THE DAILYALTS PLAYBOOK

April 9, 2020

The DailyAlts Playbook Talks Helicopter Money, Pyromaniac Bank Rules, Black Swan Blowout, and Labor Woes

PRIME OVERVIEW

Good morning,

I am running late right now because I’m trying to wrap my head around today’s jobless claims and then the Fed’s helicopter money response.

The central bank is pumping $2.3 trillion in what looks like a staggering leverage play.

These are the type of days where airport rules apply on how early is acceptable to pour oneself a drink.

I had prepared commentary on how I saw first confirmation of institutional movement into the utilities sector, which made a move into the UTSL a compelling play mid-morning yesterday.

I’ve talked a lot about being the first person over the wall with some longer-term plays, but I should have said first into the pool.

It appears that some people are now past their ankles into the water and pressing into the utilities sector due to safety and dividends.

Now with this latest Fed response, I wonder what exactly the play will be to address inflation concerns in the future as well.

It’s hard to remember sometimes that a market is not the economy.

Even though we are staring at a possibility of 30% unemployment, a long-U shaped recovery, permanent damage to a number of sectors, and the flat-out eradication of many small businesses – people still held stocks through the worst of it, and sold them at price they deem more in line with their expectations.

I think when we look back at this downturn, we’ll see that forced selling by funds was a massive factor in why so many stocks fell so low.

I think next week is going to be fascinating.

Banks will start reporting earnings, and most of the media arealready covering for the financial institutions. Analysts have barely bothered to update their forecasts since this downturn started. And my feeling is that most of the mainstream press will tell us that it doesn’t matter what the reports indicate.

It was uglier than we thought – and to quote Brody in Jaws – we needed a bigger boat. It looks like the Fed went shopping for a tanker and has loaded it with cash…

By the Way

Meanwhile, I’d prepared this content… so we’ll run it anyway.

I wanted to point out that in other publications I’ve been warning for weeks to get off the Zoom Video Communications (NASDAQ: ZM) train.

This was well before the U.S. Senate told its staff members to stop using the conference service due to security problems.

And it was well before Google banned its employees from using Zoom on their laptops.

I raised those alarms when it was at $145 per share, and I didn’t do it because I have some contrarian streak to me.

Yes, I get it. People have been working from home.

People have been using Zoom, and Google Hangouts, and new competitors are popping up.

The only reason I came out against Zoom was because it was trading above 65 times sales while short interest was rising (along side a few other metrics that I like to look at).

Stocks that trade above 20x revenue and have rising short interest over time and fail to meet certain forensic thresholds over the last 20 years have an annual performance of roughly (minus 20%) annually.

And it’s really ugly in the IT and communications sectors.

Here are the numbers…

Average Since 1999

• Average Return: -20.50%
• Sharpe: -0.38
• Beta: 0.92
• Alpha: -18.74

I’ve seen this drama a few times. Lots of hype and high P/S figures for a few months. It can be dangerous on the way up, but boy do things go south quickly when the levy breaks.

Roku Inc. (NASDAQ: ROKU) was supposed save consumers money and “change the way you watch TV” because of cord-cutting and lower costs for content. Then look at when it was trading at 21.4 times sales with rising short interest in September 2019.

Shares are off from 52-week highs of $176.55 to $87.81.

In August 2019, Paysign traded at 27.8 times trailing revenue after a remarkable run over three years. But by that point, short interest had pushed even higher.

The stock has imploded since last August, falling from $18.67 to as low as $3.63. It blew up before the coronavirus spread.

Cybersecurity firm FireEye (NASDAQ: FEYE) promised to “change the way environments are secured and monitored.” It traded at 55 times sales in March 2014, had rising short interest, and shares pushed above $80.

It hasn’t sniffed $20 in more than four years.

PagerDuty is an IT firm that would “change the way we think about how information passes between applications,” according to The New Stack.

It was trading at 26.98 times sales last July with short interest rising. Even before “coronavirus” hit the markets, it tanked.  Shares fell as much as 70% from their 52-week high.

I understand how revolutionary technologies are.

But there’s a point where the hype doesn’t meet the math. There are examples of success stories, but price-to-sales is a better warning sign of what’s to come over the next 12 months and remains an overlooked metric when you use it as a baseline.

Now, let’s get into the rest of the news…

MORNING MOMENTUM

PUMPING: The Federal Reserve responded to today’s jobless claims numbers with a monster Main Street lending program and stimulus effort worth $2.3 trillion. This is an unprecedented level of capital. Luckily, it appears that Yahoo! Finance had this article in embargo because this was really fast. The fact that this author had to put all of this copy together and hasn’t changed his name and moved to an abandoned farm with plenty of running water is surprising. Then again… the name Brian Cheung does sound like an alias… hmmm…

HERE’S WHY: U.S. Labor Department announced that an additional 6.6 million Americans filed for unemployment benefits this week. That figure surpasses expectations of 5 million. That extraordinary figure offers a staggering glimpse into the negative impact that coronavirus has played on the U.S. economy. A lot of analysts and economists are now worried that this surge in unemployment could be permanent across a number of industries. This figure brings the total number of people on unemployment on the other side of 15 million, based on the past two weeks’ figures.

CORONA: Meanwhile, the total number of coronavirus cases around the world surpassed 1.5 million. We have seen 89,000 deaths and more than 300,000 recoveries, according to Johns Hopkins University. Reports this morning indicate that the bulk of New York cases came from Europe due to a spread from travelers to the United States (though the virus still originated in China, they say). Scientists have been testing genomes to get a sense of how the virus has spread. Italy currently has the largest number of deaths at more than 17,600. Spain said yesterday that roughly 15,000 people have died. The U.S. is fast approaching that figure as well.

