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Goldman Sachs says AI isn't profitable. Is the sector set for a correction?
Canadian Retail Sales Drop, Widening Door to Further Rate Cuts š
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The Week in Review
Weekly Market Recap: U.S. and Canada
This week in the stock markets had a bit of everything. Most notably, the Nasdaq took a legitimate hit, down nearly 4%, ending a six-week run of gains, mainly due to some of the big tech stocks stumbling for the second week in a row. The S&P 500 didn't fare much better, slipping around 2%, but the Dow Jones managed to edge up by almost 1%. In Canada, the TSX eked out a tiny gain, up 0.11% at the close of trading Friday.
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Week ending July 19, 2024
S&P 500 Returns | Week At-a-Glance
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Week ending July 19, 2024 | Market Cap >$100B
TSX Returns | Week At-a-Glance
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Week ending July 19, 2024 | Market Cap >$10B
COMMENTARY
This weekās economic news centered around inflation in Canada and retail sales figures in both Canada and the United States. In Canada, inflation eased more than expected, while retail sales continued to decline, raising the possibility of further interest rate cuts. In the U.S., retail sales stalled in June, showing no growth from May.
š Canada's Inflation Rate Eases to 2.7% in June
Canada's annual inflation rate saw a welcome decline in June, easing to 2.7% from May's 2.9%. This drop no doubt came as a surprise to many who had predicted it would stay at the 2.9% mark.
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Canada Inflation | June 2024
Letā have a quick look at some of the key points:
š BoC Forecasts: The result aligns broadly with the Bank of Canada's forecasts, which anticipated CPI inflation to hover near 3% in the first half of the year. Iāll say that 2.7% is āclose enoughā to 3% to qualify.
Inflation for transportation dropped to 2% from 3.5% in May, thanks in part to a sharp slowdown in gasoline prices (0.4% vs 5.6%).
Inflation for shelter remained elevated but eased slightly (6.4% vs 6.2%), influenced by the recent rate cut by the BoC and lower bond yields, which helped reduce mortgage rates and rental competition.
Food prices were up again, rising to 2.8% from 2.4%.
The significant role of gasoline prices in the overall disinflation kept the trimmed mean core inflation rate unchanged at 2.9%.
š Canadian Retail Sales Drop, Widening Door to Further Rate Cuts
Canadian retail sales have taken a pretty big hit recently, which will in theory at least increase the probability of more interest rate cuts from the Bank of Canada.
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Canada Retail Sales Mom | May 2024
Here are my main takeaways:
May Sales Drop: Retail sales fell by 0.8% in May, the largest drop in over a year.
June Trend: Early data suggests a further 0.3% decline in June.
Core Sales: Excluding motor vehicles and gas, core retail sales were down 1.4% month-over-month.
Volume Adjusted: Price-adjusted sales saw a 0.7% decrease from April, the biggest fall since February of last year.
The report keeps the spotlight on the continuing financial strain on Canadian consumers, who are grappling with high borrowing costs and inflation. Weāre seeing more and more evidence that the average family is struggling, and this data just goes to reinforce that view.
Other key points include:
Consumer Behavior: Many Canadians are cutting expenses due to high interest rates.
Sector Impact: Sales fell in most major retail categories, especially food, beverages, and discretionary items like furniture and electronics.
Economic Impact: This downturn in retail is affecting the broader economy, with factory sales growth slowing and wholesaler sales dropping.
š US Retail Sales Flat, Not Great but Outpacing Canada
For our neighbours to the south, (the U.S. for those who are geographically challenged š) retail sales stalled in June 2024, showing no growth from May.
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US Retail Sales MoM | June 2024
Letās take a closer look at the details; starting with the drops:
Gasoline Stations: Sales dropped by 3%.
Auto Sales: Down by 2.3%.
Sporting Goods, Hobby, Musical Instruments, and Book Stores: Sales fell by 0.1%.
There were some bright spots:
Building Materials and Garden Equipment: Up by 1.4%. (Full Disclosure; My wife single-handedly propped up the Garden Equipment sector. š *Anecdotal evidence only)
Health and Personal Care Stores: Rose by 0.9%.
