Good Times; Bad Times: Have we now had our share?

[BrookIsland]

I think he means “true” collectors will find cards coming back into an affordable price range once the investors have bailed

Gotcha - I think that's largely fair but I also fear that the process by which we arrive at the next settled price will not be "free" for the industry which is to say when there's this much money on the line and this much dependence on box prices hovering at 1.5 - 4x their cost from a couple years ago for margins to be made, it's harder for me to see it ending well on the basis that those margins are just not sustainable.

I take the point that for collectors who are in it for the long haul are less price-sensitive in some ways on the basis that their goals tend to be far more long term in nature to acquire sets of whatever type/description as opposed to those who are here for the trading/speculation and are looking to exploit temporary price moves.

That being said, what I'm concerned about is the process/timeline of how we get from here to whatever the new normal will be.

Just consider an example of a manufacturer/distributor/other key hobby entity that has recently incurred a lot of debt during the price run up on the assumption that they will have offsetting (and much higher) revenue to pay it down.

That decision could become a major millstone for that manufacturer/distributor/other key hobby entity driving it to bankruptcy (the tale as old as time) or other corporate action (e.g., selling to an undesirable buyer, from a hobbyist's perspective) or closing entirely if their dependence on higher box prices slows down and they no longer have the revenue to pay down the debt.

I would view all of those items as "bad" from a "true" collector's perspective basically irrespective of how it affects the speculators on the basis that the outcomes of any kind of materially adverse financial situation for any of our key manufacturers/distributors/CDDs etc. will almost certainly not be good for us and more likely will almost certainly be bad.

Just as a very basic example: if UD (or even Leaf/President's Choice for those of you I know love their products) were to get into a financial trouble, it would be Bad. Another key manufacturer impaired/gone/sold to the last remaining manufacturer (Fanatics) leaving less choice and likely making it easier for inferior products to be made. Etc. etc. etc.

And it's pretty easy in times like these to get into financial trouble.

That's why I was challenging the position that in the end this will all be good for collectors.

Hopefully that's all clear!

 

[Triple B]

Fanatics will have a HUGE say in what the new "normal" will be.

I think a big part of it will include Fanatics eliminating "en masse" breakers from the equation. They may decide to go with a few large breakers that are already established or they may decide to go with an in-house operation, but the future of everybody and their mother becoming breakers isn't looking good and THAT will help with people cleaning out retail and hoarding and all of the other foolishness going on (Walmart and Target slapping "final sales" on all trading cards was also pretty huge).

Fanatics will also shut down a few big distributors and let's face it, those guys are largely responsible for artificially (and greedily) inflating box and case prices. That too will go a long way in bringing actual collectors back.

My HOPE is that Fanatics supports the growth of the hobby by making it affordable for everyone and growing the collector base and DOESN'T become the evil Empire with the unique ability to steer the hobby forward.

 

[creasecollector]

Can you explain a bit more why you feel that way? I tend to think the opposite but wondering why just to understand the other side here.

I think he means “true” collectors will find cards coming back into an affordable price range once the investors have bailed

Yes, this is what I was referring too. Once some big players leave (investor types/non-collectors), the "true" collectors (I hate the term, but you get my point) will still be there to enjoy the cards we love no matter what the market looks like.

 

[Chillychow]

Excellent thread and there are several strong points made throughout the posts. I concur with pretty much all of the comments - we are entering a 'new normal' where households deal with higher inflation, higher debt servicing costs and the potential for lower employment if we do in fact move into a recessionary environment. As mentioned above, the hobby's rapid price increases and recent pullback is not an isolated incident. I also track luxury watch pricing (specifically Rolex) and they are seeing a similar retreat. Personally, I have significantly scaled down purchases over the last 24 months as I couldn't justify the prices being charged. The numbers I'm seeing for high end basketball cards are simply mind numbing! I don't see this as being a 'blip' in the market, this is actually a return to a more normal and sustainable economic environment. I keep thinking about Warren Buffett's famous quote "be fearful when others are greedy and greedy when others are fearful". We might be moving towards the 'fearful' period where cash is king...