ACCRUED INTEREST

BLACK SWAN: It’s a good time to be in tail-risk strategies. Universa Investments of Miami returned 3,612% during the month of March. The fund – advised by Nassim Taleb and managed by Mark Spitznagel – is now up 4,144% through the end of last month. “Looking ahead, the world remains very much trapped in the mother of all global financial bubbles,” Spitznagel wrote. “It’s the systemic vulnerabilities created by this unprecedented central-bank-fueled bubble, and the crazy, naive risk-taking and leverage that accompanies it, that makes this pandemic so potentially destructive to the financial markets and the economy.” We’re doing more research on this, but we have found a way to replicate this strategy by using tax-free assets that help us generate enough cash to make similar trades. We’ll be discussing this strategy in the months ahead, as I think we’re going to see a lot more opportunity here.

FREE PASS: Well, this isn’t a good sign. The Federal Reserve has lifted all asset caps on Wells Fargo (NYSE: WFC) so that the financial institution can boost its lending to small businesses. The caps were put in place due to the series of scandals at the bank over fake accounts and stolen fees from customers. That scandal compounded on several others dating back to the 2008 financial crisis. While we’re at it, let’s just let all the serial arsonists out of jail this winter so they can ration the public’s supply of natural gas.

CRUDE MOVES: Oil prices are in focus as OPEC leaders prepare to meet with Russia to discuss potential caps on production to help boost crude prices. Some analysts are warning that a failure to reach a deal could lead to a very sharp downturn in crude prices, perhaps into the single digits. Check back for more information about the OPEC meeting and what it will mean should the parties reach a deal later today.

CARRIED INTEREST

Here are the other headlines getting our attention this morning.

• Hedge Funds: Blackwells had a big first quarter and will take new capital
  Alternative Investments: BlackRock won’t layoff anyone right now, says Larry Fink.
  Venture Capital: AirBNB issues a revenue warning for 2020.
  Private Equity: KKR is setting up a coronavirus relief fund.
  ESG: Coronavirus is impacting ESG in a big way.
  Digital Assets: Regulators move on “fraudulent” crypto schemes.

QUOTES OF THE DAY

“The Fed’s role is to provide as much relief and stability as we can during this period of constrained economic activity, and our actions today will help ensure that the eventual recovery is as vigorous as possible.“

That’s Fed Chairman Jerome Powell discussing the central bank’s response.

“That’s a lot. (followed by five seconds of silence)”

That’s Becky Quick on CNBC responding to the report about the Fed’s monetary efforts. I’ll give CNBC credit this morning. They actually did a very good job of getting it together to report these numbers. Someone get the guy in the production room some sort of gift certificate.

 

RECORD HIGH

Continuing on to our countdown to not ending the lockdown, we’ve moved on my music collection since 1999. We’ll just keep going until we hit 2020, and then we’ll move this section over to represent one of our verticals.

Today: 2012

I spent most of 2012 holed up in a research office trying to make sense of the 2011 government shutdown and how to prepare for the next one. I’d get that chance a year later… The thing about that period of research was that I was spending it in a two-person office with the bro-iest of bros. You know, half-drunk protein shakes sitting out, the guy who left tuna cans in the trash because he had to get his PROTEIN. It was quite a year. I relied a lot on music and headphones…

Lana Del Ray’s Born to Die was transcendent, and she keeps getting better (here 2019 album was my favorite for last year by a mile). She also put out Paradise that year.

Fun. (with their small f) – released Some Nights – which carried a lot of anthems for the generation behind me, a level of angst. I really was impressed by Nate Ruess as a lead singer in that band, but just feel like we all lost something when this band stopped. I hadn’t seen anything like him in a while – but then I realized that Jack Antonoff was better offer doing what he does in production and pushing Bleachers.

Miike Snow’s Happy to You didn’t make the same noise as his first and third albums, but it is a decent album with a few great tracks with enjoyable videos like Paddling Out.

My favorite album of the year is Jack White’s Blunderbuss. Get out of the way… this is an incredible solo project rife with everything I want in a rock album. He gets right to the point in what to expect with Missing Pieces – and everything just runs together for 13 songs. My favorite song is Hypocritical Kiss – though that’s not one of the mainstream picks from the album.

Temper Trap’s self-titled second album doesn’t have the same feel as their debut, but it is well produced, a product of the Sound Factory. El-P’s Cancer 4 Cure came out that year – and this album contains Tougher Colder Killer – a furious rap track that contains Killer Mike on it. This would be the predecessor track for the establishment Run the Jewels [NSFW]. Killer Mike also put out “R.A.P. Music” that year, and it’s a force.

Fiona Apple’s The Idler Wheel… is exceptional. That’s not really a surprise. It should have won for best alternative album, but they gave it to Gotye because he had one good song that was effectively a ripped off Sting song.

Finally, Calvin Harris released 18 Months that year, and everyone I know who got married after 2012 had “Feel So Close” playing somewhere in their wedding event. Guilt as charged as well.

My favorite song of the year is tough. I like the early visualization of Elephant with the heavy baseline by Tame Impala which just kicks into an amazing “song.” I think “Thrift Shop” by Macklemore was one of the most fun songs of the decade. Yep…

But I’m also married, and my wife will get mad if I don’t agree with her that “I Will Wait” by Mumford and Sons deserves credit.

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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.