Strome Business Minute With Dr. Jeff Tanner

We’ve said it before but now others are saying the same – reliance on corporate debt may cause a recession. Yes, we’re already in a recession but global debt surged seven point five trillion dollars in the first half of last year and is expected to be over two hundred fifty five trillion when the final numbers come in on last year – all well before the massive borrowing that is part of the stimulus. If you want to see evidence of the effects of debt in a recession, look at oil companies who can’t pay their loans back. With global GDP likely to decrease by at least three percent, there will be strain on those who are highly leveraged. Companies which didn’t use cash to buy back stock or pay dividends will thrive. To learn more, visit odu.edu/business. This Strome Business Minute is presented by the Strome College of Business at Old Dominion University.

What’s going on in your house? Apparently, it’s baking! And companies reaping the rewards of a national baking frenzy include King Arthur Flour. The premium-priced brand said its sales of flour were up more than two thousand percent year-over-year, six point six million bags in March. Karen Colberg, company co-CEO, told Yahoo Finance, “… baking is the new baseball, it’s become the national pastime.” All baking ingredients saw increases in demand. Adweek says sales of baking yeast quadrupled, baking powder tripled and sugar sales nearly doubled. King Arthur has benefited from adopting a digital marketing strategy several years ago. Recently, they introduced The Isolation Show on Facebook, with tips and original recipes, live chat for novice bakers, and an online store. Yup, online marketing works for a product as simple as flour. To learn more, visit odu.edu/business. This Strome Business Minute is presented by the Strome College of Business at Old Dominion University.

Performance Food Group, or PFG, the Goochland based food distributor, announced it is selling thirteen point five million shares of common stock this week, two million more shares than originally planned. While this isn’t the best time to sell stock, the company is seeking funds for working capital, which really means they’re using it to cover operating expenses. The company primarily serves restaurants, hospitals, universities, and other institutions, which is the hardest hit segment of the food business, so they’ve been signing up grocery stores too. PFG sales declined fifty percent the last two weeks of March and the company expects continued revenue declines until the economy reopens. Stock that is being sold was purchased by the firm as recently as last month. Share prices have fallen fifty percent in the past year. To learn more, visit odu.edu/business. This Strome Business Minute is presented by the Strome College of Business at Old Dominion University.

How the heck did oil prices go below zero yesterday? Truthfully, it’s a quirk of the technology used to manage oil trades but at the same time, prices were so low that people stopped selling. Oil is a perfect commodity, meaning the law of supply and demand works efficiently. If demand falls, and it has during the COVID crisis, prices fall unless supply also falls. And the OPEC Plus agreement a week ago to reduce production ten percent doesn’t reduce supply until May. The problem is that too many US oil producers took on debt when times were good and now, at ten dollars a barrel or less, they can’t pay back the interest so they face bankruptcy. Economists fear similar consequences for other companies that relied on debt for expansion. To learn more, visit odu.edu/business. This Strome Business Minute is presented by the Strome College of Business at Old Dominion University.

By now, you’ve seen more than a few television commercials with coronavirus themes. Some promote social distancing, others promote home delivery or take-out food, and a few that offer dreams of post-COVID experiences. But should they? A Global Web Index asked if brands should advertise as normal. In the US and globally forty percent said yes while thirty five percent were neutral. But in a second study done by Kantar, nearly eighty percent said they want brands to talk about how the brand is helpful in the new every day life and three of four agreed that brands should inform consumers about how they are handling the situation. Several other studies support consumer openness to virus-related messages, but tread lightly, avoid humor, and definitely do not exploit the virus in any way. To learn more, visit odu.edu/business. This Strome Business Minute is presented by the Strome College of Business at Old Dominion University.

The National Federation of Independent Businesses reported that on March tenth, only 16% of its members were very concerned about the potential impact of the COVID virus but by April first, the number was well over 70%. Data released this week by a regional task force comprised of economic development agencies, chambers of commerce and the Strome College of Business finds similar results, indicating that locally, three out of four businesses have been disrupted or severely disrupted by the crisis, with twenty-eight percent saying that their revenue is down more than half, while another fifty five percent are down twenty five percent or more. Three out of five businesses say that they expect more layoffs will occur, particularly if the crisis continues. The full report can be found at 7 5 7 Recovers dot com. To learn more, visit odu.edu/business. This Strome Business Minute is presented by the Strome College of Business at Old Dominion University.

