THE DAILYALTS PLAYBOOK

April 6, 2020

Today, the DailyAlts Playbook Talks Ackman’s Optimism, The Big “Short-ier”, Carbon Skeptics, and Now That’s Music 29

PRIME OVERVIEW

Good morning,

Back when I studied Financial Security in graduate school, my program lacked enough financial courses to help me write my thesis. So, the school sent me across the street to SAIS to work with a professor from the International Monetary Fund.

On day one, a student asked the IMF director, “Why does the stock market go up and down?”

“I don’t know,” he answered bluntly. “No one does.”

He launched into a monologue about market behavior and sentiment and stretched valuations and risk assessment. It was really the first time I’d sat through a real “behavioral” lecture.

He went on to say that the smartest people in the world will justify a movement in one direction, but the markets will do the opposite. There’s no rhyme or reason to it.

So, I sit here watching the Dow surge 800 points this morning, and all I can think about is that professor saying, “I don’t know, but people are always looking to justify the direction when it happens.”

CNBC and MarketWatch have the usual headlines today justifying the 800-point swing.

• Bill Ackman is bullish.
• The rate of contractions is slowing.
• JPMorgan’s Jamie Dimon is optimistic about America.
• Some other manager says that it’s time to buy stocks at Morgan Stanley.
• Japan is pumping 20% of its economic value into the economy to fight off the coronavirus impact.

Forget the fact that unemployment is north of 10% or that we are facing a wave of defaults. Forget all of the other things tied to the global economy shutting down.

What this market needs is “limit up!”

So, I ignore it all.

The only thing that matters to me is a momentum calculation, which says that we’re still negative.

So, cash is the play and if I miss these bumps, I still sleep soundly.

For now, we wait to put money to work when the time comes.

MORNING MOMENTUM

DEAL TIME: Oil prices plunged more than 5% on news that OPEC’s meeting with Russia has been delayed. Markets had hoped that a deal between the Saudi leaders and Russia would provide a big boost to crude oil. The price had been in a free-fall thanks to the ongoing coronavirus demand shock and Russia’s refusal to cut daily production by 1.5 million barrels per day. Saudi Arabia responded by tearing up the previous deal and dramatically cutting prices. A meeting is likely to happen later this week, according to Reuters. Ratings agency Fitch said that oil prices could fall into the “single digits” if both sides fail to reach an agreement very soon.

MOOD SWING: It was just a few weeks ago that hedge fund manager Bill Ackman warned that “Hell is Coming” on the coronavirus. But today, the head of Pershing Square said that the outlook is starting to look brighter. “I am beginning to get optimistic,” he wrote Sunday.” Cases appear to be peaking in NY. Almost the entire country is in shutdown. Hydroxychloriquine and antibiotics appear to help. There is increasing evidence that the asymptomatic infection rate could be as much as 50X higher than expected.

BILL PULLMAN: JPMorgan Chase CEO Jamie Dimon penned his annual letter to shareholders on Monday. Dimon said that the nation’s largest bank by assets is prepared for any economic downturn caused by coronavirus. “We have the resources to emerge from this crisis as a stronger country,” Dimon wrote. “America is still the most prosperous nation the world has ever seen. Johns Hopkins University reports that the number of confirmed cases topped 1.27 million over the weekend. The number of deaths now sits at 69,300.

ACCRUED INTEREST

BIG “SHORT-IER”: A number of funds saw massive gains during the breakdown in the market between February 20 and March 20. The latest manager to generate headlines is Kevin Smith at Crescat Capital. His two primary funds earned 40.5% and 34.5% during that period. Smith’s co-portfolio manager compared this selloff and their gains to the book The Big Short. While there are always winners, there are also losers. It appears that Bridgewater and Third Point, both run by dynamic managers, had a tough quarter. Bridgewater’s main fund reportedly lost 20% during the quarter. Dan Loeb’s Third Point had an 11% loss last month. Finally, Glenview shed 30% on paper during Q1.

VALUATION CRUNCH: This month, Tim Melvin at DailyAlts has been writing about the impact of coronavirus on the private equity industry. The consensus is that PE shops are prepared to start putting that more than $1.5 trillion in dry powder to work. Now, an interesting report from Private Equity News suggests that valuations tallied in December for companies and sectors are largely useless. The coronavirus pandemic has caused numerous bankruptcies, dynamic shifts in risk tolerance, and a reshuffling of valuations that could impact future deals and expectations of buyers and sellers alike.

