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Our briefing for Friday October 16, 2020:
Oct 16, 2020 4:16:21 PM
- In the United States, a New York Times article is alleging side meetings from President Trump’s economic team gave the asset management industry a heads-up early on in the pandemic and is what fueled the market sell-off in March. The article points to a memo written by William Callanan, a hedge fund consultant, and member of the Hoover board. The Hoover Institution were in on the side meetings. The memo from Callanan either made its way to investors, or was heard through the grapevine, and was the first significant sign that the Trump administration didn’t have a hold on the coronavirus, even though in public they were assuring everyone it was under control. One major investor who was privy to the memo said the reaction was to, “short everything.”
- In Canada, a CBC investigation is reporting the border appears to be more open than citizens think – it just depends on who you are. The CBC first reported back in September that the billionaire CEO of Uline Inc. and two of her senior executives were given “essential” worker status when they arrived in Canada for meetings in late August. The “essential” status allowed them to skip what should have been a mandatory 14-day quarantine. When CBC made Public Safety Minister Bill Blair aware of their findings, he vowed to fix the problem. Follow-up investigations from CBC now uncovered Costco America’s CEO and one of his top executives also arrived in Canada on the same day as the Uline executives. They too were granted “essential” worker status and skipped quarantine while they attended openings of their newest outlets in the Canadian provinces of Ontario, Quebec and Alberta in a three-day span. Minister Blair declined a request from the CBC to explain the Costco situation.
- United Kingdom Prime Minister Boris Johnson issued his toughest stance yet on regional leaders who oppose his government’s three-tiered coronavirus approach. On Thursday Andy Burnham, Manchester’s mayor said the plans for putting the area into tier 3 – the most restrictive stage – were flawed and unfair. In a news conference on Friday, Prime Minister Johnson issued his response – “I urge the mayor to reconsider and engage constructively. If an agreement cannot be reached I will have to intervene. Our efforts will be so much more effective if we work together.” A move into tier 3 bans social mixing and closes down pubs and bars.
- In Germany, a Berlin court has overturned the curfew introduced by Chancellor Angela Merkel that was forcing bars, restaurants and off-licenses to close from 11PM-6AM. Eleven restaurant owners had submitted urgent requests against the curfew and the court ruled that, “it was not apparent” that the early closure methods would stop the spread of COVID-19. Instead, the court said new infections were more likely to stem from private gatherings of family and friends, religious gatherings or community facilities. The court also said the curfew wouldn’t prevent young people from meeting – instead push them into areas or places that might not meet hygiene standards. Germany set a record for new daily cases twice this week – the latest over 7,000 cases.
- Australia’s largest city Sydney has opened its borders as of Friday to New Zealand as the two countries officially start their travel bubble. More than 350 passengers were scheduled to arrive on three separate flights from Auckland to Sydney and upon arrival will not have to undergo a 14-day quarantine. It was a case of good news, bad news though for Australia on Friday as Melbourne, the country’s second largest city, was marking its 100th day in one of the world’s longest pandemic lockdowns.
- The World Health Organization (WHO) released their study on remdesivir, along with three other potential drug treatments for COVID-19 and found they had “little or no effect” on death rates among hospitalized patients. The study was said to be the world’s largest randomized control trial of coronavirus treatments. Remdesivir was one of the drugs given to United States President Donald Trump after he tested positive for the coronavirus two weeks ago. Not surprisingly, Gilead Sciences, the maker of remdesivir are taking issue with the WHO’s findings saying the data appeared inconsistent, the findings were premature, and that other studies have validated the drug’s benefits.
Covid-19 – Due Diligence And Asset Management
Wall Street Executives Urge Another Round of Federal Stimulus
Brief: Lawmakers must approve another round of fiscal stimulus to keep the U.S. economic recovery on track, executives from Goldman Sachs Group Inc. and Wells Fargo & Co. said Friday. Goldman President John Waldron applauded the federal government’s rapid financial response in the early months of the coronavirus pandemic, but said more needs to be done. The absence of additional stimulus could hamper the comeback, particularly in the U.S., he said during the Institute of International Finance annual membership meeting, held virtually this year. “We are going to see a much tougher road to recovery,” Waldron said. Coming back fully from the crisis will take longer, and “people will be laid on the side of the road, sadly.” House Speaker Nancy Pelosi told Democratic colleagues Thursday evening that “disagreements remain” with President Donald Trump’s administration over a number of components of the stimulus she’s attempting to negotiate, even as an agreement nears on a Covid-19 testing program. The establishment of a national testing strategy had been a roadblock cited by Pelosi and her aides this week during talks with Treasury Secretary Steven Mnuchin. Wells Fargo Chief Executive Officer Charlie Scharf said during a separate IIF panel discussion Friday that additional stimulus is needed with the U.S. “not out of the woods” yet.
