The Weekly Random Walk – June 10, 2024 From Stephen Colavito
An Aggregation of Various Economic, Market Research, and Data
One (Is the Loneliest Number)
“One” is a song written by Harry Nilsson and made famous by Three Dog Night, whose recording reached number five on the US Billboard Hot 100 in 1969 and number four in Canada. Nilsson said he wrote the song after calling someone and getting a busy signal (some of you reading this may not know what a busy signal is). He stayed on the line listening to the “beep, beep, beep, beep…” tone, writing the song. The busy signal became the opening notes of the song.
This week, we will delve into the significance of the 'One' theme, exploring how single stocks, single themes, and single economic data profoundly affect markets and economies.
“One is the loneliest number that you’ll ever do.”
A single stock, Nvidia is now a dominant force in the equity market. This might sound like a bold claim, but when we examine the influence of this stock on various indexes, it becomes clear. Consider the S&P 500, a widely used benchmark; Nvidia's performance has contributed to a staggering 45% of the S&P 500’s gain year-to-date. That's almost half, a fact that should give you pause. If your portfolio didn’t include this stock, your gains this year might be less than expected (or none at all).
Let's delve into the numbers on Nvidia; over the past 35 trading days, NVDA has seen a market capitalization gain of over 1 trillion. To put this into perspective, this 6-week gain is greater than the total market cap of Berkshire Hathaway, a company that Warren Buffett has spent six decades building. This is not your average market movement.
The rise of Nvidia has been so extraordinary that it's only been matched by one other company with a large market cap: Enron. Now, we understand that AI chips are a far cry from trading energy futures, and we believe there is little in the way of business comparisons. However, from our perspective, the charts are eerily similar, which should make us all sit up and take notice.
“Two can be as bad as one; it’s the loneliest number since the number one.”
Nvidia's success is not a fluke; it's driven by a single, powerful theme: AI. The rapid expansion of AI is significantly impacting data center suppliers, manufacturers, and companies involved in the US electric grid. AI data centers are driving unprecedented growth in computing power and storage capacity, leading to a surge in energy consumption. These AI data centers consume significantly more power than traditional ones, posing challenges for the electric grid. However, investors see this as a promising trend, expecting it to lead to substantial earnings growth for companies involved in these sectors. The Goldman Sachs AI Data Center & Electrical Equipment and GS Power Up America equity baskets have outperformed the S&P 500 this year, up 42.1% and 25.6%, respectively. The future is bright for AI.
We have always liked selecting utility stocks in areas with positive migration and stayed away from high-regulation states or people leaving (more on that later in the note). Still, we are expanding our list of companies that also service data centers.
Lastly, a longer-term issue that must be watched is how the current administration, which has been so anti-fossil fuel and pro-alternative energy, can reconcile the energy needed. All the research we have read (so far) shows that alternative energy is unstable at best but is far below the current power needs around the country. So, adding additional data centers will put tremendous stress on the system.
“Yes, it is the saddest experience you’ll ever know.”
On May 29th, the FDIC Quarterly Banking Profile for Q1 was released, and it’s not great news for banks outside of the “too big to fail.” The big headline is that unrealized losses on investment securities for banks jumped to 517 billion in Q1 2024. This is 39 billion higher than the 478 billion reached in Q4 2023.
The surge was driven by higher residential mortgage-backed securities and office building commercial real estate losses held by banks due to rising mortgage rates and stay-at-home workforce. The first quarter also marked the 10th consecutive quarter of unrealized losses, an even longer streak than during the 2008 Financial Crisis.
This happens despite loose liquidity conditions from the Treasury. Still, unfortunately for these banks, the mark-to-market continues to move lower as “higher for longer” continues.
We are not sure that the crisis since Silicon Valley has ever really ended.
“Now I am spending my time just making up the rhymes from yesterday.”
Last week, we saw the jobs report, which confused the markets because it appears that the BLS is just making up headline numbers to make the administration look good (and then revise them the following month). Here are a few examples:
Despite the talk of all the job growth in the US, the stunning statistic is there has been ZERO increase in the jobs for US citizens in over five years. That’s right, ZERO. In fact, native-born US workers have actually lost 1.4 million jobs since October 2019, while foreign-born (legal and illegal) have gained over 3 million jobs.
We believe there are three simple reasons for that data to be valid.
1) Corporations with higher minimum wages (in California, now up to 20 dollars an hour) want stable employees needing a job. This tends to be the case with foreign-born employees who depend more on employment (based on data from ADP) because…
2) You can be an illegal immigrant in deportation proceedings and get authorization to work and stay in the US for up to five years before your deportation hearing returns to the courts (if at all).
3) Unemployment (in most but not all) states is only offered to native-born workers, so illegals are more inclined to take any job and not be picky.
So, corporations want cheap labor via illegal workers who are dependent on the job to stay in the US.
This brings us to the jobs number reported last week. The BLS reported that in May, the US unexpectedly added a whopping 272 thousand jobs to the payroll (not workers, but jobs) since the establishment survey double-counts multiple jobs even if held by the same employee, which was 50% higher than the consensus forecast of 180 thousand and 14 thousand more than the highest estimate (258K from Regions Bank).
