SCS: What's Happening on November 2, 2021

Battling the hot tub repair scene of Ajax. Tesla has a deal with Hertz. Or maybe not? Apple cuts iPad production due to chip shortage. Jay is sad about the lack of volume in Canadian small caps.

About a year ago I moved out to Ajax, Ontario.

At the time my wife and I had a 3-year-old boy and a 1-year-old daughter. We were living in a two-bedroom apartment in Midtown Toronto. Both my wife and I slept in a room that was also my baby daughter’s bedroom, which was also my office. I remember taking calls from CEOs of publicly traded companies who over time got used to the sound of my daughter crying. Some even commented they liked the sound of a baby screaming; it reminded them of a previous time in their life. My wife described that room as “the Wolf of Wall Street meets Daddy Daycare.”

In the summer of 2020, with Mayor John Tory closing local parks and a general lack of space, I convinced my wife it was time to move out to the suburbs. We managed to rent a beautiful home in a great neighborhood. For an extra 800 dollars a month over what we paid in Toronto, we now had 4 bedrooms, a finished basement, a pool, and a hot tub.

A Hot Tub with a Catch

At the time of moving in, we were told by the previous tenants the hot tub didn’t work. The landlord gave us an option, “fix the hot tub on your own dime, or we will have it removed.”

It seemed like something that might be fun to have. I mean how much work could it be to fix a hot tub? So I told the landlord I would pay to have it fixed. I went on Kijiji and searched for hot tub repairmen in the area.

I think I called four guys before I finally talked to a young lad named Sean. I asked Sean, “I think it’s worth getting this hot tub fixed? People like having hot tubs right?”

His response was, “Ya, have you ever been in a hot tub? They’re awesome.”

It seemed like a bizarrely enthusiastic response for a hot tub repairman. But I went with it. We arranged plans for him to fix my hot tub at the end of the month.

I never heard back from him.

So I called someone else on Kijiji named Franky, who marketed himself as the Hot Tub Mechanic. He told me he was actually partners with Sean, and Sean had contracted COVID but refused to get tested. At least that’s what Franky thought. This was my first glimpse into a world I was about to learn too much about.

Franky came by, rewired the hot tub, and said “there is nothing wrong with it.”

I asked Franky how much I owed him for coming by. He said ‘nothing.’

I responded with “I don’t want you to refuse to come back to see the ‘cheapskate’ if something else goes wrong. Here is $200 for taking the time to come out here.”

Six months later I ran into trouble. The hot tub stopped working.

My first move was to call Franky. However, he told me he was too busy to come over and fix it. But, he was happy to help me diagnose it over the phone. Just like that, Franky sent me to Home Depot to buy a $95 Digital Clamp Meter and test the currents. He then told me on the balance of probability it was probably likely the pump.

So I now have to remove the pump. What do I know? I’m just a small cap stock enthusiast. I call my buddy Kyle who is a plumber, he agrees to swing by and remove the pump. I then find a local repair shop called the Ajax Motor Company. With only looking at it, a nice old man named Mickey tells me “it’s seized.”

So they rebuild the motor and a couple of days later I pay them $280 for my rebuilt pump.

Kyle then comes by again, reinstalls it. And of course, we find out, the pump ain't working.

I call the motor shop. I speak with Mickey. He tells me to bring in the Spa Pack. But forgets to tell me to bring the heater. This means my buddy Kyle ends up making two more trips just to get the spa pack fully removed.

Okay, so now we’re getting close. Right?

Turns out they can’t fix the spa pack. This spa pack is designed so you can’t take it apart. Great work Gecko!

Mickey recommends I get this other spa pack that’s a little cheaper. I say sure. $900 dollars later I have a new spa pack.

Mickey tells me, I will need a repairman to install it because the pipes or tubes don’t match. He recommends this guy named Sean. Gives me his number.

I try calling Sean, no answer.

I try calling Franky, he says he’s still too busy. But gives me instructions on how to install it.

Kyle, my close friend, the plumber comes by for a 5th time now. Looks at the spa pack and says, “we need the electric cord.”

I call Franky to ask where I can buy one of these special cords. Franky says, “I live a 10-minute drive from you. Come over I will give you one.”

So now I’m in the Hot Tub Repairman’s Home

So that night, I’m hanging out with Franky in his garage. And I got to say, Franky lives in a nice house in the suburbs. Probably worth over $1.5M in this market. Clearly, a hard-working guy, who eats what he kills. The best part, he has a great hot tub repair shop in his garage with a radio blaring 80s rock. Styx. Come sail away with me.

