🎙️ Triple Leveraged

More Seinfeld?!

😅 Comedian Jerry Seinfeld has hinted at a reunion for the popular sitcom, which ran from 1989 to 1998. At a recent show in Boston, Seinfeld teased that he and co-creator Larry David had been working on a special project for fans.

Though the sitcom struggled to capture ratings in early seasons, it became a huge hit and a major reason Seinfeld himself is almost a billionaire.

“If a book about failures doesn’t sell, is it a success?” Seinfeld once quipped.

Big Seinfeld fans can check out our past write-up on “Seinfeld-onomics” here.

— Shawn and Matthew

Here’s today’s rundown:

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

• Who’s using derivatives to offset extreme weather risks

• Yoloing goes mainstream in South Korea’s stock market

• “Californization” of the Texas housing market

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

CHART OF THE DAY

IN THE NEWS

🌦️ How to Hedge Against Extreme Weather

Forget ESG. The hottest climate-related thing in investing might be the growing use of weather derivatives.

Energy companies, hedge funds, and commodity traders are now betting on the weather as extreme events like hurricanes, flooding, heat waves, and earthquakes become more frequent.

Yep, that’s right: Virtually every problem can become a money-making business. And traders are profiting from the extreme global climate.

• Average open interest in weather futures and options has been four times higher this year than a year ago, and up 12-fold from 2019. Trading volume also has quadrupled.
  

• (“Open interest” is the number of outstanding futures and options contracts not yet settled.)

How we got here: Weather derivatives began in the 1990s, partly because of the U.S. energy company Enron — yes, that Enron. The market suffered a big blow after the 2008 financial crisis but has become in vogue amid a warmer, more severe climate globally.

Said one global head of energy: “There’s a general belief that extreme (weather) events are both going to become more common and more extreme. That has been the number one driver of this.”

• This year, we dealt with the hottest ever recorded, according to NASA, causing floods, wildfires, and other disasters, leading to loss of life and billions in damages.

Investors see an opportunity: Weather derivatives let buyers hedge against the risk that weather will damage or ruin their business.

• As Reuters reports, it’s relatively simple: “A typical transaction would see an energy company buy a temperature-indexed contract to guard against the risk that the weather will be warm over the winter heating season, causing them to sell less natural gas.”
  

• “If it's hotter than average over the period, the value of the contract will rise and generate a payout upon settlement.”

Why it matters:

Think about a ski resort owner — they could hedge against the risk that it doesn’t snow enough. Outdoor music venues could hedge against excessive heat waves or rain events that cause them to cancel events.

• They’re akin to insurance: Contract holders are paid out if weather events occur or losses are incurred. Top industries that use them include agriculture, tourism, travel, and energy.

The bottom line: If this summer’s extreme weather was any indication, we could be seeing a lot more of these to come.

• “If you can measure it, and you can put a dollar amount on it, we can essentially have a product for you,” said an analyst who has launched a weather derivatives desk.

Read more

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🇰🇷 Korean Investors Embrace Risky Strategies

If you’ve never heard of a “leveraged ETF,” take our word for it when we say they’re risky. They’re a way to juice returns. It’s like adding an extra shot of espresso to your coffee — it will either dramatically boost your productivity or make you crash (or both!).

And one country’s investors are particularly fond of these strategies. In South Korea, they’re all the rage. Some of these investment products even have cool names like Super Lizard, Cobra, and Boosters.

• Regulators aren’t happy, though. The Financial Times reports, “South Korea’s financial regulators vowed to curb short-term speculation by retail investors, as their bets on tech stocks fuel fears of a market bubble.”

Gambling or investing? In August alone, South Koreans invested $1.4 billion into one U.S.-based ‘triple-leveraged’ semiconductors ETF that magnifies daily fluctuations by 3x.

• (If the benchmark ETF goes up 1%, the triple-leveraged ETF rises 3% and vice versa to the downside.)
  

• When investing overseas, six out of 10 of South Koreans’ most popular investments were in leveraged ETFs. Only names like Tesla, Apple, and Nvidia attracted more foreign investment from the country than leveraged strategies.

Why it matters:

South Koreans aren’t just YOLOing into these strategies in U.S. markets; they’re also doing it at home.

South Korea’s stock market has $90 billion worth of assets held by over 1,100 ETFs, and nearly 15% of those assets belong to leveraged funds versus 1.16% for the global ETF industry.

• In other words, extremely risky ‘juiced up’ strategies have gone mainstream in the country’s investment industry.

Bubble forming? Along with a surge in margin trading (using borrowed money to buy stocks), the strategies have helped South Korea’s tech-heavy Kosdaq index become one of the best-performing markets in Asia — up 20% on the year.

The head of research at one South Korean investment firm suggested, “Many (ordinary) investors pursue a ‘high-risk high-return’ strategy, spurred on by sensational news and tips from YouTubers, Telegram (users) and other social media.”

• Unfortunately, “their investment spans are getting shorter and shorter, swayed by news flows with no fundamental basis.”

Read more

MORE HEADLINES

🏛️ White House announces new effort to crack down on junk fees

✏️ Standardized test scores for U.S. students drop to new 30-year lows

👀 How terror groups have used cryptocurrency for financing

⛽️ Exxon’s $59.5 billion purchase of Pioneer to reshape U.S. oil industry

😵‍💫 The “Godfather of AI” worries about AI rewriting its own code

🩴 Birkenstock prices IPO at $46 per share

🏠 The Californization of the Texas Housing Market

So much for plenty of affordable housing in states like Texas. Now, even the Lone Star State is facing a housing affordability crisis, which The Wall Street Journal has dubbed “The Californization of Texas,” referencing California’s notoriously high cost of living.

Many locals in cities like Austin and Dallas have been pushed out because of sky-high home prices and higher interest rates. Pandemic-era migration from California to Texas also has driven the trend.

• In 2021, California to Texas was the most popular relocation route in the U.S. — roughly 300 people moved from Cali to Texas daily.
  

• Affordability is defined as what a family spending 28% of its gross income on housing could buy.

• San Antonio encapsulates what’s happening: In 2014, two-thirds of its homes were affordable for a median-income family. By last year, fewer than one-third were.

Spillover migration: Texas is a microcosm of a national trend, as once relatively inexpensive places like Raleigh, Colorado Springs, and Fort Myers have become less affordable:

• Raleigh’s affordability for median-income families is down from 73% to 40% — now only 40% of the city’s housing is affordable to people spending 28% or less of their gross income on housing — in the last nine years.
  

• Sacramento’s has plummeted to just 18%; Colorado Springs’ affordability has gone from 79% to just 25%; and Fort Myers has fallen from 69% to 26%.

Why it matters:

From 2000 to 2022, no state added more residents than Texas, which has gained about 10 million residents this century. It’s the fourth fastest-growing state in the U.S. (by percentage growth rate), alongside Utah, Idado, Nevada, Colorado, and Florida.

• Texas’ affordability had already been falling pre-pandemic, but it really got going in 2021, and home prices kept climbing into 2022, just when the Federal Reserve started its most aggressive interest-rate campaign in decades.
  

• To be sure, Texas homes are still much cheaper than those in high-cost areas like California and New York. The median listing in Texas was about $380,000 last month, compared with $760,000 in California.

Read more

QUICK POLL

Yesterday, we asked: Where do you get your financial news?

— Overwhelmingly, most of you said this newsletter (thank you!)

— Paid news publications like the New York Times and Wall Street Journal were also popular answers, and to a lesser extent, social media and podcasts.

— Seemingly, very few get their financial news from watching TV

See you next time!

That's it for today on We Study Markets!

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