However, the paradox to the number was that while the payroll number was clearly and purposefully stellar, the unemployment rate (U3) unexpectedly increased from 3.9% to 4.0%. So, why are more people unemployed if the US adds all these new jobs?
The answer (in part) is one of the more interesting aspects of the employment data. Those new jobs come through part-time work while full-time work is being reduced. The chart below shows that 1.2 million full-time jobs have been lost and replaced with 1.5 million part-time jobs.
So, looking through the BLS numbers, it makes more sense why, despite the spin from Washington, most don’t like the direction of the US economy. We used some of this data when speaking to a lawmaker last week who didn’t understand the disconnect, and we sent them a recent study from the Urban Institute, which did a poll in conjunction with the National True Cost of Living Coalition. In that study, we see some real concerns about the economy.
1) 65% of middle-class Americans believe they are struggling financially
2) Regardless of income level, almost 60% of Americans believe (those polled) they are going through financial hardship
3) Even more concerning is they do not anticipate a change in their condition for the rest of their lives
4) 33% of Americans face extreme stress about their debt with little hope of saving for the future
5) 32% are concerned about paying for unexpected expenses
The long and short of this study is that the American consumer is struggling and is extremely sensitive to price increases (inflation). This is not good news for the long-term condition of the economy unless something changes.
That song is a gold record!
Although gold was down for the week, it is still up over the last quarter and year-to-date. We have spoken about countries buying gold bullion by the ton and storing it away. Our foes lead the buying of precious metal in the West as China continues to buy it and dump US treasuries.
There are many reasons why they would do this: 1) the US deficits and debt, 2) the move to BRICs and away from the US-led petrodollar and SWIFT system, and 3) the potential invasion of Taiwan, which would, in all likelihood, be a deadly war with the United States. We are still bullish on gold and silver.
More than “One” Bullet Point
We don’t want our bullet points to be lonely, so we have one theme but multiple points.
Oil futures have fallen over the past several weeks as OPEC+ ministers have signaled their intention to increase production in the fourth quarter of 2024. However, they also announced that voluntary output cuts amounting to 2.2 million barrels per day (b/d) would be extended until the end of September but would be phased out over the year's final quarter and into 2025. This is a shift away from their previously focused agenda of depleting excess inventories and driving prices toward $100 per barrel. Good news for inflationary pressures.
The potential for lower gas prices is good news for those driving combustion engines as their cost to fill up their tanks should be a little lower in the coming months. However, those in EVs who have been laughing at us “combustion drivers” may be crying soon (mainly if they live in California). Since so many people now drive EVs in California, the state is losing gas tax revenue and facing a 55 billion dollar deficit. So, the state has decided to consider additional taxes, including a tax-by-the-mile plan for EVs using a GPS monitor. Being taxed by the mile and monitored (with zero privacy) would have been good to know BEFORE buying that big version of a golf cart. Maybe that Hummer SUV isn’t such a bad option after all.
Staying with the dysfunctional state of California, on June 2nd, the LA Times wrote an op-ed titled “Californians don’t have to accept skyrocketing electric bills. Here’s how to fight back.” This article suggests that the state takes over utility companies like PG&E because “profit margin isn’t part of the equation.” First, we wonder if the LA Times realizes how anything Sacramento touches turns into a hot mess (look at what the state has done to a reasonably simple rail project that costs taxpayers billions and won’t be done until 2023). Secondly, (and the more significant issue) is that public ownership is (in simple terms) socialism and falls under the Fifth Amendment, which concludes, “nor shall private property be taken for public use, without just compensation.” As best we can tell, the valuation of the two biggest electrics is approximately 130 billion dollars. The state already owes 71.7 billion in debt issuance (bonds) and, as we noted in the last bullet point, currently has a deficit of 55 billion dollars. The state is one of our favorite places (it’s beautiful other than Skid Row); we feel bad for the taxpayer. Good luck to all of them; we hope the views are worth it.
The theme of these bullets is one of conventional energy versus alternative energy. We love “Mother Earth” and hope that, as humans, we are responsible for our environment; however, California is a clear example that we cannot jam alternative energy without many years of transition; otherwise, it’s going to bankrupt the federal government, states, and their taxpayers. The high energy cost in their state is due to the “clean energy transition regulation” and has the highest residential rate at 32.47 cents per kilowatt hour (kWh). In contrast, a state without alternative mandates, like North Dakota, has the lowest at 10.44 cents per kilowatt hour (kWh). Both states are moving toward solar and wind energy; one has too much regulation, and the other doesn’t. Those are just facts, not opinions.
The market continues to be very narrow, and we have not changed our stance about caution with new money (we are in a “yellow-light” frame of mind). For those buying individual equities, we suggest stop losses as we have seen many stocks drop below their 200-day moving average (DMA) despite higher index levels.
Have a great week.
Stephen Colavito
Chief Investment Officer
San Blas Securities
stephen.colavito@sanblas-advisory.com
General Disclosures
This research is for San Blas Clients only. The opinions represented in this research are those of the CIO, not advisors or officers of San Blas Securities. This research is based on current public information that we consider reliable, but we need to represent it as accurate and complete, and it should not be relied on as such. The information, opinions, estimates, and forecasts contained herein are as of the date hereof and are subject to change without prior notification. We seek to update our research as appropriate. Some research can and will be published irregularly as appropriate in the analyst’s judgment.
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