THE DAILYALTS PLAYBOOK

October 4, 2019

Today, the DailyAlts Playbook talks about the robot apocalypse on Wall Street, the Forbes 400, Zuckerberg’s billionaire statement, and LaVar Ball (sorry about that).

Good morning,

The markets are in the red this morning as investors prepare for a fresh round of U.S. economic data.

Let’s dive into the three macro stories driving market sentiment before getting into the latest news around the alternative investment industry.

• JOBS, JOBS, JOBS – This morning, the markets will tie themselves to the mast of one report – the September Jobs Report. With signs that the economy is slowing and Moody’s suggesting that about one-fifth of the U.S. economy is already in recession – a lackluster report could provide another blow to an already ugly week for the Dow and S&P 500. The August report showed gains of 130,000 new positions and an unemployment rate of 3.7%. However, as we note below, several major U.S companies are planning job cuts as the winter months approach.
• “IRISH” [LONGSHANKS VOICE] – Boris Johnson’s Brexit plan isn’t winning the hearts and minds of Irish officials over the border between Ireland and the United Kingdom. Irish Prime Minister Simon Coveney has raised concerns about the so-called Backstop ahead of the October 31 Brexit deadline. He has given Johnson and his lead negotiator David Frost 10 days to come up with ways to improve the plan. The news came shortly before the European Commission announced that Johnson had just seven days to reach a compromise with the EU.
• FED RELIEF – The markets again anticipate that the Federal Reserve will cut rates by the end of the year. Following the worst manufacturing report in a decade, yields continued to slide in the United States. We’ve seen a six-day decline in rates as concerns continue to mount around the U.S. services sector as well. Earlier this week, Australia’s central bank cut its official cash rate by 0.25% to a record low of 0.75%. The country cited lackluster growth through the first half of the year – just 1.4%. They blamed the U.S. and China trade war.

MORNING MOMENTUM

• THE ROBOTS ARE COMING – No doubt that Financial Technology is going to have a massive impact on the banking sector. Look no further than the ATM and its role in slashing teller jobs. But with financial companies now spending $150 billion a year on tech to cut costs, Wells Fargo has a sobering prediction. It expects that robots will eliminate 200,000 jobs in the financial sector over the next decade. For some reason, the company put together a 225-page report on the subject – when all they needed was just a headline. The report cites an uptick in AI, data, and cloud computing for the bulk of these cuts.
• OR YOU CAN JUST LEAVE NOW – Forget the robots. Passive investments and ETFs are doing their job to knock out money managers and associated staff. Lazard Asset Management announced that it plans to cut up to 7% of its workforce and close multiple funds by the end of the year.  The firm informed all 850 employees last week. While media outlets suggest that the funds being shut down had little opportunity for growth – it has increased its allocations to ESG and AI strategies. The company joins AQR, Axa Investment Managers, BlackRock, GAM, and Jupiter as asset managers that have been slashing jobs and cutting costs.
• READY FOR THIS PITCH? SCOOTERS – Have you been run over by a guy on a scooter on the sidewalk? Check… Had a scooter rider slam into your car or Uber ride? Check… Listened to scooter guy talk about how great it is for the environment? Double-check. Well, get ready for more scooters. CDPQ and Sequoia Capital just put another $275 million into Bird’s Round D financing. It brings the scooter company’s value to $2.5 billion. The company has raised $700 million… all while losing $100 million and generating just $15 million in revenue in the first quarter. Hey, it’s Sequoia’s money… but it’s our ACLs and headlights blowing out while scooter guy acts like he has sovereign domain over the road he’s traveling the opposite direction in.