Clothing: Up by 0.6%.
Furniture: Increased by 0.6%.
Electronics and Appliances: Rose by 0.4%.
When you exclude gasoline, sales rose by 0.2%, which follows a 0.5% increase in May.
š° Overall Impact, in a Nutshell
Some of the key takeaways from this weekās economic reports:
This week's economic news paints a mixed picture for the overall economy. In Canada, the easing of inflation to 2.7% in June reflects a positive trend in controlling consumer prices. However, the decline in retail sales highlights ongoing financial strain on Canadian consumers, suggesting that the Bank of Canada (BoC) may consider additional interest rate cuts to stimulate economic activity. Weāll know more on this later this week.
For the Federal Reserve, the stalling of U.S. retail sales in June presents a challenge. While some sectors did see increases, the overall lack of growth may prompt a cautious approach from the Fed, which is charged with balancing supporting economic activity and managing inflationary pressures.
Overall, the easing inflation in Canada suggests some success in monetary policy, but the drop in retail sales underscores persistent economic challenges. In the U.S., the mixed retail sales data point to a fragile recovery, potentially influencing the Fed's future decisions on interest rates.
THIS WEEKāS POLL QUESTION
(Results in Next Weekās Newsletter)
I hope you take a few minutes to read the first article this that summarizes a new report out from Goldman Sachs, questioning whether the current AI boom weāre seeing is realistic. At the recent Blossom Social event in Vancouver, I shared my thoughts on some of the similarities Iām seeing today to the dot.com dreams back in the late 90ās.
After youāve read Goldman Sachsā logic, Iād love to hear what you think. Answer this weekās poll question and share your thoughts!
Do you believe there are any material similarities between the current AI frenzy and the dot.com excitement from the late 90's? |
LAST WEEKāS POLL RESULTS
It wasnāt even close last week, with over 70% of respondents seeing a potential buying opportunity with the current dip in the Canadian telecom sector.
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Comments of the Week
ā
Answered Yes
āThis sector has paid the price over the last two years of high interest rates. With more rate cuts anticipated, profitability should improve for these highly leveraged businesses.ā - realtymediaservices
ā Answered No
āTelecoms are simply too capital-intensive, and while they may hold value for income-oriented investors, there are far better companies out there that offer long-term stability and incentives for investors, without the level of price competition and continual need to reinvest to lay out infrastructure. By the time 5G is ready and fully rolled out, weāll be building out 6G.ā - maverick_83
Most Overbought Stocks
The Relative Strength Indicator (RSI) can provide a signal that suggest a stock is either overbought or oversold. A stock that has an RSI over 70 is considered to be in āoverboughtā territory. This might suggest that the stock is due for a pullback, however it is not a recommendation to sell. Always perform your own due diligence.
Week ending July 19, 2024 | Most Overbought Stocks, based on 14-Day RSI
Most Oversold Stocks
A stock that is trading with an RSI below 30 is considered to be in āoversoldā territory. This might suggest that the stock is due for a recovery, however it is not a recommendation to buy. Always perform your own due diligence.
Week ending July 19, 2024 | Most Oversold Stocks, based on 14-Day RSI
TECHNOLOGY & ARTIFICIAL INTELLIGENCE
Does AI Actually Make Money? Goldman Sachs Has Doubts
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AI is all the rage in business circles these days, but is it truly profitable? A recent Goldman Sachs report suggests not so much. Hereās the breakdown:
š AIās Promises and Investments
AI has been touted as transformative, from creating art to revolutionizing customer service and medical data analysis. Billions have been poured into AI, turning companies like Nvidia into tech giants. PriceWaterhouseCoopers even predicted AI could add up to $15.7 trillion to the global economy by 2030. All those rainbows and lollipops considered, skepticism remains about AIās ability to generate profit.
"There really has not been an industry like generative AI before, which just bleeds insane amounts of money while also really not doing enough."
