How will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 15: June 6th
Updated: Feb 8, 2021
U.S. progress against the virus suddenly stalls; Sweden's roller coaster week; Georgia's mixed reopening; 1.88 million more unemployed, but bottom appears to be coming into sight; Government data suggests astounding one third of unemployed have been stranded without benefits; Business bankruptcies skyrocket 48% to 11 year high; Non-political Congressional Budget Office releases a dark 10-year economic forecast; Heavily criticized paycheck protection program (PPP) is revamped; Anti-malaria drug hydroxychloroquine is miraculously resurrected from grave, only to stumble back in again; Real estate investment rundown; Hotel and retail commercial mortgage delinquencies soar; Brutal 42% of top retail chains didn't pay their rent; Formerly "safe" trophy properties hit the skids; Self-storage rents fall across 97% of the country; Nursing home occupancy plunges a painful 10-18%; Is your office investment really ready for a post-lockdown world?; A tale of two (multifamily) classes; Pandemic will probably deal deathblow to many movie theaters; Crowdfunding platform Crowdstreet experiences the best and worst of times; Update on my investment strategy.
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Many things happened this week that affect investors. And for the 2nd week in a row, the river of information about the virus itself slowed down. So our discussion will again be tilted toward news and analysis of the economic repercussions of the crisis (as well as real-estate).
By the way, this is one article in a multi-part series that has been published weekly since the pandemic began back in March 2020. The series started with three introductory articles on the virus, effect on the economy and alternative investment classes. And then it moved on to weekly updates on the latest and greatest developments (along with weekly updates on my evolving personal portfolio strategy). You can see the links to every article in the series here.
U.S. Progress Against the Virus Suddenly Stalls
The U.S. continued its months-long battle against the coronavirus. And as of Saturday afternoon, the death toll had climbed to 111,627 (from 105,353 the previous week).
However, the national death doubling rate (the time it takes for deaths to double) was unchanged, maintaining the same slightly inclined slope as last week, doubling over an eight week period (56 days).
This was unusual because the country had improved each and every week for the past 7 weeks (since it first started to have success bending the curve back on April 11, as discussed in part 7).
A look at the daily death chart shows why:
In the last week, there was a bit of a death surge. It ultimately settled back down to about the same plateau as the last two weeks. But little to no progress was made in bending the curve.
Some epidemiologists fear an increase in deaths in the next week or so, due to the two to three week lag from increased social activity on Memorial Day. An example is the "Zero Ducks Given" pool-party in Missouri where hundreds crammed together without masks or social distancing (see part 13). And this week, hundreds of thousands of people gathered in cities across the country on multiple days to protest the racial injustices that led to George Floyd's and others' deaths. Since speaking loudly is known to spread the virus, and there's typically a lot of shouting at protests, this also has some epidemiologists concerned.
We'll see what the data shows over the coming weeks.
Meanwhile, South Korea continued to lead most of the world for another week in minimizing deaths (one of the lowest per million) while also minimizing economic damage (projected to barely shrink this year, and without needing to borrow trillions of dollars for stimulus):
As we talked about in part six, South Korea uses an aggressive mixture of the Three T's of disease control (testing, tracing and treatment).
Japan has gone with a similar strategy, and this week continued to experience similar success:
Sweden's Roller Coaster Week
Meanwhile, Sweden has opted with a Lockdown-Lite strategy (see part 8). The hope has been that if this works well, it might provide another workable model for other countries looking to deal with the virus.
This week, the country had an up-and-down experience. On one hand, they made progress and appear to have beaten back the troubling third wave of the virus that hit them last week:
On the other hand, Sweden's death rate continues to be three to seven times higher than their Scandinavian neighbors (see part 12). And Lockdown-Lite seems to have failed its main economic objective. The country is still expected to plunge into a severe recession (GDP projected to be -5.6% in 2020 versus -5.9% for the U.S.). This is a bit better than the average -8.1% projected for the Euro Zone, but isn't the large benefit many hoped to see.
And this week, things got a little unexpectedly crazy. Sweden’s state epidemiologist and architect of its unconventional plan, Anders Tegnell, has previously been an unconditional defender of the policy. Now, he made a surprising confession to a local broadcaster and said the country "clearly" could have done better fighting Covid-19.
