM) price soared earlier this month after a cash offer which was both higher than the share price has ever traded yet still lower than the NAV of the fund.

• Alchemy Copyrights (also known as Concord) offered $1.15, 67% over the pre-offer share price of $0.69, but 11.5% below the NAV of $1.30

RHM was previously trading at a 45% discount to NAV and has averaged a 15% discount since its IPO.

The larger music royalty fund Hipgnosis (SONG) trades at a similar discount but perhaps has a more recognisable catalogue.

• SONG has a continuation vote later this month, amidst concerns that its reported NAV is too high.

Analsysis from Stifel said:

The best outcome to maximise value would be to allow the portfolio to mature and interest rates to stabilise. However, it’s clear that investors remain frustrated and so much will hinge on new information provided prior to the vote to bring shareholders back on side.

I have a small amount of money in each of these funds, and it’s been a frustrating few years for what looked like an interesting new asset class and income source.

• Once again, it has proved wise not to go in too heavy on the brilliant new idea.

Quick Links

I have six for you this week, the first four from The Economist:

1. The Economist explained What Arm and Instacart say about the coming IPO wave
2. And wondered Could OpenAI be the next tech giant?
3. And said that ChatGPT mania may be cooling, but a serious new industry is taking shape
4. And claimed that Climate change is coming for America’s property market
5. Alpha Architect looked at The Research and Development Factor
6. And Mauldin Economics shared More Personal Portfolio: Biotech, Commodities, and Gold

Until next time.