Items that may only interest or educate me ….
Canadian interest rate moves higher, Fed inline for a ‘soft landing,’ looking forward, big tech downsizing….
This past week, as widely anticipated, the Bank of Canada (BoC) raised the Canadian interest rate by 0.25%, bringing the benchmark rate to 4.5%. The BoC also said they are prepared to pause future rate hikes while they assess the impact of the recent increases (from 0.25% to 4.5% in ten months). The BoC is the first major central bank to say it likely will hold off on further increases. The head of the BoC emphasized it would be a conditional pause, depending on the economic data. If needed, they were prepared to raise the interest rate further to get the rate of inflation down to their target of 2%.
The Governor of the BoC, Mr. Tiff Macklam, said it was too soon to be talking about rate cuts, but many analysts are saying the next move by the BoC will be to lower rates, they just do not know when. We shall see. In the meantime, the higher benchmark interest rate (the rate BoC lends to Canadian commercial banks) meant the commercial banks would be raising their rates. Sure enough, within hours of the BoC announcement, all major Canadian banks had increased their lending rates by 0.25%. Mortgages, loans, lines of credit and other personal or business loans just got more expensive.
The US Federal Reserve (Fed) has gone into their customary blackout period ahead of their next meeting on January 31 – February 1. However, that did not stop analysts from predicating a 0.25% increase coming out of the meeting. Recent data indicated the US gross domestic product experienced a slight slowdown in the fourth quarter of 2022, dropping to an annualized pace of 2.9% growth after posting a 3.2% rise in the third quarter. At the same time, the weekly US jobless number dropped, indicating the US economy remains strong. Perhaps the Fed can pull off the highwire act of bringing down inflation to their 2% target without bringing down the US economy.
At the Fed’s most recent meeting in December 2022, the Fed indicated they were prepared to slow the pace of their interest rate increases. However, they also suggested that their battle with inflation was a long way from over. Perhaps this week’s BoC latest increase was a harbinger of things to come from the Fed.
If the Fed made a similar move to the BoC (a 0.25% rate increase and a willingness to pause increases), the markets would interpret that as a sign the battle with inflation was winding down and react positively. While it would be great to see markets continue their upward trend of 2023, the markets cannot move too quickly without drawing the attention of the Fed. If the markets rebound back too strongly, too fast, the Fed would likely step in with another interest rate hike too cool off the rally. Of course, this is all speculation and wishful thinking. 😊
Historically, when corporate earnings fall, share prices are more likely to increase. I had to read that twice when I first saw it. It seems counter intuitive. One would think share prices would follow earnings. If earnings are down, then share prices follow. However, the markets are forward looking, anticipating future share prices, preferably higher. Analysts and investors have already factored in the earnings declines into the current share price and are now anticipating the next moves. Being optimistic, they see higher earnings down the road and purchase shares in anticipation of future profits.
A good example of this is Microsoft’s (NASD:MSFT) latest quarterly earnings report. Their net income/earnings beat analysts estimates but the share price declined sharply following the release of their financial statements. One would think beating estimates would cause the share price to rise since the company beat estimates. However, Microsoft suggested future earnings could be lower causing the share price to fall. A day later, investors took the sharp drop in Microsoft’s share price as an opportunity to invest in a growing company. They had factored in the guidance and felt Microsoft was still a worthwhile investment.
In investing, keep in mind the earnings reports are backward looking while forecasts are forward looking. While its important to know what a company has done, its just as important to know what their outlook is going forward (and take their forecasts with a grain of salt). When you look at a company’s financial statement, take a moment to check out their guidance for the upcoming quarter as well as for the fiscal year. This information can usually be found in the quarterly press release or in an investor presentation.
Over the last few weeks there has been a number of layoffs at the big technology companies, such as Alphabet (NASD:GOOGL), Amazon (NASD:AMZN), and Microsoft. Between those three over 40,000 employees have been let go to reduce costs.
While that is a lot, these companies’ current headcount is higher than it was prior to the pandemic. For example, Microsoft hired over 40,000 people between June 2021 and June 22. Subtract the recently released 10,000 staff members and Microsoft’s headcount is still 30,000 higher than it was in June 2021. When the pandemic shutdown most of the world, the big tech companies went on a hiring spree, figuring the good times would last forever as the digital revolution took hold and they had to grow to meet the newfound demand for technology. Unfortunately, they increased their headcounts much higher than necessary.
