ASX News LIVE | XJO Edges Higher as Earnings Season Heats Up

The ASX 200 barely budged on Thursday, ending the day 0.02% higher. Rounding down, the benchmark index was dead flat.

The financials sector performed best, gaining 0.40%. Healthcare performed poorest, down 0.49%.

Mineral Resources and Flight Centre were the top movers, rising 5% and 4% respectively.

On the other side of the ledger, Telix Pharmaceuticals fell ~15%, Northern Star Resources slumped 6.70%, and a former retail favourite Brainchip slid 5%, hovering at 52-week lows.

I’ve mentioned comments from the Reserve Bank that employment data — while strong — is a lagging indicator.

How about some leading indicators of employment?

According to AMP’s chief economist Shane Oliver, AMP’s Jobs Leading Indicator ‘continues to point to slower jobs growth ahead’.

Our Jobs Leading Indicator for Australia based on job ads etc continues to point to slower jobs growth ahead. pic.twitter.com/AQPS7JQ6VA

— Shane Oliver (@ShaneOliverAMP) July 20, 2023

A report by the Australian Energy Regulator (AER) said wholesale electricity prices rose in the second half of the year because of higher demand in southern states, lower solar generation, and less cheap coal capacity.

A reduction in cheap coal capacity was partly due to the early closure of the Liddell coal-fired power plant.

According to the report, prices would have been lower had Liddell remained operational:

“In NSW, the reduction in black coal capacity largely reflected Liddell power station’s exit. Had Liddell’s capacity still been available, prices would have been lower.”

Investor Bullishness is the highest it's been since November 2021. What happened two months later? pic.twitter.com/Kg7NNTaKXu

— Barchart (@Barchart) July 19, 2023

Bloomberg Businessweek ran a punchy story on the ‘extremely bad’ ads currently run by Twitter.

‘As the site’s big advertisers—including Coca Cola, Hilton and Merck—have been scared off by Musk’s willingness to welcome bigots onto the platform and to promote conspiracy theories under his own handle, they’ve been replaced by a never-ending slate of no-name companies offering inexpensive mail order products that often ship directly from China.

‘In recent months I’ve been deluged with come-ons for an enticing (but not entirely believable) miracle drain cleaner, a remote control airplane that supposedly can survive being dunked in water, a cardboard cat toy, a high-tech beach blanket, a terrifying-looking pool floatie for infants, an equally terrifying Donald Trump bobblehead doll, and—I kid you not—a Bluetooth-connected penis ring.’

‘What happened? In short, Twitter has seemed to respond to the advertiser shortfall by drastically lowering its standards and its prices. Stepping in to take advantage have been fringe brands and—no offense to penis ring purveyors—ones that wouldn’t have made it through Twitter’s content restrictions in the past. (Sex toys and ads for pay-per-date dating sites, for instance, are still banned in theory, though I can tell you that some are sneaking through.) Twitter responded to a request for comment as it usually does: by sending a poop emoji.’

We’re still negative cash flow, due to ~50% drop in advertising revenue plus heavy debt load. Need to reach positive cash flow before we have the luxury of anything else.

— Elon Musk (@elonmusk) July 15, 2023

Can AI teach itself the ins and outs of a writer’s style … and replace him?

That’s what New Yorker’s Kyle Chayka tried to find out in a feature for the magazine last week.

Chayka had AI firm Writer train a model on 150,000 words of his work. Could the model replace him?

‘Writer has relationships with companies such as the consulting firm Accenture, the technology company Intuit, and the lingerie brand Victoria’s Secret; commissions for customized models run in the seven figures. (Mine was created as an experiment, free of charge, without some of the intensive features that a corporation’s version would include.)

‘With the help of Writer’s tools, the company hopes, a smaller number of human writers assisted by machines will accomplish the work of many, cutting down costs and increasing productivity in the composition of everything from product descriptions and tweets to C.E.O. messages, investors’ memos, and blog-post headlines.

‘In a March report, Goldman Sachs concluded that three hundred million full-time jobs worldwide are vulnerable to this form of A.I. automation, the majority of them desk jobs. Alshikh speaks of the service as a kind of assembly line for language. “We had the Industrial Revolution; now we have this,” he said.’

If that’s the new Industrial Revolution, sign me up as a Luddite.

