Wealth Destroyers

By Matthew Gutierrez, Shawn O'Malley, and Weronika Pycek · September 12, 2023

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Rivian, Uber, DoorDash, Coinbase, WorldCom — ouch! ??

Shareholder losses can quickly rack up. Each of these companies is among the biggest wealth destroyers of all time.

?? Only about 4% of U.S. stocks drive most of the stock market’s gains, and it’s similar on the way down: The 25 worst stocks — 0.1% of all stocks — have led to 14% of all cumulative losses in shareholder wealth.

— Weronika, Shawn, and Matthew

Here’s today’s rundown:

POP QUIZ

Which month has, on average, since 1928, delivered the worst performance for stocks? (Scroll to the bottom to find out!)

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

• A discovery in an ancient supervolcano may rewrite the economics of EVs
• Why banks are loading up on $1.2 trillion in risky ‘hot’ deposits
• The makings of a $20 billion paper powerhouse

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

CHART OF THE DAY

IN THE NEWS

?? Volcanic Discovery Wields Huge Potential Economic Consequences (Markets Insider)

A discovery in the crater of an ancient supervolcano along the Nevada-Oregon border has geologists, economists, investors, and even the U.S. government buzzing about the potential ramifications.

What is it? While confirmation is pending, it’s hopefully the largest deposit of lithium in the world, estimated to hold between 20 and 40 million tons of the metal, a critical ingredient in batteries for electric vehicles (EVs) — of growing importance in the fight against climate change.

• Lithium is a hot commodity — Reuters reports that global lithium demand is expected to grow more than six times by the end of this decade.

As the forecasted demand for lithium has ballooned, a pressing question has emerged about whether enough can be produced to back a full-scale transition to EVs.

• And for U.S. policymakers, the country’s lack of lithium deposits is a geopolitical vulnerability, with known deposits concentrated in South America, China, and Australia.
• As Tyler Cowen of Bloomberg puts it, “If this discovery is validated, U.S. investment in electric vehicles will no longer be so fraught with national security concerns.”

Why it matters:

Supply response: The discovery is surprising but also not that surprising. See, economists use the term “elasticity of supply” to describe this phenomenon: When the value of a resource surges, new supplies of said resource will inevitably be discovered or produced.

Think of it like a gold rush — when people smell an opportunity, such as a shortage of lithium to underpin the transition to electric vehicles, human innovation in the pursuit of profit will persevere.

• Correspondingly, this wasn’t a group of researchers who went on a hike and stumbled across vast lithium deposits. Instead, Lithium Americas Corporation put a lot of time, effort, and money into the discovery.

TBD: Questions remain, such as whether extracting the lithium will be economically feasible.

• Another reality is that one plan would create an open-pit mine spanning nearly 18,000 acres.
• While more lithium supplies are necessary to underpin a green transition, local environmentalists and indigenous populations object to the project.

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?? Banks Load Up on $1.2 Trillion in Risky ‘Hot’ Deposits (WSJ)

Follow the hot money.

That’s what banks are up to these days, collectively holding more than $1.2 trillion in brokered deposits in the second quarter, according to a Wall Street Journal analysis.

Say what? Brokered deposits are known as a form of “hot” money amid periods of distress. In other words, a bank goes to a third-party broker, say Fidelity or Morgan Stanley, to find customers to invest in the bank’s high-yielding certificates of deposit.

• This allows banks to gain large groups of customers at once, rather than a more gradual increase, customer by customer.
• There’s been an 86% increase from a year earlier in brokered deposits as banks compete for customer deposits (which is how banks fund their businesses), with banks like Citizens, Ally, M&T, KeyCorp, Comerica, Bank of America, and Wells Fargo roughly doubling their brokered deposits.

When interest rates were low, customers were okay with holding cash in banks, despite getting virtually no return. Now that rates are much higher, customers are parking their money elsewhere, like money-market funds through their brokerage accounts — earning north of 5%.

• But moving money out of checking/savings accounts into money-market funds drains banks of deposits and, therefore, funding.

Financial gravity: You're right if it feels like most of the financial world’s roads lead back to rates. One of the main reasons people use brokered deposits is to obtain higher interest rates on their savings compared to what they might get at their local bank.

• And what better time to do that than now, when rates are around their highest levels in two decades, though that also makes them more expensive customers for banks.

Why it matters:

One bank told the Wall Street Journal that brokered deposits ultimately boosted funding, allowing them to reduce other types of borrowings.

Another bank said brokered deposits “have proven to be a stable and reliable source of FDIC-insured indirect customer deposits,” even while these clients are presumably less loyal (since they’re primarily focused on shopping for higher interest rates.)

Two things to note:

1. Restrictions: Some brokered deposits may have specific terms and restrictions, like early withdrawal penalties or minimum deposit requirements.
2. Risk: Yes, brokered deposits offer the potential for higher interest rates (yield), but if the bank encounters financial difficulties or fails, there could be delays in accessing funds, even though FDIC insurance is in place.That’s also why banks relying heavily on brokered deposits might be subject to additional regulatory scrutiny.

Everything in moderation: As one bank executive notes, “Used in moderation, I think it’s quite acceptable. There are limits to what you’d want to do.”

MORE HEADLINES

?? SpaceX near-monopoly in rocket launches a ‘huge concern’

?? AI tells lawyers how judges are likely to rule

??? Apple’s iPhone 15 launch clouded by China problems

?? Americans' inflation expectations for the next few years tick higher in the latest NY Fed survey

?? More tech companies take White House AI safety pledge

?? $20 Billion Paper Powerhouse to Be Formed by Merger (WSJ)

A paper powerhouse is forming, and no, it’s not Dunder Mifflin.

Rather, Dublin-based Smurfit Kappa and U.S. packaging company WestRock are joining teams after finalizing a merger agreement, forming a global paper and packaging conglomerate worth about $20 billion.

• According to the companies' statement, their total revenue was around $34 billion for the year ending June 30, positioning Smurfit WestRock as the biggest publicly traded global packaging group by revenue.

Origin stories: Atlanta's WestRock, a packaging company formed in 2015, specializes in packaging for various products, including medicine and pizza.

• Dublin's Smurfit Kappa, founded in 1934, focuses on packaging for consumer goods and e-commerce.

Investors’ perspective: As part of the agreement, each WestRock shareholder will receive one new share in the merged entity, Smurfit WestRock, and $5.00 in cash.

• After the deal is finalized, Smurfit Kappa shareholders will hold a 50.4% stake in the combined company, but they don’t love the deal — Smurfit’s stock fell some 9% today after the news.

Why it matters:

Shotgun wedding: In an industry with as seemingly bleak of a future as the paper business, consolidations are unsurprising, if not expected.

But as the paper industry has consistently declined since the early 2000s, firms have pivoted toward packaging to capitalize on the e-commerce boom. More brown boxes, less office paper.

• In fact, over the last 15 to 20 years, the worldwide demand for paper packaging has surged by over 65%, and it’s expected to continue to grow in the long run — thanks, Amazon.

Sustainability: Companies are increasingly conscientious about their packaging methods. As they transition from plastic to paper, the race for eco-friendly and sustainable options intensifies as companies balance profitability and environmental stewardship.

• This involves not only reducing emissions but also investing in biodegradable paper-based packaging solutions, breathing new life into the aging paper industry.

TRIVIA ANSWER

September is the worst month for stocks. Why? Many believe it’s because investors return from summer vacation and Labor Day ready to lock in gains and tax losses before year-end. Plus, since investors anticipate the ‘September Effect’ to happen, sentiment turns negative to align with those expectations.

SEE YOU NEXT TIME!

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