The New York Fed published the first of regional manufacturing surveys this morning, and results were disappointing.  Whereas last month saw a slightly expansionary reading of 1.1 in the headline index, the August reading fell firmly back into contraction at a level of -19 far exceeding forecasts of -1.

In the table below, we show each category of the report. As shown, the drop in the headline number was almost entirely driven by significant deterioration in new orders, shipments, and employment metrics.  Breadth otherwise was actually fairly positive.  As for six month expectations, readings across the board have been much healthier. In addition to significant increases month over month (many of which rank in the top decile of historical monthly changes), these readings are not as historically weak as their corresponding levels for the current condition indices.

As previously mentioned, the big drop in the headline index was largely driven by weakness in new orders and shipments.  Each of those (as with the headline index) fell by more than 20 points month over month which ranks in the 3rd percentile of all monthly moves.  That shift from slightly expansionary to historically contractionary readings is another bout of volatility in these readings consistent with big swings in previous months. Amidst that volatility, these readings have generally pointed to the side of demand having weakened, but expectations have begun to move in the opposite direction.  As shown below, expectations indices for new orders, shipments, and unfilled orders have all reached the highest level since March 2022.

Both prices paid and received rebounded in August with those month over month increases coming in the 87th and 91st percentiles, respectively, of all monthly changes. In spite of those increases, that overall picture of prices trending lower remain in place.

As mentioned earlier, aside from new orders and shipments, employment metrics were the other point of weakness for current condition indices.  However, number of employees is the most elevated category of all expectations indices after a 96th percentile month over month increase in August.  Meanwhile, both capital expenditures and technology spending likewise experienced large month over month jumps in August. All combined, that would indicate a dramatic turnaround in manufacturing firms spending plans.

Major retailers are set to report earnings over the next couple of weeks as the Q2 reporting period winds down.  Before highlighting a list of the names set to report, below is a look at the performance of the “Bricks and Mortar” Retail index run by Solactive-ProShares since COVID hit in February 2020.  Already on death’s door prior to COVID due to the “bricks to clicks” trend of shoppers ditching trips to stores for supposedly more convenient online shopping, pandemic lock-downs were supposed to be the final nail in the coffin for physical retail stores.  Fast forward to today, and you may be surprised to see that brick-and-mortar retail has actually outperformed the S&P 500 by more than 50% since COVID hit.  As shown below, the Brick and Mortar Retail index did fall more than SPY during the COVID Crash in February and March 2020, but the bounce back for retail was much more pronounced coming out of COVID in late 2020 and 2021.  While the retail index has generally trended sideways for the last two years now, so has the S&P 500.  At this point, the Brick and Mortar index is up 71.6% since 2/19/20 on a total return basis compared to SPY’s total return of 39.1%.  Just when investors think they have a check-mate situation, the market always seems to have a counter move.

As shown below, more than half of the major stocks in the Brick and Mortar index are set to report by the end of August.  Target (TGT) and TJX (TJX) will report ahead of the open tomorrow, followed by Walmart (WMT) on Thursday morning.  Other big names like Lowe’s (LOW), Dick’s (DKS), BJ’s (BJ), Foot Locker (FL), and Ulta Beauty (ULTA) will report next week.

Looking at the table, some of the best performers in the group this year have been names like Dick’s (DKS), Lowe’s (LOW), Walmart (WMT), Ollie’s Bargain (OLLI), Signet Jewelers (SIG), and Costco (COST), while names like Target (TGT), Foot Locker (FL), Dollar General (DG), and Walgreen (WBA) have gone in the opposite direction and traded lower.  Over the last ten years, three names on the list are up more than 500% — Lowe’s (LOW), Costco (COST), and O’Reilly Automotive (ORLY) — while AutoZone (AZO) is currently up 499.2%.

Alongside other risk assets, metal commodities have likewise had a rough go of it in August.  As we noted in Friday’s Bespoke Report, the single worst performing asset month to date has been silver. As shown below, front month silver futures have quickly pulled back to the bottom of the uptrend channel that has been in place for the last year or so.

As for gold, this spring saw another unsuccessful retest of the 2020 highs, with a “triple top” now formed.

Turning to the industrial metal copper, once again, performance this month has been lackluster. This month’s drop in copper is putting to the test the uptrend off of the COVID Crash lows.

With weakness in both copper and precious metals, the relative strength line of copper versus gold has been fairly stable. As indicated by a falling and negative line in the chart below, copper has underperformed gold over the past five years, albeit more recently the line has not made any major shifts in trend.

The writing has been on the wall all year – Microsoft beat Google to the punch, and despite its past dominance, with the launch of ChatGPT in late 2022, Google was destined to take a backseat to Microsoft in the AI boom. The list of articles below is just a sampling of the ink and pixels that have been spent documenting the impeding collapse of Google and the rise of Microsoft in online search and business productivity tools:

“Thanks to OpenAI, Microsoft is beating Google in the artificial intelligence game” – Vox, 1/26/23
“Microsoft packs Bing search engine, Edge browser with AI in big Challenge to Google” – Reuters, 2/7/23
“Thanks to ChatGPT, Microsoft can finally beat Google” – Business Insider, 2/7/23
“‘AI First’ To Last: How Google Fell Behind In The AI Boom” – Forbes, 2/8/23
“Investors’ query: Can Google answer Microsoft’s AI threat” – AP News, 2/8/23
“How Google Ran Out of Ideas” – The Atlantic, 2/16/23
“How Google Became Cautious of AI and Gave Microsoft an Opening” – Wall Street Journal, 3/7/23
“Google Devising Radical Search Changes to Beat Back A.I. Rivals” – New York Times, 4/16/23
“Google Lost $57 Billion in One Day, Because Microsoft is Leading the AI Race” – Robb Report, 4/18/23
“Microsoft ‘holding a lot of the cards’ in AI-powered search war with Google” – Yahoo Finance, 4/26/23

For much of the first half of 2023, shares of Microsoft (MSFT) outperformed the overall market and Google parent Alphabet (GOOGL) based on the sentiment of the articles above and ones like them. Back in early February, when Alphabet rushed its AI answer to Microsoft’s Bing powered by ChatGPT, the company lost more than $100 billion in market value in a single day after Bard gave a factually incorrect answer during its introduction to the world.  It looked like a major PR disaster for Alphabet management, but Bard’s error shed light on a a key aspect of AI chat bots in general, namely that they all have a tendency to give wrong answers.  Even when it comes to queries involving seemingly straightforward arithmetic, ChatGPT often gets the answer wrong. 

Just as ChatGPT increasingly gives wrong information, the obituaries for Google also turned out to be wrong, as last week, shares of GOOGL surpassed MSFT in terms of performance since the launch of ChatGPT.  Through late morning on Monday (8/14), GOOGL was up just under 30% (29.6%) compared to MSFT’s gain of 26.4%.  Maybe it’s just a coincidence, but we found it interesting that the most recent peak in MSFT’s stock came within days of the headline below.

“ChatGPT users fall for first time, spurring questions about AI boom” – Washington Post, 7/7/23