š Goldman Sachsā Take
Weighing in with their take on the whole AI situation, Goldman Sachs recently questioned the financial benefits of AI in their report "Gen AI: Too Much Spend, Too Little Benefit?"
Jim Covello, the bank's head of global equity research, pointed out that AIās high costs and Nvidiaās processor monopoly hinder financial gains. He noted, "18 months after the introduction of generative AI to the world, not one truly transformative application has been found."
Zitron says this report is a "serious" rebuke of the AI narrative, emphasizing that when major investors express doubt, it's a bad sign.
š Hype vs. Reality
AI has been around for decades, but ChatGPT's release in 2022 captured public imagination. OpenAI CEO Sam Altman envisions AI discovering new physics or running companies, but many business leaders have taken these promises at face value without seeing immediate returns.
"Right now, what you've just got is a lot of followers in tech. You've got a lot of people who need [AI] to be the future.ā
š¼ ROI Concerns
Despite massive investments from Amazon, Google, Microsoft, and others, there's little evidence that AI is boosting profits. Divya Goyal, an equity research analyst at Scotiabank, stated, "I cannot name one specific [AI] tool that will generate significant ROI." She believes the key lies in integrating multiple technologies for customer engagement and operational efficiency.
š Skepticism and Future Prospects
The tech industry is eager for another "hypergrowth" market, akin to smartphones or cloud computing. Yet, AI might follow the path of overhyped technologies like 3D printing and the metaverse, which haven't delivered on their promises.
Grant concludes, "Technology always has a great potential to do wonderful things. But people are not seeking technology ā they're seeking outcomes that are beneficial to them and that they're willing to pay for."
So, while AI continues to fascinate and attract investment, its true profitability remains uncertain. I wonāt say thereās a direction comparison, but as an advisor who was along for the ride when every ādot comā company was set to change the world, I certainly do at least āfeelā some similarities to whatās happening today. I hope my feelings are wrong.
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IMMIGRATION & THE ECONOMY
Population Growth āMasksā Canadaās Economic Woes: RBC Report
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Canada's economy may not be technically in a recession, but to many, it sure feels like one. Here's why:
š Economic Contraction and Population Boom
Though Canada has dodged the technical definition of a recession, high population growth has obscured a troubling economic landscape.
RBC economists Nathan Janzen and Carrie Freestone say that some of what weāre seeing today has only historically been seen during recessionary times.
Higher interest rates alongside decades-high inflation in 2022-23 ate away at household purchasing power. Weaker demand spurred a rise in the unemployment rate of a size that historically only happens in recessions.ā
Canada's population has surged by 2.1 million since mid-2022, which has kept the GDP from shrinking outright despite falling per-person output.
š Declining Per-Capita GDP
The report highlights a stark reality: real per-person output has fallen for six of the past seven quarters.
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Canada GDP Per Capital | Thru Q1 2024
In fact, per capita GDP is now 3.1% below 2019 levels. "But since the 1970s, Canada has never had a trough to peak increase in the unemployment rate of that size without the economy going through a recession," the economists noted.
The unemployment rate's recent increase, though smaller than those in major recessions, comes from historic post-pandemic lows. The economists assert that, typically, such an increase in unemployment would signal a recession, but the influx of new consumers has masked this downturn.
š Future Outlook
Looking ahead, Janzen and Freestone believe that the Bank of Canada's interest rate cuts will "eventually" ease economic pressures. As household purchasing power rises, they predict per-capita growth will turn positive in the second half of 2025.
The current recession-like conditions arise from high inflation and an "aggressive" rate-hiking campaign by the Bank of Canada in 2022 and 2023. The report emphasizes that the wave of new consumers arriving from abroad has been crucial in preventing negative GDP growth.
āConsumer spending accounts for more than half of GDP, and many of those new arrivals (a larger share than the Canadian-born population) are also workers that added to the economyās productive capacity.ā
Overall, while population growth has kept the GDP numbers in check, the underlying economic struggles paint a recession-like picture. The hope is that easing interest rates will help turn things around by late 2025.
