Smart Investing with Brent & Chase Wilsey Brent & Chase Wilsey

Jobs Report 
The Jobs Report showed the labor market continues to remain on good footing considering nonfarm payrolls rose by 272,000, which easily topped the estimate of 190,000. Strength occurred in health care and social assistance (+83.5K), leisure and hospitality (+42k), professional and business services (+33k), and construction (+21k). Government was also strong as it added 43k jobs in the month. I generally don’t like to see government adding this many jobs as it is essentially an expense to taxpayers and it can detract from showing an accurate picture of the private labor market, which should ultimately drive our economy. The strangest part of the report was the divergence between the establishment survey and the household survey. While the establishment survey showed strength, the household survey showed the unemployment rose to 4% for the first time since January 2022 as the level of people who reported holding jobs fell by 408,000. Wage inflation was also a slight concern as average hourly earnings rose 4.1% compared to last year. This was above the estimate of 3.9% and last month’s reading of 4.0%. Overall, I’d say this report was somewhat complicated with a mix of positives and negatives. I don’t think it provides any evidence for the fed to cut rates, but I also wouldn’t view it as problematic.
JOLTs
The Job Openings and Labor Turnover Survey (JOLTs) showed there were 8.06 million job openings in the month of April. This missed the expectation of 8.4 million and was also below the prior month’s reading of 8.4 million. The number marked the lowest reading since February 2021 and it was well below the peak above 12 million in March 2022. While this all sounds like bad news, I believe this puts us back in line with a more normal labor market. Even with this decline, the labor market is still historically strong and I believe there is further room for it to soften without causing problems. There are still about 1.2 job openings for every available worker, which puts us back in line with where we were before Covid. 
NVIDIA and the S&P 500
There is no doubt that AI has pushed Nvidia to records that are nothing short of astounding. It should be noted that when you include Microsoft, Meta, Amazon, Apple and Alphabet into the equation, these six companies now account for nearly 30% of the value of the S&P 500. Nvidia alone has accounted for close to 35% of the index’s gain this year. Even a powerful freight train eventually gets derailed when it gets going too fast. What could cause Nvidia to fall off the tracks? I see more articles about how the demand and future sales of AI could be overhyped. If that comes to be true, then the earnings estimate for Nvidia will fall, which would cause a deep decline in the stock price. It is currently the king of the mountain and no one can knock it from the top, for now. But no company stays on top forever and competition can come out of nowhere causing the price of chips to be cut dramatically, which also could cause a problem for earnings. Keep in mind Nvidia does not make the chips, they rely on Taiwan Semiconductor to manufacture the chips for them. The contracts that they have are rather secret, but what if Taiwan Semiconductor says they want a bigger piece of the pie? This could really hurt Nvidia’s profits and there’s no other company that can produce the chips at this time. I think it could be a very rocky summer for equities, especially stocks that are trading at valuations that are well above the norm. 
Natural Gas Prices
It was a hot May across the country, except for here in San Diego. We seemed to have some nice weather with temperatures still in the 70s. But with hot weather across the country, it increased electricity demand as people cranked up their air conditioners to stay cool. Before the increase in demand, there was a large inventory of natural gas that brought natural gas prices down to levels not seen in a long time. The reduction in natu

