POP QUIZ

Americans’ favorite stocks, the Magnificent 7, have risen by how much this year? (Scroll to the bottom to find out!)

IN THE NEWS

🏢 Nippon Steel to Acquire U.S. Steel for $14.1 Billion

Andrew Carniegie’s days are long over and technology dominates the business news cycle. But U.S. Steel is still one of America’s largest corporations.

And now, U.S. Steel has agreed to be bought by Nippon Steel, Japan’s largest steelmaker, in a $14.1 billion deal, pending regulatory approval.

Best days ahead? Not so fast. It’s the latest signal of U.S. Steel’s downfall. The iconic 122-year-old company was once the largest company on Earth, led by Carnegie and J.P. Morgan.

• Today, Nucor Steel owns the title of largest U.S. steelmaker.
• “U.S. Steel’s best days are ahead,” U.S. Steel’s CEO said, although that appears unlikely. Its peak output was in the 1970s; peak employment of 340,000 came in 1943.

Demise of American steel: Its demise can be traced to the 1950s and 1960s, when Japan and Germany rebuilt from scratch after World War II. In doing so, they utilized new technologies that required less labor, money and energy.

That was the beginning of the end for U.S. Steel, which played a critical role in the country’s industrialization.

• In 1991, U.S. Steel was booted from the Dow Jones Industrial Average — 30 of the country’s most prominent companies — after 90 years, signaling that the economy had largely moved on to technology and finance over manufacturing.

Nippon’s rise: U.S. Steel produces 20 million metric tons of steel annually, which would propel Nippon Steel to the world’s second-biggest producer behind only China Baowu Steel Group.

Nippon Steel is expected to be one of the top suppliers to the U.S. auto industry.

Why it matters:

The deal could also help Nippon reach the U.S. steel market. Nippon is a major player in Japan’s auto industry, but it hasn’t cracked the U.S. steel market, where Japanese automakers Toyota, Honda, and Nissan have plants.

• The United Steelworkers union pushed back on the deal and criticized it for being “greedy” and “shortsighted.”
• Founded in 1970, Nippon has long been a Toyota supplier. Its share price has increased more than three-fold since 2020, and it has posted a $4 billion net profit in the past two fiscal years.
• It’s seeking growth abroad after slowing domestic demand, stiffer competition, and a weakening yen (which makes exports cheaper on the global stage.)

Read more

🏠 How Housing Could Drag Inflation Down

Sounds flat-out inaccurate, right? Yet as inflation has fallen to its “last mile,” one roadblock remains: shelter.

Returning to the Federal Reserve’s 2% inflation target is priority numero uno in 2024.

Shelter costs rose 6.5% this year through November. Because it makes up 35% of the Consumer Price Index (CPI), it greatly impacts overall inflation calculations: Without shelter, inflation would have registered at just 1.4%.

Home prices jumped another 3.4% in October from a year earlier, hitting a fresh record. On the positive side, the rate of price increases is nothing like May 2021, when home prices had risen 25.2% year-over-year.

Here’s the thing: Shelter inflation is based on rents, not housing prices, and rent growth has dipped 3.3% over the past year, per Zillow — lower than the average in 2019 before the pandemic-era housing mania.

• Housing prices in the CPI, then, are based on survey estimates of what homeowners think they can rent their property for, which isn’t an exact science.
• Also, the trend takes time to play out in the numbers because rents usually change only once per year and lags behind what tenants pay on new leases.

How it works: The U.S. The Bureau of Labor Statistics surveys rental properties twice a year before determining the price change using a six-month moving average.

• Tenant rent is 7.7% of the CPI. For owner-occupied housing — 25.8% of CPI — it all boils down to “owner-equivalent rent,” the hypothetical rent a homeowner would pay to rent their own house.
• The Bureau of Labor Statistics doesn’t use home prices because it sees homes as long-term investments.
• Even if good prices stop declining, falling rents will help keep inflation down.

All but over: One UBS economist predicts shelter prices (rents) will fall throughout 2024, which will trickle into the data and ensure Jerome Powell and Co. are essentially done on the inflation fight.

“If you have those finally coming down,” he said of rents, “it’s over.”

Why it matters:

Powell and Fed officials know as much, and it’s likely one of the reasons they signaled last week that they could cut rates three times next year.

• “Activity in the housing sector has flattened out and remains well below the levels of a year ago,” Powell said on Wednesday.

Take Seattle, which has one of the highest inflation rates in the U.S. But rents and home values are expected to fall rapidly in 2024. The problem? The way CPI is calculated, housing indicators are lagging, which skews inflation numbers.

• More housing supply has contributed to the trend of falling rents.
• “It will soften the market,” noted a senior economist at Moody’s Analytics. “The gradual, continuous, consistent decline in rent growth is what we need to tame shelter inflation.”

Read more

😬 FTX Files Plan to End Bankruptcy

Remember FTX? How could you forget…it became the symbol of everything that some despise about crypto, first going mainstream with its Super Bowl commercial featuring Larry David before imploding and accelerating a collapse in digital asset prices.

Today, the company’s brainchild, Sam Bankman-Fried (aka “SBF”), is in prison and will be there for a long time.

• But resolving the crypto company’s crisis isn’t as simple as locking up its founder, whose lawyer called him the “worst” witness he’s ever seen.

Clean-up job: The remnants of FTX have been navigating a messy bankruptcy orchestrated by new CEO John Ray III, who was previously brought in to clean up after Enron.

• He’s been laser-focused on one mission: Clawing back every misappropriated penny to minimize losses for everyone wronged by FTX.
• Now, a new plan to reorganize the company — aiming to return billions to customers and creditors — is on the table.

Why it matters:

One idea? Restarting the defunct crypto exchange (perhaps under a new name) — a new, non-fraudulent, and profitable version of FTX would actually be one of the best ways to pay for the sins of SBF’s FTX, at least in theory.

But creditors must vote on and approve any plans to bring FTX out of bankruptcy before sending it to a U.S. bankruptcy judge for final approval.

• While major creditors and customer groups have already accepted broad outlines for such a plan, many fine details remain TBD.
• Despite the rampant fraud and misuse of funds at FTX, the recently proposed bankruptcy plan expects to return up to 90% of creditors’ funds.

Although FTX’s collapse ushered in months of turmoil for digital assets, swift justice has helped the industry turn a new page. Since FTX’s blow-up, the market value for crypto assets has roughly doubled, with bitcoin up almost 150% year-to-date.

Read more

QUICK POLL

Do you think FTX can ever emerge from bankruptcy and operate as a profitable crypto exchange?

Friday, we asked: Have you finished your holiday shopping?

— Said one reader, “I’ve not even started my holiday shopping! Fortunately, my gift list is short.”

— Added another, “I wrapped mine up (literally) just after Black Friday — makes December much less stressful!”

See you next time!

That’s it for today on We Study Markets!

Enjoy reading this newsletter? Forward it to a friend.

Was this newsletter forwarded to you? Sign up here.

All the best,

P.S. The Investor’s Podcast Network is excited to launch a subreddit devoted to our fans in discussing financial markets, stock picks, questions for our hosts, and much more!

Join our subreddit r/TheInvestorsPodcast today!