🎙️ Blame The Dollar

We don’t have a We Study Markets “Wrapped” for you, but we’ve covered a lot this year. If you’ve been with us the whole time, we tip our hat to ya.

From covering the bank blowups this spring to the fallout from FTX, the Fed’s inflation-fighting campaign, the elusive but ever-closer “soft landing,” AI breakthroughs, and so much more, we’ve been here with you (almost) every day of 2023, breaking down the biggest stories in markets.

Cheers to another year in 2024 🥂

— Matthew & Shawn

Here’s the year-to-date rundown:

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

• Nike’s disappointing end to 2023

• Bristol Myers buys Karuna for $14 billion

• How real estate investors shaped assisted living

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

CHART(S) OF THE DAY

IN THE NEWS

😬 Nike Ends 2023 on a Disappointing Note

Many folks will get Nike apparel as Christmas gifts this year, but Nike is on investors’ naughty list.

The company’s stock plunged by double-digits after its latest quarterly earnings report was less than optimistic about sales in 2024.

• The company expects shoppers, particularly in China and Europe, to scale back spending significantly in the New Year.

Budget cuts: While the firm touted $2 billion cost-saving plans to counter weaker sales, including simplifying its product catalog, using more automation, and cutting out managerial layers, it wasn’t enough to relieve investors’ concerns.

• Nike stock is now down roughly 7.7% year-to-date, well behind its peers in the S&P 500.

Based on the recent past, though, things aren’t too bad — Nike’s roughly $13.40 billion in quarterly sales was just shy of Wall Street estimates, and earnings per share were about 21% higher than anticipated.

More good news: Following a year and a half of declining profit margins, Nike reported a 1.7 percentage point increase in gross margins on Thursday.

• After the company had to slash prices last year to offload excess inventory, CNBC reports that “Nike is in a far better inventory position.”

Why it matters:

One issue? The U.S. dollar. Nike’s CFO commented, “Last quarter, as I provided guidance, I highlighted a number of risks in our operating environment, including the effects of a stronger U.S. dollar…Looking forward, the impact of these risks is becoming clearer.”

• As strange as it sounds, the dollar really can be a headwind for large multinational companies.

How it works: If Nike sells shoes in euros, yen, or pesos, for accounting purposes, as a U.S. company, it must translate those sales to U.S. dollar figures.

And if the dollar’s exchange rate appreciates against those currencies, the value of those overseas sales in dollar terms declines.

• It also may make Nike’s products comparatively more expensive abroad if local prices are raised to offset stronger dollar exchange rates.
  

• Currency exchange rates are largely driven by differences in interest rates (for example, the gap between, say, the rate you can earn by holding dollars vs. holding euros.) The dollar’s exchange rate appreciated rapidly as the Fed increased interest rates faster than in many other countries.

With the prospect of Fed rate cuts next year, to what extent the dollar is either a sales headwind or tailwind for firms like Nike will primarily depend on how fast and by how much the Fed lowers interest rates relative to other major economies.

Read more

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💉 Bristol Myers Buys Karuna for $14 Billion

Bristol Myers is buying schizophrenia drug maker Karuna, just in time for the holidays and year-end, for $14 billion. 

Neuroscience has become one of big pharma’s key market segments, and Karuna’s top candidate, KarTX, is being reviewed by the FDA for treating schizophrenia. It might also apply to bipolar disorder and Alzheimer’s. 

The numbers: Bristol Myers will pay $330 per Karuna share in cash, a 53% premium on Thursday's closing price. The deal includes $1.3 billion in cash that Karuna has on hand. 

• Bristol Myers is on a spending spree to compete with other pharmaceutical companies. In October, it bought cancer-focused Mirati Therapeutics for about $5.8 billion. 

Writing a new chapter: Bristol is making a big bet on psychiatric and neurological drugs, a growing market. If approved by the FDA, Karuna’s drug could surpass $6 billion in annual sales. 

