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Tokyo based, expat Cape Bretoner. Learning to live in a de-leveraging world. Better suited to the crusades. CFA & FRM charter holder. Disclaimer: @Firehorsecaper reminds investors to always perform their own due diligence on any investment, and to consult their own financial adviser or representative when warranted. Any material provided is intended as general information only, and should not be considered or relied upon as a formal investment recommendation.

Semiconductors – The True Red Button

In 1850 China was a world power, their economy representing 25% of global GDP. By 1977, the end of Mao’s regime, China was reduced to 2% of the world’s GDP (PPP basis). Xi Jinping’s “Making China Great Again” is a real thing, with an aggressive 5 year plan and the goal of getting China back to the largest economy in the world by 2049. This target should not be confused with global 2050 net-zero targets, 2049 is the centenary of the founding of the Chinese Communist Party. There is a real risk that China gets old before it gets rich. Demographics are horrid, a hangover of a long standing 1 child policy (since lifted without much effect on the PRC birth rate), which accelerated female infanticide and has resulted in a gender imbalance (overall 105 males per 100 females, and gender ratios at high as 118:100 at the extreme in some provinces).

China currently controls 25% of  global semiconductor production. Much smaller Taiwan controls 21%. Taiwan Semiconductor ($TSM the ticker for their US denominated ADR’s) has been drubbed along with all risk assets in 2022, down 40% for 2022 ytd. Sporting a market cap of $382 billion ($TSLA 348bln for reference after a -68% 2022, -44% in Dec 2022 alone. China does not covet Taiwan for the stinky tofu, they want Taiwan’s semiconductor dominance in order to leapfrog the USA. “Make American Great Again” is also a thing. The US further losing a solid grip on a critical technological feedstock would be a big deal.

Warren Buffett’s Berkshire Hathaway now owns > $4bln of $TSM stock, last increasing his position in Nov 2022.

The USA currently leads the world in semiconductor R&D. Production is a markedly different matter where the U.S. share has dropped by 25% in 32 years, standing at 12% in 2022. It is said that Intel Corp is 18-month behind Taiwan Semi best chip. Fixes will not be easy or quick. Taiwan, China, Japan and S. Korea account for >70% of global semiconductor supply presently.

Biden’s Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 (CHIPS Act), was signed into law Aug 9, 2022. (Hopefully ChatGPT can improve the names of such legislation going forward). Autarky is underway as re-shoring efforts get announced to “bring it home”. The CHIPS Act brings over $52 billion to the lab for firms willing to ramp up domestic production of semiconductors. Other legislation is in the wings. Reminiscent of the Bill Clinton era efforts in Puerto Rico to revitalize and de-risk the pharmaceutical supply chain, the FABS Act prospectively would provide a 25% tax break to US domiciled semiconductor producers. Some level of production will come to the US with such a large thumb on the scale. Costs are much higher in the US, and as it the case for most product categories, re-engineering supply chains typically is costly, hence inflationary. The cost to built a semi plant stateside is considerably higher than in Asia and the staffing will be an issue as well. Even moving 5% of global production back to the US will call for 10’s of thousands of highly skilled STEM jobs.

The largest semi ETF is the Market Vectors Semiconductor ETF, ticker SMH has just under $8bln in AUM. After 2 forceful bear market rallies in 2022, the last of which took it back through the 200-day moving average (the S&P pierced it thrice) the double digit swoon in Dec 2022 has things looking dire as we enter 2023. The biggest weighting in $SMH is $TSM (Taiwan Semi) at 14%, followed by $NVDA 10%, $ASML 6%, $QCOM 5%, $AMD 5%, $INTC 5%, as well as $TXN, $AVGO, $MU and $AMAT.

$SMH, down 35% ytd is down smalls at the time of writing, Dec 28, 2022. Reports that 50% of the passengers from two inbound flights from China to Milan, Italy are C-19 positive have risk ghouls dancing once again. The outsourcing of textile manufacturing from the Milan region of Italy to Wuhan, China kicked-off this Covid-19 pandemic circus almost 3 years ago.