 

[BrookIsland]

Based on little more than my casual, unscientific observations of:

1. number of cards up for sale on eBay with very high rarity (e.g., 1:>20K, /25, /5) from 20-21
2. number of FB sale posts for SPA hits from 20-21
3. Quantum of breaks at the biggest volume AIB (i.e., CnC, OOTB, Breakaway) of 20-21 SPA
4. nhlderek's struggle to make SPA bounty sets (less than 1 as opposed to 6 last release) from 20-21

Sure seems like the 350 USD per box is having a major effect on the amount of boxes being opened of 20-21 UD SP Authentic.

Leaves me wondering about the residual inventory...

In round numbers, assuming the number of /999 autos is roughly one per box that assumes there were ~78K boxes or ~4.9K masters of 19-20 SPA.

Now, for 20-21 SPA, because of how they changed the box odds, there is either one /999 or one Retro FWA per box. That gives us ~78K boxes or ~4.7K masters.

So basically similar numbers of boxes/cases year on year but seems like far, far fewer of them have been opened/purchased so far.

It does, again based on nothing scientific, seem like way fewer SPA breaks are happening and certainly the bounty sets being down so far year on year speaks to far fewer boxes being opened.

Now, so what?

Well, who is holding all this inventory of 20-21 SPA? The answer to this question goes, I think, to the heart of my concern about the hobby and this box price that I spoke to above.

I have to think that a lot of the distributors and/or breakers are sitting on product that they spent 200-250 USD per box on and that they can't sell at 350 USD per box (in order to make money and/or cover their operating expenses).

If the "market" price per box of SPA goes down to 275 USD (or even lower) per box retail, then a lot of people are likely going to be in a lot of trouble.

According to Dealernet, the manufacturer direct price for boxes from UD was 91 USD per box and the most recent shop-to-shop price was 250 USD per box. That said, I don't think many CDD shops paid 91 USD per box.

So have to think shops are tracking closely what's happening on sales of unopened product on the secondary market (and for repurchasing more inventory) and will likely be slow (at least at the start) to unwind their unopened wax purchases by lowering costs for fear of crystallizing losses...

But, and this is where the macro-economic environment comes in, there is likely pressure for them to sell asap given inflation, whether they bought the SPA wax on credit or other loan facility (meaning they have financing expenses), and finally, given the amount of their working capital which is tied up in the product, they will likely need to unwind it to buy/stock other products for sale.

Once the dam bursts (which it might, and might not), there could be a rush on the selling side as the price of wax decreases (but likely will not collapse), which will not be good for the hobby (much less for the distributors and CDDs and others holding unopened wax that they bought at high cost).

We'll see.

Footnotes on the math assumptions:

For 19-20: This is based on this checklist: 78 of the Future Watch cards in 148 to 251 are Future Watch Autos (leaving 26 Future Watch non-Autos) in the 19-20 SPA Set, so 78 x 999 = 77,922 boxes so let's say 78K boxes for ease, or 4.9K (i.e., 77,922 / 16) master cases.

For 20-21: This is based on this checklist: 66 of the Future Watch cards in 148 to 232 are Future Watch Autos (leaving 19 Future Watch non-Autos) or 65,934 total FWAs plus the 9,622 Retro Future Watch Autos (i.e., 399 x 23 + 99 x 4 + 49 x1) in the 20-21 SPA Set, so that gives us ~75,556 (or 65,934 + 9,622 boxes) so let's say 75K boxes for ease, or 4.7K (i.e., 75,556 / 16) master cases.

General Statement: I know that this is not exactly right as e.g., in the master, there will generally be two Future Watch Auto Patches and in those boxes generally no Future Watch Auto and there will be boxes with no autos and boxes with five autos. I'm also ignoring Updates, which are not insignificant here and which would count as a Future Watch Auto and/or Retro Future Watch Auto for box odds. Lots of other factors at play too but we're not working in absolutes.

