Riots and Looting Fuel Stock Market Rally – Here’s Why
Stocks don’t exist in a vacuum
Institutions like pension funds and insurance companies constantly evaluate the risk of all assets.
Stocks, Bonds, Real Estate and others.
Riots have gotten so severe in the past 5 days, especially in New York that it has altered the risk premium for real estate.
I believe this will be permanent. I’m an optimist. But things have changed for cities. It doesn’t matter if we’re speaking about commercial buildings or residential properties. The costs, risks, and insurance have all gone up.
No one could have imagined the scenes we are witnessing in New York City. Businesses in areas like SoHo and Madison Avenue have been destroyed. They are less attractive now. To continue operating these stores, you will need serious enhanced security measures.
And even with that extra security, it is nearly impossible to combat what we have seen. A security guard cannot fight off 7 looters at one time. Have you seen the footage? And this behavior may not be going away. We have 40M unemployed.
Had you suggested this scenario to a real estate investor, they would have scoffed that the scenario might be plausible for one bad night or two. But no one would believe you that New York city would have 4 consecutive nights of pure riots.
Teens looting every single store in Manhattan non stop for days. It just happened.
The New Normal:
High End Luxury stores could move to appointment only shopping. Where you need an appointment to enter the store. Police have made it clear they will not protect property. So, you have to implement your own protections. And all of that costs money.
Instead of public access at street level, shoppers could be buzzed in by security or given an access code to enter. Street level stores – once premium real estate; is now less attractive.
Many will ask – do we even need a store at all?
Electronic Stores could move to a light imprint model: You can test a phone or laptop in the store. But they have little or no inventory. They send it to you. So a company like Best Buy would need stores at half the size they have now. Could a smaller chain of electronics stores move to this model? Probably not. Again, it is a win for the large companies that have access to capital and can pivot to a changing retail environment.
Looters were targeting drug stores. Because drugstores have pharmacies with Oxycontin and other drugs.
Its very likely pharmacies would move to an online format. You can speak with a pharmacist but they send you the pills.
Amazon recently acquired pillpack to enter this space.
Amazon benefits from these events. And they could deliver drugs within one day in most places. Drugs are a profit center. Many drug stores would close under this scenario. Amazon will be a fierce competitor in this space.
Who needs stores?
Companies will re-evaluate the cost benefit analysis of stores themselves. Do we really need them? How many do we need? How much theft (inventory shrinkage) can we afford? How high will the insurance costs be. Insurance doesn’t cover riots.
Virtual Reality
Although its not here yet, virtual reality is coming. And it is likely to alter the way we shop anyway.
The real reason the stock market is so strong.
Large businesses vs Small Businesses.
Small businesses have had the worst three months ever. Most have been closed due to Corona Virus. Many didn’t qualify or receive PPP funds. Then, the looting began. It has been horrific for small businesses.
It’s been bad for large businesses too but they are insulated due to size, scale, access to capital and geographic diversification.
Small businesses have been hit much harder by each of these waves.
And each time, large public companies gain.
Their small business competition is being destroyed. Literally and figuratively.
Small restaurants and bars are in serious trouble. I keep reading of closings. In Los Angeles, after three months of lockdown, bars and restaurants were allowed to open this past Saturday. Widespread looting occurred. Many stores on Melrose Avenue and in Santa Monica were destroyed. After a three month period with no revenues.
What small business can survive that hardship? Its heartbreaking and devastating.
Are we heading towards an America dominated by chains like Applebees and Chilis? There will be much less diversity of choices in bars and restaurants that’s for sure.
Again, public companies have access to capital. They can negotiate better lease terms. They have flexibility. And they win when the local bars and restaurants close.
Multiply this all over the economy and you see why Large companies listed on stock exchanges are doing well (and some hitting new highs) when the economy is in rough shape and there are 40M unemployed.
Stay safe.
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