Items that may only interest or educate me ….
AI coming to a cloud near you, Canadian interest rates, US interest rate data, globalization meets friendshoring …
Microsoft (NASD:MSFT) is considering adding more cash to its US$ 1 billion investment in start-up OpenAI, the developer of ChatGPT. Microsoft is already previewing ChatGPT under the name Azure OpenAI Service and plans to incorporate ChatGPT into their Bing search engine as well as their cloud-based Office applications.
Reports have Microsoft investing up to US$10 billion in OpenAI, with 75% of OpenAI’s profits going to Microsoft until its initial US$1 billion investment is recovered. At that time, Microsoft will own 49% of OpenAI (other investors will own 49% and OpenAI’s non-profit parent owning the remaining 2%). With that kind of investment and integration, at some point I expect Microsoft to buy out the remaining shareholders to own the company and technology outright. I could not see Microsoft allowing a technology so integrated and vital to its success to be bought out by a rival.
For the third consecutive month inflation in Canada has decreased, according to the latest Statistics Canada Consumer Price Index (CPI) report. On an annual basis, the data showed the inflation rate was 6.3% in December, down from 6.8% on November. Analysts had expected December inflation to come in at 6.4%. Meanwhile, Core CPI (CPI less fuel and housing costs) increased by 5% on a yearly basis, in line with expectations.
The decrease in inflation was largely the result of a 13.1% decline in gas prices. I am sure if you filled up a car with gas in December you noticed the cheaper prices. However, the decline was limited by increases in the cost of mortgages (thank you, higher interest rates), clothing and personal care supplies.
Another set of data released by Statistics Canada this week was the Canadian Industrial Producer Price Index (IPPI) for December. The IPPI measures the prices that producers in Canada receive once their products leave the plant. It does not reflect the price the consumer pays (that is the CPI). The data showed the IPPI fell 1.1% in December from November, thanks to lower prices for petroleum products and softwood lumber. On a year over year basis, the IPPI for December was up 7.6%.
Finally, the Retail Trade data for November revealed retail sales fell by 0.1%. Statistics Canada also provided an estimate of a 0.5% increase in retail sales for December’s. With the moderate decline in November and moderate increase in December, the Canadian economy appears to be holding up despite the higher interest rates.
The December jobs report caused analysts to believe an increase of 0.25% was likely. Despite signs in the latest CPI and IPPI reports that inflation in Canada is declining, there was nothing in these two reports to suggest the Bank of Canada (BoC) will not proceed with another hike. With retail sales remaining steady, in all likelihood, the BoC will raise the interest rate by 0.25% to keep inflation in Canada headed downward. This would bring Canada’s benchmark interest rate to 4.5%. And you can bet it won’t take the commercial banks very long to raise their rates, the interest rates you and I pay.
South of the border, the US Labor Department released data indicating the US Producer Price Index (PPI) had its biggest drop on an annual basis since the pandemic, going from 7.3% in November to 6.2% in December. Analysts had projected the PPI to come in at 6.8% so this was well below expectations. The Core PPI (PPI) came in at 4.6% for December, down from 4.9% in November.
Along with last week’s CPI report that showed inflation had fallen to 6.5%, the PPI was another sign the Fed’s aggressive interest rate hikes are slowing down inflation.
In other US economic news, the US Commerce Department estimated December retail sales dropped 1.1% from November. Analysts had expected a decline of 0.8%. It was the second consecutive month that retail sales decreased. Lower retail sales are indicative of softening demand, most likely caused by consumers having less discretionary cash.
With slowing inflation and weakening demand for goods and services, the signs are promising that the US Federal Reserve (Fed) will slow down the pace of their interest rate increases. However, while the Fed may slow the pace of increases, that does not mean they will stop. They will continue to raise the rate on the US benchmark interest rate, only in smaller increments. And when you consider at least two members of the Fed believe the sooner the rate gets above 5% the better, its likely the next increase will be at least 0.25%, pushing the rate to an even 5%.