 

[FrozenInferno]

Wax prices across the whole hobby could use a big correction relative to the falling prices of singles but the distributors/breakers/whoever is controlling the pricing don’t seem to want to accept that the gravy train may be coming to an end.

 

[NNeves]

So is this good or bad? I'm undecided.

For me it reduces or eliminates the temptation to open wax (good) and it also provides scarcity and stability to the secondary market.

Is this good for the true collectors?

I think it depends on product. Demand for the rookies #/999 from SPA seems to be strong as a result of the lower break rate. If the big rookies from that set are constantly selling above box prices does it make the cost of the current box prices more appealing?

A crash in the box prices will open the flood gates on the secondary market. Do prices then drop?

I think it's for the best that wax prices remain high.

 

[gomaz]

Not sure how I missed this thread till now, but it seems like a good place to say that I am in collection buying mode.

If you want to sell out your whole collection, please hit me up. I will be buying to resell over months and years so keep that in mind when thinking price.

I can meet in person or over a zoom call. The bigger the better. Well into the six-figure territory available for purchasing. Will fly to you for if the deal is big enough (think $25K+)

Hit me up and let me be the one left holding the bag. :hungry:

 

[BrookIsland]

Jeremy - interested to hear your buying philosophy if you're amenable to share which underlies a pretty bullish post above.

• I appreciate the explicit piece that you're going to be very disciplined in your selling time horizon (i.e., months/years to resell), but how do you balance that against what have been very bullish pricing moves in the last 24-30 months?
  
• Are you only going after the highest end stuff that's the most likely to retain all of its value? What about more middle-range stuff?
  
• I understand your approach if you're at a hefty discount - e.g., you're paying ~40-60 cents of whatever value proxy be it "comps" or something else - because you're buying for resale and you're providing liquidity for a relatively illiquid asset (and therefore you can relatively easily bear a 30%-40% down turn and still do ok); however, is that what you're offering?

Appreciate that some of that may be your secret sauce so don't mean to ask anything you're not comfortable answering but would be very curious how you're thinking about this as you clearly view right now as a buying opportunity.

(Not that you asked, but I don't view this as a buying opportunity yet - unless the discounts are very steep in which case you can bear quite a bit of pain before it actually hurts your bottom line.)

 

[gomaz]

Jeremy - interested to hear your buying philosophy if you're amenable to share which underlies a pretty bullish post above.

• I appreciate the explicit piece that you're going to be very disciplined in your selling time horizon (i.e., months/years to resell), but how do you balance that against what have been very bullish pricing moves in the last 24-30 months?
  
• Are you only going after the highest end stuff that's the most likely to retain all of its value? What about more middle-range stuff?
  
• I understand your approach if you're at a hefty discount - e.g., you're paying ~40-60 cents of whatever value proxy be it "comps" or something else - because you're buying for resale and you're providing liquidity for a relatively illiquid asset (and therefore you can relatively easily bear a 30%-40% down turn and still do ok); however, is that what you're offering?

Appreciate that some of that may be your secret sauce so don't mean to ask anything you're not comfortable answering but would be very curious how you're thinking about this as you clearly view right now as a buying opportunity.

(Not that you asked, but I don't view this as a buying opportunity yet - unless the discounts are very steep in which case you can bear quite a bit of pain before it actually hurts your bottom line.)

I have been buying collections for 17 years. I have weathered all of the cycles, the ups and downs of the hobby since the 80's.

I will continue to operate the way I always have. Grow my inventory, grow my hobby bankroll and add pieces to my PC along the way.

No secret sauce, no hidden agenda, I'm just bullish on the hobby as I always have been and its always worked out for me.

I suppose if I have a secret sauce, it is access to cash, and cash is king especially when people are so bearish. If you are someone who thinks the hobby is going to hell, I'm your guy. Or if you just want to sell your cards to buy a car or put your kids in summer camp or whatever, hit me up.

