THE DAILYALTS PLAYBOOK

April 29, 2020

DailyAlts Playbook: Icahn’s Victory Lap, An Opening Worth Celebrating, The Fed Talks, and the End of Mergers as We Know It.

PRIME OVERVIEW

Good morning,

There is a plan.

No, not the Federal Reserve. No, not from the White House.

Major League Baseball is considering a plan that would start the season in July. Multiple scenarios exist, including the possibility of three 10-team divisions that would put the Mets and the Yankees in the same one. In addition, both the AL and NL West divisions could end up consolidated in a way that would see the Houston Astros have to face off against the LA Dodgers multiple times and resurrect the 2017 cheating allegations.

There has also been talk about a massive College World Series-World Cup-style tournament that could see all 30 teams enter, and one winner emerges after multiple rounds and a traditional World Series.

At this point, anything works, but to have a shortened season where every single game has a playoff atmosphere in the dugout would be truly electric.

Baseball has seen its attendance decline over the recent years.

Now is the time for the purists to step aside and let the Commissioner’s office experiment with a host of untraditional options that could once again capture the nation’s imagination.

I like the idea of a tournament, as it would make it easier for an underdog to get hot for a few weeks and generate interest in smaller markets.

MLB might regret it though if the Yankees or the Dodgers – in the two largest markets – go suddenly cold and find themselves on the brink of elimination early.

No matter – as the NFL Draft has proven – Americans will watch almost anything sports related right now, even a bunch of executives sit in their sweatpants and draft players for a season that still might not happen.

Come July, the nation will pine for a showdown between the Detroit Tigers and the Cincinnati Reds.

These are the things that matter… not – you know – like all of the global debt now being twice the size of the World’s GDP.

MORNING MOMENTUM

PUMP: The Federal Reserve will wrap up its two-day meeting on monetary policy this afternoon.  Investors are looking for insight on the unprecedented policy efforts offered by the Fed since March. Fed Chair Jerome Powell isn’t expected to announce any new initiatives in a statement today, but it should provide a bit of an assessment on the state of the U.S. economy in the wake of COVID-19. The U.S. central bank is more likely to take action after its next meeting in June. The time until that meeting will give the central bank an opportunity to assess unemployment and economic conditions.

COVID: The United States – with more than 1 million infections – represents about one-third of all global coronavirus cases, according to Johns Hopkins University. The death toll in the United States – at more than 58,300 in under three months – has topped the number of Americans who died during the Vietnam War, which lasted more than 10 years. While U.S. states plan to reopen parts of their economies, the focus now centers on the ability to test as many people as possible. President Trump said Tuesday that the U.S. would soon be able to test as many as five million people per day. However, that figure dwarfs the most that the U.S. has been able to test so far in a single day – at roughly 314,000.

CRUDE: June WTI oil prices jumped nearly 14%, while rent crude gained another 4.1% thanks to a weekly inventory report from the American Petroleum Institute. The private inventory report said that the number of U.S. barrels in storage popped by 10 million last week to 510 million. That figure was actually lower than analysts had expected. Despite the rally, the outlook for oil remains bearish. Large countries around the globe have shuttered their economies due to the COVID-19 outbreak, which has sapped international demand.

ACCRUED INTEREST

BEEFY: President Donald Trump will invoke the Defense Production Act – something he’s been hesitant to do on many occasions – to force U.S. meat plants to remain open. Plants have been closing across the United States due to more than 6,500 cases of workers contracting coronavirus. The executive order says that “such closures threaten the continued functioning of the national meat and poultry supply chain, undermining critical infrastructure during the national emergency.” Unions and activists have said that if the workers are not safe, neither will the food supply chain, which Tyson Foods recently claimed is “broken.”

SURGE: Hedge fund and private equity managers — start your engines. JPMorgan Asset Management projects that the current market environment could be a boon for both sectors. In a note this week, JPM’s alternative asset arm said that cap-weighted return expectations now sit at 9.8% for the year, a 1-point jump from last September. John Bilton, the head of multi-asset strategy said that the current market uncertainty “”actually reinforces our conviction that there is a good medium-term outlook for alpha generation.”