When the pandemic threat faded away and the world returned to normal routines, the demand for their products and services declined. Add rising inflation and interest rates to declining revenues and companies had to cut costs. For technology companies, this means mothballing some of their lofty ideas, becoming more efficient and using their cash more strategically. Inevitably this means letting employees go.
The lone exception to the hiring big tech frenzy is Apple (NASD:AAPL). According to the Wall Street Journal, While the other technology companies went on a hiring bender and increased their headcount drastically from 2019 through 2022 (from Microsoft’s 53% increase to Amazon’s 100% boost), Apple stuck to its long-time staffing growth rate of 6.5%. Apple historically runs a ‘lean’ operation and was more conservative in growing its workforce. They avoided staffing up projects that were unlikely to generate a profit. As a result of staying calm during the hiring frenzy, Apple does not have to shed employees nor spend cash on severance packages. Well played Apple, well played.
With the educational items there out of the way, let’s see what happened this past week….
Weekly Market Review
Monday: The four major North American markets – the Toronto Stock Exchange Composite Index (TSX), the S&P 500 Index (S&P), the Dow Jones Industrial Average (DJIA), and the Nasdaq Composite Index (Nasdaq) – got off to a quick start ahead of a week of earnings reports. Investors are also moving into technology companies as they focus on the belief the US Federal Reserve (Fed) will raise the interest rate by 0.25% rather than signals from the Fed that rate is likely to go higher than 5%.
In Canada, the TSX ended the day at its highest level in seven months as investors wait for the Bank of Canada’s (BoC) latest increase to Canada’s benchmark interest rate. Technology companies were the big winners on the day, gaining almost three times as much as the next best, the Consumer Cyclicals sector. All but the Telecommunications Services sector ended higher.
In the US, investors continue to move back into high growth technology companies with the technology heavy Nasdaq leading the way. A few of the big technology companies will report their fourth quarter earnings this week, setting the tone for the next few weeks. Decent earnings, coupled with an anticipated 0.25% raise in the US interest rate should lead to a nice bounce in the Technology sector, and the markets in general. In trading today, it was a broad-based advance for the American S&P sectors, led by the Technology and Consumer Cyclicals sectors. The Telecommunications Services sector was the laggard, ending slightly below the bar.
Tuesday: In a mixed day of earnings results, the indexes took an early morning plunge and then spent the rest of the day battling their way higher. At the end of the day, only the DJIA ended higher. The price of oil dropped as analysts raised concerns about a global economic recession, which would slow down the demand for oil.
In Canada, analysts and investors await tomorrow’s interest rate announcement from the BoC. Expectations are for a 0.25% raise. On the TSX, the Telecommunications Services and Basic Materials (miners and fertilizer manufacturers) had the biggest advance, with interest sensitive sectors Technology and Consumer Cyclical having the biggest declines.
South of the border, the morning got off to a slow start when technical glitches caused a number of New York Stock Exchange listed companies to be halted at the start of the trading day. Fortunately, the problem was quickly resolved, and trading resumed in the affected companies. In trading, Telecommunications Services was the best performer of the American S&P sectors, while Healthcare and Energy were the worst performing sectors.
Wednesday: Another early morning dip to start the day this time only the DJIA was able end the day higher, and barely at that. In Canada, the big driver of the TSX was a 0.25% increase to the Canadian benchmark interest rate by the BoC, bringing it to 4.5%, a 15 year high. The BoC also indicated it would pause future increases and monitor economic date to guide future moves. On the TSX, a strong showing from Shopify (TSX:SHOP), helped the Technology sector be the top performing Canadian sector, easily tripling the second place Basic Materials sector. The Industrials and Energy sectors were the worst performers.
In the US, disappointing earnings weighed heavily on the three American indexes. A last-minute surge by the DJIA allowed it to sneak into positive territory at the last minute. Microsoft was the first of the mega cap (mega market capitalization – the very large companies) technology companies to report earnings. They were not great, but worse was bleak guidance for future earnings that suggested an economic slowdown. Let us hope that is not a sign of things to come for the other big technology companies spread across the portfolios. In the US markets, the best of the American S&P sectors was the Telecommunications Services and Basic Materials sectors, while the Utilities and Technology sectors were the worst.
Thursday: The North American stock markets continued the upward momentum after yesterday morning’s initial plunge, with all four indexes ending the day in positive territory. Investor optimism is rising as they believe the market bottomed in October and has been steadily climbing. Oil prices continue to rise as investors believe there will be growing demand from the world’s two biggest economies, USA, and China.
