THE DAILYALTS PLAYBOOK

September 26, 2019

Today, the DailyAlts Playbook talks topics like the wave of activist adventures, the (temporary) end of diversity on the ECB, and why Josh Brown wants Altria Group to vanish from the markets like vaping smoke.

PRIME OVERVIEW 

Good morning,

The Dow Jones is up about 51 points today as investors shrug off the impeachment inquiry on President Donald Trump.

Here are the top macro stories driving the markets Wednesday.

• The transcript release of President Trump’s call with Ukraine’s leader has done little to extinguish the flames of the new impeachment inquiry. Markets have largely brushed off concerns about impeachment. However, Acting Director of National Intelligence Joseph Maguire will testify before the House Intelligence Committee today. Expect a lot of drama, as Democrats attempt to build momentum in the movement to remove Trump from office.
• Oil traders simply can’t get a break. A little more than a week after the drone attack on Saudi Arabia, the U.S. is now imposing penalties on Chinese tankers for carrying Iranian crude oil. Not only does this news fuel increased volatility, but it also complicates an already fragile situation between the United States and China ahead of renewed trade discussions. Asia markets are clinging to hope for a trade deal, but cracks are forming in U.S. sentiment. JPMorgan Chief Jamie Dimon said he doesn’t expect an agreement before the 2020 election on Wednesday.
• Juul CEO Kevin Burns has stepped down. With Washington D.C. holding hearings on vaping products and states exploring bans on e-cigarettes, the co-founder is taking the heat. Meanwhile, merger talks between Altria Groupand Phillip Morris collapsed this week. Juul announced that K.C. Crosthwaite, former Chief Growth Officer at Altria Group, will take over for the company cofounder.

MORNING MOMENTUM

• BULLARD’S NOT WORRIED ABOUT TRUMP – While everyone on Capitol Hill runs around with their hair on fire about impeachment, one person is keeping his cool: St. Louis Fed President James Bullard. Bullard said Tuesday that the inquiry wouldn’t impact the U.S. central bank. The Fed member instead noted that the real challenge was the ongoing trade war with China. Bullard seemed to be reiterating the subtle message sent to Trump by Jerome Powell after the Fed cut rates again last week. That message is that it’s time for Trump to fix trade relations and that the Fed had done its part to support the U.S. economy.
• A HAWK LEAVES DRAGHI’S TOWER – Forget the noise of St. Louis Fed Bank President James Bullarddemanding rate cuts at the Federal Reserve. The real drama is happening in Europe. Sabine Lautenschläger – the senior German representative of the ECB – has departed. The departure tells us what we already know. There are sharp divisions among central bankers on the ECB’s rate cuts and commitment to immense efforts to loosen monetary policy. The bigger story, however, is the looming challenge faced to attract a new German representative given the opposition to low rates in Germany. And not only was Lautenschläger a policy hawk, but she was also the only female member of the 25-person governing council.
• DAILY REPO REPORT – The New York Federal Reserve is pumping more cash into the money markets. The Fed will engage in two repo operations on Thursday. The one overnight will be increased from $75 billion to $100 billion, according to Bloomberg. The Fed will continue repo operations into the fragile cash markets until at least mid-October.

ACCRUED INTEREST

• THE PUSH FOR ESG – Goldman CEO David Solomon said that financial institutions need to push ESG investing into the mainstream. During a talk at the Bloomberg Global Business Forum, Solomon encouraged advisers to ramp up conversations with clients about climate change and the associated exposure. He said his conversations have “amped up materially” over the last two years. However, ESG only comprises about 1% of global capital investments.
• “FREE SMELLS” – Inspire Brands is purchasing Jimmy John’s Sandwich Shops. The private equity firm snapped up the iconic sandwich deal. Jimmy John’s has about $14 billion in sales across 11,000 store locations. This purchase is the latest big restaurant deal for Inspire Brands. Jimmy John’s – which has the iconic “Free Smells” sign in its windows – has so many storefronts that it technically competes on that level with McDonald’s and Yum! Brands. For more deal news, go here.
• IT’S WORKING OUT – Hedge fund Tiger Global is ready for a massive profit from its stake in exercise giant Peloton. Reports indicate that the firm will earn at least a $1 billion profit when Peloton goes public in the next few days. Bloomberg says that the firm will receive a 70-fold return on its 2014 investment. The report cited data from EquityZen. Who would have thought one could make so much money on places to hang laundry… I mean, “exercise bikes.”

CARRIED INTEREST

• PARKING CASH – Paul Singer and his hedge fund aren’t the only ones building a war chest in case of a downturn. The new UBS and Campden Wealth Report indicates that family offices are realigning their strategies to protect against a slowdown in 2020. Roughly 42% of respondents were building cash reserves. About 22% were cutting leverage exposure.
• EQT IS AOK – EQT Partners stock surged more than 25% on the first day of trading in Stockholm. The firm now has a valuation of more than $8 billion. Private equity firms have sometimes struggled to gain investor acceptance. Perhaps this is a sign that investors are warming up to the industry.
• CASH DRAIN – eVestment said that investors redeemed roughly $6.51 billion from global hedge funds in August 2019. A new report on asset flows puts total flows since January 1 at negative ($63.61) billion. A downturn in performance also led to a total industry AUM of $3.259 trillion last month. Macro hedge funds and Long/Short Equity funds said the largest outflows. The latter strategy has seen a negative (-$31.14) billion drained from their funds this year. Meanwhile, Event-Driven funds increased capital by $2.59 billion.

