THE DAILYALTS PLAYBOOK

April 2, 2020

Today, the DailyAlts Playbook Talks About Activists in a Pandemic, SoftBank’s WeWork Debacle, High-Yield Defaults, and Demon Days

PRIME OVERVIEW

Good morning:

Yesterday, I noted that virtually every company that I have ever interacted with in my lifetime has sent me an email about COVID-19.

I thought to myself, there is simply no way that I could ever receive so many emails from so many random companies I have supposedly met over the last 20 years of my life.

But then I turned 39.

I have received birthday messages from four insurance companies, a children’s game-themed restaurant, and two adult game-themed restaurants. I am sure that more are coming.

But thank you, “Dave and Busters” for remembering me enough to send me letters and wake me up this morning with your good wishes.

I hit the snooze button a few times, so I’ll keep it short.

Here we are in this paper boat, drifting into the uncertainty. Out past the uncharted waters and into the fourth dimension of fiscal and monetary policy.

I have no idea what will happen, and I’m not going to make any ludicrous bets right now with momentum still negative.

There are intriguing one-directional bets on real estate and banking, and it looks like there will be some bounceback that cut into those positions today.

So, it looks like a perfect day to do nothing.

I am thankful to be sitting here looking up at a perfect sunrise over the Panther Reserve and pondering how PetSmart knows my birthdate.

What an odd economy.

What a silly period in time.

MORNING MOMENTUM

REBOUND: The Dow Futures rallied more than 340 points after a dismal start to the second quarter. This morning, investors are paying very close attention to the weekly jobless claims from the Department of Labor. Last week, the agency reported that 3.2 million Americans had applied for unemployment benefits. Today, that figure reached six million. Economists had expected roughly four to five million people to file for unemployment, with the high range at nine million.

CORONAVIRUS: The total number of coronavirus cases topped 938,000 around the world. At least 47,300 people have died as a result of the spread of the virus.  The state of New York now has 83,000 cases, while Michigan has now topped 9,300. China has reported another 35 new cases but claims that all of them are imported. This news contradicts reports of lockdowns in several counties across China. Meanwhile, nations are scrambling economically to contain the damage caused by the viral spread and the ensuing social lockdowns. The European Union has called on its members to enact a fiscal program that rivals the Marshall Plan, the U.S. initiative that rescued the European economy after World War II.

CRUDE AWAKENING: Finally, oil prices rallied this morning on hopes that Saudi Arabia and Russia can reach a deal to put the genie back in the bottle and cap OPEC+ production. Oil prices plunged during the first quarter after Saudi Arabia elected to flood the market and cut prices to capture market share. At the time, Russia had refused additional production cuts in the wake of coronavirus’ spread. President Trump is now calling on both countries to come to the negotiating table soon.

WHAT COMES NEXT: We’ll highlight the latest updates on high-yield bonds and corporate debt in a moment. But first, let’s highlight expectations from New York Life Investments’ Lauren Goodwin. This morning, Goodwin suggested that U.S. companies could soon begin a round of cuts to their dividends. The banking sector could be the first to make those moves. As we reported yesterday, several British banks suspended their dividends to shore up cash.

ACCRUED INTEREST

RETAIL APOCALYPSE: Just days after slashing its dividend, we could be looking at the end of Macy’s Inc. (NYSE: M). On Friday, the S&P 500 will drop the iconic department store from the index and replace it with Carrier Global. That said, this is likely not the first company to face the public fallout from the ongoing coronavirus crisis. A number of retailers, consumer brands, and energy companies have all seen their market caps plunge to the small-cap range. Nordstrom, Gap Stores, Kohl’s, Apache, and Marathon Oil are all sitting with market caps that now hover on the line between mid-cap and small-cap. It looks like a great realignment is on tap for the markets.

ACTIVISTS: Harvard University released a great piece yesterday on corporate governance. Titied: Activists Will Show Their True Colors in COVID-19 Pandemic,” the piece explores the expected actions of hedge fund managers as share prices drop and companies face difficult decisions. It’s easy to make those analogies to sharks swimming in blood-filled waters. I have had a conversation with a few companies that engage in activist defense, and they’ve suggested that the focus for the months ahead will be more around restructuring than worrying about activists. That said, the title to this article is right. Managers are going to show us who they really are during these times. But so too with executive boards, politicians, and even your next door neighbor.

INNING NO. 3: We’ve been keeping tabs on the financial fallout using baseball terminology, and we’re ready for inning No. 3 – the defaults. Goldman Sachs said yesterday that not even the Federal Reserve can stop the wave of high-yield defaults on the horizon. Goldman analyst Lotfi Karoui predicts that the 12-month trailing default rate in 2020 will increase to 13%.

