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You’re reading an excerpt from Ryan Dinse’s piece in The Insider.

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The flurry of hype we’re seeing right now is around generative AI capabilities.

The ability of AI programs to respond to prompts in a seemingly human way via text, speech, or video.

And, make no mistake, this is a big deal.

As Paul Farnsworth, the CTO of Ultrasound.ai, wrote recently:

‘Generative AI is being used in a wide range of industries, including healthcare, finance, marketing, and entertainment.

‘In healthcare, generative AI is being used to develop new drugs and treatments. In finance, it’s being used to predict market trends and make investment decisions.

‘In marketing, it’s being used to create personalized content and target ads. And in entertainment, it’s being used to create new forms of art and music.’

But the truth is, AI itself is a much broader field.

It’s about getting machines to figure out things ‘on their own’ in a way that humans can’t.

There’s been research going on in some shape or form on this since the 1950s.

But in recent years, it’s starting to have a bigger impact.

For example, Google’s been using DeepMind AI to manage the cooling of its data centres since 2016 with some astounding results.

As ex-Google CEO Eric Schmidt writes in his book, The Age of AI:

‘Although some of the world’s best engineers had already tackled the problem, DeepMind’s AI program further optimised cooling, reducing energy costs by an additional 40 percent — a massive improvement over human performance.’

The efficiencies of AI in making decisions could have wide-ranging benefits.

Goldman Sachs just predicted AI could boost profit margins by 4% across the board over the next decade.

And at the recent Sohn Conference, legendary investor Stanley Druckenmiller said that ‘AI is very, very real and could be every bit as impactful as the internet.’

CNBC reported this week that he’s already piling into several AI plays, as are fellow big-name investors like Bill Ackman and David Tepper.

Like me, they’ve realised the sheer possibilities that AI tech will bring are simply amazing.

And while it’ll take time to get there, I think there are already several compelling themes that will benefit from AI.

The key, as far as I can work out at this stage, is to find the companies that have valuable, novel, and entrenched sources of ongoing data.

As the old saying goes, ‘garbage in, garbage out’, and AI is only as good as the data it’s fed.

That’s one area, but there are several others, some direct and some a little more tangential.

Working out where the ‘best’ opportunities lie will be the hard part.

And yes, there will be fads and bandwagon jumpers in spades. Be wary of any company that just starts adding the words ‘AI’ into their quarterly reports.

It’ll likely be the case that the excitement overtakes reality at some point in markets too.

But always keep this at the back of your head…

There’s a genuine technology here, and it promises to be a game changer in much the same way the internet was.

To me, this is one of those ‘risky fads’ that will end up being the no-brainer investment idea of the 2020s.

It’ll be a fortune maker, the same way the internet was for those who saw the big picture lurking behind the initial hype.

In short, don’t sleep on AI…

UK inflation fell to single digits (hooray?) but continues to thwart Bank of England’s forecasts.

UK CPI fell to 8.7% in April, down from 10.1% in March. But the BoE expected headline inflation to fall to 8.4%.

An accurate forecast continues to elude the central bank, who admitted just yesterday its forecasting failures need to be learned from and corrected.

UK #inflation falls to single digits, but still higher than BoE predicted. pic.twitter.com/2bk72et7Et

— Fat Tail Daily (@FatTailDaily) May 24, 2023

The worry lies in the latest core inflation reading.

Core inflation — which excludes food, grog, tobacco, and energy — actually rose from 6.2% to 6.8%.

 

Here’s an interesting piece from AFR’s James Eyers (who co-wrote a great book on the buy now, pay later sector a few years back).

Eyers has just reported that Woolworths is introducing a new payment method in a bid to circumvent the card networks controlled by the Visa and Mastercard oligopoly.

As Eyers reports:

‘The supermarket has become the first major company to offer customers an option to link their bank account directly to its app, using PayTo functionality introduced by Australia’s new payments platform. The real-time infrastructure has been built by the banks and is operated by Australian Payments Plus.

‘Woolworths is working on enabling the option for in-store payments later this year.’

Why would a supermarket care about introducing cutting edge payment solutions?

Well, Woollies is actually the largest processor of payments in Australia outside the Big Four banks. It processed $60 billion across 1.1 billion transactions last year.

That’s massive!

In March, the RBA’s head of payments policy Ellis Connolly delivered a speech on the shift to electronic payments, noting that cards and mobile devices are surging as the predominant ways Australians pay.

Source: RBA

That speech mentioned PayTo, the key to Woolworths’s plan to shake things up in the payments sphere:

‘We could see a similar wave of retail payments innovation unleashed in Australia through the New Payments Platform (NPP) and its PayTo service. This service provides a convenient and secure way for consumers to authorise merchants to initiate a payment from their account via the NPP. PayTo will modernise the way we make direct debits by giving customers more control.

‘It can also be used by merchants as an alternative to cards for online and instore purchases, using QR codes to make the process convenient for consumers. There are many fintechs developing innovative retail payment services that leverage PayTo.

