🎙️ Among The Stars

Quick — how many streaming services do you use? 🤔

Sometimes, it feels like there are almost too many options. For many, subscription fatigue is real. So many shows. So many streaming options. So little time!

💭 Our Chart(s) of the Day illustrate streaming’s growing lead vs. cable and how the pricing breaks down.

— Matthew, Shawn & Weronika

Here’s the rundown:

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

• The “equity-risk premium” headwind for stocks

• Elon Musk’s unmatched power in the stars

• Why a 99-year-old trucking giant shut down

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

CHART(S) OF THE DAY

IN THE NEWS

💬 The Benefits of Owning Stocks Over Bonds is Shrinking (WSJ)

Stocks always go up, right? Not exactly, but they are supposed to deliver superior returns to bonds.

Why? Because when you invest in a company’s stock and become a part owner in the business, your investment has both huge potential upside and downside — the company could grow its profits incredibly and become the next Apple or Amazon, or it could go bankrupt and be worthless.

• You’re betting on the company’s prospects, but there’s no guarantee you won’t lose money.
  

• However, when you invest in bonds, you’re legally entitled to repayment by a specific date. If a company can’t pay you back, its assets can be sold off to give bondholders as much money back as possible.

Risk-free investing: When you invest in U.S. government bonds, that repayment is as close to being guaranteed in finance as it gets, hence why investors call it a “risk-free” investment.

• The government behind the world’s largest economy and military owes you money, and they’ll most likely make good on that payment.

With that context: You’d expect to earn a lot more by investing in stocks to compensate for the risks you’re taking by not just investing in U.S. Treasury bonds. And that point is why some wonder how much longer this year’s stock rally can continue…

The extra reward for owning stocks over bonds has fallen to its lowest level in 20 years, as measured by the so-called “equity-risk premium.”

• This is calculated by comparing the earnings yield on stocks (a company’s expected profits over the next year divided by its stock price) and the interest-rate yield on government bonds.
  

• Investing 101: The earnings yield is the inverse of the popular price-to-earnings ratio and is a very simple approximation of the expected return from investing in a given company.

The gap between the S&P 500’s earnings yield and the yield on 10-year U.S. government bonds dropped to about 1.1 percentage points last week, the narrowest since 2002.

• The same is true when you adjust for inflation by swapping in 10-year Treasury inflation-protected securities (aka ‘TIPS’) — the equity-risk premium remains at a two-decade low of around 3.5 percentage points.

Why it matters:

The equity-risk premium began shrinking in the second half of 2022 when stock indexes stabilized while the Fed kept pushing interest rates higher.

• This year, rates have continued moving up while stock prices have soared, lowering their earnings yields and the equity-risk premium.
  

• As the Wall Street Journal’s Sam Goldfarb puts it, “there’s a consensus on Wall Street that the equity-risk premium can’t stay this low forever.”

Said differently, as the equity-risk premium shrinks, investing in government bonds becomes increasingly attractive, pulling money away from the stock market.

Takeaway: An ultra-low equity-risk premium doesn’t spell immediate doom for stocks, but it’s a powerful headwind going forward, making a further rally more vulnerable to other factors, such as worse-than-expected corporate earnings or another surge in inflation.

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📡 The Unmatched Power of Elon Musk’s Starlink (NYT)

Elon Musk’s power is growing by the day. The tech billionaire has become the dominant force in satellite internet technology, which is sometimes the only way to get internet in war zones, remote areas, and places hit by natural disasters. But Musk’s authority is alarming global leaders.

Starlink, the satellite internet technology made possible by Musk’s rocket company, SpaceX, is helping Ukraine’s military with communications during its war against Russia.

• Musk is known for leading Tesla, Twitter (now X), and SpaceX, and he’s quietly become the most powerful man in space as he amasses power over satellite internet, which has virtually no regulation or oversight.

• Valued at $150 billion, SpaceX sends rockets into orbit nearly every week, each with about 60 sofa-size satellites. They communicate with terminals on Earth to bring high-speed internet to nearly every corner of the planet.
  