HOO BOY: Softbank Group has yanked a $3 billion tender deal for WeWork shares. As we’ve reported for months, it appears that the Japanese conglomerate has faced increasing pressure over the embattled work-sharing company. Now, things continue to spiral in the face of coronavirus. In this share buyback deal, WeWork’s founder was going to receive about $1 billion for his shares. But SoftBank has cited numerous unfulfilled obligations on WeWork’s part to terminate the offer. This could be a massive legal mess.

CARRIED INTEREST

Here are the other headlines getting our attention this morning.

• ARTIFICIAL INTELLIGENCE: Precursor to thought crime… AI is now transcribing brain signals to speech.
• HEDGE FUNDS: Citadel Gains 1.2%, Gelband’s Firm Falls
• PRIVATE EQUITY: COVID-19 to Shake Up Private Equity Performance
• REAL ASSETS: There’s a gold shortage. So, how is the price still $1,600 per ounce?
• DIGITAL ASSETS: There’s a gold shortage… so how is Bitcoin sitting at just $6,600?
• REAL ESTATE: Real Estate Spring Buying Season Could Be ‘Catastrophic’
• VENTURE CAPITAL: Collibra Raises $112 Million
• ESG: Actively Managed Funds Seeking ESG Skyrocketed in 2019
• LIQUID ALTERNATIVES: American Century to Launch Active ETFs That Disclose Quarterly

QUOTES OF THE DAY

“Their numbers seem to be a little bit on the light side, and I’m being nice when I say that.”

That’s President Donald Trump speaking on an intelligence report that says China concealed the true number of victims stricken by coronavirus and the severity of the pandemic. China isn’t the only nation suppressing this information, according to U.S. Intelligence. Iran, Russia, Indonesia, and North Korea also have reported very low numbers given the spread rate of this disease in numerous other nations.

“Both Delta and United, those are the two most critical airlines for our country. So, they are too big to fail.”

That’s Stifel strategist Mark Tepper talking about the state of the U.S. airline industry. And he’s likely right. Of course, the first is a well-run company and the other is not. Tepper prefers Delta. which we agree with here at DailyAlts. We’re also willing to speculate on JetBlue given that it is trading for under a rational liquidation metric.

RECORD HIGH

We’re still moving forward on the music experiment. Eventually, this section will turn into coverage of a specific alternative vertical. But for now, under quarantine, I’m doing a lot of research and listening to a lot of music, going year-by-year through my archives.

By the time 2005 rolled around, I had roared back to Chicago for some semblance of normalcy.

Capitol Hill was just terrible, and I wanted to get back to a place where traders traded.

After 2004’s lackluster turn, Danger Mouse helped produce the masterpiece that is Demon Days by the Gorillaz in 2005.

Feel Good, Manana, Dirty Harry, and Dare made the airways. But the final two songs are bliss, and I remember years later listening to Don’t Get Lost in Heaven and Demon Days while dancing in the Gulf of Mexico with a drink in my hand a few years later.

I had just finished a book, and Bear Sterns had collapsed a month prior. I had cashed out and checked out – and I was sure that the economy was going to end. Wow – and to think I live so close to that spot today and can’t shake those similar feelings.

Funny about life, it doesn’t repeat, but it sure does rhyme.

The full Demon Days will probably play straight through three times today. And I’ll certainly listen to the Manchester Gospel Choir’s collaboration of the final two songs, which is here.

On vinyl, I consider Sufjan Stevens’ concept Illinoise to be one of the greatest albums of all time. There is absolutely nothing like it anywhere in sound. If you’re a fan of Illinois, you’ll find small joys in almost everything this album represents. If anything, listen to Casimir Pulaski Day.

Get Behind Me Satan by the White Stripes. I know I didn’t listen to Kanye West’s first album, but there’s a lot that I do like on Late Registration, I just didn’t know it.

I’m incredibly biased to the Gorillaz, but LCD Soundsystem’s self-titled debut opened the door to a lot better music. Few good songs, but you can tell James Murphy is going to be a star.

M.I.A.’s Arular shined two years before her monster breakout “Paper Planes.” There are some political lines in there that only rival Rage Against the Machine, just in a much different form. Right album, with the right tone, for the right time.

I’m not going to directly tell you what band to avoid – but they wrote a song in 2005 called Photograph and the band’s name rhymes with “Pickleback.” And I am just finding out that Will Smith wrote the theme song to the movie “Switch.” So, avoid both.

Finally, I failed to mention David Byrne’s Grown Backwards and American Idiot by Green Day yesterday from 2004.

I received a few emails about that as people know I like these artists… as I thought they were 2005 based on the Billboard calendar. So, to my critics let me say…

“I’m stupid, you’re smart. I was wrong, you were right. You’re the best and I’m the worst.  You’re very good looking… I’m not attractive.”

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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.