THE DAILYALTS PLAYBOOK

February 11, 2020

Today, the DailyAlts Playbook talks about oil shorts, coronavirus hits earnings, crowded trades, and Toy Story 4 after a fifth viewing.

PRIME OVERVIEW

Hurricane “Two Year Old” made landfall in this author’s household Sunday night. Conditions on the ground Tuesday still consist of a spreading strep throat, late-night screaming, the futile pursuit of sleep combined with vision-locking headaches, and repetitive viewings of Toy Story 4.

Apologies upfront today if this morning column is lighter than usual.

We start today with U.S. oil prices, which ticked back above $50 per barrel after sinking to a 13-month low.

Fund managers had been dumping oil over the last few weeks, but resistance wouldn’t break down below $49 per barrel. Short sellers appear to have taken some profits off the table, pushing crude back up about 1.7%.

Markets are still waiting on news from OPEC and several key non-members that greatly influence the global crude market. With Chinese crude demand set to slide, OPEC+ is expected to slash overall production by another 600,000 barrels per day. That cut, however, would not be enough to offset the 940,000 barrels of daily crude demand that Chinese state refiners plan to cut from this month’s processing levels.

Meanwhile, Russia has taken its time announcing any support for additional cuts. And the United States will likely see another uptick in domestic inventory levels – the third consecutive weekly rise – later this week. The American Petroleum Institute releases its inventory report today. The EIA releases its official report on Wednesday.

MORNING MOMENTUM

CORONA CRISIS: On Monday night, China announced that the total confirmed cases of coronavirus hit 42,638, while 1,016 people have died due to the virus. China’s leader Xi Jinping toured Beijing on Monday after taking heat for his recent low profile. Leaders at the World Health Organization warned that coronavirus represented “a very grave threat” to the rest of the world. In China, it threatens to slow domestic GDP to under 5% in the first quarter.

FUTURE FOCUS: Despite the rising threat of the viral spread, markets continue to hold up. Dow Futures added another 66 points this morning. However, company earnings reports continue to display a negative outlook due to coronavirus. Calloway Golf (NYSE: ELY) shares fell 5% after the firm reported decent earnings but warned about the impact of coronavirus on their sale and supply chain. Meanwhile, Under Armour (NYSE: UAA) slashed its quarterly sales guidance due to the ongoing spread of coronavirus.

EXAGGERATED: Bridgewater’s Ray Dalio said that he thinks the impact of coronavirus may be exaggerated. He expects a rebound to the global markets and doesn’t share the media sentiment that a broader pandemic is possible.

ACCRUED INTEREST

SANDERS SURGE: Panic is spreading across the Democratic party ahead of today’s New Hampshire primary. Following last week’s voting disaster at the Iowa Caucus, New Hampshire aims to restore sanity and stability to the primary season. However, Socialist Senator Bernie Sanders (I-Vermont) is expected to win today’s contest. His left-wing positions – comparable to the U.K.’s Jeremy Corbyn – have raised concerns that he will lose to Donald Trump in the 2020 Presidential Election. Rumors of a brokered convention are now trickling across the media to prevent Sanders’ nomination and install a more moderate candidate to battle Trump.

POSITIVE RETURNS: The Eurekahedge Hedge Fund Index gained 0.17% in January. That figure outperformed the equity market as represented by the MSCI ACWI (Local), which lost 0.90% over the same period. January started strong after geopolitical tensions de-escalated in the Middle East and between the U.S. and China on a trade deal. However, the threat and spread of coronavirus dominated the second half of the month.

HERD MENTALITY: Hedge fund managers like crowded trades and embrace the herd, even if that’s a violation of investing’s Golden Rule. Greg Brown and Christian Lundblad of the University of North Carolina, Chapel Hill, and Philip Howard of Wake Forest University examined long positions of 1,466 U.S. hedge fund managers 2004 to the end of 2016. They found that hedge funds are piling into the same trades – more than previously thought.

CARRIED INTEREST

ROADS AND BRIDGES: Yesterday, we noted that Brookfield Asset Management had closed a $20 billion flagship infrastructure fund. The question that follows is: Who is flooding this fund with that much capital for projects around the globe. Now, we know the answer. Preqin released a report stating that the infrastructure investor pool now consists of nearly 4,000 institutions around the globe. This figure represents 35% of the entire alternative investors’ universe. It also represents a 50% jump in participation in just five years.

QUOTES OF THE DAY

“Let’s not shake hands in this special time.“

That’s Chinese leader Xi Jinping during his tour of Beijing Monday. It was his first public appearance in a week, and it was part of an effort by the state media to present him on the front line addressing the epidemic (It seems the New York Times recognized the tragedy of communism when Xi called the outbreak a “people’s war.”)

“You arrested, censured, and ‘punished’ (only God knows what you did to him and the other 7 doctors) the heroes of Wuhan. You are disgrace to humanity.”

That’s Kyle Bass, who refuses to apologize for a deleted tweet that said the U.S. should allow coronavirus to “rampage through the ranks” of the Communist Party. Bass got into a heated Twitter battle with the editor of a newspaper backed by the Chinese government.

ACTIVE MANAGEMENT

JAPAN JOLT: Elliott Management is putting more pressure on SoftBank, another sign that activism is picking up in Japan.

WATER FIGHT: Activist concerns helped produce the expected deal between Primo Water Corp. (NASDAQ: PRMW) and Cott Corp. (NYSE: COT).

UNCLE CARL: Activist investor Carl Icahn has criticized the SEC for its plan to overhaul corporate governance guidelines. Icahn worries that the new rules give management too much power in deciding corporate strategy and who holds board seats.

LIABILITIES

BYE BASEBALL: Finally, Major League Baseball’s executive committee hates their own sport, finds baseball boring, and are trying to get rid of its own fans. That is the only explanation behind a breathtakingly terrible idea to expand playoff spots to 14 and create a “Reality Show Twist” where top teams get to choose their own competition in the playoffs.

Imagine hating your sport so much that you have to pitch gimmick ideas every year to try to attract people who apparently lack attention spans. “What if we start extra innings with an offensive player on second base?” “What if we let players come back into the game in the bottom of the ninth to bat?” and now “What if we have a reality show at the end of the season where teams get to pick their competition?”

It’s been weeks since MLB blew its opportunity to punish players who engaged in practices that should warrant lifetime bans. Pete Rose is banned for life, and his actions don’t even come close to the schemes cooked up by the Houston Astros. The public reaction – and from many people in the media – is that “Everybody cheats, get over it.” That’s the sort of societal message they should put on our money. The 2017 World Series was just an illusion.

I grew up on this sport, but I’m losing interest in the gimmicks. I say keep it boring: Put it on CSPAN. Bring back one-man booths with voices like Vin Scully. And fire whoever came up with this “Reality Show” idea.

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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.