• More than 4,500 Starlink satellites are in the sky, more than 50% of all active satellites. Musk plans to increase that figure by about 10-fold to 42,000 in the coming years.

An invaluable tool: Ukraine has used Starlink to coordinate drone strikes and intelligence gathering. Activists in Iran and Turkey have used the service as a hedge against government controls. The U.S. Defense Department is a big Starlink customer, and Japan is testing the technology.

How Starlink’s business model works: Starlink’s download speeds (100 megabits per second) are comparable to most landline services.

• SpaceX charges customers about $600 for each terminal that receives a connection from space, plus a $75 monthly service fee, which is higher for businesses and governments.

Why it matters:

There’s a worry that Musk wields far too much power. He can single-handedly shut down Starlink internet access for any customer or country and leverage sensitive information that the service gathers. No country or company has matched what Musk has built, raising more concerns.

The New York Times reports that several countries in Europe and the Middle East have brought up Starlink in conversations with American officials.

• Said one cybersecurity researcher: “This is not just one company, but one person. You’re completely beholden to his whims and desires.”

• Ukraine’s digital minister said, “Starlink is indeed the blood of our entire communication infrastructure now.”

It’s great news for Starlink: Its business has no near-term threats. Starlink says it has about 1.5 million subscribers, from militaries to telecom companies to airlines, cruise lines, and maritime shippers.

• “Everywhere on Earth will have high bandwidth, low latency internet,” Musk said in 2020, adding that he plans to provide internet to countries that lack it, including Nigeria, Mozambique, and Rwanda.
  

• Musk knows his power, too: “Between Tesla, Starlink, and Twitter, I may have more real-time global economic data in one head than anyone ever,” he tweeted in April.
  

MORE HEADLINES

😬 While everyone else fights inflation, China’s deflation fears deepen

🔈 The terms "AI" or "artificial intelligence" have been used 827 times on 76 calls in earnings calls in recent weeks

☀️ How extreme heat is hitting America’s hungry

💪 Eurozone resumes growth in Q2 while inflation falls

🚚 99-year-old Trucking Giant, Yellow, Shuts Down (WSJ)

One of the oldest and biggest U.S. trucking companies said “Bye Bye Bye” NSYNC style after shutting down on Sunday.

What happened: The 99-year-old company employing 30,000 Americans has ceased operations and is filing for bankruptcy following unsuccessful attempts to reorganize and refinance its $1 billion of debts, according to the Teamsters Union.

• The company ranked as the third-largest U.S. trucker and had earned a reputation for its budget-friendly prices and fleet of over 12,000 trucks.
  

• But a series of costly mergers and acquisitions left the company saddled with unmanageable debts.

Business Model: Yellow transported goods for major retailers like Walmart, Home Depot, Amazon, and numerous smaller businesses nationwide. It focused on the less-than-truckload segment, where shipments from various customers are combined in a single trailer.

• “Teamsters have kept this company afloat for more than a decade through billions of dollars in wage, pension, and work-rule concessions,” according to a union spokesman. “Yellow couldn’t manage itself, and it wasn’t up to Teamsters to do it for them.”
  

• Yellow has a history of veering close to collapse. In 2010, the company narrowly avoided bankruptcy by largely wiping out stock shareholders and reducing wages for workers while fending off creditors to which it owed money.

Why it matters:

The shutdown would mark the most significant corporate bankruptcy in both revenue and job loss terms for the U.S. trucking industry.

• Since 2009, Yellow has generated annual revenues of about $5 billion, yet the company lost money in most years and never achieved a profit exceeding $25 million.

Even after the Trump administration provided a $700 million Covid rescue loan in 2020, the company couldn’t overcome its challenges.

• After the rescue package, the U.S. Treasury holds around 30% of the company’s near-worthless shares, which dropped to $0.71 per share on Friday.

• “It’s an incredibly sad situation because there’s the potential that this company that was about to celebrate its 100th anniversary next year may not be around,” said one Yellow board member.

See you next time!

That's it for today on We Study Markets!

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