QUOTES OF THE DAY

“We don’t need this. Shut it down. It’s enough.”

“Downtown” Josh Brown has had enough of Altria Group. On Wednesday, the CNBC analyst and head of Ritholtz Wealth Management expressed anger over the appointment of Altria’s Chief Growth Officer to the head of Juul.

Juul’s co-founder and CEO Kevin Burns stepped down yesterday. His replacement is an executive from Altria Group, a firm that has a big stake in the vaping giant. Brown said on “Closing Bell” that he hopes Altria’s stock “goes to zero.” Brown said that no investment case exists for tobacco companies (in his terms, “that sell poison to children”). He also added that tobacco companies would not comprise the “portfolios of the future.”

“The jig is up.”

That’s Anthony Scaramucci. Shortly after saying he regrets backing President Trump, he said he expects Trump to be relieved of duty. The reason: Trump’s “prima facie lawlessness.” In an interview with CNN Business, the Skybridge Capital founder said that the Ukraine transcript proved criminal activity. “The guy committed a criminal act as president of the United States. Just look at the transcript,” he said.  Scaramucci concluded by saying Republicans know they are better off without the president.

ACTIVE MANAGEMENT

• DEVIN WENIG IS OUT AT EBAY – On Wednesday, activist investors pushed out the eBay executive Devin Wenig. In a Tweet marked Wednesday, Wenig cited disagreements with fellow board members over the company’s future (primarily what to do with its Classifieds business). Earlier this year, eBay reshuffled its board. In March, Jesse Cohn, the head of Elliott’s activism practice, joined the board. So did Marvell Technology CEO and Starboard Value nominee Matt Murphy.
• Elliott Management has demanded that Marathon Petroleum’s board of directors split the energy giant into three separate businesses. The activist believes the move would unlock $22 billion in shareholder value. That figure implies a potential upside of 61% in the stock price of Marathon. Elliott owns 2.5% of Marathon stock.
• Mall REIT CBL & Associates could face pressure in the board room. Noted distressed debt and restructuring investor Michael Ashner filed a 14D stating that he now owns 5.97% of the REIT. Ashner will talk to the board about performance and alternatives.

COUNTRY RISK

• GREECE READY TO REBOUND – Greece’s new prime minister wants to slash taxes and make the nation more business-friendly. This week, Kyriakos Mitsotakis continued to lay out plans to attract foreign capital and reshape the nation’s economy. The first challenge is to convince creditors that they can reach specific targets while moving forward with reforms and privatization. The more important one is to convince the rest of Europe that they should temper expectations of its 2021 primary surplus.
• ARE REFUGEES THE CURE TO COLUMBIA? – An interesting report out of Foreign Affairs this week signals that the cure for many South American economies could be Venezuelan refugees. As Venezuela collapses and citizens flee, several nearby economies remain notoriously close-minded. Citing evidence of past refugee flows into Israel and Jordan in the 1990s, the authors argue that the wave of new immigrants helped fuel liberalization of those economies, changes in tax policies, and other reforms that provided a boost to growth. It remains to be seen if Colombia, Brazil, and other neighboring states will follow that path. But there’s a reason for optimism.

LIABILITIES

• The SEC filed charges against two Florida-based principals of several music entertainment companies. The two men allegedly conducted two multi-million dollar offering frauds and Ponzi schemes. In a press release, the agency says that for two years, Andres Fernandez and his companies “raised $20.7 million from at least 56 investors through an unregistered offering of securities.” During that time, another man named Edison Denizard had unregistered offerings and raised at least $10.4 million from 78 investors. The two defendants allegedly told investors that their investments would fund “music concert events for major artists at large venues across the U.S.” You already know how it ends. The defendants barely used any of the money for those purposes, and Kadaae allegedly misappropriated about $1 million. The rest of the cash was used to pay earlier investors.
• Now, this is genius, because there’s no way that you can be convicted of insider trading twice, right? Well, Sean Stewart, who used to work at JPMorgan, has done it. A New York jury convicted him of fraud and conspiracy after he tipped off his father about health care mergers ahead of time. The father then traded on that information. The convictions come three years after he did the same thing – tipping if dad Robert Stewart about healthcare mergers. Stewart’s previous conviction was overturned in 2018. However, both men pleaded guilty to these new charges.

BOOTSTRAPPING (PEOPLE ON THE MOVE)

• Goldman Sachs Asset Management (GSAM) has appointed Sheila Patel as chairman of the group. Hired in 2003 by Goldman, Patel was most recently co-head of Equities Distribution in Asia. Goldman’s Luke Sarsfield will replace Patel. He will join Craig Russell as co-head of asset management. Sarsfield is the global head of the financial institution’s group.
• WeWork’s Adam Neumann said he had decided it was in the best interest of the company to step down as chief executive. Neumann said the business was strong but that he was distracted by the intense media scrutiny directed at him over the company’s floundering IPO. Here’s more on the situation.
• Mark Thompson has resigned as CIO of London CIV after just three weeks. In a statement, Thompson said he is departing for personal and family reasons. The company had just announced his signing on June 18. He started his role on September 2. The pension investor said he couldn’t commit to the demands of the part in a statement.

For more People on the Move, click here.

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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.

Garrett graduated from the Medill School of Journalism at Northwestern University. He later received an MA in Global Security Studies (Economic Policy) from Johns Hopkins University, an MS in Trade Economics from Purdue University, and an MBA in Finance from Indiana’s Kelley School of Business. He 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.