🎙️ Zombie Malls

Investors keep dumping money in the stock market this year.

It all started with a strong Q1 earnings season and buzz around AI, leading to an all-time high of $1.5 billion in daily net flows.

💭 After the 2008 financial crisis, American stock ownership trended downward until 2020. Then came euphoria and short-squeeze efforts. And despite a tough 2022, investors are staying in the game more than ever.

— Matthew & Shawn

Here’s today’s rundown:

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

• Why investors are still holding record cash

• What’s up with zombie malls?

• New measures to boost supply chains, lower inflation

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

CHART OF THE DAY

IN THE NEWS

💸 Investors Are Holding Record Cash Despite Market Rally

Investors keep adding to stocks this year, as shown in our Chart of the Day above. But they’ve also been busy doing something else: Sitting on cash. 

Record investor balances remain in money-market funds even as the stock market keeps climbing higher: In November, the S&P 500 is up about 8.7%, and the Nasdaq Composite has risen 11%. The yield on the 10-year Treasury note, which drops as bond prices rise, is down nearly half a percentage point, a relatively big move. 

Cash is a competitor: Investors are plowing cash into stocks and bonds. Yet institutions and investors also have a record $5.7 billion in cash-like money-market funds, most yielding above 5% today. 

• That yield likely won’t last forever, so you might as well get it while you can, right?
  

• Bulls believe cash on the sidelines is another positive signal as inflation falls. Bears believe the record cash levels reflect caution about how well stocks could do in 2024, and most of the money-market flows are simply people moving money out of checking/savings accounts that don’t typically earn much interest.
  

• “For the first time in a long time, cash is a competitor,” one financial services CEO noted. “But I think as soon as short-term rates start to tick down, you’re going to see large flows to other assets.”

Staying bullish: One analyst said, “All that cash that customers have been piling into their brokerage account the last six months to earn yield — it says to me that retail investors are really bullish.” 

• In the past few weeks, investors have largely poured their money into tech stocks like Apple, Amazon, and Nvidia, equity index funds, and beaten-down small caps, which have been performing better after a rough first 10 months of 2023.

Why it matters:

In October, money-market funds saw their first big monthly outflow since interest rates began rising well over a year ago. But short-term rates are still around 5%, making the idea of “just parking your money in cash” much more attractive than it used to be. 

• Even if stocks continue to perform well through the end of the year and into 2024, money-market funds will likely remain in style.

“What I see here is a growing realization on the part of individuals and even institutions that there are just better yields to be had in a money-market fund than bank accounts,” a JPMorgan strategist commented.

Read more

TOGETHER WITH PERCENT

Finding Returns in a High-Interest Rate Environment

Higher interest rates and market volatility are making it harder for investors to find above-market returns.

However, private credit investments may outperform traditional markets over the next 5 years, according to research from KKR. In fact, they expect private credit returns to outpace the S&P 500 in the next 5 years¹.

Private credit used to be reserved only for big-name institutional investors, but today, Percent is making these investments accessible to everyday accredited investors.

On Percent, it’s easy to find, compare, invest, and track your private credit investments. 

You’ll get access to:

• Attractive yields. As of October 31, Percent’s weighted average APY is 18.58%.
  

• Diversification. Returns are generally independent from public market performance.
  

• Liquidity. Deals can mature in less than a year, with some offering liquidity after a few months.
  

• Up to a $500 sign-up bonus with your first investment.

¹https://www.kkr.com/content/dam/kkr/insights/pdf/mid-year-update-2023.pdf

🏬 Owners Keep Zombie Malls, But Towns Want Them Gone

How many times have you driven by an old mall with only a few operating stores, weeds growing in the parking lot, and an overall sense of misery hanging in the air?

Well, these aging malls take a long time to expire, but they can still be valuable assets. And the real estate firms specializing in buying them are making a pretty penny off them. 

Zombie malls: Many real estate executives consider malls the “stars” of their holdings, turning down offers from developers who want to tear down old malls and build something new. Thus, hundreds of “zombie malls” exist across the U.S.

• Many old, low-end malls have lost at least half their value since 2016. Some have lost 70% of their value in less than a decade.

How it works: Mall values have fallen due to shifting consumer patterns and the rise of e-commerce. When property values drop below owners’ outstanding debt balances, owners typically halt mortgage payments.

Then, they either try to renegotiate with lenders or give up and sell. 

• Real estate firms like Namdar Realty and Mason are prolific buyers of U.S. malls. They buy them cheap and keep them operating even as town officials call for an end.
  

