It Wasn't Pretty Out There

The Week in Review

It Wasn't Pretty Out There

The week ending September 29th was a rough one, with see-sawing markets, investors second guessing the direction of all the major indices and, at the end of the day, if you ended the week in positive territory you did well.

In this, the first episode of The Academy Pulse, I'll highlight the key business & investing stories of the week and summarize the Winning & Losing stocks of the week.

FTC Takes on Amazon

The US Federal Trade Commission (FTC) filed an antitrust lawsuit against Amazon.com on Tuesday, alleging that the the company is harming consumers through higher prices.  Jumping on the bandwagon, seventeen state attorneys general also joined the lawsuit, which comes on the heels of a four-year investigation and is in addition to federal lawsuits filed against Alphabet’s Google and Meta-platform’s Facebook.

In a statement, the agency said: "Amazon's actions allow it to stop rivals and sellers from lowering prices, degrade quality for shoppers, overcharge sellers, stifle innovation, and prevent rivals from fairly competing against Amazon."

This most recent lawsuit is not the only action the FTC has taken against Amazon. In May, Amazon already agreed to pay a $25 million civil penalty to settle allegations that it had violated a child privacy law and misled parents about data deletion practices on its voice assistant, Alexa.

Then, in June, the agency sued Amazon alleging that it was using deceptive practices to enroll customers into Amazon prime, and making it difficult for them to cancel subscriptions.

In a statement, FTC chair Lena Khan didn't hold back.  She said: “…Amazon is now exploiting its monopoly power to enrich itself while raising prices and degrading service for the tens of millions of American families who shop on its platform and the hundreds of thousands of businesses that rely on Amazon to reach them.”

Housing Crisis

It's nice to see that we’ve seen some early reaction to the new Housing changes the Federal Government has recently announced.

GST Reaction

First, in response to the government’s recent announcement that it would be removing GST charges on rental developments, Toronto-based real estate company Dream Unlimited Corp. has released plans to build over 5,000 new rental units in urban centers across Canada.

In the current challenging environment of recent high interest rates and construction costs, a lot of projects that had been planned have been put on pause.
The idea here is that the GST relief program will provide new inspiration and motivation for developers to add to the housing stock.

However, all is not as smooth and simple as you might hope, and a 'catch' to the program has reared its ugly head.  Dream Unlimited is saying that the whole deal is contingent upon the provinces also waving their sales taxes. In other words, the federal rebate program has got the ball rolling, but the provinces will have to do their part to keep it going.

According to the Canadian mortgage and housing corporation, Canada needs about 3 1/2 million more units than its current pace of building by 2030 to restore affordability.

$20 Billion Bump

In other housing crisis related developments, the federal government has announced that it will be making an additional $20 billion in financing available for developers who are planning to build rental units. Finance minister Chrystia Freeland announced on Tuesday this week that Ottawa will be raising the annual cap on the Canada Mortgage Bond program from $40 billion to $60 billion.

Mortgage bonds are sold by the Canada Mortgage and Housing Corporation (CMHC) and the proceeds are used to offer mortgage loan insurance to financial institutions. This in turn allows the institutions to then pass on lower interest rates to developers, providing an incentive for projects to proceed.

As a result of these measures, the government expects that 30,000 more rental units will be built annually. 

Dimons in the Rough

Some ominous predictions came out yesterday from JP Morgan Chase CEO, Jamie Dimon, who is warning that US interest rates could go up quite a bit further as policy makers face the prospects of continued elevated inflation and slow growth.

In an interview with the Times of India, Dimon said that he felt the Fed's key lending rate could rise significantly higher than its current targeted range of 5.25%-5.5%. In the interview, he threw out the number 7%, and basically challenged the business community to ask, “Are you prepared for something like 7%?” He also threw in the prospects of stagflation, injecting an added level of pessimism.