"If we were to run into the same disease, knowing exactly what we know about it today, I think we would end up doing something in between what Sweden did and what the rest of the world has done,”
Until Tegnell spoke, the Swedish had broadly supported the strategy. But after the broadcast, public support plunged 18 points (from 63% to 45%). And Prime Minister Steve Lofven promised an inquiry into the government's response.
At a later press conference, Tegnell then said he still stands by the overall strategy and believes that in the long run all countries will end up having about the same success or lack thereof. He claims Sweden could have done a better job protecting care facilities and should have "tested a bit more." He also believes that closing primary schools was unnecessary and does not believe facemasks to be effective.
Recent antibody tests in the country have also shown disappointing results. The number of people who have caught the disease has been fewer than the Public Health Agency’s models predicted and suggests that herd immunity is further off than they were counting on.
Meanwhile, some E.U. countries (like the Czech Republic) are restricting travel from Sweden as they have deemed it a "high risk Covid zone."
Georgia's Mixed Reopening
One of the most important questions for investments (as well as the health of the country) is "what will the shape and speed of the recovery be?" If it's V-shaped and quick, then many investments will be just fine. On the other hand, if it's one of the other shapes (U-shaped, swoosh, etc.), then some or many investments might run into problems. (See part 14 for more information on the possible shapes and their ramifications)
To monitor the evolving situation, we've been watching Georgia very closely. It was one of the first states to reopen. So this makes it one of the most useful early indicators of what may be in store for the rest of the nation.
On April 24th, Governor Brian Kemp reopened nail salons, hairdressers, bowling alleys and gyms (as long as they followed state protocols). Then, restaurants and theaters were allowed to open three days later on April 27th. So they've effectively been open for a little more than a month.
How are they doing? There's no state agency that publishes weekly data on this kind of statistic. But, fortunately, we can get the info from other places. For example, Placer.ai tracks mobile phone usage to different types of businesses to measure foot traffic.
In the past, we've looked at McDonald's, Applebee's, and the Cheesecake Factory. And progress has been slow. This week, let's start by looking at a different type of business: Costco. Here are the results:
This is a pretty good-looking graph. Foot traffic at Costco has recovered from a bottom of -26% eight weeks ago to -4.47%. So this is great to see for them.
On the other hand, grocery and supply stores have generally done very well throughout the entire downturn. So this chart probably isn't reflecting an increase in economic activity, but rather a shift from online traffic to in person. Either way, it's unlikely to contribute much to the state's recovery.
So let's take a look at a business in a category that would be more likely to be affected by the downturn: gyms. Here is Gold's Gym:
Unfortunately, Gold's Gym's graph isn't looking so hot. For some reason, they backtracked since last week, which is disappointing. And they are currently at -45% foot traffic versus the same time last year. Since gyms are not high profit-margin businesses, this particular Gold's Gym is probably unprofitable. The silver lining is that it has improved from the absolute bottom several weeks ago. But the overall speed of the increase looks more slow and swoosh-shaped than V-shaped.
Let's look at another business category that was affected by the downturn: retail. Here is Kohl's:
On on hand. they are at -17%, which is unlikely to be very profitable. But the trend is clearly greatly improved from the peak only four weeks ago. And, the speed of the recovery has been a lot faster than Gold's Gym (almost V-shaped). So this is potentially a promising sign for their near future. We'll continue to monitor them.
Here's another retailer: Bed Bath and Beyond:
They look more similar to Gold's Gym. While they have improved from their bottom six weeks ago, they are still at an unsustainable -41% versus a year ago, and unlikely to be profitable. Their recovery has been shaped more like a swoosh, although this week there was an acceleration. It would be nice if that were to continue next week. Again, we'll see.
Here's the Cheesecake Factory this week:
This is similar to Bed Bath & Beyond: a slow, swoosh U-shaped recovery, and currently at a very unprofitable -48.5% year on year.
Here's one more: IHOP:
IHOP is similar to Bed Bath & Beyond at a very unprofitable -46% year on year and a slow, swooshed-shaped recovery.