I am only looking for mid-high end. Cards worth $20 and up. Anything less than that and my offer would be extremely low in the 10% range because the work and time just don't make sense to take on a bunch of inventory that wouldn't even earn a place in my suitcase to the Expo. There are popel on here that will pay better on low-end than I ever will.

Thanks for the questions BI!

 

[BrookIsland]

Thanks for your reply, Jeremy - this is a key supplemental view as most of this thread has been focused on collectors only whereas I think you're viewing this from both a collector's and a dealer's perspective.

Liquidity is definitely king, and why some people made an absolute killing in 2009 as the market returned and the crazy discounts (particularly in some parts of structured credit and other during-2008-illiquid asset classes) were way too high given what turned out to be intrinsic default risk/value. Less so in some of the other asset classes that were slaughtered, ultimately forever, where the markets ceased to exist.

I frame it that way because I think about that dislocation event - i.e., 2007 into 2008 - as a reasonable proxy for where we're at right now albeit different market factors at play, though the end result may be a moderated version of the same thing.

Right now, you're sort of doing a card "carry trade" -

What I mean is you're getting "paid" to provide liquidity using an asset which is constantly depreciating (your inflationary CAD/USD cash balance which on an NPV basis is only going to be worth less in absolute terms every day) to acquire another asset, probably at a large discount, which will ideally keep up at least with inflation in value and even better will appreciate as rarity increases, the hobby becomes larger, the player's gear becomes rarer (or impossible to acquire because of scarcity/death), etc.

In those circumstances the "carry trade" can work great assuming: (1) your borrowing/financing costs for cash are manageable and certainly less than inflation and/or you can meet them out of inventory sales where you're not forced to crystallize losses, (2) the assumed discount that you're paying to whatever notional price is "enough" - meaning that you're being "paid" enough to hold the card for an undefined duration for (il)liquidity, taxes, carrying costs like storage/insurance/etc., bearing any market-specific or asset-specific drawdown, etc., and (3) you are actually able to realize a gain as a market "normalizes" or re-heats without the costs in (1) and (2) overwhelming the return.

I think they key place where we may differ is not on the merit of the trade but what are reasonable assumptions given where we are.

3.5x moves in one year for the issuance cost for products is not sustainable. Nor are medium-grade prospects' cards trading as historic highs for their very, very common (even if the hobby "marquee") rookie cards. At least in my view. What's happened in basketball is even more extreme than in hockey. Donruss basketball at 1000 USD a box?!

And where that comes in is really factor (2) above as it's assessed for every purchase (or individual "carry trade" you're making). If you're paying a big enough discount and/or each asset has enough long-term realizable value, then you're in great shape so long as there is in fact a buyer at the anticipated price. I see that value proposition in the biggest of names with the biggest/most unique pieces but for all the rest, much less so.

Accordingly, assuming you're dollar-cost averaging your purchases, that makes it really, really hard (if I'm right, and I very well may be totally wrong!), to ensure across a collection purchase that you're paying the "right" discount to make the "carry trade" viable.

This is particularly so where there are macro trends which generally only reduce demand in discretionary goods like nearly all cards (e.g., higher interest rates, inflation, GDP contraction, etc. - all of which are happening now across nearly all, if not all, of the G7).

In any case, interesting discussion (at least to me! ).

 

[quincy]

I suppose if I have a secret sauce, it is access to cash, and cash is king

Spot on, Fearless Leader.

 

[WatchMyBreaks]

The real selling hasn’t even begun. Guy’s like Jeremy that have a long vision for investing are going to pick things up for literal pennies on the dollar. Once people start losing jobs, seeing the 401k shrink or their home value tumble cardboard will be one of the first things to go.

Related video and worth the watch since Bet-David is a big buyer and fan of sports cards. In the video PBD explains how having cash on the sidelines when everyone is panicking allowed him to buy the PSA 10 OPC and Topps Gretzky RCs for a fraction of what they’re worth today.

 

[BrookIsland]

Everything is fine...

 

[quincy]

Everything is fine...