PCE
The core personal consumption expenditures index (PCE), which is the Fed’s preferred measure for inflation did not show much progress in the month of April. Year over year core PCE was up 2.8% which matched the previous month’s reading. If you want to get really mathy with the numbers and move over one more decimal place there was actual a positive move in the number considering it came in at 2.75% vs slightly over 2.8% in the month of March. This would result in the smallest gain since March 2021. Headline PCE which includes food and energy was up 2.7% compared to last year, which also matched last month’s reading and the estimate. While I can’t say the numbers were overly impressive and point to enough evidence for a cut, I also don’t see any reason for the Federal Reserve to discuss rate hikes. My estimate at this point in time is for the Fed to cut once, maybe twice this year. 
Quality Investments 
At our firm, Wilsey Asset Management, we are currently getting out of our second largest holding, which we began investing in back around 2010. I want to explain the long-term history of this not to brag about how some of our clients got a very large return over that timeframe, but to help you understand, what happened over the years to get that type of return. The numbers I’m using while very close are not the real numbers and are for educational purposes only. In 2010 we began investing in this company at around $20 per share. Eight years later it traded as high as $120 per share, along with our clients we were very happy with the gains. Then in 2020 when Covid hit, we saw this equity drop more than 50% to around $50 per share. Fast forward to today and we are currently selling this position around $160 per share. The real lesson here is to explain why we continued to hold even when we were down over 50% in 2020. We always talk about the fundamentals and how in the short term they mean very little, but in the long term they can make a big difference. Each quarter we review the financials and listen to or read the conference calls to see what is going on with that company over the last quarter and find out what management sees going forward. Every Monday we go over all the ratios, growth rates, forward earnings and roughly a total of 25 other numbers to keep asking, is this a business we want to continue to hold? This discipline and strategy is what keeps us on course with good quality companies over the long term. I have said for many years we are not traders; we are long-term investors. I want to emphasize that does not mean we or you should ever hold any equity or any investment blindly long-term without following what that business is doing on a regular basis. 
Short-Term Investing 
If you’re like our firm, Wilsey Asset Management, you may be sitting on a lot of cash as we have made a couple sales this year and aren’t finding anything worthwhile to buy. The advantage this time is short term rates are high so we can invest that money in short-term instruments and receive a roughly 5% rate. Many other people are catching on. Back in 2022 retail investors only owned about $1 billion of treasury bills, at the last count that is now over $16 billion. Investors need to be cautious because there is what is known as reinvestment risk. Today you may be receiving 5%, but then 6 to 12 months from now that could be 3 to 4%. Keep in mind these should not be long-term investments, but rather a holding place until you can find a good long-term investment. Besides the short-term maturity of T-bills and their safety, they are also come with the benefit of being free from state income taxes. There are also short-term ETF’s and money markets that can invest in short term US government securities, but be aware they may not be investing 100% in tbills. Sometimes they invest in short term loans backed by US government securities or repurchase agreements, which are not free from state income taxes. So, enjoy the high