Other semiconductor ETF’s with assets > $1bln include $SOXX, $SOXL (3X bull, -86%), $SOXS (3x bear, +16%) and $XSD.


ESG Year end 2022 year end summary for those inclined to “invest” 6 minutes of their screen time. https://open.substack.com/pub/calebgibbons/p/esg-year-end-2022-review?r=3607n&utm_campaign=post&utm_medium=web

In summary, watch the semiconductor space. It will likely be the canary in the coal mine with respect to risk assets, geopolitical risk and inflation in 2023 and beyond. Happy New Year’s wishes to all from cool, but green (this week) Nova Scotia. JCG

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Bill Hwang, CEO and founder Archegos Capital Management. Note: (Mrs. Doubtfire/Psy). Heaven and hell. How can the same coin encapsulate such a degree of dichotomy? God – heads, Lucifer – tails.

Bill (Sung Kook) Hwang (58) just experienced a post ides of March for the ages. Julian Robertson protégé, ex-founder of NY-based Tiger Asia Management ($8bln in AUM at its peak circa 2007 after a 40%+ return year) and one of the most under the radar, successful “Tiger cubs”, just got cancelled.

Archegos carcass was laid bare for the hyenas last week, due to margin calls (under ISDA/CSA see below), prompted by ruinous losses in Chinese burritos ($GSX, $DAO, $IQ, $TIGR, $TAL, and $DOYU) and USA media/sundry equities ($DISCA, $VIAC, $RAAS, $SAIC, $DM and $AMC), among other cannon fodder names.

Post insider trading charges (US-SEC), circa 2012, Bill Hwang was forbidden from managing money for 3rd parties going forward. By grace of God, net of  the $44 million paid in fines/reparations (12-months of probation was duly served)  Billy still had a grubstake of US$200 million to launch his family office, Archegos Capital Management . The name Archegos comes from the Greek, “one who leads the way”, sometimes to the path of damnation, it appears. Of the seven deadly sins only two appear evident in this sordid tale; namely pride and greed.

Over the ensuing period of 8 years, Hwang compounded his $200 million chit at a staggering 63% @ compounded return to enter 2021 with a gob-smacking $10bln in AUM.

Strategy. Equity long/short. Short, no view, ….. let’s go with the indices (S&P and NASDAQ). Longs; concentrated (10-15%+ mkt cap in some names), cash (margin) +synthetic (over-the-counter) derivative exposure. Documentation; trade – total return swaps (aka equity swaps where the underlying is stock). Documentation – Master agreement; ISDA (International Swap Dealers Association) including CSA (Credit Support Annex) schedule. Threshold $0. Daily mark-to-market. Acceptable collateral; USD fiat at 100%, US equities 70% margin credit, China ADRs 60% margin credit (blended). Rumors of re-hypothecation likely just that, rumors as the ISDA/CSA control groups within the investment banks run a tight ship .

Possible portfolio scenario. Long $80bln (margin) single name equities China ADRs/US $3.2bln pledged to prime brokers (GS, MS, CS, Nomura, MUFG, sundry), short ES/NQ $30bln notional margin $2.4bln. Starting cash $10bln, margin pledged to date $5.6bln, with $4.4bln in reserve …. all-good, ATH ahead. Viacom announced $3bln secondary trades, trades off hard (graph below). China names also off hard to start the week on a “risk-off” move. ES/NQ short bleeding (smalls, < $1bln of margin), Longs -8%, margin call $6.4bln, shy $3bln +. PB’s liquidate TRS hedges (long underlying). GS sells $10.5bln underlying Friday Mar 26th, incl. 20mm share block of Viacom (GS hedged, no loss, “hold my beer”) MS sells $5bln in stock Friday, also via block trades …… CS and Nomura have a sleepless weekend. Square positions post carnage of 26th block trades to crystalize mtm losses of prior week.

