THE DAILYALTS PLAYBOOK

March 31, 2020

Today, the DailyAlts Playbook talks about Margin Call, the WHO’s Latest Projections, Depression Level Unemployment, and Larry Fink’s Outlook.

PRIME OVERVIEW

Good morning:

I watched the movie Margin Call again yesterday.

It’s my favorite film about Wall Street and has an incredible cast.

Forget the macho hype of Wolf of Wall Street, Wall Street, Wall Street 2, or The Big Short.

Get into the character study with great acting and storytelling about what happens when a bunch of people realizes they’re holding a bag of toxic crap when the financial music is about to stop.

Every scene in that film is remarkably well written.

I highlight a car ride where the younger analyst Seth Bregman and senior analyst Peter Sullivan are on the way to find their former boss, who found out just how exposed they were to their current MBS portfolio. Knowing that the market is about to crash, Bregman sits there half-drunk contemplating that he’s just been pushing around numbers for other parties halfway around the world to bet on.

He justifies everything by saying he made a quarter-million dollars in the previous year. So, it’s fitting later in the film when he’s crying, knowingly expendable, and hours from being fired. He says – at 23 years old – “This is all I’ve ever wanted to do,” and Jared Cowen – shaving and preparing to throw many under the bus – barely responds, “Really?”

I thought of the amalgam of Wall Street analysts represented by Seth Bregman when I picked up Bloomberg at 6 a.m. and saw that 16 banks are now on the hook for $23 billion in debt from a massive, yet unneeded telecom merger.

This is the largest deal stuck on banks’ books since 2008. And even though T-Mobile and Sprint are both rated junk – the banks found a way to structure it so that the debt tied to this deal received an investment grade. I would absolutely love to dig into that presentation.

The banks planned to sell that debt to other investors. That won’t happen now. The deal between T-Mobile(NYSE: TMUS) and Sprint Corporation (NYSE: S) probably shouldn’t have been made in an already hyper-leveraged market with corporate debt already above $10 trillion.

But, hey. It seemed like a profitable idea at the time.

As did a lot of other buyouts and huge borrowing efforts to engage in other behaviors like buybacks or who knows what. With companies drawing on their credit lines, with a sharp downturn coming in the economy, and with so many other unknown unknowns, I think about how many young analysts are heading for a sudden career change when this all plays out…

It happened to me in 2008.

It all turned out okay. But if I knew then what I know now…

MORNING MOMENTUM

BOMBSHELL: Yesterday, the Federal Reserve dropped a bombshell on the markets. According to the central bank, up to 47 million Americans could lose their jobs, bringing the U.S. unemployment rate up to 32%. That figure would blow away the peak of the Great Depression and potentially shatter relationships between companies and workers when the virus does subside. That latter element threatens to undermine a future recovery. Meanwhile, Goldman Sachs (NYSE: GS) has predicted that the U.S. economy will contract by as much as 34% during the second quarter. That seems very possible.

CORONAVIRUS: Johns Hopkins University reported that global cases topped 786,000, with more than 37,820 deaths around the world. U.S. cases surpassed 164,000 last night, the largest official total for cases (can we really trust China’s numbers?). It appears that markets are trusting Chinese data around its manufacturing sector, which reportedly increased to a PMI reading of 52.0 in March. That figure defies expectations given the impact of the coronavirus on the Chinese economy. Investors have steadily been increasing their investment into the Chinese markets once again, snapping up assets in the search for value and appreciation upside.

GROUNDED: The global airline industry is effectively at a standstill. According to the OAG, roughly 50% of the world’s entire airline capacity has been grounded by coronavirus. Demand for airlines is now so low that carriers have asked their regulators if they can consolidate flights to destinations in order to fill planes and reduce costs.

CRUDE AWAKENING: WTI crude popped 7.5% to hit $21.50 after a three-day slide. Oil majors around the globe continue to wrestle with a severe demand-shock. Crude traders are banking on successful talks between the United States and Russia to help stabilize the global oil markets. Crude prices recently hit their lowest levels since February 2002, months after the 9-11 attacks that sent the markets into a recession. The downturn comes at a time that some regions around the world are selling crude at single-digit prices as a massive glut continues to plague the global economy. The sharp downturn was positive news for Pierre Andurand, who saw his Andurand Commodities Fund surge 57.5% in the first three weeks of March. Hedge funds have been cutting exposure to oil due to crude inventories as we kick off Q2.

