THE DAILYALTS PLAYBOOK

April 14, 2020

The DailyAlts Playbook Talks Ray Dalio, Weezer Cover Bands, Bank Earnings, and Big Problems at Lime Asset Management.

PRIME OVERVIEW

Good morning,

Hop into the little paper boat and let us float into the earnings season…

The Dow Jones seems unfazed this morning (futures gained 250 points) by the news that JPMorgan Chase (NYSE: JPM) reported earnings per share of $0.78. That figure missed consensus expectations of $1.84 after the firm added $6.8 billion to credit reserves. JPM is bracing for a big uptick in defaults across the energy, retail, and real estate markets on the business side. Its credit card loans could also take a bath on the consumer side.

The profit numbers didn’t matter because the revenue figure came in at a record level thanks to a surge in Q1 volatility.

“JPMorgan Chase performed well in what was a very tough and unique operating environment,” CEO Jamie Dimon said this morning. “In the first quarter, the underlying results of the company were extremely good, however given the likelihood of a fairly severe recession, it was necessary to build credit reserves of $6.8B, resulting in total credit costs of $8.3B for the quarter.”

If JPM offers any clues into the March-ending earnings season it will be that profitability can go out the window for a few quarters as investors look for any silver lining into the future.

The stock barely moved this morning.

All-day yesterday, a few investing channels I subscribe to were speculating that banks were facing back-breaking default levels and that now was the time to start loading up on Direxion Daily Financial Bear 3X Shares (NYSEARCA: FAZ).

FAZ is off 4% this morning, and it’s looking like a 10% down day on that speculative play.

I have reminded myself repeatedly that the market is not the economy and the economy is not the market.

So, I’ve avoided the temptation to write myself into any trades.

I recently opened new positions in physical gold and two mining stocks that I entered last Thursday.

Utilities and industrial REITs will be next.

Farmland about 10 miles east of me is looking quite attractive.

It’s probably time I put that agricultural economics degree to work…

MORNING MOMENTUM

PROBLEMS: This morning, financial companies started earnings season with a flurry of reports. Wells Fargo (NYSE: WFC) kicked off the day with news that it has set aside a large amount of cash over fears of potential customer defaults. The firm reported earnings per share of $0.01, much lower than the $0.33 expected among analysts. The firm also missed revenue expectations by a large amount. “Our results were impacted by a $3.1 billion reserve build, which reflected the expected impact these unprecedented times could have on our customers,” said CFO John Shrewsberry said this morning.

CORONAVIRUS: Johns Hopkins University reports that the number of global coronavirus cases topped 1.9 million last week. This figure has effectively doubled in seven days. In addition, the number of deaths now sits at 120,500. This morning, the World Health Organization said that we have not seen the peak of the virus just yet. Although cases are easing across parts of Europe, the outbreaks continue to climb in Turkey, the United Kingdom, and the United States. The WHO also reported that a vaccine is unlikely to arrive for at least 12 months.

CRUDE START: Oil prices were falling on Tuesday. The downturn came despite this week’s deal by OPEC, Russia, and other nations to cut global output by 9.7 million barrels. That figure represents roughly 10% of global supply. Other nations like the U.S. and Mexico could help to reduce global output by 19.5 million barrels. Voluntary cuts would offer support to crude prices at a time that demand has been gutted by the coronavirus outbreak. That said, China has reportedly started to increase its oil purchases as it aims to contain the coronavirus outbreak. The nation increased its crude purchases by 12% in March.

ACCRUED INTEREST

REOPENING: President Trump has unveiled his task force designed to reopen the United States economy in the months ahead. Fox News reports that the following people could be on the task force: White House chief of staff Mark Meadows, National Economic Council Director Larry Kudlow, Treasury Secretary Steven Mnuchin, Vice President Mike Pence, Jared Kushner and Trump’s daughter Ivanka. And they’ve called this team… “The Council to Re-Open America,” which sounds like a Weezer tribute band from Park Slope, Brooklyn. This all comes on the heels of news that public debt is set to surpass the size of the U.S. economy by 2023, according to the Committee for a Responsible Federal Budget.

DISASTER: We’ve focused a lot on the challenges faced by U.S. alternative investors. But let’s take a minute to highlight some red flags abroad. This morning, we learned the fate of Lime Asset Management investors. The South Korean hedge fund has faced numerous scandals and problems. Well, investors are facing a reckoning and they will lose about half of their principal, according to an update on redemptions. Meanwhile, SoftBank’s Vision Fund – already embattled by troubled investments in firms like WeWork – lost about $16.7 billion. This is the firm’s largest annual loss in history.