Mr. Hwang is abstentious, a devoted Christian. Sung Kook Hwang is Korean-American, son of a Korean Pastor father and a Catholic Missionary mother who primarily worked in Mexico. If CRISPR babies were a thing in the early 60’s Sung Kook might have been patient zero.

No drink. No smoke. Married, 1 child (22, NYC), residence, Tenafly, NJ. (pop. 15,000, 15% Korean-American, 2008 house cost $3.5mm, a “modest house” for someone with a net worth in the billions), ride; Hyundai, Genesis (the same chariot T Woods almost off’d himself in pre-breakfast), joking aside Bill does have a Mercedes as well.

Charitable foundation; Grace & Mercy Foundation ($590mm AUM) but with some ties/exposure to Archegos prior to Archegos being zero’d Mar 26, 2021. $20mm $AMZN stock donated in 2020. G&M distributed $50-70mm per annum reportedly, a goodly portion to various Korean charity organizations. Online bibles seems to be one of Bill’s giving niches. Like many, I think Bezos has us covered on that front. The Bible has #1 best seller title by a country mile, 3.9bln copies read (Mao Tse-Tung #2 at 830mm and Harry Potter 3rd at 400mm).

Only 2/7 deadly sins, but clearly that was enough. Pride. Greed.

A deeper dive on God vs. VaR; (in Korean, with subtitles).


I fought the VaR and the VaR won. At $10bln (unlevered), Bill Hwang had already amassed generational wealth for his compact family unit and broader Christian flock.  The second of his vices, greed, clearly took hold in this instance.

Netflix is a lock for Margin Call II. A Parasite sequel can clearly not be ruled out.

The inter-web has Bill Hwang’s purported portfolio listed already.

Not cool to dance on anyone’s grave, but Billy cost regular folks real money in this facade. Partnered with other cubs, with whom he shared bath-water, they cornered upwards of 70% of the float in names like $GSX, GSX Techedu, investigated by the SEC in 2020 for allegations of fraud (i.e. fake clients/bots) has a 52-week range of $33-$149, near that lower bound after the post Hwang margin driven drubbing. $GSX, almost 70% down in a week, still sports a market cap of US$8bln! There is a reason shorts are at near record lows. There are reasons margin debt is at/near all time highs (US$800bln +). None of this aids in the C-19 recovery. It increased market fragility, as CPI prints benign and the VIX floats south through 20. The ruling class check their 7 and in some cases 8 figure account statements,  while the working poor sip stone soup. This is not God’s Work Mr. Hwang.


Nomura disclosed losses of US$2bln related to the Archegos wind-down as Japan’s fiscal year end of Mar 31st approached (also pulled a $3bln bond issue priced days prior). Nomura should have been genki with the Nikkei finishing up the fiscal year up > 50%, best innings since 1972. Nomura credit rating has been placed on negative watch (Baa1/BBB+ presently). Nomura stock traded limit down in Tokyo trade and is set to finish down > 15% on the week. Credit Suisse, on the heels of a $1bln  hickey on supply chain manager Grensill have not tightened their band of pain yet and peg the Archegos tally at -$3-5bln. MUFG made a late week disclosure that they also rubbed up against Archegos with -US$300 million their estimated tithe. CS stock is down  18% on the week with rumors of an equity raise swirling. Deutsche Bank miraculously side-stepped the potential $4bln goring due with timely collateral dispositions/hedging. Early action by Goldman (vampire squid) and Morgan Stanley on Friday to flatten their risk seem to have been successful.

Hedge funds manage $3.8 trillion at present. They have been leap-frogged by 7,100 family offices which manage $5.9 trillion. Less 2 sigma events (on balance) and restrictive regulations have prompted many hedge funds to convert to family office structures (return 3rd party money and manage funds for sponsors and staff only). In the hedge fund space, the big get bigger; Millenium 277b/42b net AUM for 6.6x leverage. Citadel 234b/29bln net AUM 8.1x leverage.

