Peace Dividend

By Matthew Gutierrez and Shawn O'Malley · November 9, 2023

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The streak is over.

?? Through Wednesday, the S&P 500 notched an eight-day winning streak — the longest since November 2021. It was just the seventh such streak in 20 years.

The S&P 500 hasn’t been up nine straight days since 2004. And while the momentum is there, U.S. stocks aren’t the best-performing broad asset class this year.

That title belongs to bitcoin, which has routinely been the best-performing asset class each year over the last decade-plus. It’s on a heater again, up 31% over the past month and 118% year-to-date.

Our Chart of the Day below breaks this down in more detail.

— Matthew & Shawn

Here’s today’s rundown:

POP QUIZ

What’s been the worst-performing asset class over the past decade (in terms of average annualized returns)? The answer is at the bottom of this email!

Today, we'll discuss the three biggest stories in markets:

• Disney delights Wall Street with streaming growth
• The $2 million coal mine that might hold $37 billion
• Why the “peace dividend” may be ending, and what it means

All this, and more, in just 5 minutes to read.

CHART OF THE DAY

Key:

U.S. REITs: (Real estate investment trusts) — from MSCI U.S. REIT Gross Total Return Index

DM Equity: Stocks in ‘developed’ markets based on MSCI benchmarks

EM Equity: Stocks in ‘emerging’ markets based on MSCI benchmarks

U.S. Equity: S&P 500 Total Return Index

U.S. Bonds: Bloomberg U.S. Aggregate Bond Index

Commodities: Deutsche Bank’s DBIQ Diversified Commodity Index Total Return

*All calculations are total return figures (including dividends) in USD. Note: There are many other ways to define and portray the performances of various asset classes that aren’t captured above.

?? Disney Delights Wall Street With Disney+ Growth

The Magic Kingdom company shared earnings after markets closed on Wednesday, and Mickey Mouse feels pretty good about it — the company’s stock jumped 8% today in response.

Disney has been on a rollercoaster ride these past few years after the pandemic literally closed down its rollercoaster rides, and former/current CEO Bob Iger had to come out of retirement to help the entertainment giant right the ship.

But that’s all in the past: Revenue climbed to $21.2 billion last quarter, rising 5% year-over-year, and earnings nearly tripled from the same quarter last year.

• Investors have been most worried about the company’s streaming business, but Disney+ subscriptions were up almost 7 million last quarter. Guardians of the Galaxy’s third installment, plus The Little Mermaid’s release, helped on that front.
• The best news was that Disney expects its streaming biz to be profitable next year. The path to profitability has been (and will continue to be) rocky, but the optimism was well-received.
• This time last year, Disney+ lost $1.5 billion. This time around, investors cheered only a $387 million loss.

Why it matters:

Streaming is tough, hence why the ongoing battle for eyeballs is called the ‘Streaming Wars,’ yet Netflix has been consistently profitable for years while Disney hasn’t.

• If Disney can really make Disney+ profitable, the implications would be big for Disney (in diversifying its media business) and for Netflix and other streamers, who will have to fend off competitors who see renewed justification in pouring billions into their streaming platforms.

Still, Disney’s Experiences (think theme parks/resorts/cruises) are its core profit driver, and it’s a juggernaut.

• The division’s revenue jumped 13%, with growth across the board domestically and internationally, following the company’s recently announced $60 billion investment to “turbocharge” its experiences.

Comeback season? Disney’s acquisition of the popular sports network ESPN has been controversial, but it has offered some unforeseen upsides, such as its “44 million followers” on TikTok, which Iger proudly highlighted.

• That social media clout is driving Disney’s hope of turning ESPN into a “preeminent digital sports platform.”

Read more

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??The $2 Million Coal Mine That Could Hold A $37 Billion Treasure

?Brace yourself: a Wyoming discovery could include a $37 billion treasure.?

That’s right; a $2 million coal mine could be America’s first new source of rare-earth elements since 1952 when the average home sold for around $10,000.?

Rare minerals: In 2011, a former energy banker at JPMorgan (ka-ching!) bought the old coal mine near Sheridan, Wyoming (near the Montana border) for roughly $2 million. Until recently, he had no idea what was beneath him.?

• But government researchers started doing tests in the area to see if the ground contained “rare-earth elements,” and what they found was startling: It might contain the largest unconventional rare-earth deposit in the U.S., worth roughly $37 billion.
• Researchers at the ex-banker’s company, Ramaco Resources, started extracting more samples for analysis.
• It’s important not because it could make the banker extraordinarily rich but because the discovery comes when the U.S. vies to keep up with China in rare-earth supplies.
• Plus, we need these minerals quite badly for electric vehicles and offshore wind turbines, both critical products as the U.S. tries to be more energy efficient.

