🎙️ Big, Little Guys

[5 minutes to read] Plus: The U.S. wants to shield industries from China

By Matthew Gutierrez and Shawn O’Malley

🏠 Bye-bye, McMansions.

The median size of new single-family homes peaked in 2016 at 2,473 square feet. Today, the median is 2,237 and falling.

Surveys show that Americans have changed their idea of a dream home, vying for smaller homes with simple designs in quiet locations.

As one realtor put it, “Having a large beautiful home is always something special to have, but after moving in, the amount of upkeep for the property and the cost can be drastic.”

— Matthew & Shawn

Here’s today’s rundown:

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

  • The latest on Yellen, the U.S. and China

  • The small caps that grew big

This, and more, in just 5 minutes to read.

💭 By the way, if you haven’t claimed your 30-day free trial of our market research newsletter, We Study Markets Pro, you missed yesterday’s report on stocks’ incredible strength over the last nine months and why concerns about inflation re-accelerating may be overblown.

See yesterday’s report (and get four more for free) by trialing Pro here.

POP QUIZ

Surging chocolate prices have received a lot of press lately, but another lovable addiction is getting costlier, too—coffee. How much have coffee prices risen over the last year? (The answer is at the bottom of this newsletter!)

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In The News

🛡️ Yellen Says U.S. Has Option to Shield Industries Against China

Here we go: Treasury Secretary Janet Yellen indicated that the U.S. is considering implementing tariffs and other trade barriers on China to safeguard industries affected by China's increased production. 

Yellen emphasized this week the need to support U.S. industries such as solar cells, electric batteries, and electric vehicles, and she didn’t rule out alternative measures to protect them. Yellen pointed out that the U.S. might implement the measures because of China's significant state investments in areas like clean energy

Flooding the market: Yellen's comments reflect the Biden administration's concerns about China flooding the global market with cheaper products, which reduces demand for products from other competing nations. 

  • She highlighted China's significant investments in certain industries where production has increased without a corresponding rise in demand.

  • Yellen said Mexico, Europe, and Japan were also “feeling the pressure” from significant Chinese investment in green tech.

  • It’s Yellen’s second voyage to China in less than a year. She’s criticized China's enhanced production of electric vehicles, lithium-ion batteries, and solar energy for distorting global prices and harming U.S. companies and workers.

  • The White House has suggested possibly imposing tariffs on China, with President Joe Biden discussing China's "unfair trade policies and non-market economic practices" with Chinese President Xi Jinping.

Why it matters:

Yellen's trip to China aims to address concerns about China's industrial overcapacity, which poses risks to global economies, especially given China’s size and strength in global trade. It’s also causing deflationary issues at home, as Chinese consumers struggle to absorb the country’s manufactured goods.

  • She’s seeking to enhance cooperation with China on issues like illicit finance and climate change. During her visit, Yellen will spend two days in Guangzhou, a major commercial and manufacturing center, before proceeding to Beijing.

China threat: Predictably, China pushed back on Yellen’s fears, saying: “This new variant of ‘China threat’ theory is just a pretext for certain western countries to poison the environment for China’s domestic development and international cooperation and take more protectionist measures for their own industries.”

Global spillovers: Economists and foreign governments have noted that China is picking green tech winners, which has been coupled with weak consumer spending, high investment, and a more recent economic downturn. It has led to an export glut, driving prices down to restrict other countries from competing. 

  • “The scale of subsidies just dwarfs what we see in OECD economies,” a Treasury official said, noting that the excess capacity was having “global spillovers.”

More Headlines

🔎 Four charts comparing Tesla to its Chinese rival

🚙 OpenAI-backed startup creating software for autonomous driving has shut down

🍳 New round of bird flu threatens egg prices

✈️ Alaska Airlines says Boeing paid it $160 million for 737 Max 9 grounding

📕 One of world’s earliest-known books expected to sell for $2.6 million

🤖 Study finds AI chatbots are much more persuasive than humans in debates

💪 2024’s Two Small-Caps Who Grew Big

Last week, we wrote about how David was losing in the David vs. Goliath struggle between small-cap and large-cap stocks.

But David — small-caps — isn’t a monolith. Sure, in aggregate, they’re underperforming their S&P 500 peers, but a few winners are claiming greater sway over the market-cap weighted Russell 2000 index for small-cap stocks.

  • That is, Super Micro Computer and MicroStrategy, tapping into AI and bitcoin enthusiasm, respectively.

Big, little guys: Super Micro has surged almost 260% this year, underpinned by booming demand for its servers supporting generative AI in data centers. Up over 150% in 2024, MicroStrategy’s run has less to do with its core B2B software business and more to do with its bitcoin honeypot, which is up around 144% in the last six months.

  • These two former “micro-cap” companies are now two of the largest in small-cap stock indexes, outperforming Mag7 leaders in recent months (Nvidia is up 80% year-to-date.)

  • With $87 billion in combined market value — $60 billion added this year — the two have quickly outgrown their small-cap label. Both are expected to depart the Russell 2000 in June as part of its annual rebalancing.

  • As the Wall Street Journal writes, until then, “the small-cap index has some jumbo-size tenants.” Super Micro alone has a weight of roughly 2% in the index, which one equity analyst said was “by far the biggest single-stock weight ever in the index.”

With the Russell 2000 15% below its late 2021 record high, small-cap investors are hugely lagging their peers piling into the S&P 500 and Nasdaq 100 indexes. The underperformance would be even worse if it weren’t for Super Micro Computer and MicroStrategy.

Why it matters:

Despite being decades-old, rather boring tech businesses, the two have caught fire due to their proximity to exciting new trends with AI and cryptocurrency.

Zooming in on MSTR: MicroStrategy’s executive chairman and former CEO, Michael Saylor, is famously bullish on bitcoin. That has generated substantial value for the company from pouring much of its balance sheet into bitcoin.

  • It now boasts 214,000 bitcoins, worth over $14 billion, generating some $6.8 billion in paper profits. We emphasize paper profits because Saylor expects to never sell the holdings. Instead, the company has frequently sold shares of stock and debt to raise cash to buy more bitcoin.

  • With gains in bitcoin more than offsetting the cost of equity dilution and using its underlying business to pay off the incurred debt, his plan has worked exceptionally well in generating value for MicroStrategy shareholders (the stock is up more than 1,000% in five years, compared to 1,250% for bitcoin).

For better or worse, MSTR’s fate is tied to bitcoin: Saylor recently told Bloomberg that “Bitcoin…is the exit strategy.”

When considering other asset classes MicroStrategy could invest in, Saylor says simply, “We believe capital is going to keep flowing from those asset classes into bitcoin because bitcoin is technically superior to those asset classes…there’s just no reason to sell the winner and to buy the losers.”

Listen to our podcast with Saylor, where he outlines his corporate bitcoin strategy

Quick Poll

Americans are seeking smaller homes. What's your ideal home size?

(Measured in square feet)

Login or Subscribe to participate in polls.

Yesterday, we asked: How much do you think you need personally to comfortably retire?

— One-third of respondents believe they need $4-plus to retire comfortably, an amount one reader said is “an emotional response to ensure a buffer against fear-based general anxiety in a volatile world.” Another commented, “The best plan is to love what you do and keep doing it.”

— As for the $1-$2 million range: “Retirement savings is more a function of expected expenses than current salary. Changing your budget can make retirement much easier.”

TRIVIA ANSWER

Robusta coffee prices recently hit an all-time high at $3,800/ton, capping an almost 70% 12-month gain. Drought in Vietnam has led to one of the smallest harvests in years.

See you next time!

That's it for today on We Study Markets!

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