🎙️ Off to the Races

So much of the narrative amid 2023’s bounceback year has centered on the Magnificent 7, specifically, how Apple, Meta, Microsoft, Alphabet, Tesla, Nvidia, and Amazon have single-handedly carried the S&P 500 index to its ~15% gain.

It’s rooted in fact: The top 10 stocks in the S&P this year have contributed more than 100% of the index’s return year-to-date.

💭 As you’ll see below, this is exceedingly rare. We might be witnessing the most top-heavy, narrow-market leadership of all time.

— Matthew & Shawn

Here’s today’s rundown:

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

• World’s biggest bank forced to trade via USB stick after hack

• Does decarbonization mean lower oil prices?

• The future of co-working spaces after WeWork’s fall

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

CHART OF THE DAY

IN THE NEWS

🏦 World’s Biggest Bank Trades Via USB Stick After Hack

The world’s biggest bank is under attack. On Thursday, the Industrial and Commercial Bank of China’s (ICBC) U.S. unit was hit by a cyberattack, making it unable to clear U.S. Treasury trades.

• The bank was relegated to using a USB stick. Yes, a USB stick.
  

• The attack is suspected to be by Lockbit, a criminal gang with ties to Russia that’s also reportedly attacked Boeing, ION Trading UK, and UK’s Royal Mail.
  

• Brokerages and banks were forced this week to reroute trades. 

Off to the races: The incident highlights a danger that keeps bank leaders (and major CEOs in general) up at night: a cyberattack that could crush their financial system, prompting a series of headaches and sleepless nights as they work around the problem. 

• “This is a true shock to large banks around the world,” said a cybersecurity executive. “The ICBC hack will make large banks around the globe race to improve their defenses, starting today.”
  

• After the attack, employees scurried to urgent meetings and notified regulators. They might also seek help from China’s Ministry of State Security. 

Why it matters:

The attack isn’t the first to impact the financial system, and it won’t be the last. 

Early this year, ION Trading UK — which serves derivatives traders — was hit by a ransomware attack. This attack forced trading firms that clear hundreds of billions of dollars of daily transactions to complete deals manually. 

On high alert: Companies big and small have invested millions of dollars in heightened security as ransomware attacks become more prevalent — and costly. Attacks may hit record levels this year.

• A blockchain analytics firm has registered about $500 million of ransomware payments through September, a 50% jump from last year. Ransomware attacks surged 95% in the first three quarters of this year compared to 2022.
  

• Caesars Entertainment and MGM Resorts are among the big names that have recently dealt with attacks, showing that companies in all kinds of industries are targets.  

Read more

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💬 How Will Decarbonization Impact Oil Prices?

Decarbonization and a pivot away from fossil fuels will mean lower oil prices, right? Not exactly. At least, that’s not how the oil market analysts over at Goldman Sachs envision it unfolding.

Even in the most optimistic assessments of a global transition to renewable energy, fossil fuels will take decades to truly phase out.

• So, for years to come, we’ll need fossil fuels to heat our homes, fuel our cars, fly our planes, power the huge ocean-spanning ships that facilitate global trade, and so on.
  

• Yet, in light of government plans to phase out their industry, oil companies must decide today whether to keep investing in new oil production or return profits to shareholders.
  

• In a recent research note, the investment bank said that declining production at existing oil wells indicates that global oil supplies would decrease by about 5% annually without investment in existing or new projects.

Elephant in the room: This blurry picture is tricky to navigate — oil companies don’t want to waste their money investing in more oil production than the world ultimately wants to buy.

• And “because the demand outlook is so uncertain, companies are delaying their investments in expensive, (long-term) projects,” according to Daan Struyven, who leads oil research at Goldman.
  

• He adds: “As existing projects get depleted, oil supply could drop — and rather than a surplus, we may find ourselves with regular deficits.”

In other words, seeing the writing on the wall, investing in more oil production is increasingly unattractive for companies, even though oil is still expected to play a major role in the global economy for many decades.

