June 8, 2024 | Jobs Report, JOLTs, NVIDIA and S&P 500, Natural Gas Prices and Game Stop

Smart Investing with 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 natural gas inventories to more normal levels has allowed natural gas prices to rise and they now trade around $2.60 per million British thermal units which was about 65% higher than the low reached in late March. It is forecasted that this could be a hot summer, which means a higher use of natural gas for electricity to run those air conditioners. One area that is helping is solar, which is reducing some of the need for natural gas. Currently, estimates are that natural gas should not be too much higher as recent prices are perhaps just enough to bring back the drillers. This should make consumers happy with lower natural gas prices and the drillers happy since they can drill more and get a reasonable price for natural gas. It’s a nice situation, but keep in mind it will not last forever and something will cause the market to move one way or the other and spoil the party.

Game Stop

Roaring Kitty is back and I must say I still don’t get why people follow this guy. He seems nice and all, but he has profited tremendously from this GameStop (GME) craziness. Keith Gill who goes by Roaring Kitty now holds 5,000,000 shares of GME and has 120,000 call options with a strike price of $20 that expire June 21st. It is unlikely he will be able to take full possession of that stock after the options expire as he would need $240 million to take custody of it after exercising the calls. Just looking at the value of his GME shares he has a net worth of at least $140,000,000. Considering he started this crusade sharing his positions with a $53,000 stake in September 2019 he must have sold during the craziness in 2021. I cannot think of any other way that he was able to amass such a fortune considering the major fall in GME’s stock price that occurred over the last few years. The initial premise for buying the stock in 2021 was to stick it to hedge fund managers who were shorting the stock. At that time short interest was over 100% and a short squeeze was rather easy to achieve. Recently the short interest was around just 20%. While the intention was to essentially take money from these big hedge funds, I believe there were many small investors that Gill profited off and this time around if he sells with a big gain, I believe it will come at the expense of even more small investors. The company has terrible fundamentals considering the business model is dying with sales that declined 29% compared to last year and a loss of $32.3 m in the recent quarter. GME also said it would sell an additional 75 million shares on top of the 45 million share sale it had announced in May that raised more than $900 million.

Stocks Discussed: Salesforce (CRM), Foot Locker (FL) and eBay (EBAY)