THE DAILYALTS PLAYBOOK

February 28, 2020

Today, the DailyAlts Playbook talks about ESG Bubbles, Sharp CEF Discounts, Brexit Demands, and Bill Ackman’s Bullish Views on Burritos.

PRIME OVERVIEW

Good morning,

We start today like we did so many times this week.

The Dow Jones projects another triple-digit loss as the worst selloff since the 2008 financial crisis continues. The 10-year Treasury bond collapsed under 1.2% as investors pour into any available yield they can find. Former Fed governor Kevin Warsh predicted this morning that central banks around the world will engage in a coordinate effort to respond to the coronavirus outbreak.

The State of California is monitoring several thousand people for coronavirus. South Korea saw its number of cases increase by 500. China added more than 300 new cases. And Nigeria and New Zealand reported their first cases since the outbreak began.

What will the impact of this be? I’ve had conversations with traders around the globe. Some people have seen this as a buying opportunity. Others are avoiding this until they feel the markets are properly pricing in threat. One conversation that stood out centered on Royal Caribbean (NYSE: RCL), which saw shares pull back to $77.00 and its dividend tick above 4%.

He was buying because RCL apparently hadn’t seen that yield level in some time.

I had immediately asked him if he knew about the Herzfeld Caribbean Basin Fund (NASDAQ: CUBA). The closed-end fund owns shares of RCL and Carnival Corp. (NYSE: CCL), in addition to companies that would benefit from normalized relations between the U.S. and Cuba.

My colleague had heard of it but said that he hadn’t explored it. This closed-end fund has a higher dividend than RCL at 5.3%, owns RCL, and currently trades at a nearly 14% discount to its net asset value.

I’ve said before that closed-end funds go ignored in situations like these. CUBA will be one of the first things I look at when the smoke clears. However, with momentum signals purely negative it’s going to be a while before we consider start looking around for “bargains.”

We’ve weathered this storm very well. Our banking buyout portfolio is still flat this week. Our “dividend defense” portfolio that we’re testing is off just 2%. We’re going to keep developing alternative research products designed for volatile weeks like we’re experiencing.

MORNING MOMENTUM

GOING VIRAL – On the domestic front, a government whistleblower has accused people at Health and Human Services of “failure to protect its employees” responsible for responding the ongoing outbreak of coronavirus. The whistleblower said that the agency failed to provide proper training and equipment.

HARDBALL – Prime Minister Boris Johnson has given the European Union four months to strike a deal with Britain. He is seeking a trade agreement similar to the one that the EU has with Canada.

FLOWING – Hedge funds saw investors pull about $100 billion last year. But eVestment says that 2020 has started off positively when it comes to inflows. The January 2020 Hedge Fund Asset Flows Report shows that total assets sit at $3.31 trillion. Investors added about $10.38 billion to the industry AUM in January.

ACCRUED INTEREST

POSITIONING –  It’s going to be a very tough February for anyone who raised his or her “long bets” earlier this month. Institutional Investor looked at the funds including Tiger Global, Greenlight, Third Point and Horseman. Here’s what they found.

FLOW FREEZE – The liquidity problems in Asia are mounting. Small businesses are struggling across China due to paralyzed supply chains and slow payments. Chinese startups continue to face funding problems. They’re slashing jobs and begging for a government bailout.

PAY ME – Benchmark Compensation says that more than 66% of PE and VC pros earned more than $200,000 last year. Apparently, the bulk of those people aren’t happy with their pay.

CARRIED INTEREST

Here are the other headlines that have grabbed our attention this morning across the markets.

• Private equity pros have started placing their bets on the 2020 election.
• Jim Simons is betting big on Codagenix and its effort to develop a Coronavirus Vaccine
• TipRanks has invoked Ken Griffin’s name in a Buy list of stocks.
• Bill Ackman still likes Chipotle Mexican Grill (NYSE: CMG).
• EQT Corp. is slashing its exposure to the oil-and-gas midstream market.

QUOTES OF THE DAY

““Evaluating a start-up in normal conditions is very different from evaluating a start-up during this disaster, or post this disaster. They need to re-evaluate the company, re-evaluate the market altogether once the dust settles.”

That’s Zhao Chen, managing partner of the start-up accelerator Plug and Play China. Following the WeWork debacle last year, Chinese startups had already faced additional scrutiny. Now, with coronavirus fears, VCs are tightening their purses and raising their expectations.

“We’re not quite there yet but it’s getting to the point where anything related to hydrogen or other green technologies, for example, are all up 100% in six months, despite the fundamentals not having changed.”

That’s RWC Partners fund manager Graham Clapp warning that sustainable investing trends forming a bubble in the markets. He compared it to the tech boom of the 1990s.

ACTIVE MANAGEMENT

• Activist investor Clifton S. Robbins is closing Blue Harbour Group. He appears to be following a number of his rivals to the exit. Robbins manages about $2 billion and said he would inform his investors this morning.
• Elliott Management will likely obtain two board seats from Evergy.
• Canyon Partners has launched an activist campaign against Berry Global Group over ESG issues in the plastic packaging industry.
• A new academic paper shows that activists erode the long-term value of their targets. Despite an initial 7.7% average bump in valuation, it goes downhill from there.

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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.