☀️☕️ The Fight for AI Dominance: Competition for ChatGPT

📝 Focus

• Competition for ChatGPT

📊 In the Markets

• Powell and Pill

• Luxury Stalls

📖 MoneyFitt Explains

🎓️ Short Covering and Short Squeezes

📚 What We’re Reading

📝 Focus

Our guest writer decided to investigate OpenAI’s ChatGPT first hand from a coding perspective to understand the landscape better. ChatGPT, which stands for Chat Generative Pre-trained Transformer, is a large language model-based chatbot developed by OpenAI and launched almost a year ago on November 30th, 2022. It is based, surprisingly to some, on transformer architecture originally developed by Google.

Competition for ChatGPT

We tried to understand ChatGPT better so I enrolled myself into a coding escapade to enhance my Natural Language Processing (NLP). 

For the uninitiated, teaching the computer the English language is harder than teaching a child learning the language. For example: “Good job” and “Good job! You just ruined everything” has the same meaning for a simple NLP model. 

That is why we need a large language model (LLM) such as ChatGPT that uses billions of pages of text to train the model. 

..... ▷ On top of that, the model has more than 100 million neural networks and the next version will see more than 50% more neural networks. 

But why has monthly usage for ChatGPT been stagnant during the past 6 months?

..... ▷ The more pages one uses to train the NLP model, the more computing power is needed. If we move from 100m neural networks to 150m neural networks, the increase in computation power will increase tremendously. 

Naturally, that is why the hardware engine for NLP will benefit – that is why Nvidia has benefited from this rising trend.

..... ▷ Since OpenAI’s generative AI tool ChatGPT exploded on the scene a year ago, the technology has been an area of fierce competition between tech giants Microsoft and Google, as well as Meta and start-ups like Anthropic and Stability AI. 

Building an AI model at the same scale as those companies comes at an enormous expense in computing power, infrastructure and expertise.

..... ▷ From a markets perspective, given the stiff competition and the rapid build up of competition amongst NLP entities such as ChatGPT, sticking with chipmakers Nvidia and maybe AMD would be the obvious choice. For one, competition is not as fierce in this segment. 

Palantir’s business model, helping customers to integrate data from disparate sources and to analyse it to identify patterns and trends, may also be more sustainable.  

Guest writer: Woo FC, a veteran investment manager with over 25 years of Asia and global market experience. This article is for information only and not investment advice. The writer may have long or short positions in the companies mentioned above. All opinions are his and his alone. Please see the important disclaimer at the bottom.

🇸🇬 Singapore: Let’s Get MoneyFitt!

📊 In the Markets

European markets closed higher on Thursday, driven by strong corporate earnings. The pan-European Stoxx 600 reversed its early losses to rise by almost a percentage point at the close. Industrials were the top gainers, climbing 2.5%, while travel and leisure stocks declined by 2%.

In the Asia-Pacific region, most markets edged higher, with Chinese data revealing a faster-than-expected drop in consumer prices to -0.20% for October compared to a year ago, though the move is heavily driven by pork prices, down 30% on the year.

Core inflation, which strips out volatile food and energy prices, is still in positive territory at +0.60% (though that’s down from +0.80% the previous month… and still dangerously close to deflation.)

All eyes on the world’s biggest annual shopping festival, Singles Day, which starts tomorrow on 11.11. This year’s week-long retail blowout is seeing e-commerce players offering enormous discounts to suck shoppers into opening up their wallets.

US stocks ended an eight-day winning streak, while Treasury yields surged as prices fell following Federal Reserve Chair Jay Powell's caution about relying too much on positive inflation data (below).

And US banks have seen a decade-high increase in delinquent commercial real estate loans. Factors like rising interest rates, economic uncertainty, and remote work have heightened pressure on property owners, with past-due loans surging 30% to $17.7 billion in Q3 2023. WeWork’s bankruptcy won’t help matters.

And the actors’ strike is now over, putting an end to a historic strike that has lasted 118 days! SAG-AFTRA has reached a tentative agreement for a new three-year contract with the Alliance of Motion Picture and Television Producers (AMPTP).

Powell and Pill

Somehow surprising traders, considering recent remarks by other FOMC voters, Federal Reserve Chair Jay Powell stressed at an IMF meeting on Thursday that the mission to return inflation to the 2% target is far from over. He cautioned against misinterpreting positive price data, though he did pat himself on the back (a bit) over the easing of price pressures.