Why it matters:

That disconnect may create a situation where, as we progress through an energy transition, oil gets more expensive instead of cheaper as supply falls off faster than demand.

• Struyven explains, “Even if the world eventually uses less oil, the price of a barrel of oil could remain remarkably robust.”

Predictions are hard: The wide range of forecasts for future global oil dependency only complicates the situation.

• As Goldman Sach’s chart above shows, credible forecasts range from predicting global oil use will drop to as low as 10 million barrels per day by 2050 or increase to over 100 million barrels per day.

Read more

MORE HEADLINES

❗Powell says Fed is ‘not confident’ it has done enough to cool inflation

🎨 Picasso masterpiece sells for $139 million at auction

👁 Doctors perform the world’s first full eyeball transplant

🍼 The U.S. population is projected to peak in 2080 and shrink by 2100

🤔 Former Apple designers announce a new AI-powered lapel pin meant to replace smartphones

📲 Disney+ and Hulu merged app to launch next month

🏢 WeWork’s Bankruptcy Tests Co-Working Revolution

WeWork’s fall to bankruptcy has been well-documented as a cautionary tale. But questions about whether the co-working revolution will last remain lost in the shuffle.

WeWork once commanded a $47 billion valuation, and investors believed that WeWork would reinvent the modern office. Yet that didn’t happen. 

The questions about co-working spaces’ future are timely as commercial real estate grinds to a halt and companies scale back on big leases in city centers. Many workers aren’t going into the office five days a week or at all, while office vacancies sit at their highest level in decades. 

• Flexible office spaces account for less than 2% of all office space in the 20 largest U.S. markets.
  

• Co-working spaces will likely always be around, but they may never make up a third of all office space, which some real estate firms had predicted.
  

• “There wasn’t a snowball’s chance in hell of that happening,” one real estate executive said. 

What gives? Co-working spaces are geared toward mostly smaller companies, including non-profits and startups. 

Second, co-working spaces like WeWork can become competitive with the landlord. In many cases, WeWork leases from the building’s landlord. Then WeWork leases to its co-working tenants. 

Still hope: Some co-working executives say they aren’t worried because their business model differs from WeWork’s. While WeWork leased millions of square feet from landlords, other co-working firms split profits with landlords, making them less competitive.

Why it matters:

You’d think the pandemic and remote/hybrid work would be good for co-working spaces. Why sign a big lease when you can rent a nook in a smaller space and for much less?

• Today, employers want shorter and more flexible leases.
  

• One co-working company is IWG, which has opened about 600 new locations this year. It’s up to 3,455 locations, many in small U.S. cities.
  

• Another co-working executive said his company’s revenue has grown about 40% this year and tripled since 2019 amid “enormous demand.”

As for why co-working could last, one executive summed up why they’ve switched from traditional office lease to co-working: “I just need to have a place where people can touch down, collaborate, meet up, drop in and feel like there’s a hospitality element.”

• There’s no reason landlords like Vornado can’t emulate WeWork’s model by functioning like a hotel: Individuals and companies can sign short-term leases directly with them.
  

• “I don’t think co-working is dead at all,” a Columbia real estate professor said. “The disappearance of WeWork opens up a window of opportunity for landlords to take that space over.”

Read more

QUICK POLL

Yesterday, we asked: Do you think the global “peace dividend” for investors is ending?

🟩🟩🟩🟩🟩🟩 Yes (72%)

🟨🟨⬜️⬜️⬜️⬜️ No (28%)

—Wrote one reader: “Steven Pinker addresses these issues in multiple books - humans tend to improve well-being as we progress. One aspect of this being [fewer] wars and [fewer] deaths due to wars (as a percentage of the world population).

— Another said, “Nothing has changed other than social media and media coverage of conflicts making them seem more dramatic. Each decade since the world wars has had regional conflicts and disagreements.”

See you next time!

That's it for today on We Study Markets!

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