• Ideally, they become mixed-use properties with housing, medical offices, retail, and/or restaurants.

• “Really, any proposed use of the building would be better than a dilapidated mall,” one official said. “It’s a burden.”

One real estate firm that now owns an old mall pays about $95,000 yearly in county and local taxes, much lower than the $660,000 annual bill the previous owner paid in 2019.

• That’s because the new owners successfully appealed the mall’s property assessment, a popular strategy. 

Location, location, location: Malls are stillvaluable assets because they occupy such large swaths of prime real estate that can be sold in parts.

• One mall owner sold part of its land to Target for $8.9 million and other parts to Wendy’s, Friendly’s, and Popeyes for around $2 million.

Why it matters:

Zoom out: Malls exploded in the 1960s and 1970s amid suburbanization and rising consumerism. Big department stores anchored them, but by 2010, e-commerce was eating into their sales. Once big box stores closed, smaller tenants followed. 

Since the supply peaked in 2008, roughly 150 malls have closed. There are about 950 left in the U.S. Analysts expect another 300+ to close in the next 15 years. 

But some new mall owners show you can make big money, even in struggling sectors. Namdar Realty bought one Connecticut mall for just $9.5 million in June, well below its $153 million appraisal in 2012. 

• In June, Namdar Reality posted a profit of $86.7 million, an 8% jump year-over-year.
  

• “You make your money in buying at the right price,” a Namdar executive said. “We just see an opportunity.”

Read more

MORE HEADLINES

🛍️ Black Friday shoppers spend a record $9.8 billion in the U.S.

🏈 Ken Griffin in talks to buy a minority stake in Miami Dolphins

💼 Bill Gates says using AI could lead to a 3-day workweek

✈️: The busiest day ever at U.S. airports, visualized

🚗 How self-driving cars can gain the public’s trust

🗣️ The White House Touts New Measures to Boost Supply Chains

Inflation is on the mend, but officials want to address economic vulnerabilities made clear by the pandemic.

This means doubling down on bolstering key supply chains, which the Biden administration announced on Monday, led by a new White House Council on Supply Chain Resilience.

Meet the council: Every four years, the council will prepare comprehensive assessments of America’s supply chain resilience, mirroring reports normally prepared for national defense and homeland security.

As part of the initiative, the federal government will invoke a cold-war era law — the Defense Production Act — to invest $35 million in input materials for injectable medicines, addressing concerns about America’s pharmaceutical supply chain dependence on “high-risk foreign suppliers,” per Bloomberg.

• The goal is to foster further investments in “essential medicines” and “mitigate drug shortages,” according to a White House statement.

The announcement included about 30 measures to prevent shortages of important goods, including new investments supporting food supplies, battery production, and $275 million in grant selections for advanced energy manufacturing & recycling programs meant to “revitalize” communities impacted by coal mine closures.

• The Department of Energy will also develop an “assessment tool” to determine the risk of potential trade disruptions for “critical minerals.”

Why it matters:

The San Francisco wing of the Federal Reserve recently conducted a study that found pandemic-induced supply chain hiccups fueled about 60% of America’s inflation surge over the past few years.

This takes some blame for inflation off policymakers who passed large government stimulus packages during the pandemic.

• However, one could argue that stimulus packages added to supply and demand imbalances.
  

• Still, inflation has been a worldwide phenomenon, giving credence to global supply-chain-focused explanations over the spending actions of any one or group of governments.

Big picture: While the Biden administration hopes supply-chain solutions will bring inflation back to 2%, Fed officials are less convinced.

Fed Chairman Powell argued earlier this month that “a greater share of the progress in reducing inflation will have to come from tight monetary policy” that reduces spending (or “aggregate demand,” in econ parlance.)

• In other words, as the world has normalized after pandemic disruptions, this has accounted for much of the ‘easy work’ to bring down inflation.
  

• The Fed thinks its policies, namely raising and keeping interest rates high, remain necessary to bring inflation in line fully.

But the measures announced today aim to strengthen America’s supply chains in the face of future wars, pandemics, and other disruptions.

Read more

QUICK POLL

On Wednesday, we asked: What is your favorite type of Thanksgiving food?

—Respondents were evenly spread out from main dishes to sides and dessert. “Turkey sandwich leftovers are the best,” one reader said. “And gravy on the turkey and the dressing,” wrote another.

—One reader who chose the “other” category: “Sweet potato casserole.”

See you next time!

That's it for today on We Study Markets!

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