‘What, exactly, does Writer mean by the label “writer”? Our digitized world runs on filler text: avalanches of words and phrases written to optimize Web sites for search engines, to use as tags on social-media posts, and to employ in marketing newsletters that spam in-boxes. May Habib, the C.E.O. and the other co-founder of Writer, told me that the platform’s tools will automate the writing of “summaries, metadata, ads, distribution copy—all the stuff you spend time doing.”

‘Victoria’s Secret, for instance, is using Writer to automate product copy for its underwear and swimsuits, but Writer promises something more sophisticated than mass-produced marketplace listings or formulaic e-mail blasts. Its core product, as Habib put it, is “automated insight extraction”—another way of describing the task of thinking, which is arguably the purpose of writing in the first place. As Joan Didion wrote, in 1976, “I write entirely to find out what I’m thinking.” A.I. programs such as Writer aim to supplant that process.’

Chayka then had a great passage on the vitality of writing (unassisted by AI):

‘Writing without the aid of a generative machine might be frustrating, even excruciating, but it does encourage productive logic. If writing is thinking, ordering one’s ideas, generating text with A.I. may be a way to avoid thinking. What is writing without thinking? Maybe it is the definition of that deadening euphemism: content. As I tried to incorporate Writer into my writing process, I felt a little like a gambler pulling a slot-machine lever over and over, in hope of finding the lucky combination of phrases that communicated something like what I wanted to say.’

My new feature for @NewYorker — I had an AI company called Writer train a custom model on 150,000 words of my writing in order to copy my personal style. Then I tried to replace myself with it. https://t.co/wWCAqm7RzV

— Kyle Chayka (@chaykak) July 11, 2023

With the latest unemployment figures out, it pays to revisit an interesting speech incoming RBA governor Michele Bullock gave last month.

The speech was titled ‘Achieving Full Employment‘ and contained the admission that the central bank expects unemployment to rise in its pursuit of disinflation.

Asked if there’s a risk unemployment could return to pre-pandemic levels or higher, Bullock responded:

‘Well, we hope that’s not the case and we’re not aiming for that. A couple of points to make. The labour market is lagging. We do know it lags and we do know that consumption has come off quite a lot. So the question is: is it just a matter of time before the labour market starts to ease off or, as you are suggesting, we just haven’t put interest rates up high enough yet?

‘I mentioned in my speech that we are aiming to bring inflation back to target with a slightly longer period than countries overseas and, in many ways, it might be much easier just to jack up interest rates; because official cash rates equivalent overseas are higher than they are here in Australia. We are hoping that we can bring inflation down a bit more gradually, keep inflation expectations anchored and keep at least – the unemployment rate will have to rise but, hopefully, not – we think, actually, probably the unemployment rate was above the NAIRU before the pandemic.

‘We think there was lots of evidence that suggested that it could come lower; 4½ probably looks, we think, maybe in the ballpark. So, yes, that’s an issue that we’re worried about and the risk is on the upside that we don’t clamp down on inflation soon enough. Having said that, the indicators we look at in terms of inflation expectations, short-term and long-term expectations, at the moment still remain pretty anchored, but we’ll be watching those very, very closely in terms of our thoughts on our next decisions.’

 

The market moves quick.

After the latest figures from the ABS showed the national unemployment rate remained steady at 3.5%, the interest rate futures market put the chance of an August rate hike at 55%.

That’s up from a 36% implied probability just before the ABS release.

Australia’s unemployment rate remained at 3.5% in June (seasonally adjusted).

Employment rose by around 33,000 people, with the employment-to-population ratio at a record high of 64.5%.

Australian Bureau of Statistics’ Bjorn Jarvis said the latest figures ‘reflect a tight labour market in which employment has recently increased in line with population growth.’

That will both please and unsettle the Reserve Bank, whose dual mandate is price stability and full employment.

In its latest board meeting minutes, the RBA paid heavy attention to the tight labour market. Here are some snippets from the minutes:

‘The labour market remained very tight, notwithstanding some easing in conditions in the preceding month or so. While nominal wages growth appeared to have stabilised recently, members assessed that the environment would remain conducive to above-average increases in prices and wages under such levels of labour market tightness.

