We finished our letter as we usually do during the last week of the quarter. We decided
to have ChatGPT rewrite what we wrote to prove a point about how AI is going to
change how we work. Below is that letter.
I hope this letter finds you well. I am writing to provide an overview of the current
market situation and discuss some key developments in the field of artificial intelligence
(AI). Additionally, I will share our views on the winners and losers in this landscape and
touch upon other important factors that may impact investment decisions.
The markets have exhibited diverse performance, with notable variations among
different indices. Year-to-date, the QQQ index, which represents non-finance and
energy stocks, has shown strong growth of 27.9%. In contrast, the Dow Jones has
experienced a more modest increase of 3.8%. Small cap stocks have risen by 7.2%, while
the Value Line composite, reflecting the average stock performance irrespective of
market size, has shown a 6.8% increase. Naturally, this leads us to question the
underlying reasons and logic behind such divergent trends.
ChatGPT, the AI program I am using to compose this letter, represents a significant
advancement in software technology. It possesses the capability to enhance
productivity and solve various problems with minimal human intervention. Unlike
conventional operating systems like Microsoft Windows or Apple iOS, ChatGPT can
assist with tasks such as homework completion and software program rewriting.
Notably, ChatGPT's unique feature enables you to input 20 keywords and request an
article in the style of renowned authors like Mark Twain or Ernest Hemingway, although
it may contain some mistakes that would require your correction. The efficiency of
ChatGPT allows you to have a complete letter in just 5 minutes, which you can then edit
to your satisfaction. It can even aid in website creation if required.
ChatGPT was initially released in November 2022, but it gained significant traction
within the tech community starting in March of this year. It quickly became evident that
this program is a game-changer. Game-changing platform shifts are rare in the business
world, with examples from the past including the advent of personal computers,
landline telephones, the introduction of the first iPhones, and the emergence of the
internet. Each of these transformations brought substantial winners and losers, and this year,
Wall Street is actively identifying those who will excel and those who will lag behind in the realm of AI.
Returning to the aforementioned market performance, the QQQ index has exhibited
remarkable growth of 27.9% thus far this year. Microsoft holds the largest position
within the index at 12.86%, closely followed by Apple at 12.39%, Amazon at 6.91%,
Nvidia at 6.88%, Meta at 4.22%, and Tesla at 4.04%. Notably, our portfolio includes
significant holdings in Apple and Tesla. Wall Street has been aggressively driving up the
prices of these stocks, anticipating that one of these companies will emerge as a major
AI frontrunner. Tesla, in particular, has experienced an impressive surge of 99% this
year, while Apple has seen a 44.5% increase. However, apart from Nvidia, none of these
companies have yet witnessed substantial AI-driven earnings. Nonetheless, investors are
purchasing these stocks in anticipation of their future success in the AI field.
Now, let us examine the early winners and losers in this competitive landscape. Nvidia
stands out as the leader, manufacturing the fastest chips worldwide. In order for AI to
function optimally, low latency and substantial computing power are essential, and
Nvidia excels in these areas. Other semiconductor companies are currently playing
catch-up.
In addition to computing power, abundant data is a prerequisite for successful AI
implementation. The remaining five companies mentioned earlier possess vast data
streams derived from their interactions with customers. This valuable information can
be effectively utilized by AI to enhance marketing strategies and improve profitability.
Furthermore, since AI enhances programming efficiency, these companies can reduce
their programmer workforce and subsequently lower costs. Among this group, we
believe Tesla is the standout winner. Their development of self-driving cars utilizing
artificial intelligence, specifically neural networks, grants them a significant advantage
over competitors. This could explain the doubling of Tesla's stock price this year. When
driving a Tesla, data is recorded and transmitted via your home Wi-Fi to their cloud
computing sites for analysis. This proprietary data represents a substantial asset for
Tesla, in our opinion.
Lastly, in the AI realm, fast internet connections are crucial to reduce latency and
facilitate the data requirements of AI as it communicates with various cloud computing
sites. Lumen appears to be the most promising company in this regard. Despite their
recent poor stock performance, we believe they hold a significant position in this land
grab. However, they must demonstrate that they possess the superior solution for data
transfer before their stock can rebound. Although our performance with Lumen has
been disappointing, we intend to retain our position.
It is worth noting that the performance of the other 10,000 stocks traded on the market
may appear less appealing due to the dominance of AI. However, we maintain a
different perspective while acknowledging this viewpoint. Our strong belief is that
inflation will persist as a significant issue for several years. Additionally, we are of the
opinion that the U.S. Federal Reserve is constrained in its ability to raise rates
substantially without risking damage to the financial system. The banking crisis we
witnessed when rates reached 5% serves as a stark reminder. If rates continue to rise,
the federal government will face budgetary challenges as an increasing proportion of tax
dollars is allocated to interest payments on the national debt. It is highly unlikely that
any federal agency will be eliminated to accommodate debt interest payments.
Consequently, the Federal Reserve will likely be compelled to resort to monetary
printing at some point, regardless of whether inflation surpasses 2%. We believe our
investment strategy positions us favorably to capitalize on such circumstances, more so
than if we were invested in only AI stocks or cash.
Turning our attention to the price of oil, recent developments have significant
implications. When tensions arose between Russia and Ukraine, oil prices surged to
$120 due to supply concerns. Presently, oil is trading at $70, despite the ongoing war
and persisting supply worries. The United States maintains a petroleum reserve known
as the SPR (Strategic Petroleum Reserve), which stores oil in the event of war. This oil
would be utilized for military operations if a conflict were to arise. The SPR has been
operational for nearly 50 years, and as of July 2020, it contained approximately 650
million barrels. However, the current inventory has dwindled to around 350 million
barrels, the lowest level since the 1980s. It is difficult to envision further reduction in
this inventory. The current administration has opted to sell the oil to lower prices and
mitigate inflation. They have expressed their intention to replenish the reserve when prices reach $65 to $70, the range we find ourselves in presently. While the United
States has been releasing oil, OPEC has concurrently reduced production to
counterbalance these releases. Furthermore, due to environmental concerns, oil drilling
in the United States has decreased by 70% compared to levels seen between 2012 and
2014.
In conclusion, we believe that the short-term decline in oil prices resulting from the one-
time release of the SPR is an artificial phenomenon. Simultaneously, domestic oil drilling
has experienced a significant decline, while OPEC's production cuts further impact
supply dynamics. These factors indicate the potential for a substantial oil price
movement in the near future. Alternative energy sources, such as solar and wind, have
maintained a steady 20% share of total energy production over the past decade. It is
unlikely that they can offset a surge in oil prices. Consequently, we foresee a challenging
path forward without a significant price increase. If you don’t share this perspective or
would like further discussion, we encourage you to reach out to us.
Yours sincerely,
Mark Brueggemann IAR Kelly Smith IAR Brandon Robinson IAR
P.S. As you can tell from above, ChatGPT was able to edit our letter, correct grammatical
errors and write in a style we are comfortable with. The ramifications for this type of
technology are going to be interesting to follow for all of us.
We want to remind our clients that in September T.D. Ameritrade will be merged with
Charles Schwab. Your statements will now have the Schwab logo on them in October.
We will still be your advisors, and nothing has changed in how we will manage your
money. They will change your account number and the log ins may change as well. Feel
free to call us and we will help you with any questions you have. In the meantime, you
don’t have to do anything on your part to implement these changes.