I've seen a couple thoughtful pieces in the last few weeks wondering if the Volker Shock has been discussed as yet.

 

[BrookIsland]

I've seen a couple thoughtful pieces in the last few weeks wondering if the Volker Shock has been discussed as yet.

The anecdotal evidence certainly seems to suggest that things are going to get worse before they get better, be it Volker Shock 2.0 (hopefully not!) or something more mellow.

Real question for us I guess is how does this affect our hobby. I remain bearish that there will be casualties, though not sure who (e.g., manufacturers, distributors, CDDs) or what (e.g., reduced product lines, poorer quality, etc.) yet.

 

[quincy]

Nice reference pieces.

 

[paulxing]

I've seen a couple thoughtful pieces in the last few weeks wondering if the Volker Shock has been discussed as yet.

Whether it'll be named after Volker I don't know but i'm fairly certain an engineered recession is already on its way. The government is too slow reacting to be dovish. They look at old data and raise rates. By the time they realize the real economy is contracting and they are hiking into it, it'll be too late.

Engineered recessions hurt the society assymetrically. The lower income people get absolutely crushed while the high earners generally feel little. Hobbywise, this would translate to a decline/collapse of unnumbered stuff (think Young Guns) while the ultra high end stuff should remain relatively stable / outperform (i.e. drop less than elsewhere).

Another similar example is probably real estate. In a recession, the first domino to fall is sales collapse (not prices, just volume). Sellers don't want to sell at a new lower price and buyer don't want to pay for the old higher price. The result is then people just keep renting and rents become more competitive. Then, eventually people need liquidity and the homes in less deisrable neighbourhoods (think suburbs) start dropping. This will follow until you hit the premium areas, starting with condos/apartment and then finally premium detached homes. It doesn't always get to the premium detached homes but the suburban stuff will always go first. So again that's the base rookies getting crushed while maybe the Cup rookies come out relatively unscathed. Who knows. We've already started seeing this in other sports with the base "PSA 10" unnumbered rookies collapsing (Jordan included) while the lower numbered items holding relatively steady.

If I was buying (and I am) I'd try to focus on numbered GOATs. Rest will most likely be cheaper every month for the next few months.

 

[katoy2j]

I don't see much impact to the hobby.

Interest rates rising only matter if you have debt and/or are heavily levered.

If you were paying 5 figures or more for cardboard it's because you likely had plenty of disposable income and interest rates could rise to 50% and it won't matter because you likely didn't have any or very little debt to begin with.

High end cards will likely hold their value extremely well because there are such scarcity on them.

The housing market and the card market are completely different. You aren't getting a mortgage to buy a PSA 9 Ovechkin SPA rookie. You had the money to buy the card and you bought it. A lot of people think of these cards as investments. So they are fine holding cards for years. The boom in cardboard was a result of people who had bought cards years ago at lower prices and as increased demand came into the hobby cards were sold for multiples of what they paid for them. The people who bought those cards at high prices did so because they could afford them and likely have plenty of financial resources that don't rely on what interest rates are. They won't have to rely on selling their collection at lower prices to pay for food.

The majority of collectors are the 99% of the hobby who have a set amount of disposable income. They for the most part were priced out of the current hobby already and buy items like series 1 and 2 primarily. They may pause if there situation changes but it won't have much of an impact on the hobby either that would create any kind of crash. A young gun dropping 10 or 15 dollars means nothing.

Box prices will likely come back to normal prices which will just bring back people who were priced out to come back in.

Inflation is a problem but it's a World problem. One which every country is tackling. Remember though this was caused by the pandemic primarily and inflation data is quite a bit behind and you are already seeing prices dropping where if we haven't reached peak inflation yet we will very shortly. We aren't even sure to get a recession and if we do it will be relatively minor one and unemployment rates are super low. A recession is not always a bad thing and if it curbs demand shortly it will allow inflation to fall even faster.