Follow me on Twitter @firehorsecaper

Caleb Gibbons, CFA, FRM, SCR




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Sportradar, Sports Betting’s Google? Odds-On-Favorite: Place Your Bets

Perhaps the most unknown yet important potential SPAC since Q2 2020 is the much anticipated public market launch of Sportradar, arguably the most influential sports data/analytics firm in existence globally. Indications are that COVID-19 propelled demand boom coupled with a tax-grab via sport betting legalization in key jurisdictions could lead to valuations as high as US$10-12 billion. Q4 2020 indicative IPO valuations hovered in the US$6-8bln range with JP Morgan and Morgan Stanley rumored to be in the mix as lead underwriters. SPAC valuations were at the higher end of that indicated range at US$8bln. 2021 the market fervor for SPAC’s and sport betting have propelled $378mm AUM $BETZ sport betting ETF+22% and ballooned Sportradar’s valuation to $10-12bln.

Data Firm Sportradar Being Valued at $10+ Billion in Talks to Go Public

Led by Carsten Koerl, Founder and CEO since its’ formation in 2001 the St. Gallen, Switzerland headquartered Sportradar has 35 offices in 24 countries with 1,800 staff forming the ‘hive mind’ of sports data/statistics/AI. Sportradar coves 400,000 events annually across 60 distinct sport categories. Big data = big money.Private unicorns are famously shy, but we have a solid benchmark with the July 2018 divestiture by private equity firm EQT who sold 39% of Sportradar for an implied US$2.4bln valuation to Canada Pension Plan Investment Board (CPPIB) and growth equity fund TCV . Founder CEO Mr. Koerl took no proceeds and hence keeping his % ownership unchanged, a huge vote of confidence at Sportradar’s on-going prospects.

Sportradar Announces Canada Pension Plan Investment Board and TCV as New Strategic Partners


Sportradar have stuck deals with the NFL (no big surprise there, as they are part owners ), the NHL, MLB, FIFA, NASCAR and the NBA. NBA team owners Mark Cuban and Michael Jordan are part owners via their participation in the $44 million private funding round in 2016. Ted Leonsis, CEO of Monumental Sports and Entertainment is also a part owner.

To drive a $10bln+ SPAC valuation it is thought Sportradar will need to raise $750 million, but given their investor group pedigree Sportradar might take the interim/concurrent step of raising $2 billion via a Private Investment in Public Equity (PIPE) transaction with institutional investors looking to follow CPPIB’s lead (i.e. a near 4 banger inside of 4 years on $US936 million invested). A $2bln Sportradar PIPE could be taken up by a group of institutional investors such as Singapore’s GIC, Swiss National Bank, Japan’s GPIF, Australia’s Superfund and any number of Canadian pension funds (CDPQ, Omers, Ontario Teacher’s). Note: CPPIB has US$360 million in assets under management, hence their Sportradar investment represented 2.6% of assets under management (AUM). Having an institutional investor like the Canada Pension Plan onboard is a tremendous positive from a vetting perspective and shows that ESG exclusion screening (i.e. sin) is not the only game in town.

The bigger risk her may be that nobody is willing to sell Sportradar (yet). With DraftKings ($DKNG) sporting a $24bln valuation, largely on DFS (Daily Fantasy Sports), selling too early may be seen as a bigger risk than rolling the dice on a higher multiple. Sportradar is EBITDA and cash flow positive, it should be noted. Rating agencies privy to financial disclosures estimate EBITDA of $59 million.  No ‘price-to-sales’, TAM or similar poppycock required in getting your head around the potential valuation.

