THE DAILYALTS PLAYBOOK

March 12, 2020

Today, the DailyAlts Playbook talks about Bond Downgrades, the ETF bomb, Bitcoin’s Bust, Blackstone’s Credit Lines, and Oil Slumps.

PRIME OVERVIEW

Good morning:

We start today as we have since momentum went in the red in Today, the DailyAlts Playbook talks about Bond Downgrades, the ETF bomb, Bitcoin’s Bust, Blackstone’s Credit Lines, and Oil Slumps. February…

We’re just wondering where this ends?

Futures markets again hit “Limit Down” this morning after U.S. markets failed to take anything positive from President Donald Trump’s address to the nation last night.

The White House banned travel from Europe to the United States last night. The news rocked the European markets at a time that Italy’s death toll surged by 30% overnight.

The most surreal part of the evening last night for me was turning off CNN after Trump spoke.

CNN had Jim Acosta on, who started his typical pontification about Trump’s word selection.

I flipped to MSNBC – where Rachel Maddow launched into a monologue about how the U.S. as a country significantly lagged behind South Korea on COVID-19 testing. She read this monologue like a mortician reading a toe tag.

I then flipped on ESPN – something I rarely do at night. Within 60 seconds, Scott Van Pelt popped on the screen to announce that the NBA had suspended its season. A visibly shocked Mark Cuban was reacting on his phone (and would proceed to offer the only actually uplifting and reasonable statement on coronavirus since this outbreak had begun.)

Two minutes later – news broke that Tom Hanks and his wife had contracted coronavirus.

An hour later – Van Pelt and his guest not only commented that the NBA had ended its season (with an entire team about to enter quarantine for two weeks), but that we’ve also likely witnessed our last basketball game of the year.

They were suggesting that the NCAA Tournament – already planning to play without fans – would now likely not even happen.

By that point, morale was shot – and I hadn’t even checked the futures markets yet.

And here it is – down 1,100 – with no ending in sight.

What is the ending, we ask?

MORNING MOMENTUM

Let’s stay on topic.

Yesterday, I was talking to Tim Melvin about where we sit right now. The takeaways are part of another column that I’ll be writing later today.

Three things stand out right now.

First, the S&P 500 sat at 2,741 – or 20.6 times earnings of 133.

This morning’s downturn puts us at 19.6 times earnings.

The mean is 15.78, which would take us to 2,098.74.

Just cut that in half – that puts us at 17.69 and right around 2,350. That level has been a popular figure because it’s right around what Jim Cramer keeps talking about.

But there are two other factors that are concerning.

First – the IMF came out yesterday and started warning fund managers and ETFs might start ditching assets due, particularly leveraged loans and debt.

“There are asset managers that hold relatively illiquid assets like high-yield bonds or loans and the risk is that the investors in those asset managers might decide to redeem their shares quickly,” Tobias Adrian of the IMF told Reuters. He said that a possible mismatch between the duration of assets and duration of liabilities could apply pressure on managers to “sell relatively illiquid assets very quickly.”

Elsewhere in passive time bomb world, we’ve already seen two leveraged energy ETFs implode this week. And we’ve seen certain ETFs shed huge positions in certain stocks because the stocks or bonds no longer meet the requirements to fall inside the portfolio.

I cited the State Street’s SPDR S&P Dividend ETF (NYSE: SDY), which just unloaded 22% of the entire universe of Tanger Factory Outlet (NYSE: SKT).

There was zero buying pressure on the other side of that trade. Even though the stock is paying a – what – 14% dividend that it just raised, it’s trading under $9.50 a share.

Are you willing to try to catch that falling knife?

Second, there’s the big elephant in the room: Corporate debt.

I mentioned earlier this week that Guggenheim sounded the alarm in January. You have half of the corporate debt market sitting at BBB, and another 15% at BBB-. That universe has increased from $800 billion in 2007 to $3.3 trillion.