‘While the service was formally launched in July last year, only one of the major banks met the industry-agreed timeline to make the service available to its customers. It is difficult to promote PayTo to merchants without a strong network of banks offering it. The other three major banks have committed to connecting their retail customers by the end of April and they have indicated that they are on track to meet this timeline. This should deliver the critical mass of consumer accounts for payment services to launch using PayTo.’

Actually, that whole speech by Connolly had nuggets of information on the state of our financial plumbing.

Usually, technological advancements drive costs lower. Not necessarily the case with card and online payments:

‘The trends in card payments I highlighted earlier are putting upward pressure on merchant payment costs. This has been most evident in debit card use. In the past, customers inserted their debit card into a terminal at the point of sale and selected ‘cheque/savings’ for it to be routed through the eftpos network or ‘credit’ for it to be routed via the international networks (Mastercard or Visa).

‘It turns out that most people selected ‘cheque/savings’. The shift to tapping cards and mobile devices, however, has resulted in most debit card transactions being routed to Mastercard and Visa and away from eftpos. With the international networks on average costing around 20 basis points more to accept for in-person transactions, this has resulted in an increase in merchant costs for accepting debit card payments.

‘In addition, the shift to online commerce has contributed to higher payment costs. It costs more to safely process online transactions, but there has also been less competition between the card networks, particularly prior to eftpos entering this market over the past year or so. We have also observed that higher wholesale payment costs are charged for small businesses, and for mobile wallet and online transactions. These wholesale payment costs include: interchange fees, which are paid by acquirers to card issuers; and scheme fees, which are paid by acquirers to the card networks. All these costs are then passed on by the acquirers to merchants. Although these costs are typically not visible to consumers, they ultimately pay for them through higher prices for goods and services.’

Roger Montgomery just published a note saying the Aussie retail sector is one to avoid as the consumer gets squeezed by higher bills and mortgage repayments.

‘We believe consumers under financial duress will double down on their mortgage repayments and energy and utility costs to keep their home and keep it warm but the balancing item will be discretionary spending. It’s the reason the Montgomery Small Companies Fund, The Montgomery Fund, The Montgomery [Private] Fund have been eschewing retailers generally and discretionary retailers in particular.

‘Recently, our friends at Barrenjoey indicated a regular survey of their retail contacts has turned sufficiently bearish to warrant the publication of a note on the subject. Like us, Barrenjoey note the Australian consumer is under “huge” pressure thanks to cost of living pressures and the removal of direct government stimulus. With the latter having a high propensity to be spent in retail the report points to the rapid withdrawal of government stimulus as the precursor to an imminent decline in retail spending.

‘Consumer financial support via, for example, JobKeeper, cost of living support and tax exemptions including the low and middle-income tax offset, has been rapidly withdrawn thanks to the post-pandemic economic recovery and associated inflation. Additionally, inflation has resulted in real wage growth that is 5.2 per cent below pre-pandemic levels.

‘The withdrawal of support has meant conditions for retailers will be leaner in the 2024 financial year. Without financial support for consumers, tax returns will not be the source of liquidity they were in 2022, and the legacy economic conditions include slowing economic growth, eroded savings, ultra-low fixed-rate mortgages rolling over to much higher variable rates, and significantly higher prices for inelastic goods and services such as energy, fuel and other utilities.’

Montgomery then cited some interesting research from Barrenjoey, which compared the current retail cycle to 2011:

‘Specifically, Barrenjoey reminds us 2011 was the year when retailers ‘confessed’ that trading during 2009 and 2010 benefitted from government stimulus. Consequently, during that year, retailers reported earnings downgrades, but the larger driver of share price falls at the time was price to earnings (P/E) contraction. Many retailers ended the year on single-digit P/E ratios.

‘By way of example, Barrenjoey notes Breville’s P/E contracted 22 per cent, Billabong’s P/E fell 58 per cent, JB Hi-Fi’s fell 32 per cent, Harvey Norman and Super Retail Group saw 22 and 24 per cent P/E contractions respectively, and Flight Centre’s P/E fell 43 per cent. In addition to the P/E de-rates, many retailers saw significant falls in their earnings per share. While Breville, Super Retail and Flight Centre reported EPS growth of 10, five and five per cent respectively, the others saw earnings per share declines of between 18 and 57 per cent.

‘When earnings decline and P/Es contract simultaneously, the impact on share prices is compounded. For example, if a company earning $10 per share and trading on 20 times earnings sees both its earnings and its P/E both contract 50 per cent, the share price declines 75 per cent.’

Universal Store’s (ASX:UNI) warning of waning consumer spending in April and May has sent its stock over 25% lower on Wednesday and dragged peers down with it.

Lovisa (ASX:LOV) is down ~8%.

Accent Group (ASX:AX1) is down 7.5%.

Cettire (ASX:CTT) is down ~7%.

Baby Bunting (ASX:BBN) is down 4.5%.

$UNI warning of waning consumer spending in April and May sent its stock over 25% lower on Wednesday and dragged peers down with it.

