THE DAILYALTS PLAYBOOK

April 15, 2020

The DailyAlts Playbook Talks Ackman’s CNBC Defense, Earnings Season Blues, and Hedge Funds’ Small Business Cash Hubbalooza

PRIME OVERVIEW

Good morning,

This morning, the Dow Futures projected a 400-point decline as investors continue to digest the ongoing status of the coronavirus.

On Tuesday, President Donald Trump announced that the U.S. will halt all funding to the World Health Organization as the White House completes its review of the coronavirus outbreak.

While that is a fair thing to do, it doesn’t solve the most pressing problem – that the WHO ran defense for Beijing. China will just increase funding for the WHO. They will need a bigger, broader investigation – and that probably won’t consist of any WHO members coming and speaking before Congress any time soon.

That said, there is new evidence that the WHO knew of human-to-human contractions days to weeks before they said in January that such cases were unknown. This is a really ugly story about international organizations and concerns about patronage. We’ve been dealing with this for years at the United Nations – which just put China on the hyper influential UN Human Rights Council Panel. It’s hard to find a think tank in Washington okay with this… but the more the U.S. disengages, the more China fills the vacuum.

I’ve been asked what the likely response will be out of all this. I anticipate that the SEC is going to conduct a full-scale investigation into Chinese companies that list on U.S. markets – and that we’ll see a lot of firms delisted in time.

I expect that we’ll incentivize companies to move the manufacturing of critical pharmaceutical and healthcare operation. That will be good news for industrial REITs. Since we have all of the engineering in place for Industrial Revolution 4.0 – the IoT and B2B economy, I look at a firm like Uptake Technologies in Chicago to be a major player in the new decade.

That’d be good news for Revolution, Lightbank, Berkshire Hathaway, and Caterpillar Ventures. I’ve been a fan of what they are doing and dreaming about for a long time. And if we’re going to be heading in this direction – I want to focus on the players and technologies within their vision.

So, I’m going to start looking for SaaS, automation, and anything beaten down in that 4.0 sector as a long-term play.

That opens the door for Venture Capital Replication, a strategy that has delivered mightily since the late 1990s. As we continue to expand our research, I’ll talk more about this very soon.

MORNING MOMENTUM

EARNINGS START:  Wednesday’s headlines will focus on earnings reports from several of the top U.S. banks. Before the bell, Bank of America (NYSE: BAC) reported a 45% decline in first-quarter profits. The firm has also set aside $3.6 billion for loan loss reserves tied to the ongoing pandemic. Meanwhile, Goldman Sachs Group (NYSE: GS) announced earnings per share of $3.35, a 41% decline from the same period in 2019. The firm reported a 10% decline in revenue at $7.92 billion. Goldman’s silver lining in this report is that it lacks a robust retail banking operation. Rivals are already preparing for a wave of consumer defaults on credit cards and other loans.

CORONAVIRUS: Johns Hopkins University reported that more than 125,000 deaths around the globe due to the coronavirus outbreak. Globally, there have been nearly 2 million cases, with 30% happening in the United States, alone. Meanwhile, China’s National Health Commission announced another 46 new cases, with the bulk tied to travelers arriving from overseas. Meanwhile, Major League Baseball is conducting a massive antibody study to determine the presence of coronavirus in players and staff from 27 teams.

CRUDE STORY: Finally, oil prices are off 5% this morning due to growing oversupply concerns. The International Energy Agency said this morning that the coronavirus outbreak will knock off about a decade of demand this year alone. The agency said it expects that oil demand will fall by 9.3 million barrels per day for the duration of the year. In the second quarter, daily demand is forecasted to decline by more than 23 million barrels per day. The Agency is also expecting that the recent oil deal between OPEC+ and the G-20 won’t cut enough production overwhelm the broader logistics components in storage, pipelines, and ships in the month ahead.

ACCRUED INTEREST

CRUDE PUSH: Is the recent pullback in crude oil and natural gas a huge opportunity? Sure looks that way from the recent “‘Preqin Quarterly Update Natural Resources Q1 2020.” The report said that 332 funds started the month seekings $172 billion from investors. That’s still down from $215 billion at the beginning of the year.

