🎙️ Arbitrary and Capricious

💬 Step aside, AI — “retail shrink” is a new buzzword among corporate executives.

Retail shrink describes missing inventory. Execs at Dick’s Sporting Goods, Walmart, Macy’s, and Home Depot have said it’s a growing problem.

Some have blamed “shrink” for weakening earnings this year, so retailers are sealing pricey items in locked cases and implementing anti-theft technology 🔒

— Matthew, Shawn, and Weronika

Here’s the rundown:

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

• The first bitcoin ETF could be coming soon

• Why Wall Street is investing billions in broadband internet

• Toyota halts Japan assembly plants

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

CHART OF THE DAY

IN THE NEWS

🏛️ Court Rules in Favor of Grayscale Over SEC (CNBC)

We’re one step closer to a bitcoin exchange-traded fund (ETF.)

A federal judge ruled that the Securities and Exchange Commission (SEC) must reconsider crypto asset manager Grayscale Investments’ application to launch the first bitcoin ETF.

• It’s a loss to the regulator amid a wider crackdown on the industry and a win for bitcoin enthusiasts — bitcoin-related assets surged Tuesday morning on the news.
  

• Traders are betting that the ruling would pave the way for broader investor adoption of ETFs backed by bitcoin.

Rewind: Grayscale sued the SEC last year after the agency denied its application to convert its bitcoin “trust” — ticker: GBTC — into an ETF that holds bitcoin directly, despite having previously approved ETFs tied to bitcoin futures contracts (a different but highly correlated investment product.)

• “The denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products,” wrote the ruling Judge Neomi Rao.

A monumental step: Grayscale called the decision “a monumental step forward for American investors.” One analyst told Bloomberg that “there’s huge optimism baking into the market right now.”

• For context, Grayscale has said an ETF could help it unlock $5.7 billion in value (before the ruling, the fund traded at a 25% discount to the value of its bitcoin holdings).
  

• An ETF based on the cryptocurrency itself — rather than futures — could be a watershed moment for the industry as it taps billions from everyday investors.

A bitcoin ETF that invests in futures contracts tied to bitcoin’s price carries many more costs and nuances — presumably enough to be a turn-off to most mom-and-pop investors. But an ETF that directly owns bitcoins and holds them on behalf of investors (as proposed by Grayscale) is much more appealing.

Why it matters:

Long-time coming: For years, asset managers have tried to convince the SEC to approve a pure bitcoin ETF — one not tied to futures contracts, aka a “spot” ETF — allowing investors to get bitcoin exposure without having to securely store bitcoin themselves.

But regulators have feared bitcoin markets are prone to manipulation.

Tuesday’s decision likely improves the odds that Grayscale and other investment managers will win approval for a spot bitcoin ETF sooner rather than later.

• BlackRock, the world’s largest investment manager, filed paperwork with the SEC in June to create an ETF of its own. (Coinbase would be tasked with custodying the bitcoin.)

Pent-up demand: Other institutions like Invesco and Wisdom Tree Investments have also recently renewed bitcoin ETF applications.

• Said one crypto financial services CEO: “To our mind, there’s no doubt now (that) spot BTC ETFs are coming to the U.S. The level of pent-up institutional and retail demand in the U.S. is significant.”

👩‍💻 Wall Street Invests Billions in Broadband Internet (WSJ)

More high-speed internet options may be coming to your city. A nationwide push to expand and construct broadband fiber-optic networks, backed by billions of dollars in fresh investments from Wall Street investors, is to thank.

What’s happening: Telecom companies are borrowing big, selling three times as many “fiber bonds” as in 2023, funding efforts to bring high-speed internet to small and midsize cities dominated by poor quality, expensive services from cable monopolies.

• Many such telecom companies are backed by private equity firms who see an opportunity to upgrade communities’ internet access across the U.S., something local leaders say can’t come fast enough.
  

• Post-pandemic, quaint, or picturesque communities may be able to attract remote workers and businesses from large cities, but they can’t keep them around without high-speed internet.

Welcome to the future: While AI and robotaxis shape America’s biggest cities, many rural areas still lack a modern staple: Fast and reliable internet.

• Over the last decade, private equity investors have increasingly pushed into renewable energy, tech, and infrastructure projects — private infrastructure investments are expected to hit $1.9 trillion by 2026 (overtaking real-estate investments.)

Why it matters:

Broadband network providers issued some $4 billion of fiber-backed bonds, where borrowers pledge revenues from internet contracts to pay off the debt.

• Using fiber projects as collateral, smaller companies with a less established credit history can still borrow money at viable interest rates for projects’ profitability.
  

• The flurry of bond issuance by smaller telecom companies allows them to challenge telecom titans like AT&T and Verizon.

We’ve seen this before: Companies like Global Crossing, TyCom, and 360Networks went bust at the turn of the century, as competition to reach the millions of Americans who live between major cities overwhelmed actual internet usage at the time.

• But today, the Wall Street Journal reports that companies are being more cautious about overlapping in small markets.
  

• And the lower rates on “fiber bonds” with physical collateral backing them are less burdensome than the costlier ‘unsecured loans’ (with no collateral) companies like Global Crossing relied on to fund fiber-optic projects two decades ago.

MORE HEADLINES

🇨🇳 Chinese investors rush to offshore funds to offset domestic risks

🌪️ Florida’s insurance industry braces for Hurricane Idalia

💼 Job openings fall to the lowest level since March 2021

🏠 American home prices rose in June — again

📱 The iPhone 15 is set to be launched on September 12th

🚙 Toyota Halts All Japan Assembly Plants (Reuters)

Toyota, the Japanese car maker, has suspended work at all its domestic assembly facilities because of a snag in its production system.

Toyota said Tuesday that it had ceased operations at all 14 of its Japanese assembly plants due to a glitch in its production system, effectively halting domestic manufacturing for the world's top-selling carmaker.

• A spokesperson said the malfunction hinders Toyota from procuring parts, and its origin is unclear, but a cyberattack is "likely not the cause."
  

• These factories comprise about one-third of the car manufacturer's worldwide production.

Let’s go places: As a pioneer of the "just-in-time" (JIT) production system, Toyota minimizes costs but is vulnerable when component deliveries or major system functions are interrupted.

• Considering Toyota averaged around 13,500 vehicles produced daily in the first half of 2023, even a one-day production delay can impact the company's revenue. Such losses could swiftly escalate.
  

• For three years straight, Toyota has maintained its first place as the top-selling automaker, outpacing its main rival, Volkswagen.

Why it matters:

The obstacle occurred as Toyota had been bouncing back from a series of setbacks, including semiconductor shortages that led to production cuts.

• Still, the company was seemingly getting back into its groove — from January to June, output rose 29%, the first increase in two years.

Setbacks Abound: Toyota has faced operational issues due to a cyberattack on one of its suppliers and dwindling global demand.

• The company had to halt some of its production lines in Japan due to COVID-19 lockdowns in Shanghai, which intensified supply chain issues.

The bottom line: While analysts believe Toyota could compensate for the lost output, possibly by adding extra shifts, the outage will be a significant test.

See you next time!

That's it for today on We Study Markets!

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