THE DAILYALTS PLAYBOOK

April 1, 2020

Today, the DailyAlts Playbook talks about College!, Record Unemployment, PE Lobbying Efforts, and Icahn’s Failed Merger.

PRIME OVERVIEW

Good morning:

Any company you’ve ever met has probably sent you a letter about COVID-19.

I’ve received notes from banks. From insurance companies. From a gluten-free bakery that asked for my email two years ago. From E-Trade – which I closed my account back in 2010. This is marketing at its strangest. I found out today what the contingency plan will be for a company that sells funny T-shirts. I bought something from them in 2014.

But one email really stands out.

It came from the Dean of Weinberg College at Northwestern University (the school of Arts and Sciences).

“…all across Northwestern, faculty and staff are now working to transition courses usually taught in person to a virtual model. Weinberg College will be offering almost 700 courses this spring, so the work is intense. I am confident we will do so with creativity and calm, just as many of you are doing as you face similar transitions in your own work.”

Northwestern students have moved completely online.

I think one of the biggest losers in the post-coronavirus shift will be large, private universities. I’m explicitly talking about the very expensive ones that rely on their reputations for low-acceptance rates, networking, and “a rich tradition of” [insert university’s marketing differentiator here].

The longer this goes on, the harder it is to justify tuition levels that have been quite cozy for this administration. The commoditization of post-secondary education accelerated over the last decade, but now it will be on full display.

Annual tuition (without aid) to Northwestern University is $56,691 per year. And the tenured professors I had 15 years ago have been replaced by adjunct professors to save costs, a popular trend across the education system.

These professors – who make very little per course and have their own challenges ahead – will be instructing people using Zoom Video and YouTube technology. If you have enough initiative, about 95% of the stuff from my entire history program is laid out perfectly online and for free. You just need to know where to look.

In Good Will Hunting, a key laugh line is when Will Hunting tells the jerk graduate student that he “wasted $150,000 on an education” he “coulda got for $1.50 in late fees at the public library.” The acceleration of technology, a better mousetrap, and students simply not willing to put themselves in that level of debt will shift the tide on colleges.

Coronavirus needs to be a serious wakeup call for the education system, particularly at the highest levels of academia who have taken advantage of our government-backed loan system to jack up tuition for years.

MORNING MOMENTUM

DATA PROBLEMS: This morning, investors are starting to speculate on the March jobs report set for this Friday from the U.S. Labor Department. The ADP report on private-sector employment offers some clues into what to expect this week. At [8:15] the report said that the U.S. cut 27,000 jobs before the worst of the coronavirus shutdown impacted the economy. That said, tomorrow’s benefits report is likely to show another 3 million people filing for unemployment as the coronavirus fallout continues to batter the American economy.

CORONAVIRUS: The number of coronavirus cases around the globe topped 856,900 on Wednesday, according to Johns Hopkins University. The U.S. has the most cases (188,000), although we’re not believing the numbers coming out of China. In fact, the United Kingdom has suggested that the unofficial figures from China could be 40 times more than the 82,278 reported so far. Nations around the world are rushing to improve testing, isolate asymptomatic people from the population, and shore up their economies. Yesterday, the White House projected that upwards of 240,000 Americans could die due to coronavirus.

NOT NORMAL: The numbers could get very ugly in April. Starting with tomorrow’s unemployment benefits report Cleveland Federal Reserve President Loretta Mester said that U.S. unemployment could jump to between 10% and 30%. Mester was the only central bank official who opposed the recent decision to slash the benchmark interest rate to 0%. In a conversation with CNBC, Mester said she was uncertain how long the economic slowdown could last, but she did state that we are not facing a “typical recession.” Mester said that the U.S. banking system was strong heading into this situation, which echoes recent statements by Minneapolis Fed Chief Neel Kashkari. It looks like this argument will be tested in the weeks ahead with the threat of defaults rising across various sectors.

ACCRUED INTEREST

BAILOUT: The American Investment Council, a lobbying group for the private equity industry, sought a $500 billion bailout to provide financial support to portfolio companies. The lobbying group cited the importance of PE in the U.S. economy, as deal-making in North America rose in 2019. Private equity investment deals fell everywhere else around the world. With U.S. PE investment at an all-time high of $837 billion, according to McKinsey, the lobbying group hoped that Congress would extend aid even though portfolio firms are backed by outside investors. That sound you hear is a primal scream forming in the hallways of Sen. Elizabeth Warren’s mind.

NO DEAL: Carl Icahn’s push for another debt-saturated merger has come to an end. Shares HP Inc. (NYSE: HP) are dipping on news that Xerox (NYSE: XRX) has dropped its efforts for a hostile takeover. The deal would have created the largest printer manufacturer on earth. Xerox cited the ongoing breakout of COVID-19 for its decision to stop pursuing the deal. Xerox had offered roughly $24 per share, a figure that would drive HP’s value to $34 billion. That said, the deal would have incorporated a significant amount of debt at a time that concerns about corporate borrowing. Xerox will also drop efforts to install its nominees on HP’s board.