ACKMAN ON ACKMAN: No comment here. But be sure to read Ackman’s defense of his massive hedge wins and his decision not to liquidate the Pershing Portfolio. Criticism of Ackman’s appearance on CNBC back in mid-March has been everywhere, with Stephanie Ruhle offering the harshest take on his statements that day. DealBreaker has kept tabs on this better than me…

BAILOUT: The money is free… so here come the “small businesses” seeking a bailout. Just who these small businesses are would surprise you. Bloomberg reported this morning that lawyers and accountants have been sending out invitations to hedge funds to learn how they can qualify for the Paycheck Protection Program. Expect comment from Sen. Elizabeth Warren by Friday…

HOW LOW: The International Monetary Fund has predicted a very deep recession… and says it could be the worst since the 1930s. This will be the week where EVERYONE – everyone in the media becomes an expert in the 1930s. Get ready to hear how World War II pulled America out of the Depression (it didn’t). Get ready to hear how the government saved the economy of the 30s (it didn’t.). We had two depressions during the 1930s (the second in 1937 after a rebound), and World War II was a rationing economy – not a healthy one. We didn’t climb out of the second half of the 40s due to the Marshall Plan, Bretton Woods, and a return to normalcy from a post-War economy. That’s a very simplified explanation, but people will say a Green New Deal will do all the same things for the economy that the centrally planned New Deal did… so, you’ve been warned.

CARRIED INTEREST

Here are the other headlines getting our attention this morning.

• ALTERNATIVE INVESTMENTS: Defaults coming to P2P lending…
• ARTIFICIAL INTELLIGENCE: TPG leads a $100M raise for Onfido…
• DIGITAL ASSETS: Fidelity Digital Assets make a bigger trading push…
• ESG: Millennials turn to ESG stocks in a coronavirus downturn…
• FINTECH: SoftBank faces $12.5 billion annual loss… with WeWork’s future remainin the largest elephant in a room of big ol’ elephants.
• HEDGE FUNDS:
• LIQUID ALTS: When the Fed saves the junk markets…
• PRIVATE EQUITY: The impact of COVID-19 on European PE shops…
• REAL ESTATE: Changes in REIT tax rules during coronavirus…
• VENTURE CAPITAL: Fortino Capital launches an $80M fund.

QUOTES OF THE DAY

“Banks really don’t know how bad things are going to get over the next three to six weeks and beyond. Given that cloud of uncertainty, paying dividends now is a real mistake.”

That is Gregory Gelzinis, a policy analyst at the Center for American Progress. JPMorgan and Wells Fargo will continue to pay out dividends… for now.

“To get through this crisis, our economy needs the combined efforts of government, business, and the financial system. To compensate their shareholders, banks could consider paying dividends in shares, which would not compromise their lending capacity. But they should suspend cash dividends and bonuses until this crisis is over. That would be a good way to prove to a cynical public that Wall Street is capable of putting the public’s interest above its own. Why the Fed does not require them to do so remains a mystery.”

That is former Federal Deposit Insurance Corp. chair Sheila Bair… It’s not a mystery… not after 2008.

RECORD HIGH

This morning, I have been spending the waking hours with a toddler, so we’ve had to keep the listening experience relatively light so far. But I expect that once we have some normalcy later this morning, I’ll be able to dive back in…

This wasn’t a year that really speaks out to me in any profound manner. This was the first year that music shifted so far from my traditional genres that I did feel old. I guess that was eventually going to come.

My collection is very limited to just a few things:

Courtney Barnett’s Tell Me How Your Really Feel is a good album, but not as good as her previous two albums. I really like the song about Twitter trolls called “Nameless, Faceless” and the slow burn of “Sunday Roast.”

If Barnett released an album, you can bet that Kurt Vile did as well. His “Bottle It In” is 78-minutes of guitar and euphoria. It’s a bit out there and an acquired taste… I recommend the song Loading Zones.

Florence + The Machine’s High as Hope is my favorite album of hers… It’s not as ambitious as Lungs, but it’s better on multiple fronts… especially the song Hunger.

Nine Inch Nails’ Bad Witch is the usual gritty greatness dating decades. David Byrne’s American Utopia has a few terrific songs – and kicked off a tour that produced one of the best live shows that I’ve ever experienced. I give my thumbs up to “Everybody’s Coming to My House.”

Finally, John Prine – who just passed away due to complications from Covid – released the remarkable “The Tree of Forgiveness.”

On the song front, though the video of the year went to This is America by Childish Gambino, the message vanished from the headlines in just days. It’s powerful and deserved more than short attention spans of today’s world.

Lana Del Ray released two songs from her 2019 album a few months early in Mariners Apartment Complex and Venice Bitch. They were both great songs, but wouldn’t hold a candle to the rest of the album Norman F-n Rockwell.

I’ll wrap with God’s Plan by Drake, and Make Me Feel by Janelle Monae. The problem is that everything started to sound the same that year.

Either that’s my old ears… or the industry is running out of new ideas and needs innovation. Or both…

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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.