THE DAILYALTS PLAYBOOK

January 29, 2020

Today, the DailyAlts Playbook talks Fed Futures, Woodford Haircuts, a Terrible HBO Spinoff Idea, Joe Biden’s Awful Voter Pitch, and the Best Acquisition Case for Apple.

PRIME OVERVIEW

This morning, the markets are again back to ignoring the coronavirus outbreak in China as investors cheer positive earnings reports from Apple and General Electric. The Dow rose 120 points in premarket hours as earning reports trickle out this morning.

Although most of America isn’t paying attention, the high drama will continue Wednesday in Washington D.C. at the Senate impeachment trial of President Donald Trump. The Senate will now have 16 hours to present written questions to the Trump administration. After that discovery period, Senators will vote on whether to demand more documents or call witnesses.

It appears that Republicans do not have the votes to prevent witnesses from testifying. Reports indicate that if Democrats push for John Bolton to testify, Republicans will make it a priority to subpoena Hunter Biden, the son of the former Vice President.

MORNING MOMENTUM

CHINA FEARS: British Airways has suspended all flights from mainland China on worries over coronavirus, and the White House has suggested that U.S. carriers might want to do the same. China said Wednesday that the outbreak has claimed 132 lives with total cases just under 6,000. That latter figure has surpassed the number of cases from the SARS outbreak. Stocks and currencies of Thailand, South Korea, and Australia have also taken the biggest hits outside of mainland China.

BONDS SLIDE: The flight to safety continues over coronavirus. But investors are also pouring back into bonds as the Federal Reserve announces its first interest rate decision of the new decade. The three-month bond inverted against the 10-year for the first time since October 2019. Investors expect that the federal funds rate will remain in the range of 1.5% to 1.75%.

CYBER CONSOLIDATION: Tim Melvin reported from Bank Director Magazine Acquire or Be Acquired Conference. One of the biggest trends that will likely drive consolidation in 2020 and beyond in the banking space is cybersecurity and the associated costs. More evidence of this emerged Thursday after the SEC told financial companies to step up their game when it came to cyber threats. The agency issued the warning after it conducted internal audits. If you’re looking to capitalize on this trend, be sure to check out Tim’s Community Banking Report, which taps into cybersecurity and the other trends that have fueled roughly 60 winning investments. His latest list consists of the community banks most likely to be acquired in the months ahead.

ACCRUED INTEREST

APPLE CASH: Apple is now sitting on $207.6 billion in cash. With that level of capital, expect a lot of analysts to pitch the idea that it can purchase Walt Disney, Netflix, Spotify, of even Shopify. These are all terrible ideas. Right now, everyone knows that it’s all about ESG. So, when you have more than $200 billion, you realize that you also have more money than the GDP of all but 50 countries. Want to make an ESG splash and show up Donald Trump at the same time, Mr. Cook? Go try to buy Greenland. It’s an ideal tax haven, provides unlimited cooling for servers, provides autonomy, and would give Apple instant access to the Arctic (perfect for filming content for its new streaming service). What else are they going to do, buy another tech firm? Buyback more stock? Have you seen those walruses?

CAPITAL CONTRADICTION: Payoffs are non-linear. In a new article, Nassim Taleb challenges the basic game-playing studies that dominate behavioral economics and finance papers. “The psychological results might be robust,” Taleb says, “in the sense that they replicate when repeated … but all the claims outside these conditions and extensions to real risks will be an exceedingly dubious generalization….” It’s worth the read.

LAGGING BEHIND: Institutional Investor reports that capital has poured into low-volatility factor funds to protect against downside risk and juice returns during runups. However, a report from Northern Trust shows that the funds have disappointed by a mile. Returns for the MSCI USA Minimum Volatility index came in around 3.0% in Q4. That figure was well behind the Russell 1000’s 9% gain during the same time period.

CARRIED INTEREST

WOODFORD WORRIES: In October, Neil Woodford’s income fund was suspended after a four-month lockup and investigation by British officials. This week, investors will finally receive their first payout. Reports indicate that investors were lucky if they only lost 20% of their investment. AJ Bell said that the expected payment will be a little more than 70% 0f the fund’s current value. However, The Guardian says the first payment will “48p to 58p per share – compared with the 100p price at launch five years ago.”

DEBT BALLOONS: Consulting firm bfinance reports that 2019 was the first time that investors sought more real asset debt than corporate private debt. Total private debt raising slumped from $166 billion in 2018 to $147 billion in 2019. The report blames a 17% drop in corporate debt fundraising. The report also shows that infrastructure capital raising increased by more than 50% to $14 billion. That first is the second-highest on record (first being 2015).

QUOTES OF THE DAY

“Go vote for someone else.”

That’s Joe Biden to former Iowa State representative Ed Fallon, who confronted the former vice president on climate change. Fallon said he planned to support Tom Steyer after Biden failed to answer his question about pipelines. We thought the point of campaigning was to court votes, not encourage people to vote against you.

“No one wants to buy a company that is shrinking, so we spend all of our time thinking, ‘How do we grow companies? How do we do more R&D? How do we invest in new products?’”

Steve Pagliuca, the co-chairman of Bain Capital, refuted claims made by Democratic frontrunners about the role of private equity. During the World Economic Forum in Davos, Switzerland, Pagliuca touted the role of Bain in job creation. The co-chairman said that firms purchased by Bain have grown revenue two times faster than the S&P 500 companies.

ACTIVE MANAGEMENT

PE CHALLENGERS: Private Equity shops are looking more and more like activist hedge funds, says Bloomberg. It’s a return to the 1980s, and it will make for great board room drama. I assume that HBO is making a spinoff of Billions right now to capture the political climate around the private equity industry. Perhaps they can create a character based on Mitt Romney and Pagliuca who represent “greed” – even though HBO makes more money than some small countries. Then, they’ll have an amalgam of Bernie Sanders and Elizabeth Warren who is on the campaign trail and trying to stop a private equity firm from taking over a Greetings’ Card company in Iowa. (Can I mail this plot to myself, does that stand up in court anymore?)

QUESTIONS IN JAPAN: Last year, 75 activists launched campaigns in Japan. Now, analysts are wondering if there is money to be picked up in the corner, or will this become a case study about opportunity costs of capital in the future. We will wait to see the performances of firms like Oasis, ValueAct, and Elliott in the activist runup over the last two years.

OIL AND WATER: Exxon Mobil has pushed back against the climate proposal from Dutch Activist Mark Van Baal. The activist fund wants the global oil giant to align with the Paris Climate Accord. The group has also targeted Chevron and several other global oil companies on climate change.

LIABILITIES

PHARMA BRO: Martin Shkreli now faces new charges over the alleged price inflation of the drug Daraprim. The infamous “Pharma Bro” and his hedge fund bought the rights to the drug that treats malaria and foodborne illnesses. Word is that he has been in solitary confinement for trying to run a business out of his cell. Now, he can add market manipulation to the list of things that could keep him behind bars for the foreseeable future.

LIME LIMITATIONS: South Korean regulators are putting total return swaps at the heart of the liquidity crunch at Lime Asset Management. The hedge fund had TRS contracts worth nearly $570 million. They comprised 42% of the assets in three different Lime funds. The liquidity crunch continues, exacerbated by the ongoing crisis in China.

SOCIAL RESPONSIBILITY

SEND US A NOTE ON TWITTER.

• DailyAlts: @DailyAlts

For tips and suggestions, please contact: Contact@DailyAlts.com

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.