THE DAILYALTS PLAYBOOK

April 30, 2020

DailyAlts Playbook: Chinese Firms Hit the Exits, Musk’s Rant on “Fascism”, Hedge Fund Returns, and Unemployment Totals

PRIME OVERVIEW

Good morning,

This morning, we start with a story that caught my attention at FinanceAsia, where we see that Chinese companies are rushing to delist from U.S. exchanges and go private.

For decades, Chinese companies pressed to get access to American capital by listing on U.S. exchanges. But a shift has come after regulators increased pressure and many have speculated that the Trump administration may push to have firms delisted – whether it’s due to trade disagreements or punishment for COVID-19. Regardless, this has kicked around D.C. for months.

That said, this stance isn’t completely unwarranted.

There have been countless examples of corporate fraud and outright lying by corporations out of China about their numbers.

Luckin Coffee – which basically fabricated hundreds of millions in sales – just saw its stock plunge by 85% last month. That’s one company, as regulators are currently investigating TAL Education Group (NYSE: TAL). QTR Research made its bones by investigating publicly trading Chinese companies only to arrive in the country and find that a number of corporate addresses never existed or just happened to be a school or building in the middle of nowhere.

This fraud is extracting hundreds of billions of dollars of U.S. investor capital, and it’s happening for two reasons.

First, there is no shortage of China bulls willing to trust the narrative that the nation will soon have the world’s largest economy and the rising “middle class” will be massive consumers.

We JUST HAVE TO TAP into this incredible demographic shift or we’ll be left behind, they say.

The other reason: These companies list on U.S exchanges and don’t have to adhere to the Sarbanes-Oxley Act.

This is so idiotic that whoever decided on this exemption should never be allowed to hold any job around pools, children, knives, or pets, let alone anything related to law enforcement.

SEC Chairman Jay Clayton warned last week that investors should be very careful about investing in Chinese companies.

Now, more Chinese companies are looking to delist – on their choosing. What does that tell you?

If you’re lucid enough to remember any high school gathering where a parent showed up and said, “there will be no drinking or smoking marijuana tonight,” and then a bunch of people suddenly leave… you could assume that they were there to do one or both.

As the author of this article writes that “now is the perfect time for a privatization,” she ultimately asks, “Can Chinese companies shake off the perception that they are cooking their books as hot as their café lattes?”

Not to me. I’m very skeptical about even the largest listed companies like Alibaba Group.

The Nasdaq went through this for a decade. But amnesia is a side effect of market euphoria. Update Sarbanes-Oxley and watch how much faster the exodus goes.

MORNING MOMENTUM

JOBS: This morning, all eyes are on the U.S. Department of Labor as it reports the latest figure on unemployment benefits across the United States. More than 30 million people are now seeking unemployment benefits across America. The news comes a day after Federal Reserve Chair Jerome Powell warned that we are facing the worst economy in history. Powell said after the two-day FOMC meeting that Americans can expect to see terrible economic data during the second quarter. He also said that the Fed is prepared to provide more liquidity to the market and suggested that small businesses may need additional funding to keep their lights on.

COVID: Meanwhile, the official number of coronavirus cases around the globe topped 3.2 million, with the U.S. currently sitting at 1.04 million. In the United States, roughly 61,000 people have died due to COVID, and the figure now outpaces the loss of American lives during the Vietnam War. Around the globe, Italy is moving to reopen its economy, with Prada saying it will restart production after two months of shutdown. However, Japan has announced it will extend its state of emergency for at least another month.

CRUDE: The price of ticked higher on news that the expected glut of crude oil is not rising at the rate that many analysts had expected. WTI crude futures added 15.7% after a 22.2% gain on Wednesday. The Energy Information Administration said yesterday that U.S. inventory levels increased by nine million barrels, a sizeable miss from the 10.6 million expected by analysts. U.S. gasoline stockpiles also declined from record levels in the previous week. That said, we are still looking at storage concerns around the globe. The International Energy Agency has warned that global capacity may strike for storage around June due to a record 6% decline in energy demand this year.