VOICES: It’s been an interesting few weeks of commentary from hedge fund managers. Bill Ackman said “Hell is coming” and then reversed his stance (he made a lot of money in the process.) Leon Cooperman embraced government bailouts to address the coronavirus pandemic. And now Ray Dalio is back defending his “cash is trash” stance that he took in January. Dalio has been talking for months about a paradigm shift in the global economy – and that was before coronavirus hit. “Please remember that while it (value of cash) doesn’t move around in value as much as other assets, there is a costly negative return to it. So I still think that cash is trash relative to other alternatives, particularly those that will retain their value or increase their value during reflationary periods (such as gold and some stocks),” Dalio wrote on Reddit recently. I have to say that it is absolutely fascinating that three weeks ago, cash was the safest asset to own. Everyone was flocking to it. And now, three weeks later – after unprecedented intervention by the Federal Reserve- it is looking like the most dangerous thing to have.

CARRIED INTEREST

Here are the other headlines getting our attention this morning.

• ARTIFICIAL INTELLIGENCE: A Silicon Valley Partnership on COVID
• DIGITAL ASSETS: Crypto Exchange Huobi Deploys On-Chain Analytics Tool To Nab “Illicit” Activities
• FINTECH: TransferWise has a Cross-Border Breakthrough
• HEDGE FUNDS: A Board Room Battle Over Steaks
• PRIVATE EQUITY: Do We Bailout Private Equity or Not?
• VENTURE CAPITAL: Things are Looking Rocky for the Sector
• REAL ESTATE: Stanley Chera Passes Away at 78
• LIQUID ALTS: The 0% ETF

QUOTES OF THE DAY

“I will do all that I can to see that that happens, Joe.“

That is Bernie Sanders. For Democrats, it is Joe Biden or bust. It’s hard sometimes to remember that there will be an election in six months.

“She has lied since day one with her #Fixthedamnroads which she has failed to do anything in this regards.”

That is from a petition to recall Michigan Governor Gretchen Whitmer. I hadn’t been paying attention to state politics until this past weekend. But apparently Whitmer has really embraced her inner authoritarian. Residents are allowed to purchase marijuana as an “essential” item… but they can’t go out and buy mandated car seats for kids under eight or gardening supplies at a time that the food supply chains are buckling. She and Florida Governor Rick DeSantis are neck-and-neck for worse state management during this crisis…

RECORD HIGH

There are just four more days of our exploration of sound of the last 21 years. If you recall, this was originally designed to be a countdown until Florida lifted the lockdown on April 17. But who are we kidding – we’re going to be inside until the 2030s at this rate… I’ve also been keeping this list for my daughter for when she gets older. Everyone else who is looking for some different music, feel free to listen on YouTube. As you probably know, my taste is very diverse.

Today, I’m moving into 2017. And this was a very good year for music…

My favorite album of the year is The War on Drugs’ A Deeper Understanding, an album that has so many magical moments that – to quote the great screenwriter Alan Ball – “my heart fills up like a balloon that’s about to burst.” They pull off the impossible with a stunning 11-plus minute song in Thinking of a Place, churn out the poetic Pain, and offer the stirring video in Holding On (Watch it…). As much of a Kurt Vile fan as I am, I think this album is their finest without him. Rolling Stone said hits the nail on the head by saying “it’s as if the band’s sound makes me nostalgic for experiences I haven’t exactly had.”

Randy Newman’s Dark Matter is one of the most brilliant albums ever made. “Putin puttin’ his pants on… one leg at a time…”

I became a slow but loyal fan of Father John Misty’s ‘Pure Comedy.” Portugal. The Man’s Woodstock is best known for Feel It Still, but So Young is a much better song thanks to the assistance from Danger Mouse. (Also, I forgot to mention Evil Friends from 2013 – what an album). Wille Nelson’s “God’s Problem Child” didn’t get a lot of plays in my house that year, but Old Timer is him at his best.

The best song of 2017: It comes from a band no one has heard of.

Wolfsuka… Who? The album: Poison the Artists. Huh?

The song: Baby You Know Me. This is an incredible song that just works about a scientist falling in love with a person who puts religion over science.

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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.