In Canada, the TSX closed at its highest point in seven months. Higher oil prices pushed the Canadian Energy sector into the top performer position, followed by the Financials sector. Meanwhile, the Utilities and Consumer Staples sectors were the worst performers, sliding into the red.
In the US, investors digested another day of mixed earnings reports, data showing a stronger than expected US economy, and a strong labour market. In the marketplace, the American S&P Energy and Technology sectors were the best performers, while Consumer Staples and Telecommunications Services fell back the most.
Friday: All four indexes ended the day higher as investors are trying to figure out what the Fed will do with the latest data showing a strong US economy while inflation continues to fall. Will they or wont they raise rates? That is the big question going into next week.
In Canada, the TSX posted its fourth consecutive weekly advance. Leading the way today were the Canadian Technology and Energy sectors. Of the five sectors that declined, Basic Materials and Telecommunications Services fell the most.
In the US, despite a downward spike at noon, all threes American indexes powered upward throughout the afternoon to end the day higher. Investors digested earnings reports and more economic news suggesting the Fed’s increase were having the desired effect of lowering inflation. In trading, the interest sensitive Consumer Cyclical and Technology sectors advanced the most, with Energy and Basic Materials declining the most.
For the week, the TSX rose 1.0%, the S&P 500 gained 2.5%, the Dow advanced 1.8% and the Nasdaq posted a fourth consecutive weekly gain, jumping 4.3%.
Weekly Portfolio Review
Another week of positive momentum. For the TSX and Nasdaq, that is four weeks in a row. A perfect 2023! The S&P and DJIA got back on the winning track this week, putting up three positive weeks out of four. A very good start to the year!
The only item I see driving the markets was investor belief the worst of inflation is over. The BoC slowed its rate of increases and signalled they would pause future increases to evaluate how the cumulative effect of the rate increases are impacting the Canadian economy. The Fed is set to deliver their next increase this coming week and the market is confident it will be a 0.25% increase. Investors are hoping the Fed will also hint of a pause on future increases. Recent economic news and corporate earnings reports did nothing to dampen investors’ hopes of the smaller increase.
Cautious optimism seems to be returning to the markets. None has benefitted more than the high growth, technology heavy Nasdaq which lead all indexes higher (as shown below). The S&P also benefitted from the rise of the technology heavyweights that are on both the Nasdaq and S&P. The blue chip DJIA rode the rising tide of the American markets while the TSX benefitted from rising oil prices and investors moving back into technology companies.
The Portfolios had another good week, especially Portfolio 3. While Portfolio 3 benefitted from the overall rise in the Technology sector, the main driver was Shopify, the largest holding, which jumped over 17% this week. Portfolios 1 and 2 rode the rising tide of the markets, with Portfolio 1 getting an extra boost from the gains of big technology companies’ such as Tesla’s (NASD:TSLA) 31% spike this week.
Companies on the Radar
Two new Canadian companies came across my radar this past week – Intact Financial (TSX:IFC) and Supremex (TSX:SXP). Intact Financial is a mid size insurance company. They provide home, car and business insurance in Canada, the USA, and the United Kingdom. They have been growing their top and bottom lines (revenue and net income) for the last couple of years, as well as outperformed the S&P over the last five years. Not bad for an insurance company. They also provide a 2% dividend for income generation purposes. I have always considered insurance companies as slow growing defensive companies but beating the S&P over five years does not strike me as a slow grower.
The other company is a small packaging company, selling packaging solutions to numerous multinational companies in various industries throughout Canada and the US. As you can see in the images below, it scored well in both the Ratings (first image) and High-Level Financials (second image) sections. It has not outperformed the S&P over five years, but it has doubled its share price over the last year while the S&P tanked in 2022. Per the Yahoo Finance chart, it stopped its dividend at the start of the pandemic and restarted in January 2022. The dividend is currently half of its pre-pandemic level. I do not think Supremex will become mega cap company but if it can quietly grow under the radar that would be OK.
Both companies are intriguing, so I want to take a closer look. For now, I will add them to the four other companies on my Radar List.
- Crew Energy (TSX:CR): A Canadian oil and gas company with interests in British Columbia.
- International Petroleum (TSX:IPCO): A Canadian company with oil and gas assets in Canada, Malaysia, and France.
