🎙️ Shorting The Market

It may come as little surprise to hear that the U.S. stock market is the largest in the world, dominating global market indexes 🌎

But Goldman Sachs’ economists expect that to change, with total market capitalization in emerging markets surpassing the U.S. and other developed countries within the next decade.

America’s share of global stock market value sits at 42% today, but they project that’ll fall to 27% by 2050 as countries like India gain ground.

The projections reflect shifting economic power. Still, U.S. stocks enjoy considerable advantages, including many of the world’s top tech companies (at least for now.)

💭 What do you think, readers? Hit reply to let us know.

— Shawn

Here’s the rundown:

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

• What it means as short bets against stocks pile up

• An IPO for a piece of art?

• GSK settles Zantac lawsuit

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

CHART(S) OF THE DAY

IN THE NEWS

 🚧 Bets Against Stock Market Pile Up (Yahoo)

Short sellers — those betting prices will fall — get a bad rap, but they play an important role in markets, expressing negative concerns into prices.

Near-record bets that the S&P 500 will fall (exceeding $1 trillion this month) illustrate traders’ and investors’ lack of faith in this year’s “narrow” 14% rally, where just a few tech companies have fueled gains.

• Ironically, the further the market rallies, the more validated many short sellers feel about their bets, despite incurring increasing losses on paper. Business Insider estimates short sellers have lost some $120 billion on these trades, with much of that coming in June alone.
  

• As one market strategist puts it, “There’s a hand-and-glove relationship between the success the market has had and the pessimism that builds up as that success grinds higher.”

Even more ironically, because short sellers utilize borrowed money, or more specifically, borrowed stocks, they can be forced out of their trades, which actually further adds to stock rallies.

• Oversimplifying: Short sellers borrow stock from someone else, pay a small fee to do so, sell the borrowed stock, and hope to buy back the shares to return at a lower price, keeping the cash difference as a profit (hence betting on price declines.)

Why it matters:

This opens them up to a lot of risk, though. When you buy a stock, you have limited downside and technically unlimited upside (you can only lose what you invested, but stock prices can rise infinitely — at least in theory.)

Short sellers face the opposite: They can make a max 100% return if the stock goes to zero but face unlimited losses if prices keep rising.

• When losses on a short position cross a certain threshold, typically between 30 and 50%, brokers can force short sellers to unwind their trade, ultimately buying back the stock they sold (to return to whoever they borrowed the shares from) and contributing to a rally stomping out other short sellers, called a “short squeeze.”

What happens next is anyone’s guess. Short sellers may be right, and their concerns may foreshadow a reverse in the S&P 500’s 2023 rally, or the market may grind higher, aided by short squeezes.

• Interestingly, the companies driving this year’s rally are also among the most shorted, with Tesla, Apple, Microsoft, Amazon, and Nvidia facing a collective $83 billion in short interest.
  

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🎨 A $55 Million IPO For A Piece of Art? (WSJ)

A $55 million masterpiece is going public. This is not a drill.

A portrait by the late British painter Francis Bacon will be publicly listed this summer, despite rising rates pushing some investors away from art investing.

• A company named Artex is launching a roughly $55 million initial public offering of Bacon's "Three Studies for a Portrait of George Dyer."
  

• Shares in the portrait will go for around $100 a piece and list on a specially created art stock exchange based in Liechtenstein, allowing regular investors to buy and sell shares in famous artwork on a stock exchange for the first time. Trading could begin in July.

Artex has plans to float about $1 billion worth of paintings over the next few months. Each painting will have its IPO. Artex is one of many companies trying to "democratize" high-end artwork.

Masterworks, the best-known business in the industry, has offered fractionalized art worth more than $700 million to its investors since the firm launched six years ago.

• What distinguishes Artex is that as an exchange, it’ll be subject to tighter regulations, paintings will be easier to buy and sell since they're public, and Artex will subsidize up to 3% of market value daily to provide liquidity.

The returns haven't been anything to scoff at: Between 1995 and 2022, masterpieces from the post-1945 era gained 12.6% a year. The S&P 500 rose about 9% yearly, and U.S. corporate bonds gained 4.9% over the same period.

Why it matters:

The idea of "democratizing" art derives from "fractional" ownership models, where smaller investors (the average Joe) who don't have millions to shell out on a single painting can access the very top of the art market, where true wealth can be made over time.

• The market for masterpieces has been on a tear since the financial crisis in particular. From 2009 through 2022, the value of art sold at auction for $10 million or more increased by 700%, according to the Art Basel & UBS Art Market 2023 report.

Why? Ultraloose monetary policy is the biggest reason, as falling or low real interest rates have almost always coincided with rising art prices, as investors look elsewhere, like art, for meaningful returns.

• Should interest rates remain higher this year and beyond, it might be harder for art to deliver the same performance.

MORE HEADLINES

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🥊 A Musk-Zuckerberg fight could generate $1 billion

💊 GSK Settles Zantac Cancer Lawsuit (Bloomberg)

GSK, a London-based biopharma company, has settled a U.S. lawsuit with a man named James Goetz, who claimed that its now discontinued heartburn medication, Zantac, caused his cancer.

Goetz, a long-term Zantac user, sued after the 2019 discovery that Zantac contained a likely carcinogen, NDMA. The U.S. Food and Drug Administration (FDA) removed Zantac from the market in 2020 when they found NDMA formed in the drug, either during storage or high temperatures.

• In response, shares of the British pharmaceutical company climbed almost 5%, marking it as the top performer on London's FTSE 100 index.
  

• “This is a positive for GSK shares as it removes any negative headline risk from a potential judgment from a jury this year,” commented one Barclays analyst.

In a statement, GSK revealed that a confidential settlement had been reached, leading to the dismissal of the case filed in a California state court.

• GSK’s attorneys expressed satisfaction with the settlement, which comes as little surprise with over 70,000 Zantac lawsuits being filed in Delaware state court against GSK and other pharmaceutical companies involved in selling the drug, like Pfizer, Boehringer Ingelheim, and Sanofi.

• The original drug developer (GSK) is accused of uncovering the risks from Zantac more than 40 years ago but concealing the data.

Why it matters:

The decision to settle establishes a precedent, potentially influencing the outcomes of settlements in related cases.

• One investment manager added that the settlement “removes the distraction of any protracted litigation as the company must focus on its future pipeline, which is where value will be created for shareholders.”

Last year, the bellwether trials in the Zantac litigation named several leading pharmaceutical companies as defendants, spurring a plunge in their stock prices that week.

• In August 2022, Morgan Stanley analysts projected the total damages resulting from the Zantac litigation could amount to $45 billion.

However, in December, a Florida judge dismissed the evidence supporting claims that the heartburn medication Zantac could lead to cancer as “junk science,” thereby exempting the drug manufacturers from over 5,000 lawsuits. And this more recent settlement further alleviates concerns about the financial fallout from Zantac.

See you next time!

That's it for today on We Study Markets!

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