It appears the pandemic, and the Russian invasion of Ukraine have combined to put a dent in the ‘globalization’ of supply chains. The pandemic created all sorts of problems for manufacturers. Thanks to lockdowns, we saw shuttered factories, an inability to obtain the necessary raw materials to create products, and when companies had finished products there were tremendous challenges getting them to market, especially if they were transported by boat. Any company that depended on getting raw materials or components from other countries suddenly found their supply chain broken.
Just when those supply challenges were working themselves out, Russia invaded Ukraine, leading to supply constraints of oil and natural gas. Both Europe and Japan were dependent on Russian oil and gas and are now looking at alternate countries for their energy needs. Wheat was another commodity that suddenly came under pricing pressure as Russia and Ukraine, two of the top ten global suppliers, were unable to get their wheat to market, though for different reasons (Ukraine was busy defending itself and Western sanctions limited Russian exports).
Add in China becoming more of a threat to western countries, companies are now scrambling to source or build their own domestic supply chains. Many countries are actively encouraging domestic development or building supply chains with friendly nations, or ‘friendshoring.’ The US CHIPS and Science Act, and the Inflation Reduction Act are examples of a country building out a domestic supply chain and friendshoring.
I suspect you will see more friendshoring arrangements rather than countries trying to build their own internal supply infrastructure. There are too many products and supplies for one nation to deal with. Companies will continue to try to drive down costs which usually means cheaper labour. As companies adapt to the new reality, expect to see a variation of globalization. Only this time it will be between like-minded countries to avoid the problems experienced the last few years.
Another topsy turvy week in the North American stock markets. Overall, it is a good time for investors to stay informed and consider their investing options carefully. With that in mind, let’s see what moved the markets this past week…
Weekly Market Review
Monday: Only one game in town today as the US markets were closed for the Martin Luther King Jr. Day holiday. The Toronto Stock Exchange Composite Index (TSX) ran its winning streak to seven, its longest run since May 2022. Tomorrow the Canadian Consumer Price Index (CPI) report for December is due. Analysts are expecting the data to come in at 6.4% higher than December 2021. In trading, the Technology and Industrials were the best performing Canadian sectors. The Consumer Cyclicals sector was the only sector to slide backward.
Tuesday: The American markets were open for business again and it was a mixed bag for the four major North American indexes. The TSX and the Nasdaq Composite Index (Nasdaq) both ended the session higher while the S&P 500 Index (S&P), the Dow Jones Industrial Average (DJIA) ended lower.
In Canada, oil prices continued to climb, fueling a rise in the TSX’s Energy sector (pun intended). In addition, the Canadian CPI report for December showed inflation had dropped to 6.3%, on an annual basis, from 6.8% in November. Leading the TSX higher were the Utilities and Technology sectors, with Basic Materials and Consumer Staples the only sectors to end the day lower.
In the US, while higher oil prices were good for the American Energy sector, it was not enough to overcome the drag of unimpressive earnings from some of America’s biggest banks. The big, blue-chip banks that are part of the DJIA dragged it down. On the positive side, Tesla (NASD:TSLA) jumped after news of a sales spike in China, helping the Nasdaq run its winning streak to seven. In the markets, the best performing S&P sectors were Technology and Energy, while the biggest loser of the S&P sectors were the Basic Materials (Miners and fertilizer manufacturers).
Wednesday: All four indexes ended the day in negative territory after data showed weak US retail sales for December. Also dampening investor sentiment were comments from a member of the Fed who suggested the Fed should move ‘as quickly as we can’ to raise the benchmark US interest rate over 5%.
In Canada, despite a strong start to the day, the TSX’s 8-day winning streak ended. The Canadian Basic Materials sector was the only Canadian sector to advance. The Technology sector broke even on the day while the remaining sectors all ended lower. The Consumer Staples and Consumer Cyclical sectors were the worst performing Canadian sectors.
In the US, weak retail sales, lower productivity in factories, and investors taking profits, all contributed to the American indexes’ worst day of 2023. In the market it was a broad-based retreat as all American S&P sectors declined. The Basic Materials and Technology sectors fell the least, while the Consumer Staples and Utilities sectors dropped the most.
Thursday: A late afternoon rally kept the markets from having a worse day than yesterday, but it was not enough to prevent all four indexes from ending the day in the red. Disappointing quarterly earnings and fears the Fed would remain aggressive with their upcoming rate hike drove the markets lower.
