Wednesday Briefs – 1 July 2020

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This week: Coronavirus in June; Accidental winners; New York City budget.

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Coronavirus in June

June was another month of great progress against the virus, albeit with some fresh concerns in a handful of states. Nationwide in the US, the seven-day average of daily deaths fell from 1,017 on June 1st to 586 on June 30th. On this measure, New York State continued its recovery with deaths dropping from 67 daily to 13. But Arizona, Florida and Texas saw increases from 16 to 35 (AZ), 30 to 39 (FL) and 22 to 29 (TX).

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While concerning, these increases are very modest compared to the big numbers of daily deaths we were seeing just ten weeks ago, with the US and New York at 2,618 and 760 respectively on April 15th.

Assuming a two to three week lag between the surge in cases and the rise in deaths, we would expect deaths to continue rising in these “hotspot” states and a few others for the next month or so. Based on the cases that we are seeing now, each of AZ, FL and TX could see deaths in excess of 100 on several days in July. In theory, the reversal or slowdown in the re-opening of these states should limit this surge however.

Accidental winners

Unexpected events like the pandemic produce unexpected winners and losers in the economy and stock market. Though the S&P 500 is still down for the year, erstwhile ho-hum stories Clorox and Kroger were up 42% and 18% in the first half of the year, while once-cool Shake Shack and Ulta Beauty are down 11% and 19% (and each down over 50% from its 2019 high).

On Main Street too, the divergence is clear, if not in actual sales, in demand for services or products. Most retailers and restaurants are faring poorly. Hair salons and personal grooming were devastated. But bicycle shops and the rare surviving toy stores are seeing strong demand. Much to their dismay, this demand is not necessarily translating into significantly higher revenues given that they have sold their inventories and are having difficulty sourcing product. Finding a bicycle of one’s choice during June was a near impossibility.

Instead of planning a summer vacation, consumers have moved their dollars towards indoor entertainment (electronic or other), bicycles, boats and, if anecdotal information is worth anything (it usually isn’t), horses. As far as we can tell from a quick browse on eBay, there is not yet a pricing mania in Lego or similar products.

New York City budget

Is New York City facing difficult times or will it once again defy the odds and prove to be antifragile (per Naseem Taleb’s terminology)? Betting against the city in recent decades has been a losing proposition, as was the case in the immediate aftermath of 9/11 when real estate activity recovered quickly.

The City relies on real estate taxes for a significant part of its budget and real estate is being pressured from the weakening economy, a scarcity of residential buyers (domestic and foreign), pressures on rents and the decisions of some companies to move out or to reduce floor space.

Ultra-luxury residential was vulnerable before the pandemic because inventory was rising rapidly with the completion of several condominiums on Billionaire’s Row or elsewhere. The pandemic has made things more complicated. Michael Hendrix of the Manhattan Institute relates the following:

The city’s wealthiest neighborhoods lost between a third and half their population since the pandemic hit, and recent unrest has not helped to draw them or the rest of the estimated 420,000 departees back. House hunters are reportedly “swarming” New York City’s outskirts. Roadway Moving reports “insane” demand from residents moving out of New York City, consisting “largely of higher net-worth individuals.”

A few years ago, we expressed doubt on the profitability of some ultra-luxury residential projects (then planned, now nearing completion), in Manhattan Ultra-Luxury ‘Battling the Serpent of Chaos’.

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