AI Boom
You may have missed the AI boom in NVIDIA, but for patient longer-term investors there could be a good investment opportunity in energy going forward. As more companies begin to use AI, the demand for energy will increase. Keep in mind that this is on top of expected growth in the electric vehicle market and if it continues on in future years, cryptocurrency is also a drain on electricity to mine all those silly tokens. To give you an example on the power needed for AI, a ChatGPT request takes roughly 10 times as much power compared to if one did a Google search. Based on some research from Bank of America, they estimate that the current demand for electricity from datacenters is currently one to two percent, but in the next seven years that could increase to eight percent. There will be some great opportunities for the investor who is looking out 3 to 5 years, if they invest in good fundamentally strong companies. The nice thing about many energy companies is they also pay a decent dividend while you wait for the investment to grow. 
Bond Allocation
When we see potential clients come to our firm for a consultation and we see they have a 10% to maybe 30% allocation of bonds, I just scratch my head and wonder what the broker was thinking. Maybe they weren’t. Even the Bond King, Bill Gross, who managed the PIMCO Total Return Fund and who was largely responsible for bringing the investment firm PIMCO from assets under management of $12 million to around $2 trillion has said he now dislikes bonds and is investing money in other areas. He had some of the best returns of bond fund managers, but it came at time of declining interest rates from 1981 to 2020 that is now over. With long term interest rates at current levels, I believe the best return that investors could hope for is probably the coupon rate which on a 10-year treasury will be somewhere around 4.5%. This will not only hurt bonds; I believe it will also lead to disappointing returns in the old asset allocation model of 60% in equities and 40% in bonds over the next five to ten years. So, if your broker or advisor has part of your money in bonds, you may want to ask why. I would say be prepared for the weak answer of something to do with asset allocation or that it has worked in the past. In other words, they are taking the easy way out rather than doing some hard research for your portfolio going forward. 
Tariffs on Chinese Goods
I was happy to see the Biden administration boost tariffs on Chinese goods from electric vehicles to steel and aluminum. Unfortunately, I’m worried about Newton’s law that for every action there’s an equal and opposite reaction. The Chinese government will probably counteract against these measures by targeting the imports that they receive from us and US businesses. Two that come to mind are Apple’s iPhones and Tesla’s cars. That would hurt these companies and I believe that’s what the Chinese want to do in response. The Chinese economy is suffering and they are producing far more than they can absorb domestically. As an example, they are now producing seven times the number of electrical vehicles they did in 2019 and consumers don’t have the money to buy them. They have also been a big producer of solar cells and they too are up 500% between 2018 and 2023. China has seen their global exports increase by 14%, but exports to the G7 countries now only count for 29% of those exports. This is far below the 48% it was in the year 2000. My guess would be that they are selling more to other third world countries. This means the prices will not be as high as they could get selling to the G7 countries. One area of concern with these tariffs is higher prices in the US and as we are fighting inflation these tariffs will increase the price of products not just from China, but here in the US we may produce some of those products at a higher cost, which makes reducing inflation more difficult.
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PPI
Initially the Producer Price Index (PPI) looked problematic as it increased 0.5%, which easily topped the estimate of 0.3%. Looking further into the report though, the March reading was revised from an initially reported 0.2% gain to a decline of 0.1%, which more than accounted for this month’s beat. Looking on a year-over-year basis, PPI rose 2.2% and core PPI was 2.4%. While the core PPI increase was the biggest annual move since August 2023, I still don’t believe it’s at a problematic level considering the Fed’s 2% target. 
CPI
The Consumer Price Index (CPI) brought some positive news as the index grew 3.4% in April which was in line with expectations and better than the previous month’s reading of 3.5%. Core CPI which excludes food and energy was up 3.6% and was below last month’s reading of 3.8%. This was the lowest reading for core CPI since April 2021. Shelter continues to be the major weight keeping prices elevated as it was up 5.5% over last year and accounted for over two thirds of the growth in core CPI. Energy which was a major positive for the CPI numbers for much of last year has now brought some pressure to the headline CPI number as it was up 2.6% compared to last year. The easy comparisons from last year have disappeared and now I believe we will continue to see year over year gains in the energy component moving forward. Other areas that remained problematic included motor vehicle insurance (+22.6%), admission to sporting events (+15.4%), and motor vehicle repair (+9.8%). While there are some remaining negatives in the inflation fight, overall, I believe this report shows we are continuing to head in the right direction.
Private Credit
I have seen investors become more interested in the private credit space, but personally I have not invested any money in it, nor would I recommend my clients do so. Private credit is where nonbank financial institutions, like private-equity firms, make loans to businesses. It was essentially created to serve companies that were too big or risky for banks or too small for the bond market. The funds are generally illiquid, which means you could be stuck in an investment and if it goes south, you may have no other choice than to ride it out and hope it comes back. Also, since they rarely trade you don’t really know what the loans are worth and have to rely on pricing from quarterly accounting estimates. The fees are quite high as they are in the range of 1.25%, which I would consider high for essentially a fixed income alternative. Unknown risks could also be developing in the space due to less regulations and limited oversight. The International Monetary Fund (IMF) recently released a report that stated with the recent increase in yields, more than a third of borrowers have interest costs that exceed their earnings. Pull all the info together and I’m comfortable not being in this investment. 
Meme Stocks
Meme stocks are back in the news with companies like GameStop (GME) and AMC Entertainment (AMC) surging! AMC was actually quite smart and took advantage of the move to do a $250 million stock sale to raise capital. Like I said back in 2021, these moves are occurring for no fundamental reason. The fact that these are occurring because a guy that goes by the name “Roaring Kitty” posted an image of a man in chair leaning forward is just crazy. If you want to gamble on this stock just know that’s all it is, there is no fundamental reason for the company’s stock to be trading at these levels. It’s also important to remember that last time the hype occurred the stock reached an intra-day split adjusted high of $120.75 per share and has been in free fall before this recent move as it touched a three year low of $9.95 per share. I believe the story will end the same way for many of these traders and for those that think they are sticking it to Wall Street, unfortunately it will not have as big of an impact as they think. 
Financial Planning: Best With

Cash & Money Markets are not Long-Term Investments 
With many companies in the stock market more expensive than we’d like to see, we have been sitting on more cash in a money market than we normally would. While the 5% or so in interest is nice for the time being, we are using this as a temporary parking place until we find a good long-term investment. It could take one week or it could be three months, but the important factor is we are not considering this as a long-term investment. I know many people right now are happy with their money market rates and would totally miss a great opportunity if it presents itself to continue investing in the money market. I believe this will be extremely damaging for their long-term returns, especially as short-term rates are likely to fall. Looking long term cash will likely not beat stocks and in a recent Vanguard paper, they showed global stocks earned about 6% more a year than cash from 1901 to 2022. Don’t become complacent with the short-term yields, as you could miss a great investment that could help you over the next three to five years. 
AI and Jobs
Some people are worried about artificial intelligence taking away many jobs. I remember hearing about the same concern when computers first came out, but in reality, they created new jobs. Investment firm Goldman Sachs projects that by the end of 2034, artificial intelligence could boost the GDP to 2.3%. According to the Census Bureau’s November 2023 Business Trends and Outlook Survey, only 3.9% of businesses nationwide have used artificial intelligence, which includes machine learning, natural language processing, virtual agents and voice recognition. Another survey by Deloitte discovered that 87% of private businesses who were surveyed, expect artificial intelligence to increase their labor productivity within the next three years. It is true that change is always scary and it is true that AI will replace some jobs, but it will also create jobs that haven’t even been thought of yet. It will also make our economy more productive, which then should increase the overall wealth of consumers. 
Apple in China
Relations between the US and China are rather strained currently and Apple could be paying the price for that. In the Wall Street Journal, they released information that the company has discounted phones in China by $70, which normally sell for around $600 on average. On a side note, wouldn’t be great to get an iPhone for $600? Consumers in China have been switching to Huawei phones as the government in China and consumers begin to feel more comfortable with the company’s technological progress. If you remember a while back, we did post that the Chinese government had banned the use of iPhones in government agencies. So, Apple is now fighting with the government of China, despite what Tim Cook says and they are also fighting with the Federal Trade Commission in United States as well. They are definitely in the middle of some major storms, which could go on for years hampering sales growth for their products. This could cost the company their premium valuation on earnings, which means no stock growth going forward at best. There could also be a pull back in the stock on the horizon if they are not able to return to sound growth. 
Financial Planning: Tax Rate on Gold
Investing in gold has been popular recently, but it is important for investors to understand how gold is taxed. Federally there are 7 tax brackets (10%, 12%, 22%, 24%, 32%, 35%, 37%) which ordinary income is subject to. Ordinary income includes most sources like wages, interest, and IRA distributions. There are also separate brackets for certain types of investment income like long-term capital gains and qualified dividends. Depending on the amount of taxable income, the tax rate is either 0%, 15%, or 20%, plus there can be an extra 3.8% tax if AGI is above $200k or $250k depending on filing status. Basically, this type of investment income will always be