In Canada, investor concerns about a recession caused the TSX to end the session lower. A weak Canadian retail sales report, due tomorrow, could really cause investors to become pessimistic. Higher oil and commodity prices prevented the TSX from falling as far as its American cousins. In trading, the Canadian Energy and Basic Materials sector were the only sectors to advance. The interest sensitive Technology and Consumer Cyclical sectors fell the farthest.
In the US, all three American indexes fell as investors considered the implications of lower weekly jobless numbers and if a strong labour market would cause the Fed to make another aggressive increase rate hike. In the American markets, only the S&P’s Energy and Healthcare sectors ended the day in the green, with Industrials and Consumer Cyclicals dropping the most.
Friday: All four major North American indexes ended the day higher. Today’s gains were enough to lift the TSX and Nasdaq into the green for a third consecutive week of weekly gains, but not enough to prevent the S&P and DJIA from ending the week in the red. The price of oil continued to rise on expected growing demand for oil from China, the second largest economy behind the USA, as the nation re-opens after its Covid-19 lockdowns.
In Canada, November retail sales dropped 0.1% indicating the Canadian economy is weathering the storm caused by higher Canadian interest rates. On top of that, inflation is coming down. In trading on the TSX, it was good day for the Canadian sectors as only the Utilities sector slid back. Leading the way upward were the Technology and Basic Materials sectors.
In the US, investors moved back into the beaten down high growth sectors, lifting all three American indexes comfortably higher. In trading, it was a day of broad-based gains for the American S&P sectors as all moved solidly upward. Leading the way were the Technology and Consumer Cyclical sectors, with the Healthcare and Utilities sectors bringing up the rear.
For the week, the TSX gained 0.7%, the S&P 500 fell 0.7%, the Dow dropped 2.7% and the Nasdaq rose 0.6%.
Weekly Portfolio Review
A mixed bag this past week with the TSX and Nasdaq advancing, while the S&P and DJIA retreated. Last week, I mentioned the TSX performed a Golden Cross, a technical indicator suggesting an upcoming bull market. This week the upward momentum continued. The TSX benefitted from strong energy and commodity prices, with a late push from the Technology sector.
Down south, after Thursday’s decline I did not think any of the American indexes would end the week higher. However, a mini rally in technology companies pushed the Nasdaq pushed over the line and almost dragged the S&P over the line, falling just short. The DJIA was not so lucky as it was weighed down by mixed results from financials companies.
Overall, it was a good week for the three Portfolios. Portfolio 1 was marginally lower but that was more than offset by gains in Portfolios 2 and 3. Portfolio 1 with its larger number of companies seems to mirror the S&P. With the S&P lower, it was good to see it did not drop as much. Portfolio 2 has the most Canadian companies, so it most closely follows the TSX, while Portfolio 3 is closest to the Nasdaq. With that in mind, its good to see Portfolios 2 and 3 beat both of those indexes. Not that I am keeping track. 😊
Companies on the Radar
No new companies this week and I haven’t had an opportunity to delve deeper into DoubleVerify (NYSE:DV) other than its in the digital advertising space and it scored well on my Radar Check. I did notice when checking out DoubleVerify on the TD Direct Investing site that TD showed the company had Long Term Debt (LTD), whereas Yahoo Finance (which I use for my Radar Check) shows it with no LTD. Something to investigate when looking deeper into the company. It joins oil and natural gas companies Crew Energy (TSX:CR), International Petroleum (TSX:IPCO), and technology heavyweight Alphabet (NASD:GOOGL) on the radar.
- Crew Energy: A Canadian oil and gas company with interests in British Columbia.
- International Petroleum: A Canadian company with oil and gas assets in Canada, Malaysia, and France.
- Alphabet: The leading online search engine and advertising company, dominant mobile operating system.
- DoubleVerify: part of the digital advertising industry. Helps the world’s largest brands maximize and optimize the effectiveness of their online advertising.
The Radar Check was last updated January 20, 2022.