Potential acquirers:

There are over 300 recents SPACs seeking investment prospects and the diversity of Sportradar’s mandate could allow the majority to find Sportradar to be ‘in scope’. There are only 5 sport related SPACs > $750mm presently. A betting man would assume Golden Sate Warriors co-owner Chamath Palihapitiya has a team on the case. The best adjective for Chamath (leg day optional) is smarmy, but his money is green and he seems to have the golden touch. Softbank’s Masayoshi Son has a war room staffed with financial engineers vetting deals as well. Softbank loves to swing for the fences and with their stock trading at all time highs, sporting a market cap of $175bln, Son-san could write a check for $12bln (<7% of mkt cap) and roll Sportradar into his conglomerate. There has been some chatter on the interweb about Avanti Aquisition Corp., $AVAN, the SPAC of Egyptian billionaire Nassef Sawiris vetting Sportradar. There are literally dozens of iterations that create shareholder value and with the public market valuations spanking private market valuations handily at present, I think the SPAC route is most likely. 2020 saw more SPAC issuance than the prior decade on the premise of “feed the ducks when they are quacking”.

Apex predator:

Given the critical nature of Sportradar’s services as sport betting spoils migrate to live betting (Sportico’s sister publication Variety notes that 70% of the handle at European sports books are live bets versus 50% in the USA) I think Sportradar is holding “the nuts” and is more likely to be predator than prey. Recent podcasts with Carten Koerl do not give the impression that Sportradar in ‘in play’. Vertical integration from the provision of ‘picks and shovels’ to the sport betting industry into running their own book is a distinct possibility. Holding their best/fastest data in-house would be the equivalent of sucking all the oxygen out of the room of their competitors. This is the high frequency trading equivalent of the betting world. Sportradar > Flash Boys. Sportradar currently has 1,000 customers in 80 countries. Anti-trust concerns abound. A Swiss domicile helps in this regard.

Global sports betting is a $203 billion industry (annual spend) 2020. Global box office receipts were $42 bln pre COVID-19 for reference.

In in post COVID-19 world, on-line is the place to be. There are 25 listed names in the sports betting and iGaming ETF with a market cap > $9bln. Brick-and-mortar, land-based casinos pale in comparison: $MGM $18bln, $CZR $17mm and $WYNN $14mm are the big ones. They have struck licensing deals with their on-line governors to garner a portion of the spoils once the biggest US markets get approved (New York and California). States are scrambling to approve online gambling in all forms for the tax receipts as they try to repair their battered economies. NJ collected $302 million in taxes related to gaming/casinos in 2020, despite their 15 land-based casinos receipts at $1.5bln being down 44%. All of the shortfall was made up from on-line wagering which doubled to $970 million (sport betting as a subset was up 33% to $398mm due to the dearth of live sporting events in the first half of 2020). Traditional casinos are taxed at 8%. Online games have a tax rate of 15% (virtual slots, poker, blackjack). Sports wagers are taxed at 8.5% if placed in a land-based casino and 13% when placed online.

Flat Earth (sampling):

Many countries legally allow sports betting, the USA a recent one with state specific approvals evident from 2019. USA football is #1 and NFL wagering account for 50% of all wagers. Globally, the NFL is #2.

Canada is expected to fully approve sport betting in the first half of 2021. With COVID-19 support approaching 20% of GDP, they sorely need the tax revenue. As with cannabis legislation this will be dealt with at the  federal level, i.e. One private member’s bill, referred to as the Safe and Regulated Sports Betting Act Bill C-218 repeals a section of Canada’s criminal code making wagering on a single sporting event illegal. The bill passed the 2nd reading in the House of Commons and, after a Justice Committee review, will be sent for a vote in the Senate. Hockey is big (NHL), but the NFL is bigger, even up north!

Score Media and Gaming Inc. ticker $SCR.TO sports a C$2bln market cap.


In India games deemed ‘skill’ games are allowed (i.e. poker). Cricket is far and away the most popular sport. $1bln + population, median age 27.

Latin America is soccer (football) dominated. Baseball #2.

