THE DAILYALTS PLAYBOOK

January 14, 2020

Today, the DailyAlts Playbook talks repo markets, BlackRock’s climate reversal, bubble warnings, Climate Change funds, and the not-so-surprising news out of Tribune newsrooms.

PRIME OVERVIEW

This morning, Dow Futures were off slightly ahead of a busy round of earnings reports. JPMorgan, Wells Fargo, and Citigroup will report earnings before the bell. Delta Airlines will also report earnings on Tuesday. JPMorgan topped Wall Street Q4 earnings projections before the bell.

Investors continue to monitor developments between the United States and Chinese trade delegations. The two are set to sign a “Phase One” deal in Washington tomorrow. Ahead of tomorrow’s meeting, the United States removed China from its list of currency manipulating nations. That said, Chinese observers have maintained a guarded stance on the state of trade relations. This morning, the South China Morning Post said that the trade war is “not over yet.” It said that Wednesday’s “Phase One” deal is more like the “first round of a game.

Meanwhile, markets are keeping a close eye on the repo markets. On Monday, the New York Fed added another $60.7 billion to the financial markets. But the bigger story is what the Fed plans to do to fix the repo markets. The Fed had initially said in September that it would only pump money into the overnight markets for a short period. That pumping has continued into the new year. The Fed has reportedly sought a fix to address short-term liquidity. However, as the Wall Street Journal reported Tuesday, the biggest hurdle to addressing the ongoing problem is the hedge fund industry.

MORNING MOMENTUM

WHAT BUBBLE: The S&P 500 is sitting just shy of 3,300. Valuations have stretched over the last year. And the S&P gained more than 30% despite weaker fundamentals across U.S. agriculture, manufacturing, and several other sectors. That said, we are not in bubble territory, according to JPMorgan Chase. Analysts said Monday that the S&P 500 needs to hit at least 3,700 to reach a pattern that mirrors past bubbles. That level represents about a 13% gain from Monday’s close.

FINTECH FIGHT: Visa announced that it has purchased fintech company Plaid for $5.3 billion. It’s a big acquisition given that Plain had a valuation of just $2.65 billion in late 2018. The fintech firm allows users to connect their bank accounts to other fintech platforms like Acorns, Venmo, and Betterment. During a conference call Monday, Visa said it is “increasingly trying to move from being strictly focused on payments to being focused on the movement of funds for any purpose.” The deal will allow Visa to connect Plaid’s network to Visa Direct, a platform targeting the gig economy.

ACCRUED INTEREST

CLIMATE WARNING: BlackRock’s Larry Fink has said the sky is falling when it comes to climate change just days after his firm joined Climate Action 100+. This morning, Fink warned that climate change represents a bigger threat to the global economy than the 2008 financial crisis. “We don’t have a Federal Reserve to stabilize the world like in the five or six financial crises that occurred during my 40 years in finance,” Fink said Tuesday morning in an interview with Andrew Ross Sorkin.  Fink has called for greater “planning” and “public-private connections” to address climate change. He also predicted “a fundamental reshaping of finance.” Fink said that BlackRock will no longer own stakes in companies that derivate more than 25% of their revenues from thermal coal.

IT BEGINS: Here come the “Climate Change Hedge Funds.” David Vogel has announced plans to raise $1.5 billion for a fund that uses big data to bet on sustainability. The Voloridge Sustainability Fund will center on firms that produce technologies that promote efficiency, electric vehicle makers and suppliers, and firms impacted by events like wildfires, floods, and other natural disasters. Vogel reportedly spent five years studying data on the impact of climate change. He is launching the fund at a time that pension funds are seeking more access to ESG factors.

CRYPTO CONCERNS: The Reserve Bank of Australia (RBA) is the latest central bank to suggest that the Libra cryptocurrency project will not work. It also questioned the viability of central bank digital currencies (CBDCs), which have previously received support from central bankers like Mark Carney and Christine Lagarde. The RBA doesn’t see a future for a “digital dollar” in Australia. The central bank’s report came the same week that China increased its hype around its “digital Yuan.”