Portfolio Update
Portfolio 1
Portfolio 1 for the week ended January 20, 2023: DOWN 
- Tesla and its CEO Elon Musk went to trial in a case where Tesla shareholders claim Mr. Musk defrauded them. In 2018, Mr. Musk tweeted funding was ‘secured’ to take Tesla private. In the lawsuit, shareholders claim they lost ‘billions’ when they bought or sold Tesla shares between the time of Mr. Musk’s tweet and when the New York Times reported the funding was ‘far from secure.”
In other Tesla news, the company made the decision to utilize its production cost advantage over other Electric Vehicle (EV) companies to put pricing pressure on traditional automakers as well as new EV start-ups. With a greater profit margin, Tesla has more room to lower prices than its competitors, especially money losing start-ups such as Rivian (NASD:RIVN). - Lightspeed Commerce (TSX:LSPD) plans to shed 300 employees has it re-organizes into a leaner operation. This comes after several years of adding companies and products to Lightspeed’s product line. Its expected half of the positions shed will be in the management area as several positions became redundant after the various acquisitions.
- Alphabet suffered a significant legal setback in India when India’s Supreme Court ordered Google to implement the Competition Commission of India’s (CCI) edicts. The CCI had ruled that the licensing of Google’s Play Store should not be linked in any way to a requirement to install any other Google products such as Search, YouTube, Chrome or other Google products.
In other Alphabet news, the company joined the ranks of the other big US technology companies when it announced it will be trimming its workforce by 6%. The losses will be spread across Alphabet’s global offices, coming mainly from the ranks in recruiting, corporate staff and those involved on various product teams. - Amazon (NASD:AMZN) plans to beef up its data centres with a US$ 35 billion investment in their Virginia data centres. Amazon Web Services anticipates the expansion will be complete by 2040.
Activity
Sold: Algonquin Power & Utilities (TSX:AQN). Algonquin has significant debt and the increasing interest rates led to higher interest expenses which impacted their bottom line (net income). When this information first appeared in their third quarter earnings report, the share price of Algonquin shares took a significant hit, falling nearly 50% (strike 1). Then in early January they announced they were cutting their quarterly dividend from C$ 0.1808 to C$ 0.1085 (strike 2) and suspending their dividend reinvestment plan (strike 3). While these moves help the company, I feel there are better opportunities available for the money.
Dividends
Dividends Received this week for the following companies:
Companies followed by DRIP (Dividend Re-Investment Plan) indicate additional shares were purchased with the dividend. Any cash leftover was added to the cash balance.
Canadian $
Andlauer Healthcare Group Inc (TSX:AND)
BSR Real Estate Investment Trust (TSX:HOM.U)
Algonquin Power & Utilities Corp (TSX:AQN) DRIP
US $
No US$ dividends this past week.
Quarterly Reports
No quarterly reports this past week.
Portfolio 2
Portfolio 2 for the week ended January 20, 2023: UP 
- Guardant Health (NASD:GH) announced they are partnering with Britain’s The Royal Marsden NHS Foundation Trust to help track microscopic minimal residual disease (MRD) in post surgical patients. Guardant’s Reveal blood test will check if MRD is present in the bloodstream. If MRD is not detected, patients may not need post surgery chemotherapy (used to eliminate any residual MRD). This would allow doctors to avoid over treating patients, when no MRD is found, and exposing them to the side effects of chemotherapy.
Activity
No significant activity to report this week.
Dividends
Dividends Received this week for the following companies:
Companies followed by DRIP (Dividend Re-Investment Plan) indicate additional shares were purchased with the dividend. Any cash leftover was added to the cash balance.
Canadian $
Dream Industrial Real Estate Investment Trust (TSX:DIR.UN)
US $
No US$ dividends this past week.
Quarterly Reports
No quarterly reports this past week.
Portfolio 3
Portfolio 3 for the week ended January 20, 2023: UP
- Microsoft plans to let go approximately 5% of its employees. Most of the layoffs are expected to be in various engineering divisions and human resources.
Activity
No significant activity to report this week.
Dividends
Dividends Received this week for the following companies:
Companies followed by DRIP (Dividend Re-Investment Plan) indicate additional shares were purchased with the dividend. Any cash leftover was added to the cash balance.
No dividends this past week.
Quarterly Reports
No quarterly reports this past week.