ACCRUED INTEREST

• DISCOUNT BROKERS TARGET THE RIAS – This week saw discount brokers like TD Ameritrade and Charles Schwab cut trading costs to the bone. Zero-commission trading has arrived decades after Schwab broke from the traditional trading business in the 1970s to revolutionize the industry. With a big chunk of revenue disappearing from future balance sheets, these firms need to make up the difference. In a must-read column, Nir Kaissar explains that low-interest rates were a bigger challenge for these brokers. Meanwhile, their desire to be as close to the customer has pushed them deep into the advisory business. That makes financial advisers the logical target – and likely victims – of price competition.
• YOU’RE PROBABLY NOT ON THIS LIST – The Forbes 400 has been released. This is the 15^th straight year that only billionaires have been on the list. And it was the second straight year that one needed at least $2.1 billion to appear. That figure is so high that more than 200 billionaires in the United States missed the cut. Now, there has been a lot of chatter about the fact that progressive politicians like Elizabeth Warren would need an agency to track the assets of the top 0.1% so they could hit them with a Wealth Tax. It turns out that Forbes is just doing all the work and teeing up the talking points for them.

DAILYALTS PLAYBOOK’S CARRIED INTEREST

• COLLECTING CASH –WeWork is in a rush to raise cash after its IPO collapsed in a spectacular fashion. With the firm facing a cash crunch looking out to Q2 2020, it will put two companies up for sale, according to The Information. But it turns out that WeWork bought both assets in the last 12 months. WeWork is looking to sell Teem, which creates conference room scheduling software. WeWork bought that company in late 2018 for $94 million. It also is attempting to sell workplace management software firm SpaceIQ, which it bought just three months ago. No wonder Goldman Sachs isn’t commenting on questions about a $2 billion loan to prevent a possible collapse.
• TRY, TRY AGAIN – FireEye (FEYE) is reportedly seeking a private equity buyer with the help of Goldman Sachs. The news comes after the firm failed to find a buyer. Multiple reports suggest that discussions are in the early stages of development. This is the second time that FireEye has attempted to find a strategic buyer.

QUOTES OF THE DAY

“I’m going to go quiet in about a year.”

That’s Ray Dalio during an interview at TechCrunch Disrupt in San Francisco. Dalio, the Bridgewater fund manager and author of “Principles,” has worked on a new complementary “Principles in Action” app.

“No one deserves to have that much money.”

Quiz time: Who said it? Was it A) Elizabeth Warren – B) Barack Obama or C) Bernie Sanders? Well, trick question, because this statement came last night from No. 11 on the Forbes 400, Facebook CEO Mark Zuckerberg.

Last night, during a Q&A, Zuckerberg responded to a question about Bernie Sanders’ belief that billionaires shouldn’t exist. The man worth $69 billion replied that he didn’t have a threshold on how much wealth someone should have, but “on some level,” no person deserves that level of wealth. That said, Zuckerberg has been on his heels a tad since someone leaked his statements on how his company plans to fight government antitrust challenges.

ACTIVE MANAGEMENT

• A Gordon Haskett analyst suggested Wednesday that an activist investor may be acquiring a big stake in Hewlett Packard. It was a statement buried in a longer report around the news that HP is preparing for a broad restructuring of the company and cuts of 7,000 to 9,000 jobs soon. Don Bilson at Gordon Haskett speculated that an activist might have engaged due to a large spike in trading volume, one that didn’t have a real catalyst. Bilson runs event-driven research at the company.
• This is a battle that isn’t getting much news. But Brookdale Senior Living is in a proxy war with Land & Buildings. On Thursday, Brooksdale penned a letter to shareholders in which they called Land & Buildings board nominee “unfit to serve.” The firm accused Jay Flaherty of making derogatory comments about the female CEO of a firm called Ventas. They also accused him of “fraudulent” behavior that aimed to mislead the market. They claim that Flaherty’s actions cost the firm $100 million. It probably also caused quite a stir down at the ole’ bingo hall.