The idea that people will be rushing to liquidate their collections at huge losses to pay bills is a comical one. It's not going to happen. Will a couple people have to? Sure it's possible if you over leveraged yourself and took out money from a home equity line of credit to buy cards but very few people are in that category. That's such a small fraction of a percentage of people though and any cards they are forced to sell are likely so scarce that they certainly won't sell for pennies on the dollar as small dip in price will likely be seen as a steal by another collector

 

[BrookIsland]

paulxing - you make some really excellent points.

katoy2j - I hear you in part but I don't know if I agree with other things you've said and/or we may be having some definitional differences in what we're referring to as to what constitutes "the hobby" among other things.

I don't see much impact to the hobby.

I think a lot of what you're referring to as "the hobby" is to me the very high end collecting market (if I've read you right). I'm focused more on the broader collecting market including the people who were rushing in and having physical fights for retail blasters at Target and Wal-Mart. I think this is a completely different segment of the collecting public but a much, much larger part of the economy and a large part of the buying base that drove demand to crazy heights.

Interest rates rising only matter if you have debt and/or are heavily levered.

Yes, insofar as you're solely focused on the high end collector - again, I'm really thinking about e.g., Fanatics which had to have taken on a huge amount of debt/financing as part of their spree of acquisitions (and/or is bound by a series of financial covenants/waterfalls) that will obligate them to make certain minimum payments / distributions / interest payments (if for nothing else that whatever proxy they will have for license fees).

Or take the smaller card shop that took the recent boom as an opportunity to expand their offerings and/or purchase a bunch of inventory at (what turn out to be) inflated prices using some form of debt, floating or fixed rate. If box prices do fall as you predict and they haven't liquidated their inventory in time, they bear major risk of crystalizing significant losses (never mind the rising financing expenses).

These are both examples of there being material adverse effects of rising interest rates at least in my view.

If you were paying 5 figures or more for cardboard it's because you likely had plenty of disposable income and interest rates could rise to 50% and it won't matter because you likely didn't have any or very little debt to begin with.

High end cards will likely hold their value extremely well because there are such scarcity on them.

Absolutely fair and agree. Or the debt you do have is well covered by other resources (assuming that the people who are spending this much are financially "responsible" as much as any of us who spends that much is!).

The housing market and the card market are completely different. You aren't getting a mortgage to buy a PSA 9 Ovechkin SPA rookie. You had the money to buy the card and you bought it. A lot of people think of these cards as investments. So they are fine holding cards for years.

Again, I think this is really true for long-term high-end collectors, not necessarily the broader, less affluent participants in the card market (to say nothing of the other players in the market like manufacturers, distributors, dealers, etc.).

The boom in cardboard was a result of people who had bought cards years ago at lower prices and as increased demand came into the hobby cards were sold for multiples of what they paid for them. The people who bought those cards at high prices did so because they could afford them and likely have plenty of financial resources that don't rely on what interest rates are. They won't have to rely on selling their collection at lower prices to pay for food.

Do you have any empirical data for this? Would be very curious to see it if so. My anecdotal observation is that the boom was driven by discretionary income that would have gone to other forms of entertainment but didn't as they weren't available during the pandemic coupled with a massive decrease in supply because of Covid-related supply chain issues. Not sure about the factors you mention but I can certainly see how they contributed to it too.

The majority of collectors are the 99% of the hobby who have a set amount of disposable income. They for the most part were priced out of the current hobby already and buy items like series 1 and 2 primarily. They may pause if there situation changes but it won't have much of an impact on the hobby either that would create any kind of crash.

Also, just curious on what basis you're coming to this conclusion? No subtext just wondering why/how you believe that.

Box prices will likely come back to normal prices which will just bring back people who were priced out to come back in.

How do you see this happening? It's hard for me to see this happening but may turn on what you mean by "normal" - do you mean a CPI-adjusted version of 100 USD per box for SPA and 600 USD per box of Cup?

The idea that people will be rushing to liquidate their collections at huge losses to pay bills is a comical one.

Probably not to the people who are confronted with that as a choice!

In any case, good to hear a different view. Thanks for your reply.