Category: Uncategorized

On May 18th, I posted “Why Stocks Haven’t Tanked.”

At that point the S&P 500 was only down 12% YTD – which was surprising, given the terrible economy.  I wrote that the big reason was that big companies really weren’t suffering that much – especially when you consider the performance of the major digital businesses that drive most of the equity markets.

Well, since then, the S&P is now only down 2.2% YTD.  As we approach the second quarter earnings season, I decided to redo the analysis.  As you can see, the story hasn’t changed – in fact concentration on the digital winners got even bigger.

In the top 100 US stocks, digital businesses surged – now up 34% YTD.  

Nearly half of the market cap of the top 100 US businesses are in digital businesses.  In addition, Tesla – a car manufacturer that investors see as “digital” is up a whopping 268% YTD.  I made Tesla its own category since it was warping the analysis.     

When you take into account the 24% of the top 100 market cap in health care and essential industries (like telecom or big box retail), nearly three quarters of the largest portion of the stock market is relatively pandemic resistant.

The rest of the stock market, the industrial, consumer, financial services, and other companies are also off their lows, but still down year over year.  More importantly, they are making up a smaller and smaller piece of the overall market.  And for the most part, they too won’t see much impact from the pandemic.  Even banks, which might lose money on loan losses, will get bailed out from the government.  

No doubt the pandemic is hitting certain sectors extremely hard, like retail, restaurants, bars, cruise ships, and airlines.  Restaurants, bars, and retailers are often small businesses and don’t really affect the market.  There are some travel companies, but they are a tiny component.

Earnings may change this outlook, as ad supported digital companies Facebook and Alphabet will likely have rough second quarter reports.  Moreover, it is possible that the market is overvaluing the digital revolution on an absolute level, even though it is performing appropriately on a relative level.   

In either case, the implications for the real world economy are pretty troubling.  New virus surges in the Sun Belt will slow or reverse reopening.  Small businesses with physical assets like restaurants, bars, and recreational facilities will stay closed or operate way below capacity.  Small business operators will continue to be crushed while major companies will get stronger.  

The problem is that 30 million people work in retail trade, leisure, and hospitality.  Those industries are going to be crippled for months, so it is hard not to see near double digit unemployment going on for a while — not to mention the knock on effects as many companies simply stop hiring due to the uncertainty.  Moreover, sales taxes will continue to be shrunk, hurting local and state governments.

With “pandemic economics” likely lasting through next year, the value consolidation will likely get even more pronounced.  

The combination of digital employees and shareholders getting richer, millions of unemployed low wage workers, and governments running huge deficits is a recipe for extreme political backlash.

Baseball owners and players are locked in yet another epic negotiation, this time about whether to play an adjusted 2020 season in light of the pandemic.

The real problem?  No one – outside of regional cable sports networks – cares.

As everyone knows, the NFL remains the king of pro sports.  The pandemic will likely enshrine what many of us have suspected for years – that the NBA is the real number 2.  

And if MLB is not careful, pro soccer will soon be third.  Not just on the backs of the improving MLS, but also due to the plethora of European soccer on American TV and a popular women’s game with cross over stars.

To date, baseball drove its business based on powerful TV ratings.  In many markets, the local baseball team is the top tv show – maybe even one of the top 3.  Based on those ratings, regional sports networks can charge significant carriage fees to cable operators, generating big returns. Otherwise, the networks don’t make it into the cable bundle, and the rabid fan base complains about not getting its daily Red Sox fix in summer.

Now, the pandemic brings the perfect confluence of three problems for baseball.  First, a recession will cause cord cutting which will in turn reduce the number of regional sports network subscribers.  Second, playing without fans in stadiums eliminates ticket revenue, which is a big driver of baseball economics.  And third, intriguing NBA and NHL tournaments will interfere with baseball’s monopoly on summer sports TV.

Beyond the challenges of COVID, baseball already had structural issues.  As many have written in the past, COVID is an accelerator of long term trends – the biggest of which is how baseball – the product – has deteriorated in the past few years.

I’ve been a lifelong Yankees fan, but I need to admit it.  The game is boring.  I can’t think of the last time I watched a regular season game or even a postseason game where I did not have a rooting interest.  The incessant walks, the frequent timeouts, the ridiculous fielding shifts, and the constant pitching changes have made the game unwatchable.  MLB tries to adjust, but right now baseball is just not that entertaining.  

Now, even if MLB gets its act together the regular season would be head to head against the NBA playoffs.  When given the choice of LeBron vs. Harden in the playoffs or a midseason MLB game, I can’t imagine anyone picking baseball.  A fast moving sport with bankable personalities is great TV.  Thirteen pitch at bats in the third inning while a left hander warms up in the bullpen is terrible TV.

In addition, as many have noted, the lack national stars really hurts.  There is very little national following around the teams.  Could you imagine a 10 part documentary on any baseball player, ever?  But ESPN just screened one on Michael Jordan that was quite successful.  Media loves to copy success – so expect the LeBron, Wilt or Magic/Bird series coming to a cable channel in 2021.  

All this comes to a head when re-evaluating the cable bundle.  Sports networks drive a huge portion of the monthly cable bill.  Increasingly, folks who are not sports fans will go to skinny bundles, augmented by Netflix, Hulu, HBO Max, Disney Plus and a host of other streaming services.  Cable bundle deterioration should scare the daylight out of owners, who sometimes even own portions of the channels themselves. 

While baseball’s ratings are large on a relative basis, only a small portion of fans feel strongly enough to insist that bundles include the regional networks.  They may keep cable or migrate to a standalone package.  But for most skinny bundle subscribers, those subscriber fees are gone for good,

All these trends mean that losing an MLB season right now will be devastating to the business of baseball.  A big reason for a person on a tight budget to keep cable is gone.  Folks will get out of the habit of watching games and going to games.  In the meantime, younger fans who follow the sport to manage their fantasy teams and conduct sports betting, will find other past-times.   

With so many other content options – the vacuum would be quickly filled, perhaps by a surging professional soccer (both men and women, in the US and abroad).  Soccer fans are younger, and soccer appeals to both men and women. The USWNT is at a level of dominance last seen by the 1990s Bulls.  I’d watch a documentary on them – and it is one of the few shows my daughter might watch with me, too.  

With non stop action, big personalities, and relatively short games, soccer is tailor made for today’s media environment.  Soccer struggled because it doesn’t look good on a small TV and there wasn’t any opportunity for TV timeouts.  With a decent sized HDTV and a pay package not dependent on commercials, watching a good soccer match is a terrific way to spend an evening.  Having access to games from the best leagues in the world from Europe doesn’t hurt either.

The bottom line – at a time when a deteriorating cable bundle is floating a league that has an inferior product, taking a season off during the worst recession in 100 years is a really bad idea.  Hopefully players and owners get with the program, because otherwise MLB may join department stores as businesses COVID wrecked.