When the global economy stops, the need for oil nearly ceases and when that happens, the strict laws of supply and demand kick in. The price for a barrel of oil plummeted to about thirty dollars. That price devastates American oil producers because they rely so heavily on debt to finance production, compared to the Middle East and Russia. If you can cut supply to match demand, prices should rise. At first, Russia seized the opportunity and refused to cut so as to put American operators out of business. But under US pressure, they gave in, only to see Mexico back out of the agreement. Again, the US applied pressure and Mexico came back. Now oil production is limited and prices should rise to a survivable level, though prices will rise at the pump too. To learn more, visit odu.edu/business. This Strome Business Minute is presented by the Strome College of Business at Old Dominion University.

Smithfield Foods announced the closure of a pork production facility in Sioux Falls, South Dakota after hundreds of the company’s workers tested positive for the coronavirus. Nearly three hundred, or about 40% of the state’s seven hundred and thirty positive cases, are workers at the plant. The plant produces about eighteen million servings of pork a day, enough to feed about six percent of the US. The company had kept the plant open as other meat producing plants closed, following a three-day closure for deep cleaning and development of distancing policies, saying it was necessary to maintain the country’s meat supply. On Sunday, though, the company bowed to pressure from the South Dakota governor and others. Other plants closed around the country include one each owned by Tysons and Cargill and two belonging to JBS. To learn more, visit odu.edu/business. This Strome Business Minute is presented by the Strome College of Business at Old Dominion University.

The Coronavirus Aid, Relief, and Economic Security Act, dubbed the CARES Act, is already pumping millions of dollars into businesses through the Paycheck Protection Program, or P P P. Bankers report processing huge volumes of loan applications. One banker reported that she is working about eighteen hours a day processing loans. Average loan sizes are about two hundred and fifty thousand dollars. When a company is given a loan, three-fourths of the money must be used to provide paychecks. This requirement is intended to provide relief to companies who would otherwise have to lay off employees or lower pay but it only benefits companies who can continue to operate. Loan restrictions actually hurt companies like hotels who have to close, who’s employees are better off claiming unemployment because they get a CARES Act bonus. To learn more, visit odu.edu/business. This Strome Business Minute is presented by the Strome College of Business at Old Dominion University.

While the economic news has been pretty dreary, there are bright spots. For example, the Pilot reported that Global Technical Systems, based in Virginia Beach, was just awarded a US Navy contract worth seven hundred and eighty two million dollars to manufacture batteries. They’ll make these batteries in their new seventy million dollar facility being completed on Bird Neck Rd. where the Owls Creek Golf Course used to be, and plan to have about eleven hundred employees at the facility. The batteries are a non-chemical type, making for clean manufacturing. More importantly, the Navy contract brings the manufacture of these batteries back to the United States, which in the current state of the world, is important for maintaining a continuous supply chain and that’s important for national security. To learn more, visit odu.edu/business. This Strome Business Minute is presented by the Strome College of Business at Old Dominion University.

While consumers everywhere are trying to do their part by supporting their favorite restaurants with pick up or delivery, organizations on both sides of the water are working to support all businesses in the 757. A regional task force of leaders from the regional Chambers, Workforce Councils, the Planning District Commission, ReInvent and ODU’s Strome College of Business created the website seven five seven recovery as a repository of information about federal and local resources to support businesses, as well as forums with experts who respond to questions. The task force is also compiling a survey of local businesses to determine needs, and using results to design additional services, as well as providing data to our state and federal representatives. Again, to ask experts, that website is 7 5 7 Recovery. To learn more, visit odu.edu/business. This Strome Business Minute is presented by the Strome College of Business at Old Dominion University.

DroneUp is a local company founded in 2016 that provides aerial data collection, training, program integration and equipment sales for aerial drones. The company has trained and has available over ten thousand certified drone pilots. They just acquired AeroVista Innovations, a Chicago-area company also founded in 2016 and will rebrand the merged company as The DroneUp Training Academy, a division within DroneUp. AeroVista brings expertise in emergency management and law enforcement, as well as an established training background similar to DroneUp’s, and the employees will come over in the merger. One goal for DroneUp is to be a one-stop shop for drone services for both commercial and government customers, and the company recently announced contracts with the states of Utah and Arizona for drone services. To learn more, visit odu.edu/business. This Strome Business Minute is presented by the Strome College of Business at Old Dominion University.

