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.