🎙️ NYC On Sale

[5 minutes to read] Plus: What's wrong the Shiller ratio?

By Matthew Gutierrez and Shawn O’Malley

Believe it or not, the S&P 500 has been in the green for 13 of the past 14 weeks, quite the run since Halloween. It’s the first such streak since 1985 — before we were born. 😅

And we know that a strong January for stocks bodes well for the remainder of the year. So, about one month through 2024, we’re keeping our eye on the S&P 500’s top performers, as shown below.

💭 Related, ICYMI: Fed Chair Jerome Powell hit on inflation, rate cuts, and economic strength in a fresh 60 Minutes interview. Notably, he said the Fed is wary of cutting rates too soon.

Matthew & Shawn

Here’s today’s rundown:

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

  • Why NYC apartment buildings are 50% off

  • What’s wrong with the Shiller Ratio?

  • Whether the $139 Amazon Prime subscription is worth it

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

POP QUIZ

What was the median price for home sales in 2023? (The answer is at the bottom of today’s newsletter!)

Chart(s) of the Day

The S&P’s top stocks haven’t been this concentrated in 50 years

In The News

🏢 Why NYC Apartment Buildings Are on Sale for 50% Off

Forget this bonkers housing market. How about buying a whole apartment building? New York City apartment buildings are on sale for a bargain, sometimes 50% off. 

Case study: One NYC landlord bought a 21-unit building in 2018 for $4.8 million in Washington Heights, a gentrifying neighborhood in northern Manhattan.

  • But it’s subject to the New York rent-regulation system, the oldest and biggest program in the country. Thus, he’s not legally allowed to charge tenants more than $650 per month — roughly 25% of the market rate. 

Context: It used to be relatively easy for landlords to make big money by sticking to a playbook: buy rent-stabilized run-down buildings, renovate them, and then pass along the expense by raising rents. Then cash out.

  • But in 2019, New York lawmakers reduced how much landlords could raise rents after renovations and widened the pool of rent-stabilized apartments. 

Career-ending change? That landlord (mentioned above) is a seasoned veteran who has bought over 40 properties for $300 million over the past 20 years. His case is emblematic of a city-wide trend as interest rates have soared. New laws are in place, and he’s falling behind on his mortgages. A dozen of his properties could be foreclosed. 

From Bloomberg

Why it matters:

In 2023, New York buildings with at least one rent-­stabilized apartment sold on average for $203,000 a unit, down 34% since 2019. In New York, the issue is particularly large: Two-thirds of residents rent their homes, double the nationwide rate. 

  • Meanwhile, the price of nonregulated apartments jumped 23%. By some estimates, tough rent control has destroyed $75 billion in property value.

  • One high-profile NYC real estate executive notes: “A lot of owners I’m speaking with want to walk away from buildings.”

Is rent control good? It depends on whom you ask. Most tenants, facing soaring rents in major cities like New York, would say so. But economists generally hate rent control, saying it drives housing shortages and higher rents in market-rate buildings. 

  • New York City tenants paid a third less for rent-­stabilized apartments than they would have for equivalent market-rate apartments. That’s an annual discount of $5.4 billion.

  • But the current market is failing renters. As Bloomberg reports: “In classical economics, rising prices should be leading to more construction and moderating rents. But scarce land in attractive cities and zoning rules cause persistent shortages.”

Read more about rent regulation in the Big Apple

Together With Fraction

The Best Developers Already Have Jobs

As the hiring landscape adapts to recent layoffs and economic uncertainties, a profound shift is occurring. Companies, anticipating potential downturns, are turning to fractional teams as a strategic solution.

This emerging concept is reshaping traditional hiring practices in the wake of uncertainty - and with Fraction, you can try it out for yourself.

Fraction gives you access to the best-vetted US-based senior developers, designers, and product managers at offshore rates, without commitment.

Hiring fractionally can increase your impact, cut costs, and give you an edge over your competitors.

💭 Take the first step with their risk-free trial. If you’re not satisfied with a hire, they’ll replace them at no additional cost.

💬 What’s Wrong With The “Shiller” Ratio?

Created by DALL-E via ChatGPT

In 1934, Benjamin Graham — Warren Buffett’s mentor — and David L. Dodd released Security Analysis, a legendary book on investing. It outlined that when valuing companies, investors should average earnings of “no less than five years, preferably seven or ten years.”

  • In other words, we shouldn’t emphasize or extrapolate too much from a single year’s results; a better approach zooms out on companies’ financial performance and current stock prices.

CAPE ratio: In 1988, the economists Robert Shiller and John Campbell took this lesson to heart when devising methods for anticipating future stock market returns.

  • The product was the Cyclically Adjusted Price-to-Earnings (CAPE) ratio, aka the Shiller CAPE ratio, which averaged earnings across the past ten years.

  • The metric soon became a popular tool for assessing expected returns over the coming decade (or longer), proving more reliable than conventional price-to-earnings ratios based on results from just one quarter or year.

Why it matters:

Today, though, the Shiller CAPE ratio sits at 33 times, mirroring levels before the 1929 crash. While some see a reason for caution, others suggest the CAPE ratio was never intended to predict market movements over short-term periods.

  • And even over longer timeframes, its value is hardly perfectly predictive of broad stock market moves.

  • For example, the Shiller CAPE ratio sat at modest levels in the 1960s and 1970s, providing no warnings for the dismal stock returns provided in those decades.

Over the last decade, the famous CAPE ratio has been well above historical averages, yet stock indexes have tirelessly pushed higher. Following the CAPE ratio in 2014 would’ve been an extremely costly mistake.