Wall Street Bank Trading Boom Does Little to Assuage Concerns About Lending
Brief: As Wall Street banks reported quarterly results this week, investors wondered about the staying power of the trading bonanza that has floated profits, offsetting problems in traditional lending businesses that have been hurt by the pandemic. Trading revenue was up 4% to 29% at the five U.S. banks with major trading operations. Otherwise, lower interest rates hit lending income and prompted banks to add to loan-loss reserves. Goldman Sachs Group Inc and Morgan Stanley benefited most, because they do not have the lending operations of rivals like JPMorgan Chase & Co, Bank of America Corp or Citigroup Inc. Enthusiasm about trading revenue among bank shareholders has faded since the 2007-2009 financial crisis, when the businesses were shown to be black boxes of risk-taking that could generate huge losses. Later, banks’ trading revenue fell dramatically because of new regulations and clients avoiding profitable products they once peddled. Now, trading businesses tend to move in line with market trends or with a bank’s strengths rather than with taking home-run risks. It remained hard to tell why, exactly, Bank of America might experience a 2.5% gain in bond trading whereas Morgan Stanley saw a 35% increase.
Who is William Callanan, the Hedge Fund ‘Outsourced Strategy Officer’ at the Center of an Explosive NYT Report
Brief: Late Wednesday, the New York Times reported the story of how officials from the Donald Trump administration had privately expressed fear of a coronavirus outbreak while publicly expressing more positive views — and how that information had been sold onto at least one hedge fund by a “consultant. But who is William Callanan, the “outsourced strategy officer” at the center of the storm? Callanan is best known for his efforts as a portfolio manager, analyst, and investment strategist who worked at some of the most high-profile macro hedge funds in the business: Soros Fund Management, Fortress Investment Group, and Stanley Druckenmiller’s Duquesne Capital, according to published reports. In 2019, Callanan left another well-known hedge fund firm — Key Square Capital, started by former Soros investment chief Scott Bessent — to start London-based Syzygy Investment Advisory. Callanan, an astronomy buff, named the investment advisory firm after an astrological term for the alignment of three celestial bodies, according to a Financial Times report last year. Rather than make its own investments, Syzygy provides long-term investment themes “and aggressive ways of trading them” to hedge funds, pension funds, sovereign wealth funds, and other clients who implement the positions themselves, according to the FT report.
COVID-19 Boosts Some Real Estate Trends, Puts Others on Hold
Brief: When it comes to trends in real estate investing, the coronavirus has exacted a toll, according to the annual Emerging Trends in Real Estate report. Densely populated metropolises, once viewed as preferred destinations for millennials, are now being challenged by smaller cities and suburbs. At the same time, co-living and co-working arrangements, for reasons due to human proximity, are being rethought, according to the report, the result of a survey and interviews with industry participants by PricewaterhouseCoopers and the Urban Land Institute. "My one take away is take nothing for granted ... I've seen many cycles but nothing like this," Mitchell Roschelle, managing partner of new strategy advisory firm Macro Trends Advisors, said Wednesday during a panel discussing the latest Emerging Trend's report. Behavior can change very quickly, said Christopher Lee, partner and head of Americas real estate at Kohlberg Kravis Roberts & Co., a speaker on the same panel. For real estate, Mr. Lee said, it means that behaviors of businesses and consumers can change "in ways we've never seen before and it is happening very rapidly."
Alternative Investment Professionals Predict That Full Deal Activity Will Return in 2021
Brief: A new survey of more than 250 alternative investment professionals finds that a strong majority expect a return to pre-pandemic levels of deal activity by the close of 2021. The survey, conducted during EisnerAmper’s Virtual 5th Annual Alternative Investment Summit, shows that 74% of industry professionals predict a return to pre-COVID-19 deal activity by the end of Q4 2021. Two in five (41%) respondents predicted an even swifter recovery, with a return to pre-pandemic deal activity by the end of Q2 2021. When asked to identify the industries that present the best chance for growth in Q4 2020, respondents pegged technology and health care/life sciences as the sectors with the greatest opportunities. This largely mirrored results from EisnerAmper’s 2019 survey, when technology, cannabis, and health care/life sciences were named as the strongest growth sectors. EisnerAmper’s survey also identified the major trends that will impact how the alternatives sector operates moving forward. Many dealmakers hit the pause button in March 2020 when COVID-19 caused a global economic crisis and dramatically shifted the ways in which deals get done. Despite the investment industry continuing to largely operate in a work-from-home setting, 80% of private equity executives agree that they have been able to satisfactorily conduct deal due diligence during the pandemic.
Virtual AGMs Stop Roubst Engagement
Brief: Watered-down shareholder participation at AGMs, due to virtual meetings during the pandemic, is sounding alarm bells at APG, the largest pension fund in Europe, where collaboration with other asset owners and organisations is the beating heart of its ESG strategy and a central tenet to its stewardship response to the pandemic. Virtual annual meetings may be the pandemic norm, but Dutch asset manager APG is concerned about the consequences of lost face-to-face engagement and the ability of investors to collaborate to put pressure on companies to change. “In our view, AGMs as they are now can only be an interim solution,” said Claudia Kruse, managing director, global responsible investment and governance, APG, Europe’s biggest pension fund in an interview with Top1000funds.com. The majority of AGMs that APG has attended since the shut down due to the pandemic are one-way webcams, simply speeches that don’t involve two-way dialogue. Nor is the advance voting process as effective according to Kruse. “We’ve participated in 10 webcast AGMs and sometimes put forward questions as part of a collective engagement, but of course the votes are cast in advance,” she said. In other cases, questions are not put forward as part of collective engagement, and interaction between the board and retail investors is also lost. Possible solutions include hybrid models where investors can participate virtually in conjunction with a smaller physical meeting, said Kruse.