Africa is soccer (football) dominated, but 60 sports on offer. Nigeria has 60 million people aged 18-40 that engage in sport betting.

It is estimated that 96% of the world’s population will have access to online wagering within 5 years. This presumes the market environment in China, which is currently a ‘black market’  changes. All forms of gambling with the exception of the state run welfare lottery and sports lottery are illegal in China.

In Hong Kong horse racing dominates.

Japan is said to be studying approvals, but the state lottery and horse racing currently dominate. The government turn a blind eye to the pachinko industry (land-based, 180 decibel “door #3 in hell” standing pinball machines). Baseball is the most popular sport in Japan.

How to participate:

$BETZ Roundhill Investments ETF. The Roundhill Sportsbetting & iGaming ETF is up 21.8% ytd in 2021. $BETZ is a double from launch in mid 2020. MER is a reasonable 0.75% (matching Cathie Wood’s $ARKK). $BETZ AUM is US$378mm presently (small, but with decent liquidity). The chart is a thing of beauty:

$BETZ – Holdings

Ticker Name Identifier Weight Shares Market Value
888 LN 888 HOLDINGS B0L4LM9 2.63% 2,847,673 $11,772,190.00
ACX GR BET-AT-HOME.COM B05GS53 0.43% 38,308 $1,937,211.00
ASPIRE SS ASPIRE GLOBAL PLC BF1YCK9 0.40% 246,572 $1,806,180.00
BALY BALLYS CORPORATION 05875B106 2.02% 150,090 $9,017,407.00
BET AU BETMAKERS TECHNOLO BJDXBQ1 2.17% 12,578,500 $9,691,439.00
BETCO SS BETTER COLLECTIVE BFYR3S0 1.61% 275,619 $7,196,275.00
BETS B SS BETSSON AB BMVT214 2.22% 1,192,881 $9,920,428.00
BRAG CN BRAGG GAMING GROUP INC BG5Q7H0 1.48% 2,781,605 $6,596,081.00
BYD BOYD GAMING CORP 103304101 1.92% 162,689 $8,607,874.00
CHDN CHURCHILL DOWNS INC 171484108 2.78% 56,894 $12,452,389.00
CTM SS CATENA MEDIA P.L.C BYZYH36 1.83% 2,176,740 $8,193,510.00
CZR CAESARS ENTERTAINMENT INC NEW COM 12769G100 2.74% 147,420 $12,259,447.00
DKNG DRAFTKINGS INC 26142R104 4.49% 329,636 $20,078,128.00
DMYD DMY TECHNOLOGY GROUP INC II 233277102 2.04% 451,152 $9,117,781.00
ENT LN ENTAIN PLC B5VQMV6 3.98% 929,508 $17,786,479.00
EVO SS EVOLUTION GAMING BJXSCH4 3.52% 120,690 $15,726,602.00
FDJ FP LA FRANCAISE DES BG0SC10 1.76% 172,215 $7,852,541.00
FLTR LN FLUTTER ENTERTAINM BWXC0Z1 3.70% 86,601 $16,535,014.00
GAN GAN LTD G3728V109 3.41% 518,284 $15,247,915.00
GIG NO GAMING INNOVATION BHNZKX3 0.36% 606,976 $1,631,588.00
GMR LN GAMING REALMS PLC BBHXD54 0.45% 4,179,961 $2,009,146.00
GNOG GOLDEN NUGGET ONLINE GAMIN 38113L107 2.15% 568,570 $9,631,575.00
GYS LN GAMESYS GROUP PLC BZ14BX5 1.86% 437,985 $8,298,146.00
IGT INTERNATIONAL GAME TECHNOLOGY SHS USD G4863A108 1.73% 438,260 $7,744,054.00
KAMBI SS KAMBI GRP PLC BMNQDC1 3.96% 311,414 $17,722,273.00
KINDSDB SS KINDRED GROUP PLC BYSY2K5 4.96% 1,448,530 $22,184,464.00
LEO SS LEOVEGAS AB BYY1RS3 1.92% 1,781,314 $8,574,061.00
MGM MGM RESORTS INTERNATIONAL 552953101 2.15% 263,916 $9,611,820.00
NLAB SS ENLABS AB B15QQH8 1.07% 920,743 $4,785,768.00
OPAP GA OPAP(ORG OF FOOTB) 7107250 1.69% 597,540 $7,572,419.00
PBH AU POINTSBET HOLDINGS BJYJ845 4.70% 1,665,497 $21,029,200.00
PENN PENN NATL GAMING INC 707569109 4.81% 178,561 $21,489,816.00
PTEC LN PLAYTECH PLC B7S9G98 2.70% 1,834,719 $12,078,909.00
RSI RUSH STREET INTERACTIVE INC 782011100 3.23% 730,274 $14,422,911.00
SCOUT SS SCOUT GAMING GROUP BF1PMV3 0.27% 181,801 $1,199,868.00
SCR CN SCORE MEDIA AND GA COM NPV CL A SB VTG SH(R/S) BNRMW58 3.97% 486,461 $17,770,159.00
SGMS SCIENTIFIC GAMES CORP 80874P109 2.79% 264,251 $12,480,574.00
SKLZ SKILLZ INC 83067L109 2.56% 317,911 $11,425,721.00
TAH AU TABCORP HOLDINGS L 6873262 3.06% 3,849,987 $13,666,282.00
WMH LN WILLIAM HILL 3169889 4.10% 4,827,104 $18,318,102.00
Cash&Other Cash&Other 0.39% $1,731,555.00