CARRIED INTEREST

2019 RETURNS:  We continue to report on 2019 performance among hedge funds, private equity, and other investment vehicles. This morning, we learned that Joseph Edelman’s Life Sciences fund returned a whopping 53.7% in 2019. The $4.8 billion hedge fund is the flagship fund of Perceptive Advisors. According to reports, the firm saw strong gains thanks to biotech names like Global Blood Therapeutics and Mirati Therapeutics.

VENTURE BOOM: PitchBook and the National Venture Capital Association released their latest numbers on dealmaking in 2019. A new report released Tuesday says that American firms received $136.5 billion in venture capital investment in 2019. That figure was down roughly 2.6% from the previous year. The report also says that the number of deals increased by 2.2% with the number of deals surpassing $100 million hitting a new record. At the same time, VC fundraising dropped by 20% to $46.3 billion. Despite the downturn, this was the second-largest capital pool raised over the decade.

QUOTES OF THE DAY

“We’ve moved from a pay-for-performance industry to a socialist regime for most of the hedge fund industry.”

Ilana Weinstein, founder and CEO of IDW Group, didn’t hold back in an interview with Bloomberg on the state of compensation in the hedge fund sector. Weinstein discussed the ongoing decline in incentive and management fees for hedge funds and stepped back to raise concerns about aggregate returns since 2015. Weinstein called 2020 a “make-or-break” year for a lot of funds as they attempt to justify their fees and investment strategies.

““Do you have any ideas on how to explain that to the public?” 

That’s Federal Reserve Chair Jerome Powell. In October, Powell hosted guests at the Fed Building in Washington. During a conversation with non-profits, small businesses, and community groups, he explained that inflation was lower than the Fed’s target. He then went on to explain the threat: If inflation falls too much, the Fed would lose the power to encourage banks to lend more money. At that point, he smiled and asked the question above. The Fed faces a number of challenges, but none greater than the lack of understanding around fed policy, particularly as it attempts to unwind its balance sheet and addresses the repo markets.

ACTIVE MANAGEMENT

MEDICAL MOTIVE: Activist hedge fund Starboard Capital has disclosed a 9% stake in Merit Medical. The hedge fund will provide the firm with guidance on how to improve operational performance, according to Reuters. Shares of Merit Medical hit a three-year low in October after a weak earnings report and a cut to forward guidance.

NEWSROOM CUTS: Just two months after Alden purchased a 32% stake in the publisher, it has offered buyouts to Tribune employees. The hedge fund is notorious for reducing employee headcounts and expenses at the publications it purchases. Just two months ago, Alden purchased a 25% stake from Michael Ferro in November 2019. It further increased its stake and added two board seats in December. As part of that agreement, it cannot hike its stake in Tribune Publishing above 33% until the end of June. Expect political candidates to chime in on this news ahead of the Iowa Caucus. It’s red meat for Sens. Bernie Sanders and Elizabeth Warren.

LIABILITIES

BUSY, BUSY: Donald G. Blakstad has been quite busy, allegedly doing things he shouldn’t. The SEC has filed a complaint that he operated a fake crypto making business. Blakstad told investors he would use their money for “Start-up costs” tied to the purchase of mining equipment for cryptocurrency. He raised roughly $3.5 million from 14 investors through three firms: an oil, gas and alternative energy firm; a Canadian car parts acquisition vehicle; and a “purported” crypto mining operation. Turns out that none of that was real. And if his name sounds familiar, it’s because he was arrested in July 2019 for allegedly running an insider trading scheme. DealBreaker covered all of the bases on this one Monday.

COLLUSION: Citadel has gone to court against London-based GSA Capital Partners and five of its senior executives. IRs charge: That GSA allegedly obtained the highly confidential algorithm and other sensitive material illegally. It did so by allegedly colluding with Vedat Cologlu, a senior manager and quantitative researcher at Citadel. The strategy is referred to in court documents as the “ABC Strategy,” as reported by the Financial Times. According to the hedge fund, GSA and Cologlu formed an “unlawful means” conspiracy.

BOOTSTRAPPING

BlueBay Asset Management appointed Mihai Florian to the new role of Senior Portfolio Manager. Florian will help lead the development of the company’s firm’s emerging market debt (EM) illiquid corporate credit strategies. The position is based in London. Alt

Alternative asset services provider SANNE has named Marie Measures as its new CTO. It is a new position for the firm. Measures will be based in London and join the firm’s Executive Committee.

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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.