ACCRUED INTEREST

RETURNS: Preqin reports this week that hedge funds have been affected quite differently by COVID-19. The research giant said that the Preqin All-Strategies Hedge Fund benchmark saw a loss of 10.4% in Q1 2020. That figure effectively erased all gains during 2019 (+10.97%). That said, the fund index did outperform the 20% decline by the S&P 500. Preqin released its house report: “COVID-19’s Impact on Alternative Assets” this week. The report notes that equity funds with a long-bias took the biggest hit during the month. Meanwhile, CTAS were the only ones to make gains in Q1. The group also reported that just 87 new funds launched during the first quarter. That figure was off sharply – about 66% – from the same period in 2019. HFR offered a similar report on Q1 performance and took a more positive spin on Q1 developments.

ILLIQUID: As we’ve noted, illiquid assets remain a problem in current market conditions. Institutional Investor noted this week that a large number of credit funds aren’t struggling to properly mark net asset values, especially those operating in structured products such as MBS. The publication cites PivotalPath, a research and data firm, that tracks performance information. The firm says that by this point of the year, upwards of 80% of fund managers would have reported this information for March. However, just a third have provided NAV updates to the firm.

RANT: The hedge fund Citadel recently disclosed a large stake in Tesla Corporation (NASDAQ: TSLA). So, let’s see if they respond to Tesla CEO Elon Musk’s latest rant about the government. During the earnings call for Tesla, Elon Musk called government stay-at-home orders fascist and warned about the company’s ability to resume its production at its California-based manufacturing plants. Musk said that the government was “forcibly imprisoning people in their homes against all their constitutional rights.” The rant came around the same time that Glenn Tongue of Deerhaven Capital Management warned that Tesla may need to announce yet another offering due to its cash position.

PERFORMANCE: State Street Global Markets today released the results of the State Street Investor Confidence Index for April 2020. The Global Investor Confidence Index decreased to 73.0, down 0.7 points from March’s revised reading of 73.7. The Asian ICI plummeted to 18.3 points, falling to 80.0 from 98.3. Meanwhile, North American ICI inched upward by 1.2 points to 68.0 and the European ICI rose from 95.5 to 102.8. Investor confidence dipped slightly in April, largely driven by weaker sentiment for Asia,” said Rajeev Bhargava, head of Investor Behavior Research, State Street Associates. “Despite an end of the lockdown in China, the Asia ICI fell to its lowest level since 2005, possibly a reflection of weaker economic data regionally and renewed concerns over the region’s ability to sustainably exit lockdown as cases resurface in previously locked-down countries. In contrast, however, the US and Europe showed stability in investor appetite this month with Europe actually seeing a material rise in investor confidence. The unprecedented amount of stimulus central banks have injected into markets as well as signs of a slowing in new COVID cases locally seem to have had a stabilizing effect on risk behavior.”

QUOTES OF THE DAY

“I think the people are going to be very angry about this and are very angry. It’s like somebody should be, if somebody wants to stay in the house that’s great, they should be allowed to stay in the house and they should not be compelled to leave. But to say that they cannot leave their house, and they will be arrested if they do, this is fascist. This is not democratic. This is not freedom. Give people back their goddamn freedom.”

That’s more Elon Musk talking on a recorded line during an official earnings call. There was an F-bomb or two in there somewhere in the transcript. It’s quite a rabbit hole.

CARRIED INTEREST

Here are the other headlines getting our attention this morning.

• Hedge Funds: Bill Ackman “had a hunch back in February” and other great “journalism” from MarketWatch…
• People: Quilter’s New ESG Chief Joins from Sustainalytics
• Earnings: Carlyle Group Sees $1.2 Billion Investment Loss, Beats Street Earnings
• Private Equity: Blackstone Continues to Buy Up Casino Assets
• PAYOFF: Chris Hohn and TCI Take Big Gain Shorting Wirecard
• WINNERS AND LOSERS: Pandemic Gains for the Tech Tycoons
• REAL ESTATE: Large City Offices Could Be Thing of the Past, Says Barclays CEO

HEDGE FUNDS IN FOCUS

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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.