DeepSeek Is Good News For The AI Gold Rush

•  In July and August of the past year, I explained the world had entered an AI and tech gold rush. Enormous amounts of money were pouring into building computer models that could extract and interpret golden data.

• Since that time, the number of AI miners and camp followers has exploded, making AI or Nvdia names that even your grandmother knows.

• In those articles, I cautioned that I believed the AI miners would find golden data, but how much of it they would find and how much investors would be willing to pay for it were big question marks.

• The other reality that I saw was that, with AI, we are in the mining phase, not the golden-products phase. No single product or service stands out at present as the game-changing prototype of things to come. 

This past week, a more ecnomical Chinese DeepSeek model caused lots of wild gyrations of most tech stocks. Net, net the tech market ended down only 3-4%. On the surface, DeepSeek, which costs a fraction of that of an NVDA, chip would seem to be a category crushing piece of software.

That many big techs rose sharply, such as GOOGL, AMZN, and Meta reminds us of what stage we are traversing in the gold rush. In short, those stocks rising clearly suggest that we are in the mining stage of the gold rush and not in the ingot stage. 

AMZN may be the biggest benefactor of the AI gold rush of any stock in America. They have millions of employees, millions of products, thousands of warehouses, millions of delivery miles worldwide, and billions of customers. If a better, more efficient, and less costly means of doing business is not in AMZN's future, AI will be the biggest bust since Beany Babies. 

Other giant benefactors of AI will be WMT, COST, the banking and insurance industries, and the industrial sector. If industrial sector companies like Raytheon, Caterpillar, Honeywell, 3M, and GE are to 'reshore', jobs from overseas, they must extract enormous costs from domestic manufacturing. My guess is they can do it, but it will take years, maybe decades, to get it done.

I believe DeepSeek will ultimately be viewed as a boon to the AI industry. It reduces the cost of participating in the AI gold rush and broadens the number of institutions and people who can afford to play.

Greg Donaldson has founded or co-founded four investment advisory firms and two families of mutual funds. He has authored two books, one on investing and a book of poetry published soon after he was out of college.  

This article is not intended as investment advice. You should seek an investment professional's views before making any investment. 

These views I have shared here are my own and not any company I am associated with.

Randy's Comment to a Client

This is a response to a client by Randy Alsman. Randy is our newest portfolio manager. Randy joined us from a major pharmaceutical company where he held numerous positions from finance to senior executive for managed care, where he dealt with the government and the insurance companies. You don't need to ask, why he's so happy to be back in his hometown. I consider Randy and expert in corporate strategy. He's a brilliant guy and has taken responsibility for our investment strategy in health care, insurance, and technology. His joining our firm will be good for all of us. Jim, here's my view of the current state of the market and economy: Oil traders continue to push oil prices higher because of fears that there are no new visible oil discoveries coming on board large enough to meet the increases in demand from the burgeoning economic expansions in China and India. In the face of these rising oil prices, US consumers are cutting back their use of gasoline for the first time in 20 years; however, both China and India still provide cheap oil to their citizens and thus, demand continues to grow at a high rate in these countries. Stock traders, seeing the runaway oil prices combined with their growing belief that more bad loan write-offs are coming in second quarter earnings releases beginning next week, have sent stock prices in the opposite direction of oil prices, with stocks falling to new 2008 lows. All of this flies in the face of the US economy which continues to confound the pessimists with a steady stream of better-than-expected reports, the most recent showing GDP growth in the first quarter of 1%. Indeed, many economists, who were formerly calling for a recession in 2008 have now come over to our view that the economy will just muddle along for the rest of the year. The media and many political candidates seem to be going in the opposite direction of the economists. From their perspectives, a "Hooverville" will be coming to a city near you soon. In fact, Arthur Lafley, chairman of Procter and Gamble, lashed out at the presidential candidates yesterday for crying, "woe is me" on the economy, which Mr. Lafley said was making people feel the economy is it much worse than it really is. The oil spike is lifting inflation fears and the credit crunch is increasing recession fears. We're a long way from stagflation (double digit inflation and unemployment at 6.5 - 7.0%), but it still feels like stagflation to a lot of people. The fixes for recession or inflation are pretty straightforward. However, facing both at the same time is much trickier. That uncertainty is causing traders to be more cautious, which translates into lower stock prices. Forced to put a stake in the ground, I'd guess near term trading will continue to be very volatile. If I am right and second quarter earnings come in much better than expected, the markets will be just as volatile on the upside as they have been on the down. Right now, we're pretty close to where we were at the January and March lows, which were just a few points shy of the mythical 20% down bear-market definition. Absent any big new news, we will most likely bounce up and down between here and 1,000 points higher for a while. Our investment strategy for 2008 is based on that scenario. Risking sounding like a broken record, we're buying and holding quality companies that have successfully weathered similar bad times, and worse, and that are increasing their dividends. So far, the average company in our portfolio has increased its dividend more than 11% over the last 12 months. We see that partly as a sign that they are expecting to come out the other side of this down market in decent shape. That’s all for now, I’ll have more to say when the earnings start rolling in. Randy Alsman, Vice President Portfolio Manager

Boeing Is a Dream

The Boeing 787 Dreamliner was introduced to the world on July 8. While you may not have seen much about the new plane in your local newspaper, it may be the most important new product of the 21st century.

