Small Businesses Are Coming Back
We hear a lot about how badly small businesses are doing. Tthat’s because the businesses that are near shutting down or have been forced to shut down get most of the news coverage. For example, it’s not news if a business is doing 10% worse than before the recession, but it is news if a company closes because workers are laid off.
To be clear, many small businesses are hurting, but framing the discussion around the chart below shows how small businesses are doing overall.
As you can see, 9.7% of small firms said business would never return to normal on June 27th. 1.5% actually closed as of August 15th and 7.5% said business would never return to normal. We can assume the ones doing the worst in June closed. These are the reports you hear about in the news.
It’s rightfully so that they are reported on as closures will have a long term impact on the economy. Employment impact depends on their size. It's safe to say the smallest small businesses closed at the highest rate. Larger firms have greater access to capital.
On the positive side, 8.5% of firms said business returned to normal as of August 15th. Plus, 15.2% said they would return to normal in 1 month or that COVID-19 had no effect. We can’t say how this did in rate of change terms because there is no data from July, but obviously an improvement from June is good news. Economies in the hotspots are reopening now that COVID-19 cases are declining rapidly.
Arizona Warded Off COVID-19
Hotspots have lowered their new cases. Since Arizona was the first hotspot in the 2nd wave, it’s leading the removal of COVID-19. There were no COVID-19 deaths in Arizona on Monday which is a huge accomplishment. Charts below show the declines in deaths, cases, the positive rate, and hospitalizations. A decline in tests per day isn’t bad because fewer people are getting sick and we aren’t testing everyone.
No one foresees a situation where everyone is tested. Instead, we see treatment improving, lowering the death rate. 7 day average of national deaths per day finally fell below 1,000 on Sunday. Let’s see if it can get to 800 by the end of the month.
Real Time Data
Latest reading on the economy is that it was weakening in the second week of August. Let’s see if that trend is confirmed by the Redbook same store sales reading on Tuesday and jobless claims on Thursday. As you can see from the chart below, the 7 day average of yearly growth in airline passengers has very slowly been increasing.
It seems like this is one of the last things people will go back to. Number of deaths per day would probably need to fall below 500 before flying gets back to normal.
Small business employee growth has been flat. Yearly growth in restaurant dining has accelerated as more places allow for outdoor dining via tents. We can wonder how this will play out in the winter when outdoor dining isn’t as pleasant. Finally, walking, driving, and transit growth have been increasing. Driving and walking are how most people are traveling as mass transit is being avoided because of COVID-19.
Hedge Fund Hotels
Hedge fund hotels are stocks that are beloved by hedge funds and have high compound annual returns. Problem is everyone crowds into them causing them to crash sometimes. Likelihood of a crash has increased now that these stocks have exploded.
As you can see from the chart below, the hedge fund VIP basket’s forward PE multiple has exploded to about 28 while the S&P 500’s PE ratio is near 20. Since 2002, the gap has never been larger. Tesla, Sea, Carvana, Apple, and NVIDIA are the top 5 components of this index.
They have exploded higher. Neither Tesla nor Carvana are profitable which makes this hedge fund index even riskier. Personally, I would run away from most of these stocks.
Valuations Don’t Matter
We’ve known for a few months that valuations don’t matter to momentum driven hedge funds and retail traders. Latest news is fundamentals don’t matter. Rule is stocks always go up. Nothing matters except that rule. As you can see from the chart below, Apple, Amazon, and Microsoft combined have almost a 45 price to free cash flow multiple.
That’s about 1 point below the peak in 2000. If we get a rally in tech this week, the record high will break. These are the 3 largest publicly traded stocks in America, making this a big deal.
Tesla Is The Main Attraction
Tesla is the main attraction in the 2020 tech bubble. It’s not the largest company, but it’s the largest company to have this poor fundamentals and this high of a multiple. As you can see from the chart on the left, Tesla’s market cap is higher than all the auto companies combined. Bulls will argue it’s not an auto company.
However, its solar sales have been declining for several quarters and its self-driving component doesn’t fully work. When solar sales increase for a few quarters, it’s an energy company. When the car drives itself, it’s a software company. For now, it’s an auto company with very low market share.
According to 2022 estimates, Tesla will have lower auto sales than each one of the publicly listed American and European automakers. Similarly, Tesla will have less capex in 2022 than each automaker. How can Tesla reinvent the car without leading in capex?
Other automakers haven’t released a full lineup of electric cars because they aren’t profitable to sell yet. By the time electric cars are profitable, all the manufacturers will sell a full lineup of electric cars. That might take 5 to 10 years, so the automakers still have time even though Tesla bulls think Tesla has already won the race (it hasn’t started yet).
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