Tuesday, October 17, 2023

Morning Note: The AI Hype Problem, And Surprising Retail Sales

Two points I'd like to make in the opening to this morning's message:

1. I am indeed in the camp that believes AI is a real long-term game-changer.

2. Like I said yesterday, "... today's CEO has been reduced to little more than shepherd of his/her company's stock price (quoting Julian Brigden)"

Now, with regard to my view of AI, the operative words there are "long-term."  In the short-term, however, per last Monday's Wall Street Journal, there are issues that those Q2 earnings calls conveniently failed to mention (or at least emphasize).

Here are a few snippets from Big Tech Struggles to Turn AI Hype Into Profits:

"Generative artificial-intelligence tools are unproven and expensive to operate, requiring muscular servers with expensive chips that consume lots of power. Google and other tech companies investing in AI are experimenting with an array of tactics to make, market and charge for it.

Microsoft has lost money on one of its first generative AI products, said a person with knowledge of the figures. It and Google are now launching AI-backed upgrades to their software with higher price tags.

ZOOM has tried to mitigate costs by sometimes using a simpler AI it developed in-house. Adobe and others are putting caps on monthly usage and charging based on consumption."
"Building and training AI products can take years and hundreds of millions of dollars, more than with other types of software."

"AI often doesn’t have the economies of scale of standard software because it can require intense new calculations for each query. The more customers use the products, the more expensive it is to cover the infrastructure bills. These running costs expose companies charging flat fees for AI to potential losses."
"Microsoft, for example, is using OpenAI’s latest software for its AI features. The version, called GPT-4, is among the largest and most costly AI models available.

Using it to summarize an email is like getting a Lamborghini to deliver a pizza."

“They require massive compute power,” said Jean-Manuel Izaret, the head of the marketing sales and pricing practice at Boston Consulting Group. “They require massive intelligence.”"

So, per my point #2, despite the reality that such a potentially massive long-term sea change was never likely to make for epic overnight success, where they nevertheless could, CEOs hitched their wagons to AI, and in some instances (as intended) rocketed their stock prices to the proverbial moon... And, in the process, had an, albeit concentrated, not-small impact on a couple of cap-weighted equity indexes.

The potential problem being obvious; should the Wall Street Journal have it right, reality could see those same high-orbit stocks (and the indices they're concentrated in) finding their way back to earth in, at the extreme, dotcom-bubble fashion.

No prediction here, just risk assessment.

On a different note, US retail sales for September were reported this morning, and to say that they exceeded expectations would be an understatement... Headline came in up 0.7% vs up 0.3% expected, and August was revised up by 0.2%... Ex-autos up 0.6% vs 0.2% expected, August revised up by 0.3%... Ex-autos & gas up 0.6% vs 0.1% expected, August revised up by 0.1%... 

This either flies in the face of the latest anecdotal data (spending sentiment on the decline), or it represents sort of a last hoorah for the consumer, or -- in that retail sales data are not adjusted for inflation -- standard inflation measures are sorely missing the mark.

That said, looking at our retail sales chart, I guess it's not unheard of to see a spike (yellow circles) in retail sales just ahead of recession (red-shaded areas):


Asian stocks were mostly green overnight, with 14 of the16 markets we track closing higher.

Europe, on the other hand, is mostly red so far this morning, with 13 of the 19 bourses we follow trading down as I type.

US equity averages are (save for small caps) lower to start the session: Dow down 114 points (0.33%), SP500 down 0.70%, SP500 Equal Weight down 0.06%, Nasdaq 100 down 1.11%, Nasdaq Comp down 1.11%, Russell 2000 up 0.69%.

As for Friday’s session, US equity averages traded higher: Dow by 0.9%, SP500 up 1.1%, SP500 Equal Weight up 1.2%, Nasdaq 100 up 1.2%, Nasdaq Comp up 1.2%, Russell 2000 up 1.6%.

This morning the VIX sits at 17.94.

Oil futures are up 0.39%, nat gas futures are down 1.61%, gold's up 0.56%, silver's up 1.60%, copper futures are up 0.09% and the ag complex (DBA) is up 0.83%.

The 10-year treasury is down (yield up) and the dollar is down 0.03%.

Among our 33 core positions (excluding options hedges, cash and money market funds), 12 -- led by SLV (silver), XME (base metals miners), Range Resources, Dutch Bros and XLE (energy stocks) -- are in the green so far this morning... The losers are being led lower by VNM (Vietnam equities) TLT (long-term treasuries), XLK (tech stocks), Johnson & Johnson and EWW (Mexico equities).

"“The farther backward you look, the farther forward you are likely to see,” Winston Churchill once said. He understood that events never keep moving in a straight line, but rather turn around inevitable corners. And to figure out how events are likely to turn in the future, there is no alternative but to learn how this has happened before.”

--Howe, Neil. The Fourth Turning Is Here: What the Seasons of History Tell Us about How and When This Crisis Will End

Have a great day!

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