Overall it looks like the positive progress on shutdown-battered businesses is mixed. On one hand, Kohl's could be recovering in a quick V-shape. On the other hand, Gold's Gym, Bed Bath & Beyond, Cheesecake Factory and IHOP appear to be more of a slower swoosh recovery.
A statewide V-shaped recovery would almost certainly require wide participation by the majority of businesses. So far that doesn't seem to be the case. We'll continue to monitor to see how this evolves.
Meanwhile, one immediate X factor to consider is a second wave of the virus. If that hits and a shutdown is necessary, all the economic progress to date could be lost.
Here's how that's looking right now:
Georgia's daily data is noisy but the state appears to be stuck in the same plateau it's been in for the last three weeks. As mentioned above, some epidemiologists are concerned that we may see a spike next week due to the delay factor from increased activity on Memorial Day. We'll continue to monitor.
1.88 Million More Unemployed, But Bottom Appears To Be Coming Clearer Into Sight
For the 10th week in a row, more than a million Americans reported that they lost their jobs. This week it was 1.88 million, which is down a little from 2.13 million last week.
However, this jobless claims statistic tells us only who has lost jobs, and not whether some have been rehired. So for that, we need to go to the "continuing claims" number.
Last week, this number went down for the first time since the pandemic started, which was very welcome relief. And it suggested we might be near the bottom. But, as we also mentioned, the biweekly nature of the states' reporting, and the fact that hard-hit states (like California and Florida) are not included, mean the continuing claims statistic still probably overstated the recovery.
This week confirmed that theory. Continuing claims actually rose again from 21.1 million to 21.5 million (surprising some analysts, but not readers of this series). Even with the backsliding, this is still lower than the 25.1 million peak two weeks ago. And despite the move in the wrong direction, the trend currently still looks like a bottom. The next two weeks will tell us for sure.
Meanwhile, the May nonfarm payroll report also brought some very welcome news. After going into freefall in April (-20.7 million on payrolls), this week's payrolls clawed about 12% of that back, by increasing 2.5 million.
The fact that the nonfarm payroll even went up at all was a surprise to virtually all economists, who were expecting another drop. So the reversal was good news. On the other hand, some pointed out that the bounce may have been only temporary. The rules in the Paycheck Protection Program (PPP) originally required many companies to rehire at about this time, to avoid having to repay the money. So if the economy is not fully recovered when that one-time stimulus money runs out, the newly rehired employees may go back out the door just as quickly. But there's no way to know for sure at this point. And for now, good news is better than bad news. Again, this may indicate that we're close to or at the bottom. A few claimed this data point was proof of an imminent, quick, "better than V-shaped recovery." (See part 14 on the different recovery "shape" possibilities). Others claimed the growth looks too anemic and at best is looking like a slower, swoosh-shape. Time will tell who's right. Meanwhile, the headline unemployment rate fell also, from 14.7% to 13.3%. However, as we discussed in part 11, this is a potentially misleading statistic in today's environment. Similar to last month, a large number of workers were improperly recorded as "absent," when they were actually unemployed. Correcting for this, the Labor Department said the real number was 16.3%. Still that was lower than the same correction a month ago (which was +5% or 19.7%). And in theory, this was good to see.
But even that number does not take into account the fact that the headline rate doesn't include all of the unemployed. It omits people who have given up looking for work, which which makes sense in normal times but not now (when many people who want work, can't even try because the jobs aren't available yet). So to get the full picture, we need to look at the U-6 rate, which was 21.2%. Unfortunately, this was not much different from the 22.8% last month. And it would mean that a brutal one in five Americans were still unemployed.
And unfortunately, even the U-6 rate ignores factors needed to accurately count the out-of-work. For this reason, the Chicago Federal Reserve came out with a new statistic called the U-COV that does. As we discussed last month, this previously showed the actual unemployment rate for April was a mind-blowing 30.7%. That meant almost one in three Americans was out of work.
We will have to wait for them to crunch the numbers for May to see what U-COV comes out to be next.