All that remains is choosing the best ticker symbol, Sportradar $SPRR has a ring to it?

Vetting $BETZ, and Sportradar.

Long micro-cap: i3 Interactive Inc., $BLITF (otc USD), $BETS.CN (PURE exchange, CAD). https://www.i3company.com/

Follow me on Twitter @firehorsecaper


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Photo: NBC

Operation Warp Speed:

The COVID-19 vaccine race officially goes into high gear with the announcement of USA’s plan to test the 6-odd top vaccine candidates across upwards of 150,000 volunteers (min. 100,000 pooled from VA hospitals and through participating pharmaceutical company recruitment efforts) in the coming months. The goal is to prove out both efficacy and safety in record time, with the lead candidates ferreted out by the end of 2020. The public-private funded ACTIV is a key driver of the initiative.

Accelerating COVID-19 Therapeutic Interventions and Vaccines (ACTIV):

(ACTIV) has identified four priorities in its effort to develop an international strategy for quickly developing therapeutics against the virus:

  • Develop a collaborative, streamlined forum to identify preclinical treatments
  • Accelerate clinical testing of the most promising vaccines and treatments
  • Improve clinical trial capacity and effectiveness
  • Accelerate the evaluation of vaccine candidates to enable rapid authorization or approval

Partners include 18 biopharmas, up from 16 when ACTIV was first announced on April 17.  Eisai and Gilead Sciences have joined a group of participating companies that included J&J and many other global biopharmas: AbbVie, Amgen, AstraZeneca, Bristol-Myers Squibb, Eli Lilly, Evotec, GlaxoSmithKline (GSK), KSQ Therapeutics, Merck & Co., Novartis, Pfizer, Roche and its Genentech subsidiary, Sanofi, Takeda Pharmaceutical, and Vir Biotechnology.

Cov-SARS-2 – What is does to the human body, from Valvular Heart Disease blog, valvereplacement.org :

“Cov-SARS-2 doesn’t put you into rapid ARDS (Acute Respiratory Distress Syndrome) like SARS and MERS did. It slowly and progressively attacks your surfactant production. Surfactant is what our lungs make inside the alveoli (air sacs.). This is like lube inside the lungs; it makes the tissue stretchy, and the more of it you have the easier those little sacs open (the less pressure it takes.). With lower amounts it is harder and harder to inflate each minuscule sac, like trying to inflate a new balloon vs one that has been blown up a bajillion times. Eventually as the surfactant gets low enough, if you are not pushing to keep those air sacs open, they’ll stick/fuse together at the edges and no longer inflate at all. You are slowly developing more and more atelectasis (collapsed air sacs) and your lungs are regressing to be like a premature infant, born without prenatal steroid treatment. You cannot breathe without a vent, eventually.