– $LOV is down ~8%

– $AX1 is down 7.5%

– $CTT is down ~7%

– $BBN is down 4.5% #ASX https://t.co/aW1ZWE3VEH

— Fat Tail Daily (@FatTailDaily) May 24, 2023

 

The financial world lost a big figure this month.

Sam Zell, a self-made billionaire, just died at age 81.

Zell was infamous as a real estate man.

He got dubbed the ‘grave dancer’ early on in his career after he bought up distressed properties in the 1970s. That’s how he made his first killing.

Oddly enough, I just gave Sam Zell’s memoir to my brother to read as he recuperates from an operation.

Dead men tell no tales, but their wisdom can live on if we learn from them.

And I reckon we can channel a bit of Sam Zell wisdom right now!

Let’s dig into why I’m saying that (and putting my money where my mouth is!).

Sam Zell was a short dude, but he had big balls. You have to give him that.

It’s easy to say platitudes like ‘buy low, and sell high’, ‘buy when there’s blood in the streets’, and all the rest of those kind of market cliches.

But to risk your money or, even more risky, borrow money, when the world or industry looks grim….that takes guts!

Sam Zell pulled that kind of move many times over.

Let’s channel his spirit into the asset class he helped create…

Real Estate Investment Trusts (REITs).

Have you heard of these? Probably.

But just in case you haven’t…

REITs hold commercial property in different subsectors of the market.

Think childcare centres, offices, logistics, shopping malls, pubs…you name it, you can usually access it in some way via a publicly listed trust.

These have not been a happy place for investors over the last 18 months.

We don’t need to look far to work out why.

You don’t need me to tell you about how interest rates have gone lately…

Straight up!

It’s been a rate hiking cycle like no other.

This sent REIT shares into a tizz in 2022 because they’re very interest rate-sensitive businesses.

They use borrowed money to buy and hold property assets and capture the potential upside of rent and capital appreciation.

But rising and uncertain interest rate rises make it very difficult for investors to judge their outlook.

One problem is their cash flow takes a hit from higher debt repayments.

And rising rates have the potential to hit occupancy and tenant demand.

2022 was something else, I tell you.

A couple of years ago, I went back and looked at how REITS had done in the previous hiking cycle between 2003 and 2007.

They rose alongside the market in a steady upward march.

History didn’t rhyme at all in 2022.

The XPJ — the property trust index on the ASX — got cut down around 30% between January and September 2022.

That was because the speed of rate hikes was so much faster than 2003–07.

However, what does the life of Sam Zell teach us if not anything?

From crisis comes opportunity!

Let’s look around us now…

https://www.moneymorning.com.au/20230524/grab-some-reit-action-in-the-spirit-of-the-grave-dancer.html

I mentioned Universal Store (ASX:UNI) latest guidance for FY23.

Well, about that.

According to fresh research first reported by Bloomberg, company earnings guidance is wrong about 70% of the time.

That’s quite a feat considering these estimates are ranges, making the misses all the more glaring.

The latest study found that companies offer accurate guidance only about 30% of the time.

This cascades to consensus analyst estimates, which are influenced by firms’ guidance. As Bloomberg then explained:

‘Their inaccurate forecasts, in turn, influence the earnings estimates given by Wall Street stock analysts. That helps explain why only a very low percentage of companies deliver results within analysts’ estimates, according to data compiled by Bloomberg for the S&P 500 over the past 60 quarters. In the first fiscal quarter of 2023, companies in the bellwether index reported earnings in line with estimates just over 3% of the time.’

That last line bears repeating:

In the first fiscal quarter of 2023, companies in the bellwether index reported earnings in line with estimates just over 3% of the time.

Bloomberg: 'Companies offer accurate guidance about 30% of the time. Their inaccurate forecasts, in turn, influence the earnings estimates given by Wall Street stock analysts.' https://t.co/Yd6eXpuZb3

— Fat Tail Daily (@FatTailDaily) May 24, 2023

Youth fashion retailer Universal Store (ASX:UNI) is down nearly 30% and hit a 52-week low on Wednesday after releasing a FY23 trading update.

Interestingly, the numbers shared by Universal seem positive.

The retailer said it expects to deliver ‘record sales in FY23 and material growth in EBIT compared to FY22’.

However, UNI did say the macro environment is ‘deteriorating’, with ‘increasingly clear signs that the youth customer is seeing pressures on their discretionary spending levels.’

The savage market response highlights the adage that markets are always looking ahead … and they’re not liking UNI’s prospects for FY24.

The retailer said trading conditions over April and May ‘further tightened, indicating that some customers are reducing their spending’.

Universal expects this ‘subdued environment’ to continue into FY24.

UNI guided for FY23 underlying EBIT to be in the range of $39 million to $41 million, which is below consensus estimates of ~$46 million.

$UNI is down ~30% and hit a 52-w low on Wed, despite $UNI.AX expecting 'record sales in FY23 and material growth in EBIT compared to FY22'.

However, $UNI is seeing 'increasingly clear signs that the youth customer is seeing pressures on their discretionary spending levels.' pic.twitter.com/xl1STnXqnm

— Fat Tail Daily (@FatTailDaily) May 24, 2023