- Alphabet (NASD:GOOGL): The leading online search engine and advertising company, dominant mobile operating system.
- DoubleVerify (NYSE:DV): 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 27, 2022.
Portfolio Update
Portfolio 1
Portfolio 1 for the week ended January 27, 2023: UP 
Apple has been talking with various media companies, including Disney (NYSE:DIS) about developing virtual reality (VR) content for Apple’s upcoming mixed reality headsets. The headset will combine two ultra high-resolution displays for the VR content and external cameras to pass through the real world. Together they will create an augmented reality world for the viewer. You could mop your floors while Mickey Mouse conducts a brigade of mops, all to the sounds of The Sorcerer’s Apprentice.- The trial of Tesla CEO Elon Musk continued this week. Mr. Musk is accused of pumping the share price of Tesla when he tweeted the company would be taken private, only to see the share price drop when it was reported Tesla would not be going private.
- Magnet Forensics (TSX:MAGT) is being bought by private equity firm Thoma Bravo for C$ 1.8 billion, or C$ 44.25 per share. Magnet will be added to Thoma Bravo’s cybersecurity portfolio in the fast-growing cybersecurity industry.
This is a tough one since the shares were bought near C$ 50 so this will go down as a loss. The way the share price rose over the last nine months (almost doubling), I was confident the share price would be higher than C$ 50. Looks like Thoma Bravo agrees the Magnet has a bright future. - Amazon (NASD:AMZN) gets wings in India. Amazon became the first e-commerce company in India with its own dedicated air freight fleet. India is a rapidly growing market for Amazon, and they want to be able to deliver their products within two days, like Amazon Prime members have here in North America. Amazon made a deal with Indian airline Quickjet to move their products quickly between major cities throughout India.
- The US Department of Justice (DoJ) and eight states filed an antitrust lawsuit against Alphabet’s Google for “anticompetitive behaviour” that forced competitors out of the online advertising market. The lawsuit claims Google is attempting to use its near monopoly of the digital ad industry to prevent competition and preventing companies from monetizing their own content. The plaintiffs are calling for Google to divest its ad manager suite.
As part of Alphabet’s 12,000 layoffs, they are closing their DeepMind Technologies research office in Edmonton. DeepMind is a subsidiary of Alphabet, focused on developing artificial intelligence systems. Alphabet’s version of Microsoft’s OpenAI’s artificial intelligence. - Canada’s Federal Court of Appeal has rejected the Canadian Competition Bureau’s request to overturn the Competition Tribunal’s approval of the Rogers Communications (TSX:RCI.B) purchase of Shaw Communications (TSX:SJR.B). This clears the way for the merger to proceed, pending sign off by the Industry Minister.
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.
Canadian $
Brookfield Select Opportunities Income Fund (TSX:BSO.UN) DRIP
US $
No US$ dividends this past week.
Quarterly Reports
Visa Inc.
All currency listed in millions of US dollars, except for earnings per share
Selected highlights from their first quarter 2023 financial results on January 25, 2023
- Revenue of $7,936 for the three months ended December 31, compared to $7,059 for the same period in 2021. An increase of over 12%.
- Net income of $4,179 for the three months ended December 31, compared to net income of $3,959 in the same period in 2021.
- Diluted earnings per ordinary share of $1.99 for the three months ended December 31, compared to $1.84 for the same period in 2021.
Tesla, Inc.
All currency listed in millions of US dollars, except for earnings per share
Selected highlights from their fourth quarter 2022 financial results on January 25, 2023
- Revenue of $24,318 for the three months ended December 31, compared to $17,719 for the same period in 2021. An increase of over 37%.
- Net income of $3,707 for the three months ended December 31, compared to net income of $2,343 in the same period in 2021.
- Diluted earnings per ordinary share of $1.07 for the three months ended December 31, compared to $0.68 for the same period in 2021.
- Revenue of $81,462 for the fiscal year ended December 31, compared to $53,823 for the same period in 2021. An increase of over 25%.
- Net earnings of $12,556 for the fiscal year ended December 31, compared to net earnings of $5,519 in the same period in 2021.
- Diluted earnings per ordinary share of $3.62 for the fiscal year ended December 31, compared to $1.63 for the same period in 2021.
Canadian National Railway Company
All currency listed in millions of Canadian dollars, except for earnings per share.
Selected highlights from their fourth quarter 2022 financial results on January 24, 2023
- Revenue of $4,542 for the three months ended December 31, compared to $3,753 for the same period in 2021. An increase of over 21%.
