THE DAILYALTS PLAYBOOK

February 14, 2020

Today, the DailyAlts Playbook talks Tesla Cults, China’s Deception, and a Very Busy Slate of Activist Interventions.

PRIME OVERVIEW

We return this morning thanks to modern medicine, good sleep, and the first time the household has been quiet in five days.

Thank you for the emails and the texts. The flurry of “Where is the DailyAlts?” texts at 9 a.m. helped motivate me this Friday.

I start today with Tesla, which is a theme of this issue.

You’re likely aware by now that I’m not a big fan of the company. Back in 2016, I said that investors had joined a cult. That said, I give credit to people like Trip Chowdhry who put big premiums on the stock and were right about this run. I can bang on the window all day and scream that the underlying metrics don’t make any sense.

But I know better. I’ll admit I’m wrong and I won’t spike the football when this thing does finally come back down to earth.

Fundamentals? What fundamentals? But what’s the point of trying to make sense of this when 40% of companies trading are “zombie stocks.”

If you’re rational, you’re going to lose. And trying to time the reckoning is a terrible thing to do – especially with other people’s money. This morning, Yahoo! noted that anyone shorting Tesla took a bath in January. Greenlight Capital lost 7.6% last month. Crispin Odey’s European fund lost 11.2% (a Tesla short was its fourth-largest position), and GMT now took a hit as well.

Bill Ackman finally had a moment when he stopped trying to make his Herbalife shorts and his Valeant longs work. And he came out very clean on the other side and has talked about the lessons.

There is an incredible amount of temptation to go heavy against the tide of investors who only care that the stock is going up – rationality be damned. I won’t short Tesla. I will sit out trying to take out some of these companies trading at 100 times sales. And shorting China is just going to be a headache if it keeps pumping the GDPs of neighboring countries into its system.

What’s the lesson: It’s a reminder that it’s sometimes best just to steer clear and focus on boring stuff.

Like the fact that government service buildings that lease to the U.S. Post Office provide a better return than Manhattan real estate.

If you read anything today, make it the latest by Sophie Bakalar at Collaborative Fund.

Boring is beautiful, and there’s a fortune to be made on the stuff that won’t put you in the headlines. Our research – and you’ll see a lot more – centers on community banks, REITs, private equity replication, closed-end fund arbitrage, and some of the least exciting things on the planet.

Thing is – we’re not trying to be the people who “called the crash” or said that Stock X  would “triple.”

We might be the loudest people at a party, but our investment strategies can feel like watching paint dry.

I will warn you: It is so boring. Boring. Boring. But it makes a lot of money. Our community banking strategy has returned upwards of 22% a year since inception, and Tim Melvin has never had a losing trade in seven years in this space.

We’re building this site to draw attention to opportunities that go completely unnoticed. Why do they go unnoticed?

Because they’re boring and poorly understood.

We’ll talk more about that next week.

MORNING MOMENTUM

NO TRUST: Investors and the White House are doubting the latest figures on the coronavirus out of China. The Chinese government has altered the way it counts cases, which quickly drove the number of confirmed cases above 60,000. The death total is now at 1,380. The Trump administration, however, “not have high confidence in the information coming out of China.”

ELON’S BUDDY: Shanghai Mayor Ying Yong is now taking over the top political post in the Hubei province. Deemed “the man to save China,” Ying is best known for his ability to lure Tesla (NASDAQ: TSLA) and Elon Musk to produce cars in China. While the entire handling of this situation by China has been terrible, this is also a reminder that the American subsidy system for electric vehicles has made little sense.

ALL IS WELL: Z-Ben Advisors says that China’s mutual fund industry has remained resilient despite the ongoing battle against Coronavirus. Penghua Fund Management raised $1 billion for its fund this month. Meanwhile, Wanjia Asset Management raised $430 million this week. Ignore the fact that China effectively told managers that they can’t sell unless they face a wave of redemptions that would drive them to the brink. And ignore the fact that China has pumped an amount of money int the last week that doubles the GDP of nearby Kazachstan. Guys, it’s all going to be just fine. Ignore the debt bubble over there – especially in real estate. Ignore the fact that Jim Chanos called the nation’s real estate market a “treadmill to hell.”

PRIVATE FLIGHT: With airlines avoiding China, private jet travel is picking up.

ACCRUED INTEREST

GOLD JERRY: Goldman Sachs is good at making money. They’re also good at capitalizing on hedge funds’ herd mentality. They built a portfolio of 50 stocks that are most commonly found in the top 10 holdings of “fundamentally driven hedge funds.” The results: The portfolio is up 7% so far this year. The S&P 500 is up 4%.

UNDER 40: Rishi Sunak, 39, has become the new U.K. Chancellor after the sudden resignation of Saji Javid. The news comes amid a shakeup in Prime Minister Boris Johnson’s cabinet. It was a sudden and surprising announcement given Sunak’s relatively short career in politics. The son-in-law of a billionaire is the second-youngest Chancellor in the nation’s history and has ties to Goldman Sachs and Sir Christopher Hohn. [Note: I’ll be 39 in April, so there’s still time for me to get that cushy job at the Treasury Department, right?]

CARRIED INTEREST

NEW RULES: Lime Asset Management hurt a lot of investors in South Korea. Now, the new rules around “full redemption” claims will limit the establishment of certain open-end funds.

SUSTAINABLE: BlackRock continues to unveil its suite of ESG products to back up its rhetoric on climate change and sustainability. The firm announced a $600 million investment from Finland’s largest pension insurance firm. Ilmarinen invested the capital in the iShares ESG MSCI EM Leaders ETF (NASDAQ: LDEM). This was the firms’ second investment in iShares ESG strategies.

QUOTES OF THE DAY

“Can it pull it off? It’s plausible.”

That’s New York University finance professor Aswath Damodaran. The so-called “Dean of Valuation” says that Tesla’s valuation numbers are a bit stretched. He says that the firm must match revenue figures comparable to Volkswagen in 10 years and experience positive margins similar to Apple (NASDAQ: AAPL) to justify the stock’s price point. Not that it matters, people keep giving him money.

“Mr. Staley also confirmed to the Board that he has had no contact whatsoever with Mr. Epstein at any time since taking up his role as Barclays Group CEO in December 2015.”

That’s Barclays Group in a statement on its CEO’s relationship with Jeffrey Epstein. British regulators are investigating Jes Staley on his ties to Epstein. It’s a much deeper rabbit hole than it appears.

ACTIVE MANAGEMENT

DATING BLUES: Sahm Adrangi’s Kerrisdale Capital hedge is shorting Match Group (NASDAQ: MTCH). The hedge fund believes that regulators are set to crack down on platforms like Match and Tinder.

SECRET STRENGTH: P2 Capital Partners said in a recent 13D filing that it built a 5.9% stake in Cott Corporation (NYSE: COT). The hedge fund has been on a roll in recent weeks.

SOFTBANK + SINGER: Yesterday, we noted that SoftBank has struggled to attract investors to its Vision Fund 2. The firm is also facing activist pressures from Paul Singer and Elliott Management.

LIABILITIES

GOING UNDER: Monique N. Brady, 45, is facing 10 years in prison for scamming friends and relatives in a large Ponzi scheme.

BANKING BLUES: PNC Bank and Heartland Bank & Trust are facing a lawsuit from two firms. The lawsuit alleges that both financial institutions aided a $75 million Ponzi scheme.

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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. He holds degrees from Northwestern University, Johns Hopkins University, Purdue University, and Indiana’s Kelley School of Business. He also 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.