THE DAILYALTS PLAYBOOK

February 3, 2020

Today, the DailyAlts Playbook talks about the China “Herd Effect”, the 2020 Primary Kickoff, the SEC Shareholder Debate, and All Quiet on the Brexit Front.

PRIME OVERVIEW

The morning, we start in China, where a massive selloff hit the Shanghai Index during the market’s first day back from the Lunar New Year celebration. The Index fell by 7.7% as the spread of the coronavirus shatters sentiment. Investors ignored positive data showing that manufacturing activity increased during January.

The focus remains on the spread of the deadly virus, which could create a nightmare for the world’s second-largest economy. New estimates suggest that China’s economy could slow to 5% growth in Q1.

The official death toll passed 360 over the weekend. The number of confirmed cases has topped 17,400, and Hong Kong has shut down its checkpoints with mainland China.

The most interesting story hovering in the background is the accusation by China that the U.S. “inappropriately overacted” to the news of the coronavirus. China has said that the U.S. hasn’t offered much assistance to stop the outbreak. That charge conflicts with previous reports of the U.S. extending aid offers to China.

“The U.S. government hasn’t provided any substantial assistance to us, but it was the first to evacuate personnel from its consulate in Wuhan, the first to suggest partial withdrawal of its embassy staff and the first to impose a travel ban on Chinese travelers,” said Hua Chunying, China’s foreign ministry spokeswoman.

MORNING MOMENTUM

“HERD EFFECT” – The PBOC blamed the “Herd Effect” for today’s sharp decline. However, keep in mind, the 7% decline in China today could have been much larger. The Peoples’ Bank of China has injected $174 billion of liquidity into the markets to try to deter selling. Just so we’re clear here, $174 billion is the annual GDP of neighboring Kazachstan. Add that to the fact that it’s illegal to engage in short selling there, and you’re also not allowed to sell large blocks of stock. While the U.S. markets are in the green today, the selloff in China negatively impacted public markets in Japan, South Korea, and other nearby countries.

EYES ON IOWA: Punxsutawney Phil didn’t see his shadow Sunday, signaling an early spring. But while we won’t see another six weeks of winter, he did say that we’re still in for another nine months of American politics with the 2020 primary season starting today. Get ready for the mudslinging and the inevitable showdown between two men in their 70s bickering over an election that will likely be decided by people 50 years younger than them. Bernie Sanders appears to have the lead heading into today’s vote. Reports indicate, however, that the DNC and mainstream Democrats are highly concerned about Sanders’ potential to lock up the nomination. Centrist Dems are hyperfocused on defeating President Donald Trump and worry that Sanders’ brand of socialism might deter independent voters from providing support to his campaign. We have another nine months of this campaign, and then we get to kick off the 2024 campaign sometime around January 23, 2021. RealClearPolitics final Iowa polling average: Bernie Sanders, 24.2%; Joe Biden, 20.2%; Pete. Buttigieg, 16.4%; Elizabeth Warren, 15.6%.

NEVERMIND: There was a time that the Brexit was the largest threat to the history of the world. But today, everyone got back to business following the United Kingdom’s departure from the European Union. The U.K. exited the EU market on Friday night. We’ve noted that investors aren’t deterred from backing Britain’s fintech sector. But here we are on Day One, and it’s eerily calm. Britain will now need to work with EU officials to establish a new trade deal. Prime Minister Boris Johnson outlined his vision for the UK in a speech this morning.

ACCRUED INTEREST

COMMODITY BETS: Short-selling against oil has surged in the wake of the coronavirus. Bets against West Texas Intermediate surged by 52% during the week ending Jan. 28. This 52% jump was the largest spike since August 2018. The ongoing panic over coronavirus sent U.S. crude prices down 16%. Short positions are still building over concerns over a “Black Swan” style pandemic that would see crude prices and demand fall even further. John Kemp at Reuters dug deeper into the data on Monday.

SWAMP BATTLE: Dan Loeb criticized the SEC on the agency’s goal of disarming shareholder advisory firms last week. But now, the battle is expanding and more participants are taking sides. Robeco, Neuberger Berman, and Morningstar have now sent letters demanding changes to the SEC requirements to change ownership requirements around shareholder resolutions. The 3-2 vote by SEC officials last year was based on the argument that the rules would prevent frivolous shareholder resolutions from burdening boards of directors. However, Morningstar argues that it hasn’t seen any increase in resolution filings or burdens to companies. In fact, shareholder proposal submissions declined by 26.8% from 2008 to 2018.

TESLA TROUBLES: David Einhorn’s Greenlight Capital was off 7.6% in January. This is clearly the fault of Elon Musk, right? Einhorn has been a notorious Tesla (NASDAQ: TSLA) bear for years. However, January saw TSLA stock rally by 46%.

CARRIED INTEREST

GLOVES OFF: On the ESG front, Goldman Sachs (NYSE: GS) has taken a bat to expectations for Exxon Mobil (NYSE: XOM) in the years ahead. Following a weak XOM earnings report, Goldman has said the oil giant will only meet 50% of its return estimates by 2025.

MAN SEEKS PRESIDENCY: Tom Steyer really wants to be President. The former hedge fund manager wants it so badly that he has now sunk $200 million of his own money into his 2020 campaign. What did all of that money get him as we start the Primary season? Steyer is polling at 3% in Iowa. That’s almost $67 million per percentage point. He probably could have bought a hockey team for that kind of money.

QUOTES OF THE DAY

“Of course, what we witness in the chart below may simply be the initial stages of a green stock bubble forming that will eventually burst.”

Joachim Klement offers a very compelling dive into recent empirical evidence on the state of “brown stocks” versus “green stocks.” Is a bubble forming because of the ESG rush? That’s hard to say. But we did see European funds dedicated to ESG experience a record $132 billion of capital inflows in 2019.

“Increasingly we’re getting called to censor a lot of different kinds of content that makes me really uncomfortable.” 

That’s reportedly a statement from Facebook CEO Mark Zuckerberg. Lost on Page 24 of the hedge fund space is a behind-the-scenes battle between Zuckerberg and hedge fund manager George Soros. The latter has accused the former of indirectly helping Donald Trump get re-elected. At the heart of the debate is the spread of disinformation ahead of the 2020 election. While Zuckerberg has said that his company will take down harmful content, the question remains where the line exists.

ACTIVE MANAGEMENT

“NOT AN ACTIVIST” – Private equity giant KKR has said it’s not an activist. That sentiment comes from its co-President a week after most market observers said that the PE shop took an “activist stake” in Dave & Busters. KKR says it intends to work with management.

NEXT FOR WEXLER: Last week, news emerged that L Brands (NYSE: LB) founder Leslie Wexler could soon be heading for the exit. There was also speculation that the company might spinoff or sell Victoria’s Secret. Such developments are part of a broader battle between the company and hedge fund Barington Capital. Barron’s covered the story over the weekend.

BOOTSTRAPPING

• Morgan Stanley promoted Alex Silverman and Roland Jeurissen to co-head its FX options unit. he moves come as part of a shakeup after an internal investigation. The options-trading division lost $100 million in the third quarter on currencies tied to Central and Eastern Europe, the Middle East, and Africa.

• WeWork has appointed a new CEO in Sandeep Mathrani, the company announced Sunday. Mathrani is a successful executive who has one mission: Turn around the company in the wake of its failed IPO in 2019.

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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.