Following the huge decline in oil prices this week, we aren’t seeing too many moves yet from credit rating agencies to – you know – rate credit. Downgrades appear inevitable – and this is the period where firms would usually try to unload this debt from their books.

And funds and institutions that have investment-grade mandates – they’re going to need to unload all of this debt as well.

Are there buyers?

And if not – are people going to mark their books to reflect their current risk levels?

Our models told us to head to cash back around February 18. And while we’d love nothing more than to start diving in and snapping up banks and airlines sitting under tangible book value – there’s simply no point to go bargain hunting yet.

Time to turn off the machines and go for a walk.

ACCRUED INTEREST

BAN BLOWBACK: As expected, the European Commission pushed back at the Trump administration for the travel restrictions between the U.S. and its 26 countries. The European Commission effectively said it wasn’t consulted before the President acted on his travel ban. This isn’t surprising.

FISCAL V. MONETARY: Trump appears to be scrambling right now – and he spent the better part of Wednesday yelling at Treasury Secretary Steven Mnuchin about the Federal Reserve, Jerome Powell, and why we’re not getting additional interest rate cuts. Trump’s speech last night largely focused on fiscal policy efforts – and perhaps someone helped him understand the difference between monetary and fiscal policy. The markets await Fed Chair Jerome Powell and his merry band of central bankers this month. Expectations: Another 50-basis point cut.

CARRIED INTEREST

CRUDE AWAKENING: Oil prices were off another 5% this morning after the coronavirus panic prompted the Trump travel bank with Europe. That news came at the same time that Saudi Aramco sought permission to increase output in its all-out war with Russia for market share. Both WTI crude and Brent crude are now off roughly 50% from their January highs and have experienced their sharpest downturns since the 1991 Gulf War. Meanwhile, traders were hit by additional news that the United Arab Emirates is planning to boost its production after a deal between OPEC and Russia to cut global production collapsed last week. The nation said it plans to boost its production from roughly four million barrels per day to five million barrels per day.

BITCOIN BUST: Bitcoin hit $6,231. People are wondering why. It has nothing to do with a European travel ban. Where were people going to spend it? The problem is that we are facing liquidity issues and people are panicking and pulling their money from every direction. How is this so difficult to grasp? The same goes with gold. If gold were truly a “safe asset” in times of massive economic contagion, it’d be trading at $3,000 right now. It’s not – because the price of gold when trade collapses is the price of your appetite for a week. They have written books about sieges and how thieves hoard gold and become rich trading it for food during a crisis. And yet, Gold Bugs are still acting like there’s going to be a massive wave of capital flowing into gold. Meanwhile, the BitMex CEO came out and said Bitcoin would hit $6,000 and then magically rise to $20,000. Come on people! Stop answering the phone when reporters call.

QUOTES OF THE DAY

“So far we are not seeing a credit crunch but at some point we might see an increase in defaults.”

That’s the IMF’s Tobias Adrian talking about the possibility that ETFs could start unloading illiquid assets. I hate to disagree with someone who clearly has a more advanced pedigree than a guy who writes a morning blog from a pool on a Thursday, but we are facing credit challenges across the board.  Bloomberg just wrote about this last week. I know the IMF isn’t supposed to make people panic, but these are the types of quotes that come back to haunt officials over time.

“There is no firmwide directive to our portfolio companies to draw upon credit lines. We are evaluating the financing needs of certain companies directly impacted by COVID-19.”

Blackstone has lots of dry powder – and it looks like it’s going to finally put it to work – by offering credit for all of its companies. All hands on deck.

ACTIVISTS

SELL, SELL, SELL: Starboard Value has nominated several people to the board of directors at eBay (NASDAQ: EBAY). The hedge fund argues that eBay isn’t moving quickly enough to divest its Classified Business.

KEEP SELLING: Prudential is reportedly looking to IPO its U.S. division Jackson. The news comes after Dan Loeb’s Third Point applied pressure on the firm to split its U.S. and Asian operations.

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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.