THE DAILYALTS PLAYBOOK

April 21, 2020

The DailyAlts Playbook Talks Free Oil, Gold at $3,000, and Media Uncertainty on Investment Debt and Kim Jung Un

PRIME OVERVIEW

Good morning,

Where to start.

That said, Monday’s historic oil decline was… historic.

This was the first time that oil prices went negative in market history – and somewhere, right now, there is some poor trader who is exposed and won’t realize it until [6:45] tomorrow morning.

I received multiple texts yesterday from people who said – quote – “I never thought I’d see this in my lifetime.”

Were my friends really sitting around thinking about this before Monday?

Sure. This is unprecedented, but I’m starting to see some evidence that this happened in the lumber industry back in the 1970s.

And sure enough, a number of stories emerged that a guy who liked to speculate on commodities ended up holding the bag on physical deliveries. Is it really best to take delivery in Oklahoma?

I had called my friend in London yesterday. He trades oil professionally – but I’m pretty sure he’s looking into running a lacrosse camp instead after this. He said that he had called his broker yesterday – while oil prices sat at $2.00 – to ask if he would lose money if he bid zero for crude in Cushing, Oklahoma.

Of course, the broker said. He would still need to go out and find storage in a place where there is none. So, this explains why producers were forced to pay upwards of $35 a barrel to have traders take it off their hands today.

The Trump administration responded by saying that it would buy 75 million barrels to add to the Strategic Petroleum Reserve – because what we need right now – is more oil. Or we could invade Mexico and force them to take our oil. Maybe that will solve the problem.

There isn’t really any logic to this move except to suggest that moral hazard is a business strategy.

Oil prices are at zero? Well, let’s pump more and hope the government buys it.

Our bond rating is BBB?

Well, if we find ourselves teetering on the edge of a cliff, maybe the Federal Reserve will fill that canyon with pillows… and then save us from ourselves.

Whatever the case, we’re still just in the third inning of this crisis.

MORNING MOMENTUM

CRUDE REALITY: On Monday, oil futures fell into negative territory for the first time in market history. With expiration taking place today, producers were forced to pay traders to take crude off their hands at the delivery point at Cushing, Oklahoma. Crude for May delivery fell to negative $37.63 per barrel. This morning, the June contract fell 24% to $15.50, while the Brent crude contract shed nearly 19%.

REPORTS: Is Kim Jong Un alive? That is the question that the U.S. media cannot answer. Last night, NBC reported that the North Korean dictator was “Braindead” after heart surgery. However, other reports conflicted that story and suggested that he had contracted COVID-19 from a Chinese doctor and has since recovered.

RELIEF: The U.S. Senate is poised to pass a new small business relief bill on Tuesday. Senate Minority Leader Chuck Schumer suggested that a new bill would pass the Upper Chamber of Congress later this afternoon. The bill would likely add hundreds of billions in new loan capital for small businesses struggling with the impact of COVID-19.

ACCRUED INTEREST

BOOM: We’ve been talking about the coming surge of downgrades in corporate bonds due to this economic crisis. It’s simply been a slow-moving problem. JP Morgan reported this morning that we’re going to see a lot of problems here and in Europe. The bank said that roughly $215 billion in U.S. investment-grade debt and $100 billion in European IG debt will get downgraded to high-yield — read: JUNK – later this year. This could create a lot of problems for portfolios due to forced selling.

BUYOUTS: Bloomberg reports that buyout firms have shelved about $20 billion in deals for European technology companies. Robert Smith tops the list of managers who are putting deals on hold. His sale for roughly 50% of Finastra – which includes about $10 billion in debt – will have to wait due to the coronavirus outbreak. He’s not the only one.

WELP: Hin Leong Trading PLE lost about $800 million. However, the firm didn’t tell anyone, according to Reuters. A new court filing said that the firm lost this massive sum over several years. Now the company is trying to avoid its debt to 23 banks. That is going well.

GOLD: Bank of America Securities hiked its 18-month gold price target from $2,000 to $3,000/oz. That’s quite a change… The name of the report announcing the upgrade in price was: “The Fed Can’t Print Gold.”

CARRIED INTEREST

Here are the other headlines getting our attention this morning.

• • This whole SMB funding isn’t going as planned.
  • Citigroup is wrapping up its work with Skybridge.
  • Renaissance Fund is loving Bitcoin.
  • John Kemp talks crude oil.
  • Crude oil’s slump might be bad for Bitcoin.
  • Futures Fund plans to break its silence.

QUOTES OF THE DAY

““You have a fiduciary responsibility when the government lays out a program to use it because you have no idea how long this pandemic is going to go for, when or if there’s going to be therapeutics or a vaccine. You just don’t know.”

That’s Kevin O’Leary. The Shark Tank shark showed off his penchant for capitalism on the way up, and socialism on the way down.

“Patience is a virtue.”

Phil Orlando doesn’t expect this be a short downturn.

CANNABIS AND REAL ESTATE

It’s 4/20. So, let’s talk about cannabis legalization.

Cannabis CEOs now predict that the COVID-19 crisis will speed up legalization at the federal level. It’s relatively clear given that eight states kept recreational cannabis shops open during the lockdown across the country.

We’re talking about legal cannabis as an “essential business.” It’s so apparent because Michigan has made it illegal to go to your vacation home along Lake Michigan if you live in a different state, and they’ve made it impossible for people to purchase gardening equipment. But want to go out and purchase an ounce of pot? Go for it. Cannabis is essential.

The financial institution Cowen – one of our favorite backdoor cannabis investments – said that weekly sales of cannabis in March hit at least $134 million in the Western states.

I think that this is pretty much a done deal in the next 12 months. I don’t see how we don’t legalize cannabis across the nation. We need the tax revenue, and we need to keep people interested in Netflix originals.

Cannabis is a by default an alternative investment – and it offers a wealth of opportunity that we can tap into for the years ahead. First, we’re seeing strong demand in the industrial REIT sector for cultivation centers. That demand will hold in the year ahead.

Second, Cowen remains the best financial institution for this sector. It remains engaged despite a lot of uncertainty about what banks are allowed to do. When this is sorted out, Cowen likely has a massive inside edge.

Finally, of all the cannabis stocks, the only one I like is Trulieve. It trades at an EV-Ebitda multiple of 6. With the average buyout multiple last year at 12, I think this company is going to see a lot of interest if we get legalization. It owns 50% of the Florida medicinal market with just 18% of the retail space.

I can get on board for a long-term run with this OTC stock given that it’s one of the few profitable companies in the industry. You should see the lines out the door during this lockdown in Florida.

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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.