So Franky is rebuilding a hot tub in the middle of his garage. He tells me he can make way more money rebuilding old hot tubs than doing service calls. Thanks to COVID, people really want hot tubs, and thanks to supply chain issues, they are hard to get.

I tell him about my experiences over at the Ajax Motor Company. He told me he visits that shop at least twice a week and knows them well.

I tell Franky, Mickey recommended Sean. He was hurt. But shrugged it off.

Anyways, after three more visits from Kyle, one visit from Franky, and two part orders….

Tonight Kyle and I fixed the hot tub. Okay, mostly Kyle fixed it.

Supply Chain Breakdowns, Demand Volatility, and Inflation

I don’t envy anyone looking to get a hot tub fixed right now.

Franky probably could have fixed my hot tub on two trips. And trust me, I was happy to pay. He chose not to fix it. I’m not sure if it was some kind of Karate Kid style teach a man to fish experience, where Franky thought I’d get into the hot tub repair business and save the hot tub demanding citizens of Ajax, Ontario. Or if he was just helping me out of pity. I don’t blame Franky for not wanting to roll up his sleeves for me. In fact, I’m happy for Franky. He found a way he could make more money reselling hot tubs and that’s how he chooses to spend his time now.

The point is this. Since March of 2020, our consumer behavior has changed. Some people want new things. Some people are developing a new mindset for life. And others are transferring their skills to more lucrative opportunities.

Get ready. The economics of post-COVID are showing up in strange places. It’s impossible to model how things will play out with so much volatility on various components of inflation. But be prepared for various products or services to see large spikes in pricing or even not exist as we reemerge from the pandemic.

I will tell you this though, if you move into a new home and your landlord says, “there is a broken hot tub, fix it or have it removed.”

I’d get it removed.

Macro: The Macro Themes Surrounding Equities

• ‘Squid Game’ Memecoin Developers Pocket $2.1 Million After Rug Pull (TDD)

• Half of Beijing’s flights are cancelled as China’s capital city tightens Covid restrictions (CNBC)

• Ethiopia declares state of emergency as conflict escalates (FT)

Large-Cap News We Can’t Ignore

• Facebook to Shut Down Facial Recognition in Photos, Videos (WSJ)

• Tesla has not signed contract with Hertz yet - Elon Musk (SA)

• Fiverr buys freelance management platform Stoke Talent for $95 million (SA)

• Apple Cuts iPad Production to Allocate Scarce Chips to New iPhone 13 (TDD)

• Netflix starts rolling out mobile games to all Android subscribers (YF)

Small Cap News

• Eguana Tech Partners With Power Center+, Producer Of Duracell Power Center, To Launch Premium Home Energy Systems (TDD)

• Apple Cuts iPad Production to Allocate Scarce Chips to New iPhone 13 (TDD)

Things to Be Watching Out For:

Eguana Technologies today announced a deal with a company that has a deal to produce Duracell home energy storage systems. Move over Tesla, the competition is coming! I will have more on this tomorrow.

Canadian Small Caps With Jay Lutz

A common theme discussed as of late is the absolute lack of interest in Canadian markets by retail investors. Let’s be honest, we’re all feeling it. Fintwit, which in years past was abuzz with activity in the fall time, has seen the tumbleweed roll on through more often than not lately.

Yet despite this, you might be surprised to learn that in terms of volume, the S&P/TSX Venture Composite Index is relatively at par in terms of volume when compared to last year. Don’t believe me? Have a look for yourself.

Rather, it appears that the major issue is instead the simple fact that activity seemingly has not been aggregated into a single sector that has taken the retail investor hivemind by storm. After having hit multi-year highs in February, things have cooled off substantially in terms of both price action and volume, with this past summer seeing a strong slowdown in activity.

What appears to have happened in fact, is retail may have seemingly transitioned from high-risk to lower-risk, electing to stop rolling the dice on small cap mania and instead place their money into more sound equities. The S&P/TSX Composite Index in comparison to the Venture Index has by and large blown it out of the water.

While volumes may be about the same in comparison to prior years, the gains are most certainly being felt here, with the index continuing to set all time highs this year. Meaning in this case, that the low-risk class has more than outperformed its higher risk counterpart on a relative basis.

MEMEs of the Day:

Full Disclosure: Eguana Technologies is a client of CanaCom Group. Steve Hyland owns a minority position in Canacom Group. Both CanaCom Group and Steve Hyland are long Eguana stock.