‘Members observed that measures of spare capacity in the labour market remained near multi-decade lows. Employment growth had surprised on the upside in May (following a weak outcome in April) and the unemployment rate had declined to 3.6 per cent. Although economic growth was slowing, the continued tight labour market reflected the usual lags from activity to labour market outcomes.

‘Although labour market conditions were easing, this was occurring more gradually than many central banks had previously forecast and wages growth remained high relative to productivity growth.’

The meeting minutes did suggest the RBA is wary of putting too much weight on labour market data given how laggy it is:

‘They acknowledged that it takes time for households and businesses to adjust their spending and investment plans, and that there were still significant resets of low fixed-rate loans ahead. Similarly, demand for labour typically responds with a lag, which implied that the current tightness in the labour market might also ease.’

South Australia has the highest unemployment rate in Australia at 4.2% in June 2023, with NSW recording its lowest jobless rate on record at 2.9%. Tasmania recorded its equal lowest unemployment rate of 3.5%. #ausecon #auspol #Australia #inflation@CommSec pic.twitter.com/2afbC2pzMh

— CommSec (@CommSec) July 20, 2023

The previous post mentioned the widely circulated leaked Google memo that bluntly admitted neither the tech giant nor OpenAI has a moat when it comes to AI.

You can read the memo here.

Here are some excerpts:

‘We’ve done a lot of looking over our shoulders at OpenAI. Who will cross the next milestone? What will the next move be?

‘But the uncomfortable truth is, we aren’t positioned to win this arms race and neither is OpenAI. While we’ve been squabbling, a third faction has been quietly eating our lunch.

‘I’m talking, of course, about open source. Plainly put, they are lapping us. Things we consider “major open problems” are solved and in people’s hands today.

‘While our models still hold a slight edge in terms of quality, the gap is closing astonishingly quickly. Open-source models are faster, more customizable, more private, and pound-for-pound more capable.

‘They are doing things with $100 and 13B params that we struggle with at $10M and 540B. And they are doing so in weeks, not months. This has profound implications for us:

• We have no secret sauce. Our best hope is to learn from and collaborate with what others are doing outside Google. We should prioritize enabling 3P integrations.
• People will not pay for a restricted model when free, unrestricted alternatives are comparable in quality. We should consider where our value add really is.
• Giant models are slowing us down. In the long run, the best models are the ones

  which can be iterated upon quickly. We should make small variants more than an afterthought, now that we know what is possible in the <20B parameter regime.’

$115 billion by 2030…

That’s the potential gain for the Aussie economy if we fast-track AI adoption, an estimate that suggests the potential for this nascent technology could overhaul productivity for numerous industries.

This is the outlook from the latest research report by the Technology Council of Australia in collaboration with Microsoft.

Suffice to say, they make it evidently clear that this AI trend is here to stay.

The question for investors though, is who will stand to benefit the most?

Because when it comes to modern tech, usually it’s the providers who stand to benefit the most.

Household names like Microsoft, Google, and Apple didn’t earn their status by sheer goodwill. These are giant tech companies that have figured out how to turn trends, like AI, into profit…

So, should you join the bandwagon and just invest in big US tech stocks?

They certainly aren’t bad investments.

But if you’re looking for the kind of exponential growth that AI could deliver, they probably aren’t your best bet. In fact, with the way AI technology is evolving, none of the big tech firms may actually ‘win’.

We could be looking at a race to the bottom, rather than the top…

Unlike a typical piece of hardware or software program, AI must learn to improve. It needs input from not only the team developing the algorithm, but also the users who will eventually use it.

This is why, back in May, a leaked internal memo from Google caused a bit of a stir. Titled simply ‘We Have No Moat, And Neither Does OpenAI’, it got to the heart of this dilemma.

Google’s AI team had quickly realised that open-source AI projects were scaling faster than they ever could. The vast contribution from different developers and users was dwarfing the kind of manpower that even a big tech firm could muster.

All you had to do was look at the difference between DALL-E and Stable Diffusion. These two AI image generators largely do the same thing — create a digital image from a text prompt — but the key difference is that Stable Diffusion is open-source.

That difference led to far more adoption and use which, in turn, improved the AI. With more people using Stable Diffusion, the AI was able to learn faster than its key competitor.

And therein lies the big conundrum of AI.

How can you monetise AI when it’s going to be bested by a competitor that offers it for free?