COUNTRY RISK – DAILYALTS PLAYBOOK

• SAUDI SLUMP –The iShares MSCI Saudi Arabia Capped ETF (KSA) has fallen double digits from its 52-week high, and more problems are on the horizon. This week, Fitch Ratings slashed the Saudi Kingdom’s credit rating from A+ to A. The decision comes two weeks after a surprise attack on the nation’s oil fields. And it’s a reminder that the country still has a long way to go to diversify its economy away from fossil fuels. “The downgrade reflects rising geopolitical and military tensions in the Gulf region, Fitch’s revised assessment of the vulnerability of Saudi Arabia’s economic infrastructure and continued deterioration in Saudi Arabia’s fiscal and external balance sheets,” the agency wrote on Monday.
• EMERGENCY IN HONG KONG – This week, China celebrated its 70^th anniversary by showing off Death Star style weapons that can annihilate every corner of the globe in less than an hour. President Xi Jinping also said that his country remained committed to unification with Taiwan and Hong Kong, a statement that hasn’t sat too well with protestors in the latter. Well, to amplify tensions, Hong Kong leader Carrie Lam stepped up emergency powers this morning that will ban the use of face masks during protests.

LIABILITIES AT DAILYALTS PLAYBOOK

• Since we’re late in the economic cycle, this is the time when a lot of schemes and scams start to unravel. So, it’s a busy period in our Liabilities category of the DailyAlts Playbook. The latest Ponzi disaster comes out of Colorado – where a massive cattle trading and marijuana Ponzi scheme has imploded. In this case, a man with no cattle and a failing pot business convinced older Americans to give him millions of dollars to trade both commodities. But, he turned around and used the money to pay off early investors, buy cars, buy plane tickets, and pay off medical bills. The scam ran from 2014 to 2019, according to the SEC. The agency says that the scheme was moving up to $140 million between accounts each month. Here’s the full recap of a settlement from the Denver Post.
• Thomas Gilbert Jr. has been sentenced to 30 years in prison for the murder of his father in Manhattan in 2015. His father was a founding partner of Wainscott Capital Partners. The murder occurred after the elder Gilbert slashed his son’s $1,000 allowance and was staged to look like a suicide.
• Let’s throw one more household name in for good measure. America’s worst entrepreneur and least favorite Dad LaVar Ball – father of NBA player Lonzo Ball – has been accused of embezzling $2.5 million from his family-owned businesses. His former business partner Alan Foster is suing Ball. That comes while his son has sued him as well for $1.5 million. “LaVar is a liar who fraudulently utilized BBB and BSG to fund his personal lifestyle,” Foster alleges. Just think, America. His other son LeMelo could very well be the top pick in the 2020 NBA draft, which means ESPN is going to do nothing but talk about this guy over and over again for the next eight months. Ugh.

BOOTSTRAPPING (PEOPLE ON THE MOVE)

• Martin Gilbert is not seeking re-election as chairman of Aberdeen Standard Investments. Instead, he will depart the company he helped found in 1980 before steering it to a merger with Standard Life in 2017. Gilbert will become the chairman of Revolut as it prepares a global expansion thanks to a partnership with Visa.
• BlackRock’s head of macro research, Elga Bartsch, is reportedly a candidate to replace Sabine Lautenschlaeger on the European Central Bank’s executive board. The ECB will announce a decision in November for a senior appointment from Germany. As we recently noted, Lautenschlaeger stepped down two years before her term ended due to disagreements on policy. She was the only senior-level woman on the executive board, which prompted controversy. Other candidates include Isabel Schnabel, a German government advisor, Marcel Fratzscher, who runs the DIW Berlin think tank, and Claudia Buch, Vice President of Bundesbank.

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ABOUT THE DAILYALTS PLAYBOOK

Garrett Baldwin is the author of the DailyAlts Playbook.

An economist and author based in Naples, Florida, Garrett has an extended history of financial analysis, business journalism, public relations and consulting experience in hedge funds, private equity, alternative investments, housing policy, commodities, and public equity coverage.

Garrett graduated from the Medill School of Journalism at Northwestern University. He later received an MA in Global Security Studies (Economic Policy) from Johns Hopkins University, an MS in Trade Economics from Purdue University, and an MBA in Finance from Indiana’s Kelley School of Business. He has a Certificate in Global Business from Harvard Business School.

An avid Baltimore Orioles and Buffalo Bills fan, he would prefer to discuss other sports, please.