HOUSING
Toronto Condo Market Hits 27-Year Low in New Unit Sales
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Toronto's condo market has just seen its slowest pace in new unit sales in nearly three decades, despite a housing shortage. Here's some insight:
šØ Sales Plummet
Sales of new condos in Toronto dropped by 57% from last year, with only 3,159 transactions in the first half of this year. This is the fewest sales since 1997, and it has led to a record high in unsold inventory.
Despite a rate cut by the Bank of Canada in June, the modest quarter-point decrease hasn't significantly eased housing affordability.
"Buyers remained cautious in anticipation of further rate cuts and amidst a burgeoning supply of units for sale.ā
š Price Stability Amidst Slowdown
Interestingly, even with the sales slump and increased inventory, new condo prices have only dipped by 2.6% over the past year. Developers are grappling with high construction and financing costs, along with expensive land prices, making it tough to reduce prices.
š Impact on New Developments
The drop in new unit sales has also led to a sharp decline in new developments. Only 727 new condo units started construction in the second quarter, the lowest in 20 years. (I had to double check these numbers to make sure I wasnāt imagining them, because the 727 didnāt seem believable.)
Obviously, this poses a real challenge for policymakers aiming to boost housing supply to counter high prices and record rents.
āThe continued weakening in condo market conditions during the second quarter of 2024 is likely to cause more projects that were slated to launch this year to remain on hold.ā
As Toronto deals with these market shifts, we can only hope that further interest rate cuts will make new condos more affordable and revive the market. For now, though, both developers and buyers are playing the waiting game and for many, the future isnāt all that bright.
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FOOD INDUSTRY
Canadaās Major Grocers Sign on to Code of Conduct
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I wasnāt sure weād ever get here, but Canada's five largest grocers ā Loblaw, Walmart, Costco, Metro, and Empire ā have agreed to a new grocery code of conduct. Hereās what this means:
š A Major Milestone
This commitment is a huge step towards fairer and more transparent practices in the grocery supply chain.
āThis is a positive step toward bringing more fairness, transparency, and predictability to Canadaās grocery supply chain and for consumers.ā
The code, which is designed to level the playing field for suppliers and smaller retailers, sets guidelines for fair negotiations, including penalties and fees. Itās designed to be voluntary and industry-led, avoiding the need for government enforcement. Ok, so this might be a bit of a weak link. š¤Ø
š Unified Front
After initially hesitating, Loblaw agreed to the code, contingent on other players joining. Then, following Loblawās lead, Walmart and Costco also came on board, with Walmartās spokeswoman, Stephanie Fusco, noting the codeās balance while highlighting ongoing discussions about governance and dispute resolution.
Federal agriculture minister Lawrence MacAulay said, āNow we have the five major retailers signing on, thatās good news for the whole supply chain.ā However, he emphasized that the code is not meant to lower grocery prices but to improve transparency and fairness.
š Looking Ahead
The board overseeing the code is now focused on setting up an office and hiring an adjudicator to ensure compliance. They are also seeking government funding to support these efforts. While Minister MacAulay didnāt confirm the funding approval, he assured, āWeāll do everything to make sure that this is a success.ā
The adoption of this code comes amidst rising grocery prices and public pressure on major grocers. With food prices up over 22% in four years, grocers have faced accusations of profiteering.
šŖ Impact on Consumers
Gary Sands from the Canadian Federation of Independent Grocers highlighted the consumer benefits, saying,
āWhen you bring more stability, fairness, and transparency to the industry, thatās bound to have a positive impact on just relationships, on how prices are set.ā
Overall, this new code aims to bring more predictability and fairness to Canada's grocery industry, potentially benefiting everyone involved, from suppliers to consumers. Call me skeptical, but Iām not yet 100% convinced this will result in anything more than a āsmoke and mirrorsā effort, designed to take the pressure off the big food food companies. Weāll see.
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Market Movers
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TSX, NYSE & Nasdaq Exchanges | Market Cap >$10B | Week ending July 19, 2024
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