Fed chair Jerome Powell has previously said that the central bank would not hesitate to raise rates if they feel inflation is not moving lower in a predictable matter. At a minimum, we can probably expect the 'higher for a longer scenario' where rates stay at the elevated levels we see them at today.

In the Bullseye

Target announced this week that it will be closing nine stores as a result of theft and organized retail crime making the environment unsafe for both staff and customers.

As we’ve seen on the news lately, there has been a wave of retailers struggling to manage crimes in their stores, and the costs have gone straight to the bottom line. We’ve seen reports of stores closing, needing to lock up merchandise, and taking other measures to mitigate the effects of this crime wave. There’s a thought that with food becoming so expensive and inflation continuing at a higher level, shoplifting is sort of a normal part of doing business.

That said, the rise in activity from ORGANIZED crime groups is putting a different spin on what’s happening today.

Target says they plan to close stores on October 21 in New York, Seattle, Portland, San Francisco and Oakland.  The company has previously said that they expect to lose about a half a billion dollars this year due to theft. According to the National Retail Federation the cost of external and internal theft, fraud, and damage cost retailers about $112 billion in 2022, up from $93.9 billion in 2021.

Of course, like everything else these days, politics also plays a role here. In certain cities it’s thought that criminal justice reform laws and local District Attorneys' policies make it very attractive for these criminal groups of thieves to operate. In certain cases, shoplifting is now a crime that will no longer result in jail, and in some cases, even the requirement to post bail has been removed, regardless of how many times a thief has been caught. Basically, there is no disincentive in the system.

To put a fine point on the problem, there’s a story circulating of a Vietnamese restaurant, Le Cheval, that has operated in Oakland, California for 38 years. It has announced it will close at the end of the month, citing burglaries and violent crime in the neighborhood.

REIT Troubles

Northwest Healthcare Properties Real Estate Investment Trust (NWH) is the latest REIT to announce it's slashing its distribution.

The REIT has cut its dividend from $0.80 to $0.36 annually, effective immediately. The trust owns 231 hospitals and medical offices with a total value of about $10.6 billion according to its website.

The REIT says that this move is part of a larger debt reduction strategy and it specifically addressed the goal of paying down $3.7 billion worth of debt, noting that 34% of this is at floating rates.  Shares of NorthWest are down around 60% since recent highs back in March of 2022.

This isn’t the first example of real estate investment trusts reducing their distributions in 2023.

In March, True North Commercial REIT (TNT.UN) rate cut its dividend by 50%.  Since then, its share price has dropped around 60% as well.
In April, Slate Office REIT (SOT.UN) lowered its dividend payout by 70%.  Its share price has dropped 45% since these cuts.
Even before that, we saw a number of other REITS slash distributions during the pandemic period.

The industry has been hurt with the increase in interest rates, mostly because REITs typically carry very heavy mortgages on the properties they own.

Weekly Winners & Losers

Winners

The major indices were down over the past week, but as usual there were still some winners that provided gains to investors.

The Top Gainers were:

Sirius XM (SIRI), up 12.16%
Lucid Group (LCID), up 9.39%
ResMed Inc.(RMD), up 8.25%
Trimble (TRMB), up 7.25%
AMD Inc (AMD), up 6.88%
Teck Resources (TECK), up 7.75%
Imperial Oil (IMO), up 6.21%
Canadian Natural Resources (CNQ), up 5.67%
Cenovus Energy (CVE), up 5.42%
Nike (NKE), up 5.25%

Losers

The worst performing sector of the past week was Utilities, with a smattering of non-utility companies losing ground as well:

The Biggest Loser were:

NextEra Energy (NEE), down 15.38%
Newmont Corp (NEM), down 9.30%
CarMax Inc. (KMX), down 7.74%
NiSource Inc. (NI), down 7.53%
The Southern Company (SO), down 6.70%
Workday, Inc (WDAY0, down 6.92%
Exelon Corp (EXC), down 6.02%