🎙️ Train Wreck?

Almost no Wall Street strategists called this year’s stock rally. As you’ll see in our Chart of the Day, those “experts” predicted a down year for the first time since 1999. What came next? The best start to a year in 26 years.

Before this year, strategists hadn’t even predicted a single down year for stocks this century 🧐

The classic joke that weatherman is the “only job you can be wrong and still get paid,” might need to get updated.

Turns out, you can be well off the mark as a Wall Street strategist, too. It’s why many top business leaders and investors say they don’t pay attention to predictions about the economy or stock market.

—Shawn & Matthew

Here’s the rundown:

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

• What the demise of America’s downtown means

• The intrigue of BlackRock filing for a bitcoin ETF

• Alibaba’s CEO steps down to focus on growing cloud segment

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

CHART OF THE DAY

IN THE NEWS

 🌆 Wall Street Sours on America’s Downtowns (WSJ)

Walk through most downtown areas in America, and the vibe just isn't the same. Whether it's big cities like New York, Philadelphia, and Chicago or mid-sized cities like Pittsburgh, Kansas City, and Omaha, it hasn't been smooth sailing for downtowns. The culprit: Offices in major metro areas have about half as many workers as before the pandemic.

That dynamic has hurt downtown coffee shops, restaurants, and other small businesses, which rely on downtown workers to pay the rent. It's a chain reaction: Fewer downtown workers means less business for downtown storefronts and less tax revenue for cities.

• As a result, investors pay less for bonds financing things such as New York subways and buses. Downtown-focused real-estate investment trusts (REITs) are trading at less than half their pre-pandemic levels, and bondholders are demanding extra compensation (more yield) to hold office-building debt.
  

• Downtowns have long been critical for cities in providing billions in tax revenue, amplifying tourism, and bolstering areas of the economy, including food and beverage and hospitality. But with white-collar workers spending more time at home or in offices outside of downtown, investments linked to those areas are trading at falling prices.

Train wreck? “You could see this as a slow-motion change or as the beginning of a slow-moving train wreck,” said one analyst. “I hope it’s not a train wreck, but it could be.”

Why it matters:

Many city governments rely on tax collection on office buildings, wages earned within city limits, and fares from office workers' commutes. But each category is facing headwinds, hampering city budgets.

• In New York, library branches are expected to close an additional day each week under cuts proposed as the city faces rising labor costs and budget gaps projected to hit $7 billion in 2027. With the outflux of downtown workers, many visitors complain about empty downtown streets and deserted transit stops filled with people who are homeless.

“The suburbs are going to be one of the big winners in this, and the potential losers could be the large cities that have depended on people coming back and forth to work,” a real estate analyst noted.

Also important: Office-building property taxes make up roughly 10% of revenue in major cities. Green Street, a real-estate analytics firm, projects "a dire picture for future city budgets with high levels of remote work."

• Northeastern, Midwestern, and California cities with high debt loads and pension liabilities have faced budget struggles. Meanwhile, some sprawling cities in the South (think Tampa, Miami, Nashville) are booming in population influx and downtown development.

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💼 BlackRock Files for Bitcoin ETF (Blockworks)

It’s an interesting time for one of Wall Street’s biggest firms — BlackRock — to embrace Bitcoin.

Just months after FTX’s collapse, the Securities and Exchange Commission (SEC) has turned its focus on other large digital asset exchanges like Coinbase and Binance, suing them for acting as unregistered securities exchanges (illegal marketplaces for crypto tokens which may legally be securities, requiring more regulatory oversight.)

• But late last week, BlackRock filed an application with the SEC for a “spot” Bitcoin exchange-traded fund (ETF).

Don’t Bitcoin ETFs already exist? Yes, and no. See, the SEC has only approved Bitcoin ETFs based on futures contracts. That is, funds that track future price expectations for Bitcoin and settle in cash.

• These funds enable you to bet on Bitcoin prices to some extent (they don’t perfectly track current prices — learn more), but investors in the funds don’t actually own Bitcoin in a futures-based ETF.