ACCRUED INTEREST

RECOVERY: The question everyone wants to know is whether we’re looking at a V-shaped recovery or something that rivals the 1930s. Everyone is looking for a prophet, and the alternatives space is paying close attention to the words of leading managers. Larry Fink at BlackRock gave his forecast yesterday: He expects a gradual recovery, according to his annual letter to shareholders. Fink noted that the Fed and other central banks are being more aggressive to address challenges in the credit markets. He also said that the economy is not facing the same structural challenges that it did back in 2008.

SOVEREIGN SLUMP: We noted that Norway’s sovereign funds and multiple sovereign funds across the Middle East were in a rush to cash. But a follow-up story indicates that Norway’s $950 billion fund is about to liquidate a massive amount of assets through forced selling in order to cover a huge amount of government withdrawals. Unlike the 2008 financial crisis when Norway unloaded stocks, this time the focus is on its massive bond portfolio.

RAISING CAPITAL: It’s a busy time for alternative managers who are looking to capitalize on the recent downturn. JPMorgan Chase announced it wants to raise up to $10 billion for a new fund in the face of the coronavirus outbreak. Meanwhile, we reported this morning that Ardian has raised roughly $18 billion for a new fund and could close to new investors by April. Finally, VC shop General Catalyst has raised $2.3 billion and will focus on technology startups.

CARRIED INTEREST

Here are the other headlines getting our attention this morning.

• Macro funds are beating the quants and the active managers.
• The Netherlands is acknowledging its pension problems. Will the United States do the same?
• The rotation into investment-grade debt has been stunning.
• Money managers like gold… a lot.
• Barclays is still pushing climate commitments despite the focus on coronavirus.
• Starboard is buying up Commvault shares, while ValueAct is targeting Japanese chip suppliers.
• Raging Capital is buying up PKE and CSLT.

QUOTES OF THE DAY

“Let me be clear. The epidemic is far from over in Asia and the Pacific. This is going to be a long-term battle and we cannot let down our guard.”

That’s Takeshi Kasai, Regional Director for the Western Pacific at the World Health Organization (WHO). The first thing that the WHO can do is get rid of Tedros Adhanom and then investigate him.

“We are offering a $1,000,000 bounty for the first individual to provide proof of such a campaign.”

That’s Houseparty talking about rumors of a cyber breach. My first thought: What is Houseparty?

RECORD HIGH

We’re doing what we can to keep the days in quarantine sane. We’re not really going to be able to do so without music. So, I’m onto 2003 for albums and carving through the limited vinyl I have on that side of the pile. We’ll probably be relying heavily on Amazon today for ideas.

Already started the day with Forever to Tell by the Yeah Yeah Yeahs will make the cut on the back of “Maps.” A haunting love song and fabulous video. Speakerboxx/The Love Below by OutKast defined an entire fall quarter on college campuses with “Hey Ya!”, and Hail to the Thief by Radiohead during those long hours of working on a history thesis or sitting in a stakeout working on an investigative journalism project. Eels’ Shootenanny!, Jay-Z’s The Black Album, Christopher O’Riley’s True Love Waits (a piano cover of Radiohead), Mogwai’s Happy Songs For Happy People, 50 Cent’s Get Rich Or Die Tryin, and Yo La Tengo’s Summer Sun.

I’ll probably listen to St. Anger by Metallica… and, you’re damn right… In the Zone by Britney Spears. I know of some high-level hedge fund managers who sat in the first three rows of a Britney Spears show across the street from the SALT Conference back in 2017. Yes, they were dancing to “Toxic” from that album. I’ll save that for market close…

The biggest let down of 2003 for me was Jane’s Addiction’s Strays. I should have done a better job vetting that album. That album just never gets off the ground. “Just Because” is not a hit as much as I wanted it to be.

My favorite album that year was Blur’s Think Tank, but that’s not a very popular choice when competing against Elephant by the White Stripes. That said, I’ve heard Seven Nation Army way too much at sporting events as a Baltimore fan. “Sweet Song” by Blur is the first song I ever played on a vinyl record for my daughter because of the melody. Though she has listened to “Ripple” by the Grateful Dead every night since she was four weeks old. I’m worried she might fall asleep in 25 years if she is at work and “Ripple” comes on the radio.

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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.