#163 - The Fed Is the Worlds Biggest Influencer, Hockey Canada Is In Crisis and Elon Offers His Russian/Ukraine Solution
- Steepest drop in home prices since 2009
- Elon has the answer to Ukraine/Russia
- Canadian Housing Prices
- Apples newest FoxCon
- BaaS is the new franchise
- Mr Beast pays 500k for someone to stand in a circle for 100days
- Hockey Canada HAS A HUGE PROBLEM
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It’s been a rough year for stocks.
The S& P 500 finally tested its summer lows and actually closed at new year-to-date lows at 357. The next levels of potential support are 350 and 340.
Typically, nothing goes down in a straight line. It is normal to see bounces along the way.
There will be an emergency FOMC meeting on Monday.
I doubt it is because they want to raise rates sooner.
It has come to a point when federal officials might start worrying more about financial stability than inflation.
The trading world continues to revolve around macro.
Every equity trader is keeping an eye on the US Dollar and interest rates.
The recent moves in forex and bond markets have been of historic proportions.
Pension funds in England were close to going under before the Bank of England stepped up to buy $65 Billion of gilts.
I don’t see how all those increases in interest rates around the world don’t lead to more QE at some point next year or earlier. It’s no wonder gold and Bitcoin have stabilized lately.
When the US Dollar finally starts to really pull back, those assets are likely to outperform.
In the midst of all the macro dislocations and relentless selling last week, one sector stood out.
I don’t know at what stage of the bear market we are. We could be in the middle, we could be towards the end. The former is more likely. We are already seeing major companies like Nike down 54% from their 52-week highs made in November of 2021.
This is a bigger correction than the one they had during the Great Recession in 2008/2009.
Obviously, valuations are very different. Many companies are still trading at high P/E multiple and the one thing that characterizes a bear market is P/E multiple contractions, especially in the current environment of rising interest rates.
But we’re witnessing some interesting action bubbling up under the surface of this market, along with some key divergences that are pointing to higher stock prices.
Add in a massive washout in sentiment and a reversing dollar and you have the perfect storm for a major rally.
Headwinds are turning into tailwinds before our eyes!
What Is BaaS?
BaaS is another way to look at what the franchising model is at its core, and also shows the the similarities it has to SaaS (software as a service).
SaaS companies are unanimously viewed as cooler and sexier than your average franchise, and in part is why some of the best founders and employees gravitate to SaaS companies (and tech in general).
However, franchises are just as cool when you really break down what they’re doing, but the reality is that we have a brand problem.
That’s right, the “F-word”, aka franchises, has a bit of a perception issue.
The average joe that hears that word likely associates it with 1 of 2 things:
So basically this means that many people who hear the word “franchises” instantly think of a cheeseburger company that’s been around since the 1950’s, or equating it to fraud, being ripped off, etc.
Business as a Service
Franchisors (the providers of BaaS) all start with 1 location. They have a choice of either continuing to build their own locations, or they can package up the operational insights, and sell that to individuals that want to own their own business.
But building more locations requires much more capital, and also adds in layers of management and complexity as your units under management grow.
So instead, you can sell BaaS, and give entrepreneurs your playbook for running a [insert any small business here] in exchange for ~6% of monthly revenue.
When franchisors have an exceptional BaaS offering, just like SaaS companies, the margins become outstanding at a certain scale.
The big difference however is that the franchisor's true customer is their franchisee. A franchisee has much more skin in the game than a sales director who’s using company money to pay for a HubSpot subscription.
A franchisee, the BaaS customer, won’t just opt out at a moment's notice.
Given this difference in incentives, if your BaaS offering enables entrepreneurs to start up and succeed in business, then churn only occurs if your franchisees go out of business!
I bring this brand up a lot, but Crumbl is a perfect example of being an amazing BaaS provider.
The average unit volume in 2021 was $1.6M, with a net income of $350K. Crumbl corporate owns just 1 of their own cookie shops, but makes $30M/year in royalties alone. Most importantly, they’ve never had a BaaS customer (i.e. a franchisee) close their doors!
That’s the perfect example of a BaaS provider enabling entrepreneurs to succeed.
And that lack of churn is why the recurring revenue generated from royalties is perhaps the most dependable in the world (even better than SaaS). The ripple effect from that is BaaS founders, just like SaaS founders, get insane multiples.
Example: Firehouse Subs got a 20x EBITDA multiple (all in cash) when they were acquired in November 2021.
BaaS > SaaS
The franchise industry needs more BaaS providers. When it’s done right, I really think it’s the most equitable business model out there.
Good franchisors are wealth creators for their franchisees.
Tying it back to the beginning, McDonald’s may be a “cheese burger company that’s been around since the 1950’s”, but they’re also wealth creators.
The average McDonald’s franchisee today owns 8 locations and is worth ~$23.2M.
So yes, while the franchisor has reaped the financial benefits of scale, the franchisees are also making heaps of money too.
And the best part is, BaaS isn’t limited to just restaurants, it can be done in any industry:
💸Reformed Millennials - Post of The Week
Look what just a little bit of Dollar weakness does to the market...
At this point, it feels obvious what the major issue is.
It's super important to note that extreme volatility IN BOTH DIRECTIONS is commonly found near turning points in price.
The last time the US Dollar Index had a single day GAIN as large as Friday's was 3/19/20.
The last time the US Dollar Index had a single day LOSS as large as Wednesday's was 3/26/20.
The Dollar Index peaked on 3/20/20. Stocks bottomed the very next trading day on 3/23/20.
Take a look at the attached chart:
So we are back to the June lows in both the S&P500 and Nasdaq100.
Support held for a few days this week at the same prices that it held 3 months ago...
I don't know which way we resolve from here but it feels like an incredibly important turning point in markets.
I guess we'll see. Hold onto your butts.
Outliers, Revisited: Revisionist History - This is a must-listen if you're a parent. Gladwell investigates what led a group of students at UPenn to end up there and become some of the highest achievers in the country for their age group, and one factor stands out from the rest.
From The Episode:
"...we want to think about success as a word to describe ourselves, our own progress, but it's not really people who are successful, it's the systems around us. Great students and great hockey players come from great teams and great classrooms. And if you want to judge the success of those teams in classrooms, start by looking at their composition. Like when was everyone born? And if we can't get that one, right? God help us with everything else."