A “spot” Bitcoin ETF changes that. It would accumulate Bitcoin as an underlying asset, giving investors more direct exposure. And because ETFs trade as stocks do throughout the day, they’re very attractive investment vehicles, enabling millions of people to more easily and directly invest in Bitcoin in the same brokerage account they might use to buy Apple stock or an S&P 500 index fund.

• Despite the SEC approving several futures-based Bitcoin ETFs, no such spot ETF exists.

Why it matters:

Enter BlackRock. The asset management giant oversees trillions worth of assets and maintains deep political connections. While other institutions’ spot Bitcoin ETF applications were rejected, perhaps BlackRock’s prestige is more likely to attract regulatory support.

• One thing’s clear: BlackRock wouldn’t waste its time with a filing if it didn’t think there was at least a chance of approval. We’ll likely know for sure in the next few weeks.
  

• Bloomberg’s James Seyffart and Eric Balchunas report that BlackRock’s record for ETF application approvals stands at roughly 575-1, with its only denial coming in 2014.

Hence the speculation that BlackRock’s application will be the first true Bitcoin ETF approved, further legitimizing Bitcoin as a financial asset and enabling Americans to invest in Bitcoin with a more established, better-regulated financial institution such as BlackRock as a counterparty than, say, shady offshore crypto exchanges like FTX.

• One investor told CNBC, “If this were to get approved, then I could anticipate a lot more institutional investors adding bitcoin to their portfolios…it would institutionalize the market in a way that isn’t possible right now.”

MORE HEADLINES

💼 President Biden to meet with A.I. experts in San Francisco

🚗 Rivian joins Ford and GM in turning to Tesla chargers

✈️ India breaks record for largest purchase of airplanes ever in deal with Airbus

🛒 Alibaba’s CEO Steps Down to Focus on Cloud Business (Bloomberg)

Daniel Zhang, CEO and chairman of Alibaba, aka the “Amazon of China,” will step down to prioritize the company's cloud division. This move aligns with Alibaba's ongoing restructuring plan to split into six distinct businesses.

• “As everyone is well aware, the development of core technologies such as cloud computing, big data, and AI will lead to a tremendous transformation of our society and is of utmost strategic significance,” Zhang said.
  

• Since December, Zhang has juggled three roles, taking charge of the cloud unit following a significant outage described as the company's most severe failure in over 10 years.

Alibaba confirmed that Eddie Wu, the CEO of its subsidiaries Taobao and Tmall Group, will take over. Joseph Tsai will step in as Chairman of the $240 billion company, effective Sept. 10.

The context: Alibaba is undergoing a significant reshuffle after facing intense regulatory scrutiny in the tech sector. In 2020, Jack Ma and Ant Group faced a crackdown, leading to allegations of monopolistic behavior against Alibaba and a substantial fine.

After the regulatory crackdowns, Alibaba has struggled to regain its rapid growth, facing competition from new players like ByteDance (TikTok’s parent company) and PDD Holdings. Additionally, the company experienced challenges in the cloud sector, losing market share to state-backed competitors.

• Zhang unveiled his vision to break apart Alibaba after the company marked its third consecutive quarter of single-digit revenue growth, raising concerns about Chinese consumer spending, rising inflation, and an economic growth recovery after years of recurring Covid-19 lockdowns.

Why it matters:

As Alibaba breaks apart its conglomerate, investors have mixed feelings. Three of its spin-off entities will likely dilute existing investors considerably in upcoming fundraising efforts (namely, IPOs.)

Once a favorite among value investors, Alibaba’s stock has disappointed despite a growing underlying business. This prompted the legendary investor and Warren Buffett’s right-hand man, Charlie Munger, to call his investment in the company a “mistake.”

• Alibaba’s stock is down more than 56% over the past five years and is down some 71% from its peak.
  

• Still, the decision to move CEO Daniel Zhang, a well-known figure to many investors, to the more dynamic cloud business may prove reassuring to Alibaba shareholders, who will receive ownership stakes in the spun-off unit.

See you next time!

That's it for today on We Study Markets!

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