Well, how quickly things have turned from the rosy forecast for commercial real estate made just a couple of weeks ago to today's reality. What we're hearing is that some deals are still moving as buyers and tenants are able to, but other buyers and tenants have lost the cash they planned for their acquisition. Other deals are halted because of the coronavirus pandemic lockdown. So, when the virus does run its course, real estate professionals are a bit worried that the move to teleworking will become permanent, reducing the need for office space. Now perhaps - that may happen. Bur some say that we'll see people come back to common workspaces. To learn more, visit odu.edu/business. This has been a Strome Business Minute, presented by the Strome College of Business at Old Dominion University.

Chmura released projected economic vulnerability report of the coronavirus on metropolitan statistical areas or MSAs, those regions used by the government to collate data. Our MSA extends into parts of North Carolina. For the MSA, we are at higher risk than average for the country. If the average is 100, they estimate we’re at a risk of 105 to 110, meaning slightly higher risk. But if you switch to the county level, we shoot to the highest level risk in Hampton Roads. Why? Because of the impact on the tourism and hospitality industry, as well as the impact on transportation, that is, the port. Further, the county view also shows significant vulnerability for the closest part of the eastern shore, again due to tourism. To learn more, visit odu.edu/business. This has been a Strome Business Minute, presented by the Strome College of Business at Old Dominion University.

Fed Chairman Jerome Powell says he expects the economy to rebound quickly once people are allowed to go back to work because the economy is fundamentally sound with no reason for continued recession. While many wish they shared his confidence, it's safe to suspect a fairly long recession will affect different sectors differently. For example, studies indicate that at least one-third of college-bound high school seniors are putting off going to college for at least a year. Another study indicated forty-two percent are undecided because college savings funds are being depleted early to pay rent and buy food when parents are unemployed. One result will be closure of an estimated twenty percent of colleges and universities. To learn more, visit odu.edu/business. This has been a Strome Business Minute, presented by the Strome College of Business at Old Dominion University.

Moody’s Investor Service downgraded higher education from stable to negative, warning investors about the potential inability of universities to pay off debt. The downgrade reflects the high costs of moving programs online coupled with likely revenue losses as students withdraw, either unable to move online or unable to pay tuition due to the loss of their own jobs. Add in the instability of the stock market and its damage to university endowments, non-tuition sources of revenue are likely to suffer. The impact of the virus on students is already being felt. Many students work in the hourly-types of jobs that are being laid off, such as in restaurants, retail and the like, leaving them wondering how they’ll survive. To learn more, visit odu.edu/business. This has been a Strome Business Minute, presented by the Strome College of Business at Old Dominion University.

The government has responded to the COVID-19 crisis with a massive economic stimulus bill.

Riding the stock market lately has been less like a roller coaster and more like riding the Tower of Terror, a 13-story drop at Disney World. We just experienced the fastest thirty percent decline in history, a rapid twenty-two days. And it took nearly seven weeks before we could get back-to-back days of average stock price gains, which happened last week. The daily volatility over the past two weeks has been greater than seven percent, according to Raymond James, and that is also a record. There have been three rounds of fiscal stimulus already: Round one was eight point three billion dollars, round two was one hundred billion and round three is two trillion, yet more may be needed in some sectors. To learn more, visit odu.edu/business. This has been a Strome Business Minute, presented by the Strome College of Business at Old Dominion University.

As experts tear apart the two point two trillion dollar stimulus bill, or as some say, the survival bill, they are finding some unintended consequences, such as unemployment payments far higher than the wages that were earned for some workers. These are expected in any legislation this massive and written, argued, and voted on in about five days. There are some points to the survival bill that regular listeners know I support, such as if you want to receive federal aid, you can’t at the same time use your company’s cash to buy its stock back to bolster its price or pay big bonuses to executives. We need more execs like Marriott’s Arne Sorenson take a fifty percent pay cut through these times. To learn more, visit odu.edu/business. This has been a Strome Business Minute, presented by the Strome College of Business at Old Dominion University.

If you haven't caught the theme over the past few days, all reports at the 25th annual Strome College Harvey Lindsay School of Real Estate Market Review were very positive. And Richard Counselman's report on Multifamily was no different.