CRUDE REALITY: The trade that everyone forgets is paying off massively for those who saw the opportunity in March. With crude prices plunging and storage capacity stretched, the only logical place to put crude is in massive container ships. Reports indicate that storage prices surged from $35,000 per day to well over $200,000 per day. Crude tanker stocks have surged as a result. And that has been a huge book for hedge fund Svelland Capital, which posted solid March numbers as a result. This trade still has room to run. While many will cheer OPEC and Russia working on a deal, the demand shock to the oil market is extreme. While a deal might provide a temporary boost, we could still see oil prices fall under $20 per barrel with consumers sidelined.

CARRIED INTEREST

Here are the other headlines getting our attention this morning.

• Hedge Funds: Elliott Management is up 2.2% so far in 2020.
• Private Equity: It could be much uglier for PE investors than initially thought.
• ESG: A Carbon Skeptic is up 32% so far this year.
• Venture Capital: Founder friendly venture raises may be a thing of the past.
• Digital Assets: Here’s another Bitcoin to the moon projection.
• AI: Big data and AI aren’t the solutions you’re looking for with COVID-19… yet.
• Fintech: Startups are still raising during the crisis
• Real Estate: Surprise… a real estate agent is bullish about the housing market.
• Alternative Investments: Insider buying recap.
• ETFs: DataTrek Research talks investment-grade bond ETFs.

QUOTES OF THE DAY

“We don’t know exactly what the future will hold — but at a minimum, we assume that it will include a bad recession combined with some kind of financial stress similar to the global financial crisis of 2008.”

That’s Jamie Dimon – not Bill Pullman. Are we sure that Dimon isn’t running for President?

“We are committed to helping our customers during these unprecedented and challenging times, but are restricted in our ability to serve as many customers as we would like.”

That’s Charlie Scharf at Wells Fargo trying to get regulators to lift caps on the company. Is he surprised if people don’t exactly trust Well Fargo at a time like this?

RECORD HIGH

Finally, a reminder. Record high will be going away once we get to the year 2020. So, that’s two weeks from now. This part of the newsletter will become a regular recap of one of the 10 verticals that we cover at DailyAlts.

This has been an experiment in sanity during our constant time indoors. I’ll find something else amusing to write about. This is just an opportunity to discover some new music during this period…

That said, over the weekend, I was writing.

So, I started Saturday in 2007 albums.

I dug into Radiohead’s “In Rainbows”, Kanye West’s “Graduation”, and LCD Soundsystem’s “Sound of Silver.” I loved M.I.A.’s “Kala.”

The album “Mirrored” by Battles is a tough thing to get into unless you like experimental music. I love the guts it takes to create a song like Atlas. My wife hates it. I can listen to it for days and write a book. The guitar distortion is fabulous. The same goes for the audio/visual on the crash cymbal, which might as well be on the moon…

To think, Trent Reznor could do all this buy himself.

My favorite album of 2007 is surprisingly Spoon’s Ga Ga Ga Ga Ga – especially the songs Don’t You Evah and The Underdog – the latter being my favorite song of the year. The Underdog has a great video that offers a thoughtful visual essay into the nuances of this song’s construction.

On Sunday, it was 2008 – Beck’s Modern Guilt, Randy Newman’s Harps and Angels, David Byrne’s “Everything That Happens Will Happen Today”, and Hot Chip’s Made In The Dark – featuring my favorite song of the year “Ready for the Floor.” (The song is built on a reference to Jack Palance’s deceptive line in the first Batman film: “You’re my number one, guy”).

I also own Elbow’s “The Seldom Seen Kid” and give it praise.

Sadly, Guns and Roses’ “Chinese Democracy” is hot garbage (the first CD I ever bought was Use Your Illusion II).

Today, we’re back in 2009.

My top albums. Phoenix’s “Wolfgang Amadeus” and Andrew Bird’s “Noble Beast.”

I liked but didn’t love Animal Collective’s “Merriweather Post Pavilion”, but that was the consensus album of the year among critics. People remember the album’s cover art more than they remember the names of the songs. As a Flaming Lips fan, I found Embryonic to be solid yet bleak. It’s not an album to soak oneself in during a medical pandemic.

It might have been the financial crisis, but 2009 wasn’t a great year for music. If you need evidence of this claim, know that Now (That’s Music) 29 — TWENTY NINE – was the #15 album of the year, according to Billboard.

That album is a smattering of other not very good pop songs from previous years sold over the television.

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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.