Government Data Suggests Astounding One Third of Unemployed Have Been Stranded Without Benefits
Studies have shown that when significant numbers of workers lose jobs and have no income, the damage to the economy can last a long time. So one of the key U.S. strategies to delivering a quick, V-shaped recovery, has been to provide a strong unemployment safety net. The idea is to provide unemployment income to keep the jobless spending money (which supports the economy). And it also helps them to keep their housing, continue to eat and be able to look for a job when things rebound. And as part of the CARES stimulus bill, the U.S. government provided additional unemployment payments on top of the typical state payments to do this.
However, as we discussed in previous weeks, millions of the unemployed have been left high and dry and not able to access their funds. This has been caused by antiquated and overloaded state computer systems and bureaucratic snafus. And if this happens to enough people, the odds of a quick recovery become very low.
Unfortunately, the government doesn't release any official data to measure the number of people still unpaid under CARES. So back in part 12, a senior fellow at the Century Foundation used indirect means to try to estimate it. He concluded that about 40% of people had not been paid at that point.
This week, Bloomberg economists attacked the problem in a more direct way. They compared the claims made by the states versus the actual payments recorded by the U.S. Treasury over the course of the pandemic. And from March to May, an astounding one third of the unemployed have not received their money.
If accurate, it suggests that there may be significant amounts of lasting damage. If so this could be problematic for a quick recovery.
The silver lining is that May was the lowest shortfall at about 20% (versus about 55% in April). So while still not acceptable, it has also improved a lot in just a month. And so it's possible that next month will continue to improve and look better. We'll see when they update the analysis next time.
Business Bankruptcies Skyrocket 48% To 11 Year High
U.S. courts reported that business bankruptcies skyrocketed 48% in May (versus last year). This number was up from a 28% increase in April (year on year). And year to date, the numbers are the worst since the Great Recession (in 2009).
The pain was widespread, and large companies were not spared either. Prominent companies who filed bankruptcy included JCPenney, Neiman Marcus, J.Crew, Gold's Gym, Lasix Vision Institute, Le Pain Quotidien bakery chain and generic drug maker Akron. This drove up the bankruptcy rate for major companies (having $50 million in liabilities or more) to 37%. This was also the worst month for this since the depths of the Great Recession in 2009.
Bankruptcy lawyer James Conlan, with Faegre Drinker Biddle & Reath LLP’s restructuring group, said May was a "busy month" and that pain was wide-spread. Sectors included energy, airlines, aircraft lessors, real estate, top automotive suppliers, hospitality and retail. And he claimed that while the pandemic downturn caused the situation for many, some companies had actually gotten themselves into trouble beforehand by borrowing too heavily.
Few expect this to be the end. Amy Quackenboss is executive director of the American Bankruptcy Institute and represents more than 12,000 bankruptcy professionals. She said, "The Cares Act and other swift government measures have been successful in keeping consumers afloat during the crisis. As this relief runs its course, however, mounting financial challenges may result in more households and companies seeking the shelter of bankruptcy.”
Conlan also concurred.“I think we’re going to see an extraordinary number of large corporate bankruptcies, not just in the U.S. but across the globe,” he concluded.
Non-Political Congressional Budget Office Releases a Dark 10 Year Economic Forecast
Meanwhile, the nonpolitical, nonpartisan Congressional Budget Office (CBO) released its 10 year forecast.
Surveys from purchasing managers were negative and indicated a recession (a 43.1 on the U.S. Institute of Supply Management Manufacturing Index). This was a bit better than 41.5 reading in April, but well below the 50 that marks an expansion.
And the analysis showed that the slow pace of recovery, despite the removal of lockdowns, suggests that the recovery in the months ahead could be tentative. They also found that the $3.3 trillion stimulus program will only "partially mitigate the deterioration in economic conditions".
As a result they revised their previous estimate of 2020 growth from 2.2% (pre-covid) to a painful -5.6%. They expect unemployment to still be above 10% at the end of the year. And while they project continued slow growth, it will not come fast enough to make up for the ground that's been lost so quickly. As such they are forecasting a depressing 10 years before the country returns to its pre-Covid-19 economic health:
If this ends up being accurate, this would be a combo-shaped recovery (see the different recovery "shape" possibilities in part 14). The recovery would start quickly (v-shaped) but eventually peter out into a long "swoosh-shaped" recovery.