Labor Market payrolls
Nonfarm payrolls increased by 175,000 in the month of April. While this was well below the estimate of 240,000, this may actually be a big positive. Having that type of growth still shows the labor market is on good footing, but to combat the Fed’s inflation concerns it’s nice to see a labor market that is not too hot. Previous revisions also weren’t major considering March was revised up by 12,000 to a gain of 315,000 and February was revised lower by 34,000 to a gain of 236,000. Areas of strength included health care and social assistance (+87K), transportation and warehousing (+20.1K), and retail trade (+20.1K). Some areas actually saw minor losses including mining and logging (-3K), professional and business services (-4K), and information (-8K). With wage inflation being a major concern, I’d say the biggest data point was average hourly earnings growth of 3.9% missed the expectation of 4.0%. This was a decline from March’s reading of 4.1% and actually marked the lowest reading since the Fed starting hiking interest rates in 2022. Overall, I was quite pleased with the job numbers as I believe it shows a cooling labor market that remains healthy.
 
Job Openings
At the end of March job openings totaled 8.5 million. This missed the estimate of 8.7 million and was lower compared to the previous month’s reading of 8.8 million. Compared to last year, job openings were down 1.1 million. While this all sounds like bad news, I believe this is a positive. To start, pre-covid we had never seen a reading of over 8 million job openings, which means there is still plenty of available work for those that are looking. Also, when there were too many available jobs it created more competition for workers, which many times leads to wage pressures and in theory puts pressure on inflation. The labor market has remained resilient, but I believe we need to continue to see some softening to assist with inflationary concerns. This report came after the employment cost index spooked markets as it rose 1.2% in the first three months of the year versus an expectation of 1%. Compared to last year’s first quarter, wages and benefits rose 4.2%, which matched Q4’s reading and is off the multidecade high of 5.1% in 2022. Wages make up about 70% of employment costs and they increased 4.3% compared to last year, while benefit costs increased 3.7%. One other note to consider is that union workers saw a larger increase than non-union employees in the quarter. As we lap the impact from the union negotiations that concluded late last year, we will likely see a smaller increase from union jobs in the report.
 
Microsoft and OpenAI
I’m very curious to see how lawsuits against Microsoft and OpenAI over copyright infringement play out. Late last year the New York Times announced a lawsuit and now eight newspaper publishers in California, Colorado, Illinois, Florida, Minnesota, and New York have claimed Microsoft and OpenAI used millions of their articles without payment or permission. All eight publishers fall under the ownership of hedge fund Alden Global Capital and include names like the Denver Post, Chicago Tribune, and the New York Daily News. “The current GPT-4 LLM will output near-verbatim copies of significant portions of the publishers’ works when prompted to do so,” the complaint said. It also showed several examples of ChatGPT and the Copilot allegedly doing so. If these companies are able to win, I worry it could open the floodgates and other content providers could then claim the same infractions. ChatGPT also received more bad news with competitor Anthropic announcing its first enterprise offering and a free iPhone app. Anthropic was founded by ex-OpenAI research executives and has backers that include Amazon, Google, and Salesforce. Its Claude 3 model can reportedly summarize up to about 150,000 words and convert the large data sets into summaries in the form of a memo, letter or story. For compariso