THE DAILYALTS PLAYBOOK

January 28, 2020

Today, the DailyAlts Playbook talks about Bernie Sanders Blowback, ESG Battery Woes, Impeachment Implications, the ECB, and New York State Tax Revenge.

PRIME OVERVIEW

U.S. equity markets are pushing higher Tuesday after their worst day since October.

Health experts are calling for calm and insist that coronavirus has been contained for the moment. Chinese health officials claim that 4,515 have been infected, while 106 have died from the disease. China has taken dramatic steps to contain the virus – including the cancelation of Lunar New Year events in Beijing and quarantining several cities.

Foreign health officials also say that the virus has a much lower death rate (2% to 3%) than SARS and MERS (10% and 35%).

The coronavirus has inspired a lot of speculation, a lot of predictions about death tolls and central bank support, a significant amount of political risk columns, and your regular dose of doomsday hype.

Economists and Senior Economists, and friends of economists, and neighbors of economists and even people who reject modern economics have flocked to blogs to provide their take on everything from manufacturing to air travel, from factory output to Chinese economic growth. We’re even getting our usual helping of conspiracy theories and hoaxes.

And in a few weeks, a lot of it will likely be forgotten, left alone on a shelf somewhere on the internet, never to be seen again by the eyes of civilized man.

Perhaps I’ll revisit these analyses from time to time – like a random acquaintance you meet for a drink whenever you’re traveling through Dallas – and ask: “When and why was this a thing?”

MORNING MOMENTUM

BERNIE BOOM: Senator Bernie Sanders is starting to pull away from the rest of the field in Iowa, and it’s starting to look like he could take both the Caucus next Monday and New Hampshire. With front-runner status comes front-runner criticism.

• Peter Schiff argues that Sanders is more dangerous than coronavirus.
• Sen. Amy Klobuchar has said that Sanders “should not be leading the ticket.”
• Author Peter Schweizer has dug deep into Sanders’ wife’s alleged grifting and corruption from his time as a public servant.
• David Frum argues that the Trump machine won’t play nice in 2020 and will destroy Sanders.

TRADING TAX: The U.K. Financial Conduct Authority has determined that high-speed trading costs mom-and-pop investors about $5 billion. The practice of “latency arbitrage” reduces total volumes on global exchanges and hurt liquidity. The agency has called HFT a “tax” on other investors. The study suggests a $55,000 tax on every $1.3 billion traded. Kirsten Wegner, CEO of an HFT lobbying group, said defended the practice. She argued tha the Wall Street Journal was serving a political agenda. She also said that the practice reduces transaction costs and “helps” investors. We will be the judge of that…

IMPEACHMENT, EH: The Democrats are pushing for John Bolton to testify at the impeachment trial of Donald Trump. That has sparked speculation that Republicans will call on Hunter Biden to testify about his time working for the board of a corrupt Ukrainian energy company despite his lack of expertise in the space. Bolton has reportedly written a book that says that Trump knowingly pressed to hold back aid in exchange for information on his political rivals. While this all makes for interesting political theater – it still likely won’t be enough to force Trump out of office.

ACCRUED INTEREST

ESG GRUMBLE: Bloomberg raised concerns about battery fires as climate advocates push for the elimination of fossil fuel use. Battery fires are very difficult to put out, as evident in an April 2019 explosion in Arizona and in manufacturing hub South Korea. Also, keep in mind that this transition to other forms of energy isn’t going to have the cleanest footprint. Lithium-ion batteries require strip mining, solar panels have a dangerous greenhouse byproduct in nitrogen trifluoride or NF3; and windmills kill a few hundred thousand birds a year. The protests over the new energy sources will come at some point. By the end of it, we’ll be cooking vegetables and heating our homes with composted embers inside a cylinder steel trashcan.

ESG TUMBLE: State Street is the latest financial firm to turn up the heat on managers. The firm said that it’s going to use the upcoming proxy season to “take appropriate voting action” against board members who lag competitors and fail to explain how they will improve their ESG score. “Ultimately, we have a fiduciary responsibility to our clients to maximize the probability of attractive long-term returns — and will never hesitate to use our voice and vote to deliver better performance for them,” said Cyrus Taraporevala, SSGA chief executive. “This is why we are so focused on financially material ESG issues.” Um, can I ask a pretty basic question? Is it me, or has ESG given a number of large institutional investors and fund managers a big shiny hammer to bang away at boards and then influence other objectives later?

FED FIRST: The Federal Reserve will kick off the first meeting of 2020. A rate cut isn’t likely to start the year, but that hasn’t stopped hundreds of media sites from asking the question as their headlines. It turns out that there are a lot of people just Googling the question: “Will the Federal Reserve Cut Interest Rates in January?” So, everyone has some sort of variation of this in their SEO tabs. Perhaps investors should instead turn their attention to the Bank of England, which will likely cut rates later this week in preparation for the Brexit. The U.K. is set to depart the EU on Friday.

QUOTES OF THE DAY

“I would not go short in the global rates markets now.“

Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets. Bloomberg reports that the total amount of securities paying a yield under zero increased by $1.16 trillion last week. That was the largest jump in a week since 2016. The report suggested that more inflows into these assets were likely this week due to fears over the coronavirus. Lyngen said that healthcare scare needs to run its course.

“An assessment of business models showed that most significant institutions’ earnings are below their cost of capital. This hampers their capacity to organically generate capital and to issue new equity.”

The European Central Bank said that six eurozone banks have failed to meet capital requirements. The ECB has ordered them to fix the financial shortfalls. But… but… but… the ECB – is the problem. Can someone explain to them that it’s really hard to raise capital when you’re operating in a market with negative interest rates caused by ECB policy?

ACTIVE MANAGEMENT

ANOTHER DEFEAT: Elliott Management failed to sway investors to hold out for a higher price at Altran. The French IT giant Capgemini was able to convince the majority of Altran investors to take their offer and to ignore Elliott Management. Capgemini locked in a 53.6% stake in Altran in a tender that closed on January 22. Elliott has not responded for comment.

BOARDROOM BATTLE: Offshore drilling giant Valaris will give Luminus Management a board seat. The New York hedge fund will appoint one of its partners to the board. The firm owns 18.7% of Valaris stock.

LIABILITIES

4X PENALTY: The CFTC is pushing for a default judgment against VOS Capital Management, and its principal Dominick Vincent Carducci. The agency wants a civil monetary penalty worth $2,861,625, a figure that is three times what the firm and Carducci earned when they solicited, accepted and misappropriated funds “for a pooled investment vehicle in off-exchange leveraged or margined Forex contracts.” The CFTC also wants restitution of $953,875.

NEW YORK STRIKES: New York tax officials have hit a Connecticut hedge fund manager with a $10 million bill and interest after the state found him to be a statutory resident. This news comes despite the fact that the manager paid taxes on the same income to Connecticut. The $10 million bill is the single largest deficiency imposed on an American in decades. Oh, and they want interest too.

RISK BREACH: The SEC and CFTC have announced charges Catalyst Capital Advisors, its president and CEO, Jerry Szilagyi, and portfolio manager Edward Walczak. The report states that the hedge fund breached its risk parameters and failed to take corrective action with its investments. The fund lost about 20% of its value due to mismanagement.

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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.