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REAL TALK ON
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The Daily Alpha - 09.25.15

The Daily Alpha - 09.25.15

Garrett Baldwin



Today's Alternative Thinking on Boehner’s Resignation, the Private Equity Oil Bloodbath, Activist Influence, Hedge Fund Foreclosures, and Daily Fantasy Sites.

“He is proud of what this majority has accomplished, and his speakership, but for the good of the Republican Conference and the institution, he will resign the Speakership and his seat in Congress, effective October 30."

House Speaker John Boehner will retire from Congress next month, ending a tumultuous five-year stretch as the face of the lower chamber.

In the process, Wall Street loses one of its closest allies.

As Dealbreaker wrote today, John Boehner received more money from Wall Street money that any other member of Congress. He regularly defended the financial sector and was staunchly opposed to the Dodd-Frank Act and further regulation.

Pull back the pages of Open Secrets, and one can find that he received $1.2 million from Wall Street during the 2014 election alone.

Not bad work if you can get it.

The question is who will replace Boehner at a time that economic uncertainty is rising.

The government’s current funding is set to expire on September 30, and some Republicans are willing to shut down the government over public spending for Planned Parenthood. Boehner had the political will to get deals done and ensure that the government remained funded and that such concerns wouldn’t extend to the markets again like they did a few years back.

Will he jump back into this battle one more time? Politico argues that a shutdown is less likely in October, but now higher in December.

It’s unclear how future leadership will address the matter. Republican Majority Leader, Rep. Kevin McCarthy (R-Calif.) is the favorite to take over as Speaker.

If that’s the case, blank checks to purchase influence should be addressed to…

Rep. Kevin McCarthy (Calif.)

2421 Rayburn House Office Building

Washington, DC 20515

However, challenges are expected from far-right candidates.

The reason that Boehner’s resignation is so important is the timing and the possibility that it reduces clarity into the factors that affect the Federal Reserve’s decision in interest rates. If nothing gets done this week, there's a minor chance that we don’t’ see an employment report from the Bureau of Labor Statistics next Friday.

How that will affect the market’s focus on rates will be in focus next week.

“This price level could result in substantially lower annual oil and natural gas investment…”

As noted yesterday, the falling price of oil is “the most important” economic story happening around the globe. Not hedge fund tax rates, not Hillary Clinton’s drug-prescription plan, not Donald Trump’s Great Wall of Ego, it’s the falling price of oil.

It will continue to have a dramatic impact on currencies, confidence, and inflation around the globe. Falling prices could destabilize governments and leave social safety nets dissolvent in the coming years.

In the U.S., the impact on inflation is clear.

But at a time that the U.S. has seen almost all of its net-job gains from the energy sector, falling prices will affect future employment and investment.

The quote above is from the Energy Information Administration, which anticipates that oil prices will average around $70 per barrel in 2020. That price is much lower than previous forecasts, and could slash into budgets for some of the nation’s largest oil-and-gas producers, infrastructure builders, and refiners.

In Texas, which has been the biggest driver of job growth across the United States since the Great Recession, the mood is turning sour.

According to the Federal Reserve Bank of Dallas, its Beige Book indicated a negative outlook for the energy sector, while business expectations were sharply higher for other industries.

That isn’t good news for private equity companies engaged in the space. LBO wire reported this morning that falling prices could cause PE firms more pain in the near future. “As lenders through November review loans that were made to private equity firms' portfolio companies, some of these companies face a dire situation: They are running out of cash, oil prices remain in the doldrums, and they can't access capital markets…”

The news doesn’t get any better from there.

 “Whatever deal that went on between Bank of America, Selene and HUD is not known to me.”

Is someone suggesting that a housing agency engaged in centralized planning and one of the nation’s top financial institutions are in bed together?

That’s… just… shocking… 

A disturbing trend out of Washington involves the ever-inept Department of Housing and Urban Development, which oversees the insurance arm of the Federal Housing Administration. It turns out that the HUD is selling large pools of mortgages to hedge funds, and most of the homeowners (a.k.a. the indebted) don’t even know about the transfer of the debt.

This isn’t a case of banks foreclosing on homes, another talking point during the 2012 elections.

This is the U.S. government – the agency that is supposed to save low-income Americans –selling mortgages without anyone’s knowledge directly to hedge funds.

Why would they do this?

First, the HUD is operating an inept insurance scheme with unintended consequences. Second, the agency is broke because homeowners are still falling behind. By doing so the FHA is able to “shore up” its “hemorrhaging finances and give borrowers some breathing room to work things out with a new mortgage-holder.”

Read that sentence again. A failing government agency’s idea of ensuring dignity is to sell a person’s home to a hedge fund and expect… what?

At some point, anticipate a scandal here. It’s simply too absurd of a program to exist.

When the new home owners send the residents packing in favor of a surging rental market or they flip the homes for a profit, the political talking point will center solely on the actions of the buyer… of the hedge fund. The agency is basically admitting defeat and then setting up hedge funds to take a publicity hit when these homes (which shouldn’t have been sold in the first place due to the buyer’s high default risk) are sold on the open market by the hedge fund when they stop receiving mortgage payments.

In reality, this is just another failed program run by centralized planners who helped fuel the housing crisis in the first place and then were shocked…shocked… that the market reacted to bad incentives, worse policy, and very little responsible oversight.

What’s the next trick that HUD has up its sleeve? This...

"Activists are demonstrating that they're being reasonable. They're not looking to change everything out."

Expect more shareholder activism in the future.

That can be inferred from a study released this week by professors at the University of Texas at Austin's McCombs Business, who concluded that the average cost of a proxy fight for a company against an activist investor is running around $10.7 million.

Scott Stringer, New York City's Comptroller, does not approve: “Boards have become quick on the trigger to grant seats to activist investors just to avoid a proxy fight. He followed up by calling the trend "disturbing."

Read more at Finalternatives.

“An incremental 50 basis points represents roughly a third of our estimated +1.5% year-over-year third quarter TV advertising growth assumption, with most benefits accruing to broadcasters of the NFL.”

FanDuel and DraftKings continue to surge in popularity with their one-day fantasy game platforms. But the real winners, says Maggie McGrath at Forbes, are the broadcasters and operators of traditional fantasy sites.

It’s an interesting breakdown on this emerging sector.

But the Alpha Pages has another argument coming next week on what one-day fantasy is actually doing to ESPN. And it’s not a positive outlook.

Check back next Friday for a controversial piece about the future of ESPN and how it’s starting to resemble one of the stock market’s least favorite networks.

Have a great weekend.
















































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