THE DAILYALTS PLAYBOOK

April 20, 2020

The DailyAlts Playbook Talks $0 Oil, How to Play Recreational Cannabis, and Why Macy’s Is Selling RE-backed Bonds…

PRIME OVERVIEW

Good morning,

Please forgive my tardiness – but as an economist, I’m trying to figure out what kind of scotch to use to help these oil prices make sense after market close.

On Saturday night, I saw a Tweet of the U.S. physical oil market.

These were prices from Friday.

• WTI Midland: $19.27
• North Dakota Sweet: $9.04
• Louisiana Light Sweet: $20.27
• Utah Sweet: $8.97
• Wyoming Asphalt Sour: $1.71
• Kansas Common: $10.0
• Oklahoma Sour: $4.0
• South Texas Sour: $2.0
• Upper Texas Gulf Coast: $4.12

Again, this was Friday.

This morning, however, WTI crude was down to $12 per barrel after a roughly 36% decline overnight.

That means – South Texas is likely under $1. My typical sources are not even bothering to post prices right now. But a conversation with a friend in London this morning suggested that condensate prices in the Marcellus and the Utica fields are likely negative.

I am a bit speechless right now, but it’s not like there wasn’t a grand thesis that suggested this was likely. My friend in the U.K. had shorted oil after the stimulus pop due to storage concerns, and his puts were at $10.

So, I assume that he can now purchase a very large house out in the country, bolt all the windows and doors shut, and then pump crude in through the chimney since there isn’t any available storage at the moment.

Or he can just start carrying barrels into his home and let them sit there for at least 24 months.

He’s a smart guy who has been waiting for this for weeks.

I asked him what happens Tuesday. He said crude might go up or down 50% in the next 24 hours. Would anyone be surprised?

MORNING MOMENTUM

DEALMAKING: On Sunday night, the U.S. Senate was negotiating a deal that would provide another $310 billion to the Paycheck Protection Program. The news comes a week after the existing program ran out of money due to the incredible demand for small business loans during the Coronavirus outbreak. Democrats are seeking more money for federal testing, hospitals, and local governments to combat the crisis. Once a bill passes, the House of Representatives could take up a vote as soon as Wednesday

CORONA: Despite recent rallies in the market, the number of Americans seeking unemployment benefits continues to rise. Roughly 22 million jobs have been lost in a month, according to the Department of Labor. Meanwhile, the number of global coronavirus cases surged above 2.39 million with nearly 165,000 deaths due to the outbreak. The U.S. now has more than 755,000 official cases. President Trump has announced that he has invoked the Defense Production Act to increase swab production at a time that the U.S. is facing a shortage.

TO THE SKIES: United Airlines (NYSE: UAL) announced that it has struck a deal to sell and lease back 22 of its aircraft with the Bank of China Aviation. The deal will allow United to conserve cash at a time that it is facing increased losses due to the massive downturn in global travel. However, the deal does raise concerns about China’s ability to obtain assets from American companies during this difficult economic environment. UAL shares are off more than 6.5% as the company will likely seek additional bailout money from the U.S. government.

ACCRUED INTEREST

DEAL OR NO DEAL: Venture capital deals slumped in the first quarter, according to THE PwC MoneyTree report. “US VC deals fall for the third consecutive quarter in Q1’20: 9% QoQ and 16% YoY. In March 2020, US deals decrease 22% YoY, with some of the decline attributable to the COVID-19 pandemic. Nonetheless, funding still rises 14% QoQ on the back of larger deals.” This wasn’t the only negative report I read today on deal-making. Refinitiv said today that there was no deal last week worth more than $1 billion — anywhere on the planet. That hasn’t happened since September 2004.

REAL ESTATE: If you’ve ever wanted to live in a Macy’s (NYSE: M) building, here is your chance. The company is currently looking at a rescue package designed to boost its liquidity. CNBC reports that the firm might sell bonds that would be backed by its existing real estate. Shares of Macy’s are off 65% since the start of the year, and its market cap of $1.8 billion is largely supported by its real estate holdings. The firm drew its full $1.5 billion credit line on March 20.

SHAKE SHACK: The Paycheck Protection Program has largely been a free-for-all. If you need evidence of that, look no further than the news that Shake Shack had received $10 million in SBA loans at the same time it was raising $150 in an equity offering. The firm announced that it will hand back that government-backed money and said it can go to independent restaurants “who need it most, (and) haven’t gotten any assistance.” The mind reels.

CARRIED INTEREST

Here are the other headlines getting our attention this morning.

• • ACTIVIST: Starboard’s next target is CVLT.
  • HEDGE FUNDS: A bounce back stopped the breach…
  • PRIVATE EQUITY: $4.3 billion in PIPEs through April 13.
  • ABROAD: It’s a bad time to be a hedge fund in Japan.
  • VC: Britain is putting together a big rescue package for startups.
  • SOVEREIGN: New problems in Norway over an expenses scandal.
  • DIGITAL ASSETS: A supply shock for Bitcoin?

QUOTES OF THE DAY

“There is no limit to the downside to prices when inventories and pipelines are full.”

That’s hedge fund manager Pierre Andurand, who has had a good run in recent weeks due to the downturn in crude prices.

“If you have such a large portfolio, you must have hedges. So the more hedges you can find, the better it is, the more variety. Getting rid of hedges makes no sense.”

That’s Nassib Taleb. The author of The Black Swan took to the airwave to challenge CalPERS decision to reduce its tail-risk hedge strategy before the massive selloff this year.

CANNABIS AND REAL ESTATE

It’s 4/20. So, let’s talk about cannabis legalization.

Cannabis CEOs now predict that the COVID-19 crisis will speed up legalization at the federal level. It’s relatively clear given that eight states kept recreational cannabis shops open during the lockdown across the country.

We’re talking about legal cannabis as an “essential business.” It’s so apparent because Michigan has made it illegal to go to your vacation home along Lake Michigan if you live in a different state, and they’ve made it impossible for people to purchase gardening equipment. But want to go out and purchase an ounce of pot? Go for it. Cannabis is essential.

The financial institution Cowen – one of our favorite backdoor cannabis investments – said that weekly sales of cannabis in March hit at least $134 million in the Western states.

I think that this is pretty much a done deal in the next 12 months. I don’t see how we don’t legalize cannabis across the nation. We need the tax revenue, and we need to keep people interested in Netflix originals.

Cannabis is a by default an alternative investment – and it offers a wealth of opportunity that we can tap into for the years ahead. First, we’re seeing strong demand in the industrial REIT sector for cultivation centers. That demand will hold in the year ahead.

Second, Cowen remains the best financial institution for this sector. It remains engaged despite a lot of uncertainty about what banks are allowed to do. When this is sorted out, Cowen likely has a massive inside edge.

Finally, of all the cannabis stocks, the only one I like is Trulieve. It trades at an EV-Ebitda multiple of 6. With the average buyout multiple last year at 12, I think this company is going to see a lot of interest if we get legalization. It owns 50% of the Florida medicinal market with just 18% of the retail space.

I can get on board for a long-term run with this OTC stock given that it’s one of the few profitable companies in the industry. You should see the lines out the door during this lockdown in Florida.

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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.