THE DAILYALTS PLAYBOOK

March 10, 2020

Today, the DailyAlts Playbook talks about NBC News’ Remarkable Debt Coverage, Corona CAPE Shiller, and Why Just Six States Will Decide This Election.

PRIME OVERVIEW

Good morning,

We arrived back to Southwestern Florida on choppy seas Sunday night. A 3 a.m. bedtime combined with motion sickness fueled yesterday’s skipped Playbook.

My apologies.

But you can imagine rough seas for four hours – and then feel more nauseous by staring down a futures market that was off more than 1,000 points and oil down more than 20%.

Morale is a bit better this morning, but we’re still looking at negative momentum, and all-cash has been the rule since mid-February unless there are some banks that hit the magical entry points.

Today, the futures are up more than 1,000 points…

There’s already chatter by the Trump administration to slash payroll taxes to offset the economic impact of coronavirus. One would have thought that a 25% cut to oil prices might do that trick as well, but we’ve grown accustomed to a maximum response at all times.

In the words of Jim Cramer talking about the recent rate cut: “I’m more concerned than I was.”

Goldman Sachs had a call on Monday that features health and economic experts on the state of the Coronavirus outbreak.

The call indicated that China is no longer the driving force behind the spread of the virus.

China is getting back to business – that’s evident with solid resumption rates in its National Grain Processing and Railway Cargo Loading. That said, its national logistics are still sitting at just 60%. Auto traffic remains low in major cities, And passengers are still avoiding intra-city transport.

However, its property transaction market has slowed to a crawl.

But let’s discuss the United States and the Goldman Sachs report.

Goldman said that equity valuations at the start of the current outbreak were higher than prior pandemics. You have a higher valuation multiple across six categories. The Shiller’s CAPE Ratio was sitting above 31 at the start of the year– well above the multiples at the time of SARS, Swine Flu, MERS, Ebola and Bird Flu.

That ratio was back down to 26 on Monday. That’s still within an earshot of where the index sat on Black Monday in 1929.

Yet, the goal here it seems is to keep pushing equity markets back higher by the Treasury Department.

This is a playbook that remains questionable. We’ve been here before. We know how it ends.

I’m still reminded of Guggenheim Partners’ January 20 report on the state of the markets. The firm had been ringing alarms about corporate bonds for some time.

There remains a serious downgrade risk for BBBs. A stunning 50% of today’s investment-grade market sits at BBB.

Back in 2007, that number was 35.

That year, BBB- was at 7%. Today, that figure for BBB- is 15%.

Guggenheim projected that we’d see about 15% to 20% of those BBB graded bonds face a downgrade in 2020.

That is the other shoe poised to drop.

If yesterday’s downturn in the crude markets – across the entire, debt-saturated energy supply chain – didn’t ring out that alarm – it’s not clear what other signals we really need?

The big question moving forward is when we’re going to see widespread debt downgrades?

The answer is likely soon if the plot of Margin Call is now a playbook.

Of course, like every slow-moving crisis, the press takes its sweet time bringing everyone up to speed. NBC News wrote a report on Monday explaining the threat of corporate debt and drew comparisons to the mortgage debt boom of the previous decade. “This time a different type of debt looms – business borrowings…”

Looms?

It’s already here. We’re already surrounded by the fog of debt.

Please, someone working at a sister media arm of CNBC, tell me that this isn’t the first time you’ve reported on this.

Meanwhile, we’re already starting to see the eulogies to the Bull Market with 20/20 Hindsight.

There will be lots of football spiking this week from people who correctly predicted 15 of the last two market corrections.

MORNING MOMENTUM

ELECTION 2020:  On the election front, the Cook Political Report has the Senate remaining Red, the House remaining Blue, and the election more or less a tossup. The report shows that it will come down to the same states once again that tipped the 2016 election to President Trump.  There are 105 electoral votes up for grabs in Wisconsin, Michigan, Arizona, Pennsylvania, North Carolina, and Florida. Six states will decide the Presidency.

PERFORMANCE: Bill Ackman’s publicly traded hedge fund has seen a boost in its NAV. Pershing Square Holdings (OTCMKTS: PSHZF) saw a 2.8% jump in its NAV through March 9. I suppose we’ll see how Monday’s selloff affected its numbers.

OIL WOES: Hedge funds are likely to have been the big winners in the Great Oil War of 2020. For the week ending Tuesday, managers were short at least 133 million barrels across the top six petro futures and options contracts. The downturn in crude prices could also be a boon for the ESG category.

ACCRUED INTEREST

SHORT ELON: Tesla Inc. (NASDAQ: TSLA) remains the second-largest short position in the markets at $12.35 billion. That news was meant to be an appetizer to the news that Elon Musk is very concerned that SpaceX won’t make it to Mars in his lifetime. Musk has basically taken the artwork and stories of Phillip Dick novels, crammed them into a pitch deck, and made gobs of money. Now, he’s telling everyone that they too might be dead before their investment pays off?

JACK STAYS: Elliott Management has struck a deal with Twitter () that will allow Jack Dorsey to remain at the helm of the social media giant. Silver Lake is investing about $1 billion into the firm to help the company repurchase stock. The deal will also see Silver Lake’s CEO Egon Durban and Elliott’s Jesse Cohn join Twitter’s board of directors.

CARRIED INTEREST

Here are the other headlines that have grabbed our attention this morning across the markets.

• The Bank of Japan is exploring a cryptocurrency.
• Italy is completely on lockdown. That is sparking talk of a bank bailout.
• Real estate climate risk is going to get a lot of traction in Europe.
• Private equity firms with a lot of energy exposure were big losers on Monday.

QUOTES OF THE DAY

“The recent downdraft has made equities very attractive relative to bonds.”

That’s Goldman Sachs from its call on Monday. Well, the 10-Year is sitting at 0.5% and the Dow did just shed 2,000 points.

“If I had written a commentary on how 4,000 people dying from the flu would topple global financial markets, I think I would have been deemed insane. Yet today that is exactly the story.”

That is Guggenheim CIO Scott Minerd talking about the coronavirus outbreak. “What next? Guggenheim expects that the 10-Year note will hit -50 basis points before 2021 and could see a drop to -2% by the end of the year.

ACTIVE MANAGEMENT

BOARD PUSH: Teleios Capital Partners has written to French furniture and home décor giant Maisons Du Monde asked for help from shareholders before any new board directors are announced. The activist hedge fund owns more than 13% of the company’s stock.

DUMP US: Coast Capital is pushing for the board of First Group to dump its U.S. operations in shipping. The transport giant owns Great Western Railway and Transpennine Express. The activist firm wants the company to sell or float those operations and hand the cash to its shareholders.

SOCIAL RESPONSIBILITY AND THE DAILYALTS PLAYBOOK

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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.