No one can build a moat.

https://www.moneymorning.com.au/20230720/how-to-invest-in-ai-its-not-as-easy-as-you-might-think.html

Flight Centre [ASX:FLT] is up 4% after upgrading its profit guidance.

Flight Centre now expects underlying EBITDA to come in between $295 million and $305 million for the twelve months ending June 2023.

The midpoint of the upgraded guidance reflects a 7% improvement on FLT’s previous guidance and would represent a $483 million turnaround on FY22’s underlying loss of $183 million.

Total transaction value for FY23 is expected to come in at $22 billion, up 115% on FY22. This would market Flight Centre’s second-strongest full year result behind FY19.

FLT managing director Graham Turner said demand has ‘generally rebounded’:

‘Looking ahead, our expectations are that leisure travellers will continue to prioritise holidays and experiences over other areas of discretionary spending, as we have seen in the past and as evidenced by the consistent year-on-year growth in outbound travel in large and important markets like Australia.

‘In corporate, we expect that the large volume of new business that we continue to win – both from competitors and accounts that were previously unmanaged – will offset the impact on TTV flowing from lower-than-normal client spend.’

 

Here’s an interesting chart from investment research entity Game of Trades.

This year, the US technology sector’s valuation premium to the S&P 500 rose without a commensurate lift in earnings expectations.

Tech is at highest relative valuation against the S&P 500 since the Dot Com bust, despite falling 12-month forward EPS

A thread 🧵 pic.twitter.com/dpym3K7LFO

— Game of Trades (@GameofTrades_) July 18, 2023

According to Game of Trades, US tech is currently the most expensive it has been since the GFC, trading at 1.4 times the S&P 500.

The only time it was more expensive?

The Dot Com bubble…

The Magnificent Seven stocks in the US are ‘literally holding up the entire market’, according to the Kobeissi Letter.

You can't make this up:

The S&P 7, a handful of technology stocks, is now up an incredible 58% this year.

Meanwhile, the remaining S&P 493 is up just 4%.

AI hype and technology stocks are literally holding up the entire market.

Markets really believe AI is the next big thing. pic.twitter.com/MgL48sD03Y

— The Kobeissi Letter (@KobeissiLetter) July 18, 2023

The reason for Zip’s falling active customer count may have to do with falling app downloads across the BNPL sector.

Two days ago a Bank of America report showed consumer downloads of buy now, pay later apps fell again in the latest quarter, the third straight quarter of year-on-year declines.

Average daily BNPL app downloads globally fell 22.8% YoY. Zip was part of the BNPL cohort tracked by BoA analysts.

It seems BNPL is maturing as a sector … and trudging toward a customer adoption plateau.

On a monthly active user basis, Klarna remains the most popular BNPL provider globally, accounting for 58% of monthly active users.

Afterpay is second, with 22.8%.

Zip is fourth, behind Affirm, at 4.4%.

Buy now, pay later.

What a frenzied era that was.

Now, BNPL and BNPL stocks have been relegated to cautionary tales or, worse yet, forgotten tales.

Today, the largest remaining BNPL firm on the ASX — Zip [ASX:ZIP] — is trying to rekindle interest with a 4Q23 results update titled ‘Zip continues to deliver’.

ZIP shares are currently up over 11%.

What is the fintech continuing to deliver?

In the June quarter, revenue rose 21.1% to $193.8 million year on year. Transaction volume rose 6.4% YoY to $2.3 billion.

Active customers at quarter end totalled 6.2 million, down 3.5% YoY!

At the end of June, Zip had $57.3 million in available cash and liquidity. Is that enough cash to ‘continue to deliver’? Zip said the cash is ‘sufficient … to achieve group cash EBTDA profitability during 1H24.’

Source: Zip

ASX #BNPL $ZIP open 11% higher on Thursday after a 4Q23 results update titled 'Zip Continues to Deliver'.

While Zip continued to deliver solid YoY revenue growth of 22.5%, transaction volume growth stalled and active customers fell. #ASX $ZIP.AX #BNPL pic.twitter.com/E5wNY7kxg1

— Fat Tail Daily (@FatTailDaily) July 20, 2023

Good morning!

And welcome to earnings season as things really kick into gear today.

We’ve got reports from Netflix, Carvana, and Tesla overnight.

And locally we’ve got the likes of BHP, Nuix, Zip, Flight Centre, and Mineral Resources reporting.