The 787 Dreamliner is a show stopper. It is the world's first mostly composite commercial airplane. It will not only use 20 percent less fuel per passenger than similarly sized airplanes, but also produce fewer carbon emissions, and yet offer quieter takeoffs and landings.

The Dreamliner has been so successful in its advance orders that Airbus, its European rival, has suffered some order cancellations for some of its new products.

As Boeing's success with the Dreamliner has become more apparent, the stock has begun to rise. Indeed, it has tripled over the past 4 years. Recently, I have seen many analysts say that Boeing has come too far too fast. I do not agree. Our Dividend Valuation Model for BA shows why.

The Chart shows BA's actual annual prices (blue line) and our model's predicted values( green bars) over the last 20 years. You can see that over the last four years, BA's prices and predicted values have been almost a perfect fit. Therefore the current price of the stock is fully substantiated by the recent dividend growth of the company.

The striped bar to the right is the predicted value of BA based on my year-ahead dividend growth and interest rate predictions. That price is near $120 per share. That would be nearly a 20% increase from the current price of $102.40.

My guess is the Dreamliner will be an even bigger success than the market now believes, and thus, my year ahead prediction may be low. You know I can't see the future and the airline business is a treacherous business, so success is not assured. Having said that I want you to think about Boeing in a little different way.

There are only two major airplane manufacturers in the world, Boeing and Airbus. With the growing global economy, these two companies have what amounts to a toll road connecting every continent of the world. If you want to go to China, you will go on a plane made by Boeing or Airbus. The same for Europe, Japan, and South America. The only way a human being can reasonably travel long distances in on aircraft made by these two companies.

The airline business may continue to be a cutthroat business, but the aircraft manufacturing business is a duopoly. Unless these companies are run by fools they both have a very bright future, especially when the world is clamoring for more fuel efficient planes. Boeing is certainly not run by a fool. James McNerney has a proven track record of turning businesses around and maximizing profits.

There are all kinds of reasons why my optimism might not come to fruition, but I believe there are many more that say it will.

The stock is owned in our Capital Builder investment style.

When China Sneezes . . . The US Doesn't Have to

As I write this, the Dow Jones is down about 400 points or just over 3%. The fall in US stocks is a carry over of the selling that occurred in China and the Far East overnight. Stocks in China fell by almost 10%, as investors sought to lock in profits in the face of a rumored Chinese crackdown on speculative buying and stock manipulation. The Shanghai domestic stock market has been nothing short of phenomenal, recently, racking up a gain in 2006 of 127% and 13% year to date. To say the Chinese market may have been a bit overbought, is an understatement of monumental proportions. But what does a sell off in the frothy markets in China have to do with the rest of Asia, Europe, and the US, where stocks have also sold off sharply? The answer is the interrelatedness of the world wide capital markets and economy. Welcome to the global economy. If any of the world's major economic players sneezes, there is the chance that the rest of the world may catch a cold. If you think of this in reverse, it may be more understandable. If the US would have reported an Enron like scandal yesterday that caused US stocks to fall sharply, today all the major stock markets around the world would be down in sympathy with us. We are so important to the world's economy that any disturbance in our economic prospects or confidence impacts everyone, because we are the largest consuming nation in the world. How about China? How important is it in the world's economic scheme of things. On an exchange adjusted basis, China is about one sixth the size of the US, and represents about one thirtieth of World Gross Production. Trouble in such a small portion of the world's economy would not seem to justify such a violent reaction to stock markets in the world's economic capitols. Indeed, we see few fundamental reasons for the world wide stock sell off, and we do not believe that economic growth estimates will change much as a result of today's sell off. Stocks sold off, mainly, because of the ease of selling. All you have to do is to turn go on your Internet and sell until your fingers wear out. In our judgment, in the days and weeks ahead today's selloff will be seen for what it is: a trading event and not a fundamental economic event. The fundamentals are still strong and stock prices will, ultimately, follow the fundamentals. How about the prospects that the US stocks markets, which had a good year in 2006, could be overvalued? There is good news on that front. US stocks did rise over 15% in 2006, but they are now selling at about the same PE and dividend yield than did at the beginning of 2006. The price rise in 2006 was entirely justified by the growth of earnings and dividends. US corporate earnings were better than expected in all four quarters of the year just past. The US economy is growing near 3%, and the Fed has stopped raising rates. If the economy were to slow for any reason, the Fed would quickly cut rates to spur economic growth. Finally, my friend Dr. Spear sent me an email and said, "Is this 1929 or 1987?" The answer, Doc, is neither. In 1929, on Black Monday, stocks fell by almost 13%. That would be equivalent today of nearly 1650 points. On Oct. 19, 1987, stocks fell by an amazing 22.6%, equivalent to nearly 2850 points today. The US markets have experienced numerous 3%-5% selloffs in its history. Few have led to any serious economic downturns. We are confident this one will not either. With US stocks having recently reached all time highs, some profit taking was probably inevitable sooner or later. The sell offs in Asia and Europe last night were just a good excuse for it to happen today here. While we believe the volatile markets will calm down in the days ahead, we expect that some additional selling may occur in the near term. We have put together a buy list of terrific companies that we would like to own, we hope we get the chance to do some nibbling. China may have sneezed. They might even have a cold, but our economic strength will help us ward off any cold bug, and, indeed, help pull them out of their chill. We'll keep you posted on any changes in our thinking.