Not quite get-rich-quick: The discovery won’t make the ex-banker richer tomorrow.?

He and his company are trying a “mine to magnets” strategy, hoping to mine the elements, process them, and then manufacture them for companies that need them for EVs, offshore wind turbines, and military applications like missile defense.?

• Whether Ramaco can do all of that productively and economically remains to be seen.

Ramaco stock rose about 30% Thursday on The Wall Street Journal report. Shares are up 83% year-to-date vs. 15% for the S&P.

Why it matters:

This isn’t necessarily a one-off case. Researchers hope the discovery could be a model for other firms sitting on critical mineral deposits, notably in remote areas. There’s no telling how much lies beneath the surface.?

• New technology and artificial intelligence could help scientists find rare earth elements in coal.

Today, Ramaco is digging upward of 700 feet beneath the surface, searching for more samples and rare minerals to see what they uncover.

Read more

MORE HEADLINES

?? Ransomware attack disrupts Treasury market

?? Actors and Hollywood studios finally reached a tentative deal to end strike

?? Apple suffers setback in fight against a $14 billion tax bill

?? Grand Theft Auto V is the second-best-selling game ever — in a few weeks, we’ll get the trailer for GTA VI

?? Google’s founder is backing the production of a new airship that’s longer than three Boeing 737s

?? The language app Duolingo jumps 17% on profit surprise, launches music and math courses

IN THE NEWS

??? Is The “Peace Dividend” Dead?

It’s abstract, but the peace dividend is real. But at least one famous investor thinks it’s fleeting.

See, global instability spurs uncertainty for companies, from sourcing raw commodities in production to keeping supply chains functioning and managing teams of employees worldwide, similar to what we saw during the pandemic.

• Besides operational headaches, broad war concerns may spur banks and investors to pull back on lending, making it harder for companies to find affordable financing.
• And with rising tensions, countries often resort to nationalistic policies, slapping tariffs on imported products and subsidizing less productive domestic businesses — injecting inefficiencies into world trade.

Peace pays: Running an international business is just harder in a world engulfed broadly in conflict. In markets, investors become more cautious, not willing to pay elevated prices to own the same companies’ stocks.

• Meaning, earnings multiples (i.e., P/E ratios) contract as premiums on stock prices turn to discounts.
• For the same dollar of earnings, investors may shift from paying $20 (P/E ratio of 20) to $15 (P/E ratio of 15). That doesn’t sound like much, but a P/E ratio decline of 20 to 15 equates to a 25% stock price decline.

Why does that happen? Imagine you’re going to outbid someone else on a house listed for $450,000, and because you’re confident the house is intact and really want it, you’d bid $475,000.

• Now, imagine the seller mentions there’s a 20% chance the house’s foundation is rotting.
• Suddenly, paying a premium for the house seems like a mistake, and you may want a discount on the $450,000 listing to justify buying it.
• It’s the same in financial markets. When geopolitical tensions spill into sweeping global conflicts, huge risks and uncertainties impact most businesses, causing investors to sell stocks and demand lower prices that justify these risks.

Why it matters:

Consider that we’ve lived in an era of relative peace (by historical standards) — 80 years from the last major global war.

That peace has underpinned huge leaps in economic prosperity, which have jointly enabled many different financial assets to compound at rates well north of inflation.

• Yet, Ken Griffin, Citadel’s founder — one of the world’s biggest hedge funds, thinks this era is ending, most obviously with Russia’s invasion of Ukraine.
• He argues, “The peace dividend is clearly at the end of the road.”

End of an era: Without a peace dividend, he thinks investors will be less willing to lend to governments without more compensation for the risks, translating to “higher real (interest) rates” that weigh on the U.S.’s “$33 trillion deficit.”

• The billionaire worries the era of “globalization” is ending, which pairs with the idea of an expiring peace dividend.
• He says, “There’s many trends at play right now that are pushing us toward de-globalization.”

Read more

QUICK POLL

Do you think the global "peace dividend" for investors is ending?

• Yes
• No

Yesterday, we asked: How many streaming services do you pay for?

— The most popular answer is 1 or 2 (39%.) About 24% pay for 3 or 4, and another 20% for none. The rest said they pay for 5 or more!

— One reader commented, “Netflix, Hulu, Amazon Prime. Under $50/month and plenty of television.”

— Another said he has YouTube TV but just “during college football season.”

TRIVIA ANSWER

?According to BlackRock, the worst-performing asset class since 2014 is government debt from developed market countries, with an average annualized return of -1.4%. That’s followed by investment grade credit, Chinese stocks, and cash, which all returned an average annualized return just above 1%.

SEE YOU NEXT TIME!

That's it for today on We Study Markets!

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