Powell emphasised the need to move cautiously, balancing the risk of being misled by favourable data and the risk of over-tightening (or keeping rates too high for too long.) Benchmark interest rates remain at 22-year highs.

Meanwhile, across the pond, Bank of England Chief Economist Huw Pill said that it was essential that UK interest rates stay at current levels in order to tame inflation, a jarring shift from Tuesday, when he remarked that market expectations for cuts from next summer were “not unreasonable”.

..... ▷ Powell and Pill's statements reversed a narrative that had taken hold in recent weeks that a rate hike was around the corner, if not quite imminent. 

Stories sometimes emerge to explain moves in the markets rather than the other way around, and there are some signs that large scale Treasury market short covering 🎓 led that (quite reasonable) narrative. 

..... ▷ Either way, it triggered selling in both stocks and government bonds on both sides of the Atlantic.

As bond yields move in the opposite direction to their prices, the 30-year US Treasury yield rose by 0.12 percentage points to 4.78%, and the 10-year yield climbed 0.13 percentage points to 4.64%. 

The yield on 10-year gilts (UK sovereign bonds, denominated in Pounds Sterling) increased by 0.03 percentage points to 4.27%, with 2-year gilt yields up 0.02 percentage points to 4.64%. 

(A ransomware attack on the Industrial and Commercial Bank of China, China’s largest bank by almost all measures and second only to JPMorgan in global rankings by market value, disrupted Thursday’s trading in Treasuries, including the 30-year auction.)

..... ▷ Powell noted the remarkable resilience of the US economy this year despite significantly restrictive policies. 

While there are some early signs of a cooling labour market (Thursday data showed jobless claims down slightly), he refused to say that interest rates are sufficiently restrictive, stressing that the Fed’s monetary policy response could still be to tighten given the risk of stronger rather than weaker growth. 

Gita Gopinath from the IMF, at which Powell was speaking, also warned against premature easing of monetary policy.

..... ▷ Huw Pill emphasised the need for continued monetary policy restraint to combat inflation, but that maintaining the current restrictive interest rates should suffice.

Though a clear pullback from his dovish remarks on Tuesday, even holding UK rates steady could be seen as a win considering consumer price inflation in September came in at 6.7%, the highest among large advanced economies. 

Although the BoE expects a big drop in October’s CPI, due out next week, it has said it will likely take another two years for it to get to the BoE’s 2% target.

Luxury Stalls

Tapestry, the luxury group, known for brands like Kate Spade and Coach, trimmed its full-year sales forecast downwards due to weak demand. It now anticipates just a 2 to 3 per cent revenue increase for 2023, down from an earlier projection of 3 to 4 per cent. 

In its latest results, Tapestry's first-quarter profit beat the best guesses of Wall Street’s Finest, with earnings per share at 93 cents vs estimates of 90 cents. But it fell slightly short on the “top line”, with revenue at $1.51 billion, driven by a 3% rise in Coach sales but a 6% drop for Kate Spade and a precipitous 19% decline for Stuart Weitzman.

..... ▷ Tapestry is relying on higher prices for its handbags and shoes to maintain margins amid sluggish demand in North America and China. 

Although the gross margin increased by 250 basis points, the company expects 2024 revenue of about $6.7 billion, lower than the initial goal of nearly $6.9 billion. 

..... ▷ In August, Tapestry announced the acquisition of rival Capri, the owner of Jimmy Choo, Versace and Michael Kors, which is set to close only next year. Capri's own second-quarter revenue of $1.29 billion missed expectations.

..... ▷ The merger does have some fashion and supply chain logic as all three defined affordable American leisure-glamour through the 1990s and 2000s. 

To put things in perspective, the two companies and their six brands generated a combined $12bn in revenues in 2022 compared to industry giant LVMH, with 75 brands (including Louis Vuitton, Dior and Fendi) reporting $87bn and Kering (Gucci, Bottega Veneta, Saint Laurent, Balenciaga etc) with $23bn.

But under Tapestry's Stuart Vevers, Coach, once a bit blah, seems to have been adopted by the fast-growing and faster-spending Gen Z, who will make up 40% of the luxury goods market by 2035, so there's a path for Tapestry if it can execute."