- Net income of $1,420 for the three months ended December 31, compared to net income of $1,201 in the same period in 2021.
- Diluted earnings per ordinary share of $2.10 for the three months ended December 31, compared to $1.70 for the same period in 2021.
- Revenue of $17,107 for the fiscal year ended December 31, compared to $14,477 for the same period in 2021. An increase of over 18%.
- Net earnings of $5,118 for the fiscal year ended December 31, compared to net earnings of $4,899 in the same period in 2021.
- Diluted earnings per ordinary share of $7.44 for the fiscal year ended December 31, compared to $6.90 for the same period in 2021.
Portfolio 2
Portfolio 2 for the week ended January 27, 2023: UP
- Chorus Aviation (TSX:CHR) unit Jazz Aviation was named Atlantic Canada’s and Nova Scotia’s top employer. Now, to get those earnings and share prices back to pre-pandemic levels and restart their dividend program.
- Microsoft suffered a network outage that brought down its cloud service Azure, the key service that drives many of the identification management of other Microsoft cloud services. Microsoft’s popular Teams collaboration and Outlook email cloud services, which rely on Azure, were also hit. The outage was the result of a network change, and it impacted companies and users across the world. Microsoft rolled back the change to get its network back up and running again.
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 $
Brookfield Select Opportunities Income Fund (TSX:BSO.UN) DRIP
US $
No US$ dividends this past week.
Quarterly Reports
Microsoft Corporation
All currency listed in millions of US dollars, except for earnings per share.
Selected highlights from their second quarter 2023 financial results on January 24, 2023.
- Revenue of $16,517 for the three months ended December 31, compared to $20,779 for the same period in 2021. A decrease of almost 21%.
- Net income of $16,425 for the three months ended December 31, compared to net income of $18,765 in the same period in 2021.
- Diluted earnings per ordinary share of $2.20 for the three months ended December 31, compared to $2.48 for the same period in 2021.
- Revenue of $32,528 for the six months ended December 31, compared to $37,410 for the same period in 2021. A decrease of over 13%.
- Net earnings of $33,981 for the six months ended December 31, compared to net earnings of $39,270 in the same period in 2021.
- Diluted earnings per ordinary share of $4.54 for the six months ended December 31, compared to $5.19 for the same period in 2021.
Portfolio 3
Portfolio 3 for the week ended January 27, 2023: UP
- Brookfield Corporation (TSX:BN) and American Tower (NYSE:AMT) are reportedly talking with Spain’s Cellnex about taking over their mobile phone tower operations.
- After twelve years of holding the line on the fees of their three levels of services, Shopify decided its time to raise the prices. Shopify said the higher rates are necessary to provide the latest tools and innovations to Shopify merchants. The higher prices, combined with layoffs in 2022 should improve Shopify’s bottom line.
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 $
Brookfield Select Opportunities Income Fund (TSX:BSO.UN) DRIP
goeasy Ltd (TSX:GSY)
US $
No US$ dividends this past week.
Quarterly Reports
Microsoft Corporation
All currency listed in millions of US dollars, except for earnings per share.
Selected highlights from their second quarter 2023 financial results on January 24, 2023.
- Revenue of $16,517 for the three months ended December 31, compared to $20,779 for the same period in 2021. A decrease of almost 21%.
- Net income of $16,425 for the three months ended December 31, compared to net income of $18,765 in the same period in 2021.
- Diluted earnings per ordinary share of $2.20 for the three months ended December 31, compared to $2.48 for the same period in 2021.
- Revenue of $32,528 for the six months ended December 31, compared to $37,410 for the same period in 2021. A decrease of over 13%.
- Net earnings of $33,981 for the six months ended December 31, compared to net earnings of $39,270 in the same period in 2021.
- Diluted earnings per ordinary share of $4.54 for the six months ended December 31, compared to $5.19 for the same period in 2021.
Real Matters Inc.
All currency listed in thousands of US dollars, except for earnings per share
Selected highlights from their first quarter 2023 financial results on January 27, 2023.
- Revenue of $38,165 for the three months ended December 31, compared to $107,757 for the same period in 2021. A decrease of almost 65%.
- Net loss of $4,619 for the three months ended December 31, compared to net income of $2,636 in the same period in 2021.
- Diluted loss per ordinary share of $0.06 for the three months ended December 31, compared to earnings of $0.03 per share for the same period in 2021.