• Bristol’s CEO told The Wall Street Journal that the acquisition will bolster sales growth as its older products face losing patent protection and lower-price competition.
  

• “We are in the process of writing a new chapter for Bristol Myers Squibb,” he said.
  

• Other schizophrenia drugs have been among the industry’s best sellers, and the market for Alzheimer’s treatment is expected to balloon in the coming decades. 

Why it matters:

The global market for central nervous system treatment is $150 billion and growing 9% annually. Big pharma is well underway in preparing to meet the demands of the aging baby boomer generation and an increasingly drug-dependent country overall. 

Bristol’s stock is down roughly 30% this year vs. a nearly 25% rise in the S&P 500, and its stock is roughly flat over the past five years. 

• Bristol reported $33.5 billion in revenue for the first nine months of this year, a 4% dip from last year. 

Questions remain. Can Bristol overcome patent expiration for many of its top-selling drugs? One is Opdivo. Another is Eliquis, a blood thinner. Key to long-term success in the industry is a diversified pipeline hitting the market. 

• “I don’t think the pipeline has ever been stronger, and on top of that, we are in a great financial position,” its CEO noted.

Read more

MORE HEADLINES

👉 Why everyone was so wrong about the 2023 economy

😮‍💨 The Fed’s preferred inflation measure just dropped below 2% on a six-month basis

🎮 China cracks down on videogaming (again)

🎬 Warner Bros and Paramount CEOs discuss possible merger

💬 Goldman Sachs outlines its case for 6% returns from the S&P 500 next year

🚝 High-speed train company Hyperloop One shuts down

🏢 How Real Estate Investors Shaped Assisted Living

The $34 billion assisted living industry is only getting bigger as the Baby Boom population ages. 

But there’s a problem: Costs have skyrocketed. Assisted living facilities are highly profitable and usually charge around $5,000/month, not including extra fees for everything from blood pressure checks ($12) to medications ($93) to inhaler help ($315). For years, prices for assisted living have outpaced inflation. 

Lucrative care: Roughly one million Americans live in assisted-living facilities, a lucrative piece of the long-term care industry. Investors, regional companies, and even international real estate trusts are all making money in the industry, and half are earning returns greater than 20% or more than it costs to run them. 

• There are 31,000 assisted-living facilities nationwide, twice the number of skilled nursing homes. About 80% are for-profits.
  

• A recent survey found that 83% of adults said they couldn’t afford the $60,000-per-year cost of care. 

Care is ancillary: Assisted living is typically for people who can’t live independently at home but want something less institutional than a nursing home. 

• “Their position was: We are trying to increase our profitability,” said one former real estate executive. “Care is an ancillary part of the conversation.”

The economics: Investors don’t buy the businesses; they buy the buildings that house the senior homes to gain rental income and property portfolios without the legal risks of caring for older people. Then, they pay a management company to run the facility.

• In 2008, Congress enacted a law that allowed investors to hold senior housing properties tax-free, further driving the trend of real estate investors dipping into the market.

Why it matters:

A recent Washington Post report detailed one company, Balfour, as emblematic of an industry fraught with a “profits over care” approach. 

• Balfour markets its senior-housing properties like boutique hotels with nice furniture, dining, and other services. But cost-cutting measures have left it “unable to meet the basic needs of many residents,” according to the Post, citing numerous incidents of neglect. 

Today, many facilities are held by investors operating under pressures to produce profits, which has led to a bare-bones approach to staffing, plus low pay: Assisted-living aides earn about $15 an hour, less than Starbucks baristas. 

Meanwhile, long-term investors in senior home real estate earn 9% annual returns, more than double the yield for many office properties and hotels.

Read more on the assisted living industry

QUICK POLL

Yesterday, we asked: How much will you be keeping up with financial news over the holidays?

— It’s that time of year: “I’m with the in-laws, going to try and escape as much as I can without getting in trouble with the wife.”

— Another commented, “I always try to unplug, but I’m sure I’ll be scrolling X or reading the news at some point.”

See you next time!

That's it for today on We Study Markets!

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