POLICY: Two prominent Democrats are moving to pass the Pandemic Anti-Monopoly Act, legislation to stop mergers while the U.S. deals with COVID-19. Senator Elizabeth Warren (D-Mass.) and Representative Alexandria Ocasio-Cortez (D-NY) are pushing the bill. This new bill would place a moratorium on all mergers reported to the FTC. It would also stop any deals involving firms with more than $100 million or engaged in private equity The lawmakers said that the moratorium would last until the FTC unanimously decided that small businesses and workers are “no longer under severe financial distress,” according to the statement. The FTC has five voting members.

QUOTES OF THE DAY

“This (pandemic) is showing what bulls–t most AI hype is. It’s great and it will be useful one day but it’s not surprising in a pandemic that we fall back on tried and tested techniques.”

That’s Neil Lawrence, former director of machine learning at Amazon Cambridge. In an interesting article this morning, Lawrence notes that during this pandemic, the labs of Facebook AI Research, DeepMind, and OpenAI have been largely quiet. He says that people are falling back on the basis of statistics and mathematical models to address COVID-19.

“We have billions and billions of dollars on the short side of this. It really is a beautiful trade on a risk-reward basis.”

That’s Carl Icahn last week in an interview with Bloomberg Television. Icahn can take a victory lap after he took aim at the BBB- portion of the CMBX 6 and the junk portions of the commercial real estate index. I suppose he’s lucky, because it feels like this was the only thing that the Federal Reserve and Congress didn’t bailout.

“I’m surprised at the size of the bounce when you look at our economy and the fact that we [may] have … 20% unemployment, and in the center of the fairway of where we think it will be by the end of the year, in a perfect world, maybe we’ll be back to 7% to 10% unemployment.”

That’s Kyle Bass talking about the disconnect between the market and the economy. He’s not the only person who feels this way you know.

CARRIED INTEREST

Here are the other headlines getting our attention this morning.

• AI: US Rules that AI can’t be an inventor
• BLACK SWANS: ‘Markets were priced for perfection, but all of a sudden the world lost its veil of perfection’
• DIGITAL ASSETS: Bitcoin is back above $8,000
• FINTECH: An industry offensive in Hong Kong
• VENTURE CAPITAL: New risks on the horizon
• ESG: Some people aren’t fans of Blackstone
• PRIVATE EQUITY: BlackRock to close European abs return equity fund
• HEDGE FUNDS: Hedge funds are still buying into private companies
• ALTERNATIVE ASSETS: Impact Assets launches COVID-19 impact fund
• LIQUID ALTS: Video game ETF hits 52-week high

VENTURE CAPITAL IN FOCUS

Filippo Mezzanotti, an Assistant Professor of Finance at the Kellogg School of Management at Northwestern University, has been studying how private equity fares in a crisis.

He examined data from nearly 500 PE-backed companies in the United Kingdom before and after the Great Recession. He and his research team found that d that PE-backed companies weathered the crisis better than other companies.

Almost all firms cut back on spending during a crisis. Mr. Mezzanotti found the private equity-backed firms cut back far less. PE-owned firms spent 5.9 percent more than the non-PE ones. They concluded that this extra sending stems from the private-equity firms’ access to capital.

Private equity firms that have uncalled capital can use those funds to shore up companies in the current portfolio. That access to capital gives them a massive advantage over companies owned by entrepreneurs. They do not have the same access to capital as private equity firms, which puts them at a significant disadvantage.

Mezzanotti also found that PE firms often have the advantage of specialized knowledge. He points out that “Clearly if you have a private-equity firm with a lot of experience in turnaround and distress, that could be very useful now.”

Private equity firms have trillions of dollars of dry powder right. Mezzanotti thinks this will allow them to play a critical role during the current crisis. They will have the capital to shore up portfolio companies and direct desperately needed money to companies in which they choose to invest. We have already seen this happen as there has been $17 billion in private investment in public equity in 2020.

Wayfair(W) and Dave and Busters (PLAY) are two examples of private equity firms making significant non-control investments in struggling companies.

Mezzanotti points out that this is not a new role for private equity firms. One research study from earlier this year showed that PE firms acquired one-quarter of all failed banks between 2009 and 2014. The PE-backed banks went on to recover better than banks that had been acquired by other banks.

For more insight on Private Equity and other alternative investments, check out our latest news at DailyAlts.com.

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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.