CUTS: Here comes the wave of dividend cuts in the banking sector. Over in Great Britain, Royal Bank of Scotland (NYSE: RBS), HSBC (NYSE: HSBC), and Barclays (NYSE: BCS) have suspended their dividend payment. The banks are doing their best to reduce their exposure to defaults and bad loans as this crisis accelerates.

WAR COMING: BCG suggests that activists are preparing for a massive wave of assaults on board rooms. Institutional Investor writes, “A recent survey by Boston Consulting Group found that 59 percent of the investors it polled think activists are coming for companies amid the devastation caused by the spread of Covid-19 – and that management should do more than sit and wait.”

ACTIVISTS: As stock prices were falling once again on Tuesday, we saw more reports of activist investors and private equity funds taking positions in stocks with the intent of influencing management to take steps to improve the stock price. Here’s our daily recap on Active Alpha.

CARRIED INTEREST

Here are the other headlines getting our attention this morning.

• ARTIFICIAL INTELLIGENCE: Who do we hospitalize, and who do we send home?
• HEDGE FUNDS: Renaissance Technologies Off 17% Because of Coronavirus
• PRIVATE EQUITY: PitchBook: PE Ready to Target Listed Companies
• DIGITAL ASSETS: Apifiny launches an institutional platform to connect exchange liquidity
• REAL ESTATE: Commercial Lending Concerned About Fiscal Health
• VENTURE CAPITAL: Chicago-based Baird Capital has raised a new $215 million fund
• ESG: Barclays Sets 2050 ‘Net Zero’ Carbon Goal after Investor Pressure

QUOTES OF THE DAY

“While the Covid-19 crisis will probably pass, our fragile economic and financial system will take longer to recover.”

That’s Satyajit Das, a former banker and the author of “A Banquet of Consequences.” In a Bloomberg opinion piece, Das lays out that coronavirus was just the pin in the bubble. The deflationary elements came when the rest of the economy’s exposure. Blame the Fed. Blame corporations and buybacks. Blame liquidity risk. Blame the banking system. But remember all of these things, because we’re probably facing a huge shift in policy in the future, and it’s all going to be overhauled by a lot of young, left-leaning progressives come 2022.

“Markets don’t come back in a straight line; after an earthquake there are tremors.”

That’s Steve Cohen of Point72. Cohen wrote in a memo to his employees last week praising their risk management and talking about the state of the markets.

“This could be a hell of a bad two weeks. This is going to be a very bad two, and maybe three weeks. This is going to be three weeks like we’ve never seen before.”

That’s President Donald Trump laying out expectations for the month of April. Turn off the television. Go for a walk. Hang out with your family. Flatten the curve. Let this storm pass.

RECORD HIGH

Yesterday, I was able to get a lot done.

And my daughter really took to some of the more arcane MUSIC selections coming from the office.

A lot of people have been asking why I’m writing this section over the last week.

First, if you’re looking for random and interesting music to listen to, please check out these albums while you’re indoors. People have been asking for Netflix recommendations, but I have used the time to listen to music and do some more creative hobbies.

Second, these are trying times. These sections are part of a larger letter to my two-year-old daughter on music and her father’s interests – I’m finishing the second half of it. So, you’re just witnessing an experiment that hopefully will find itself into a longer anthem in her collections many years down the road.

So, let’s move onto the very tricky year that was 2004. It feels like Hot Fuss by The Killers is the best representation of the year.

Some of the album is catchy, some of it overproduced, most of it was “meh” when you hear it.  I guess I’ll listen if its on the radio. I won’t turn it off. But I still don’t understand the lyrics to “Somebody Told Me.”

Why would someone tell another person that someone had a boyfriend who looked like a girlfriend that he had in February of last year? What? Why? These are the things keeping me up at night as I remain locked in quarantine.

I remember having a hard time telling the difference between the Killers and Franz Ferdinand’s Franz Ferdinand, which came out the same year and was superior. Options are a bit limited for 2004… unless I want to hear Lil Jon scream “Yeah!” a few hundred times alongside Usher.

I started at 5 a.m. today with some psychedelic folk in Devendra Banhart’s Rejoicing in the Hands. For all the television shows this album has been featured in, it’s surprising how few people know any of these songs.

Brian Wilson’s Smile was a nice throwback to an odd combination of the Beach Boys and early Genesis. I liked Mos Def’s The New Danger, Morrissey’s You Are The Quarry, and Danger Mouse’s The Grey. There are also some good things on Love. Angel. Music. Baby. by Gwen Stefani (and some pretty bad ones too).

My favorite song of the year was Scissor Sisters “Take Your Mama” – a lively anthem that offers an early Elton John feel. Phoenix’s Alphabetical is also a great song for writing.

De La Soul’s The Grind is just a fabulous album – and you can feel their impending connection to Gorillaz’ Demon Days, which would come out a year later (I’ll discuss that gem tomorrow).

I will confess that I’ve never really spent any time listening to Kanye West’s The College Dropout. My wife – who has an encyclopedic knowledge of hip hop from the 1990s through the first few years of the 2000s – raved about it – though I’ve never heard her listen to it either.

I’ll give it a shot.

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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.