On the positive side, the forecast is based only on what we know today. And they acknowledged that certain things might drastically change the results. One of these was the possibility of the government passing significant additional stimulus.
Last week, we talked about how a chamber of the U.S. Congress (controlled by one political party) had passed a $3 trillion stimulus bill.
Initially, the other chamber (controlled by the other party) had pronounced it dead on arrival. But then some very poor economic data came out, and the President and his administration announced support for more stimilus. And then the leaders in the blocking chamber also agreed. As of last week, negotiations were ongoing.
This week, little progress was reported. However, the President further proposed a $1 trillion package, and the leader of the balking chamber has agreed to this in principal.
At the same time, several leaders of that chamber say they aren't in a rush to pass stimulus. And, the earliest they will even look at it is late July. If this continues, then those waiting for a stimulus calvary to charge over the hill, might be waiting for a while.
Heavily Criticized Paycheck Protection Program (PPP) Is Revamped
In late March, the U.S. government passed the first part of a huge stimulus package ($2.2 trillion) to offset the economic pain of the lock-downs. A large part of that ($660 billion) was allocated for the small businesses hit hardest by the shutdowns, like restaurants, shops and salons. The idea was to give them free money to tide them and their employees through the shutdown. This would allow the businesses to reopen quickly afterwards and prevent the employees from falling through the bottom and permanently damaging themselves and the economy. This program was called the Paycheck Protection Program (PPP) and was designed to facilitate a V-shaped recovery.
However, in part 7, we talked about how many companies haven't been able to receive the aid intended for them, due to a string of problems. These have been caused by government bureaucracy, snafus and questionable decisions by the Small Business Administration, the Treasury Department and others.
And in part 11, the SBA and Treasury were dressed down by both parties in Congress for leaving tens of thousands of businesses out in the cold with overly strict rules (that were also against the intention of the law). Despite this criticism and despite lobbying by business advocates, the agencies did not back down.
So this week, Congress explicitly passed a revision bill to deal with this, and it was signed into law by the President on Friday. It makes the following changes:
It reduces the controversial requirement to spend 75% on payroll to 60% (effectively increasing the amount available for other things, like rent, from 25% to 40%). The previous restriction made it impossible for many retail businesses in high rent area to use the program. Although the reduction was less than the 50/50 split that business advocates had recommended, it's still expected to be a big step in the right direction.
It increases the time frame in which businesses must spend the money from 8 weeks to 24 weeks. The eight week period ended up being impractical for many businesses, as they had no chance of opening during shutdowns and thus would have a better chance of surviving if they could use it for payroll when actually open. So this change is expected to help those businesses.
It pushes back the deadline for rehiring workers from June 30 to December 31. The majority of businesses have no hope of fully rehiring all workers by the end of this month. So this change makes the requirements more realistic and should encourage more businesses to participate.
Tom Sullivan, of the U.S. Chamber of Commerce and Vice President for Small Business Policy claimed the changes would, "help Main Street's efforts to reopen."
He also pointed to the Chamber's latest Small Business Coronavirus Impact Poll, which found that while 8 in 10 businesses are in the process of reopening, 55 percent of owners believe it will take six months or more to be fully operational. This number is up from 50% in April, which itself was up from 46% in March.
Some were concerned that both the SBA and Treasury Department will still have to provide significant additional guidance on the above. And time is of the essence since the first PPP deadline has already passed (May 29). But guidance from both departments has previously been heavily criticized as slow, incomplete and sometimes contradictory. Karen Kerrigan, president of the Small Business & Entrepreneurship Council (a nonpartisan advocacy group) said, "We ask that it be clear and speedy".
Anti-Malaria Drug Hydroxychloroquine Is Miraculously Resurrected From Grave, Only To Stumble Back in Again
Many had hoped that the anti-malaria drug hydroxychloroquine could be repurposed into an effective Covid-19 treatment. And early on, studies looked promising. The potential catch was that none of these studies were scientifically sound, because they were too small or didn't follow proper scientific protocols.
In mid-April, the first big scientifically rigorous study came out (150 patients) and was disappointing. It showed no benefit from taking the drug at all. Still, there was a faint hope that perhaps another larger study would show something different.
Then in late May, a study of 96,000 people