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This Month’s Newsletter

Are We Out of the Woods?                                                                  Join our Monthly Newsletter                September 2020                                                                                              

Mark R. Hoffman

CEO, Principal


When the economy shut down in late March, there was widespread belief that a tidal wave of bankruptcies was on the way. Everything stopped. People sheltered in place – truly sheltered in place. No one went anywhere or did anything but walk the dog. Any business not named Amazon or Peloton was seemingly doomed. Yes, there were some big names – J. Crew, Neiman Marcus, Hertz, Virgin Atlantic – that went under fairly quickly, but the stampede to the bankruptcy courts hasn’t materialized. A massive stimulus bill and forbearance on debt and rent appeared to stave off Armageddon.

I went looking for bankruptcy statistics. The American Bankruptcy Institute (yes, there is such an entity – check it out at abi.org) publishes US business filings every quarter. I expected to see a sharp increase in numbers, but what I found was remarkable. In the second quarter, the number of businesses filing for bankruptcy stood at 5,154. That might sound like a lot, but it is actually the lowest quarter on record since 4,858 filings in the second quarter of 2006.
 
States began to reopen in late April. Some restaurants and hair salons flung their doors open to welcome back the cabin fever-riddled public. I live in Georgia, so thankfully I could go get my annual Mother’s Day tattoo. Did this signal that we were out of the woods? Unfortunately, I don’t think so.

As the second wave of COVID-19 spread across the South, California and Arizona, we began to realize that this was going to take a little longer. But wait! There are 20 companies that have potential vaccines and lots of those are in or nearing Stage 3 trials. Surely that signals the end of the misery! But wait – even if those trials are successful, A) the vaccines won’t be widely available until late 2021, B) even the most optimistic projections are that they will be only 60-70% effective and C) 20-30% of the population says they won’t take it even when it is available.

So what does this all mean? It means that we are in for a long, slow fight. A fight that will be characterized by (hopefully) two steps forward and one step back. Where does that leave businesses in our country, particularly small businesses? In a long, slow fight for survival. If vaccines are only 60% effective and only 75% of the public will take them when they are available, we as a nation can’t change our behavior. The vaccines will save lives, but unless you’ve already had COVID-19 (and having had it gives you some form of immunity), you can’t safely go to a restaurant, see a movie, mill around an airport waiting for your flight, attend any large gathering, etc.

Almost all of the $600 billion Payroll Protection Program money is gone. Landlords can’t forgive rents forever. Banks can’t extend loans forever. There are serious cracks in the foundation that are starting to appear.

There are 700,000 restaurants in the US and another 60,000 bars. How many have you been to in the last 5 months? According to a National Federation of Independent Business survey in late July, 23% of the respondents expect to be out of business in 6 months unless economic conditions change. Yelp reported in early August that since March 1, there have been 155,000 business closures of which 91,000 are permanent.

Bank loans have allowed many small businesses to struggle on. But how much more can they borrow and how can they pay it back if there are no customers? PayNet tracks $4 trillion in loans to 30 million small businesses. Here is what their data shows on the percentage of loan and lease defaults.


                         


Finally, we have indications from the largest banks. In their latest quarterly results, JP Morgan increased its bad debt reserves from $1.2 billion to $10.5 billion. Wells Fargo went from $1.6 billion to $10 billion. Citigroup went from $2.4 billion to $8 billion. Other banks show the same horrid trends.

There will be clear winners as this COVID-19 fight wars on. The stock market rally has been terrific. But we are not in the clear. Not by a long shot. Our advice? Hunker down. Stay diversified. Understand that the volatility isn’t going away any time soon.

 


 

Mark is a co-founder of Lanier Asset Management and serves as its Chief Executive Officer. Prior to founding Lanier, he was a partner at The Boston Consulting Group. Mark is an honors graduate of The University of North Carolina at Chapel Hill with a BA in Economics, and holds an MBA from The Harvard Business School.


August 2020: COVID-19's Potential Impact to Deficits

July 2020: Random Musings in Our Random New World

June 2020: Does Anything About This Feel Normal To You?

May 2020: Can the Rebound Last?

April 2020: The Big Bear of Q1 2020

March 2020:  Where's the Bottom?

March 2020: A Perspective on Crises

March 2020: Is there Any Good News Out There?

February 2020: Is Diversification Dead?

January 2020: The Roaring (or Boring?) 20's Are Here!

December 2019: Providing 'Alpha,' The Holy Grail of Investing

November 2019: The Search for Yield: Chapter 2

October 2019: Given the Current Rate Environment, How Has the Search for Yield Changed?

September 2019: What is the State of your State?

August 2019: Volatility is back, but is it the end of the world?

July 2019: Is This the Year 2000 All Over Again?

June 2019: Concerns of an Economic Slowdown?

May 2019: Benefits of Hedge Fund Investing

April 2019: Yet Another Burden On The US Economy

March 2019: Capitalism vs. Socialism: The Debate is Alive and Well

February 2019: What Are the Most Important Factors for Investing in a 401k Plan?

January 2019: A Look Back and a Look Ahead

December 2018: The Inverted Yield Curve - In Layman's Terms

November 2018: A False Sense of Security

October 2018: Reflections From Over Four Decades

September 2018: A Decade of Assisted Recovery

August 2018: The Entitlements Train Wreck - Possible Solutions?

July 2018: Is Wage Growth In This Country Improving Over Time?

June 2018: The Impact of Corporate Tax Reform

May 2018: Kentucky Derby Talks - Bulls vs. Bears

April 2018: How Much Longer Can Interest Rates Stay So Low?

March 2018: Policies For Economic Growth

February 2018: Volatility

January 2018: So What's In Store For 2018?

December 2017: Tax Cuts and Jobs Act: Good or Bad for Me? It Depends.

November 2017: Whack-A-Mole - D.C. Style

October 2017: Should You Consider a Robo-Advisor?

September 2017: Alternative Investments - What and Why?

August 2017: The QT Quandary

July 2017: Quality of Life Influencers (Cont'd)

June 2017: Quality of Life Influencers

May 2017: Repatriation Myths and Realities

April 2017: Time to Invest in International Equities?  Let's Take a Look...

March 2017: Valuation - A History Lesson

February 2017: The Prince of Darkness

January 2017: Mountains of Debt - Does it Matter Anymore?

December 2016: Trumponomics: Reagonomics' Twin?

November 2016: Found Money

October 2016: Marrying Theory and Practice

September 2016: Do You Have a Sharpe Portfolio?

August 2016: Be Careful of High Dividend Stock Strategies

July 2016: "Die Younger" is Not a Strategy

June 2016: Blame Tina

May 2016: Would You Rather:  Tax Cut or Tax Increase?

April 2016: Father Time Demands Your Attention

March 2016: What Has the Last Year Taught Us?

February 2016: Winners and Losers of the Oil Battle

January 2016: Diversification Improves Returns and Lowers Risk

December 2015: Synergy and the Art of Building High Performance Portfolios

November 2015: Take Control...or the Government Will For You

October 2015: A Note from Our Dean of Business

September 2015: Double Espresso at Midnight

August 2015: An Allocation to Hedge Funds - Essential!

July 2015: Another Greek Tragedy?

June 2015: What Does Financial Planning Mean To You?

May 2015: The Active vs. Passive Battle

April 2015: Out on an Island – Preparing for the Fed Rate Hikes

March 2015: To Fee or Not to Fee?

February 2015: European Central Bank Tries QE – Will it Work?

January 2015: 2014 Recap