New ratio, who’s this? Even Shiller seems skeptical about his ratio these days, pivoting during the pandemic to favor the “Excess Cape Yield.

  • (The difference between inflation-adjusted Treasury yields and the cyclically adjusted earnings yield — the long-term average of companies’ earnings per share divided by their share prices.)

  • The FT’s Toby Nangle calls its logic “sound” by accounting for the relative value between stock and bonds, which helps explain why stocks zoomed during the pandemic when bond yields fell to zero.

Read more (Shiller’s pandemic-era paper on the CAPE ratio)

More Headlines

💪 Workers win as wage growth outpaces CPI

🥽 Apple Vision Pro review: The infinite desktop

😳 Angy Chinese investors take to U.S. Embassy’s social media accounts to vent about plunging stock market

🤞 Small businesses are upbeat about 2024

🎵 Taylor Swift makes more Grammys history, announces new album

👀 The Dutch parent company of “Russia’s Google” sells off Russian assets, will exit the country

📦 Is the $139 Amazon Prime Subscription Worth It?

Amazon Drones GIF by HULU

Gif by hulu on Giphy

Amazon vans are everywhere. Amazon boxes are on every other doorstep. The Amazon Shopping app is basically as common as the big social media apps. 

But is the $139 Amazon Prime subscription worth it? 

Apparently, people have a lot of feelings about it: The Wall Street Journal’s top story Monday dives into the cost-benefit analysis. 

Last week, Amazon began adding ads to Prime Video content, charging an extra $2.99 to eliminate them — the latest extra fee. The news sent some into a collective uproar. 

Amazon has raised the annual price up from $79 a decade ago to $139 today, which has driven some American shoppers to quit Prime altogether. (So, instead of two-day delivery, it’s more like four- or five-day delivery.)

  • Adjusted for inflation, Amazon Prime’s 2005 fee of $79 is roughly $127 in today’s dollars, less than the current $139.

  • Amazon delivers goods fast, and its growing library includes every item on earth. There’s also the time-saving element.

Book it: Amazon Prime includes two-day shipping, on-demand entertainment, and grocery discounts. But it’s difficult for consumers to assess how much value they derive from the entire package, which is by design. 

  • Subscriptions can succeed because customers don’t track usage or change offerings. (Or they forget to cancel.)

  • “There is a lot of bookkeeping that needs to happen,” one professor noted. 

Why it matters:

Amazon, a $1.75 trillion giant, is wildly popular. Last week, it reported another stellar earnings report. 

  • The number of Prime users in the U.S. grew from 112 million in 2019 to 176 million in 2023. The U.S. population is 336 million, meaning 52% of American citizens are Amazon users.

Many Americans love Amazon but don’t want to cough up all the money for the annual subscription, so they’re sharing accounts: You can add another adult and up to four teens to your Amazon Household. They don’t have to live under the same roof to get all the perks, like free shipping. 

  • Still, a fully loaded Prime subscription could run north of $300 annually, including all the ad-ons. That’s before ordering groceries or impulse shopping on the app. 

Read more on how Amazon makes money

Together With Shopify

GROW YOUR BUSINESS THE EASY WAY

Start, run, and grow your business without the struggle. Be in control of every sales channel with Shopify.

Sign up for a $1 per month trial period today.

Quick Poll

Do you believe Amazon Prime is worth the cost?

Login or Subscribe to participate in polls.

On Friday, we asked: Do you subscribe to Peloton or another fitness subscription service, from gyms to meditation apps and sleep trackers?

— Wrote one reader, We have nothing available where I live, but even if we did, I like working out at home.

— Added another, Been a Peloton subscriber since ‘15. It’s the best. I hope they can right the financial ship because I don’t know what I’d do without the bike and guide.

— This reader has a recommendation: “Fitbod, one of the best workout apps to reach your progress, builds your workouts and lets you manage everything for those that lack the discipline or know how to build effective workouts long term for many different goals.

TRIVIA ANSWER

$389,900. That was the median existing home sale price in 2023, a new record. And new-construction homes commanded a ~$30,000 premium as of December, according to Forbes.

See you next time!

That's it for today on We Study Markets!

Enjoy reading this newsletter? Forward it to a friend.

Was this newsletter forwarded to you? Sign up here.

Use the promo code STOCKS15 at checkout for 15% off our popular course “How To Get Started With Stocks.”

Partner with us.

Follow us on Twitter.

Keep an eye on your inbox for our newsletters on weekdays around 6pm EST and on weekends. If you have any feedback for us, simply respond to this email.

You can also leave your comments/suggestions/feedback anonymously here.

What did you think of today's newsletter?

Login or Subscribe to participate in polls.

All the best,

P.S. The Investor's Podcast Network is excited to launch a subreddit devoted to our fans in discussing financial markets, stock picks, questions for our hosts, and much more!

Join our subreddit r/TheInvestorsPodcast today!

© The Investor's Podcast Network content is for educational purposes only. The calculators, videos, recommendations, and general investment ideas are not to be actioned with real money. Contact a professional and certified financial advisor before making any financial decisions. No one at The Investor's Podcast Network are professional money managers or financial advisors. The Investor’s Podcast Network and parent companies that own The Investor’s Podcast Network are not responsible for financial decisions made from using the materials provided in this email or on the website.

Subscribe (for free) to keep reading!

This content is free, but to read the rest of this newsletter, you must be subscribed to We Study Markets.

Already a subscriber?Sign In.Not now