This is why (it seems) it is hitting newborn infants hard and leaving most children alone; children’s lungs after they adjust to “life on the outside” make a crap ton of surfactant; you have to lubricate lungs VERY well to allow them to grow. Surfactant production starts to drop statistically much more quickly after age 50y. Surfactant is used up faster in some lung diseases like asthma. Diabetes affects surfactant production. It fits. The science is not well enough researched to be sure, but so far what we know for sure has not refuted this model; so far everything fits.

The problem is the EVENTUALLY. What is killing people on vents is only partially their lungs. Most of it is organ failure, a cascade that has always been nearly impossible to reverse. If it were just their lungs we’d have a decent chance.

The trouble is that CO2 diffuses vastly more rapidly across the alveolar matrix than oxygen. This isn’t a problem, it’s great, usually. Our bodies use acid/base pH sensors to monitor our acid status constantly (CO2 is an acid when dissolved in blood) and so we change our breathing to adjust. If we have too much CO2 we breathe faster. If we are making acid (working out, fever, too hot, drank engine cleaner, septic/poor circulation), then the acid monitor tells us to breathe faster. We feel short of breath; we breathe faster/harder and that ramps up our oxygen delivery. Oxygen goes up as a lovely side effect; when oxygen goes up our tissues are happier and make less acid. Solid system. Almost every form of lung disease comes on quickly enough, or affects the TISSUE of the lungs in such a way that BOTH CO2 and O2 levels are affected, so the breathing difficulty is fairly readily apparent. We can tell by talking to you, getting a history, watching how hard it is for you to breathe.

COVID doesn’t do that. As it picks off your alveoli one by one, you lose lung function so slowly that you may not consciously realize it other than feeling fatigued or chest pressure. If your CO2 levels remain stable, and there is *just* enough oxygen to go into organ failure, you may just feel off/tired/flu-like. This allows it to remain silent. Eventually your oxygen will drop. When it drops enough for your tissues and organs to start to starve, they will make acid and you will start to work harder to breathe. By the time it is obvious that you need to risk the ED to be seen, your oxygen levels may be as low as 40% EVEN THOUGH YOU WALKED INTO THE ED UNDER YOUR OWN POWER. The lowest reported so far is 38% in a patient who DROVE to the ED and WALKED in and was TALKING ON HIS CELL PHONE. But he was in multi system organ failure cascade and was dead within 18 hours. Not because they didn’t have a ventilator; because his oxygen had been too low for too long and his inflammatory cascade from organ failure was too severe. As oxygen drops below 80% the blood becomes more viscous and more likely to clot, increasing stroke risk.

So help keep your lungs open. Deep breaths at least a few once an hour while awake. Blow up a balloon once an hour. Dig out that old incentive spirometer plastic thingy they sent home with you from your last surgery that you never threw away. Do it preventively, and especially if you get sick. Report to your doctor if it is getting harder to do by the day. Check your oxygen if you even think you are sick, with a pulse oximeter; preferably one that is not a knock-off piece of crap, but even the knock off ones are more likely to unnecessarily scare you than to miss a real low (though some are misfired so the HR and the Pox show up in reverse fields, but still work; work out a little to raise your HR and see what happens.). If your O2 is consistently dropping less than 95% let your doctor know, and insist on at least a Telehealth appointment if you are below 90%. Early lung exercises, and home oxygen, may be enough when the disease process is caught early; it’s easier to prevent a snowball from rolling downhill than to stop the avalanche.

The countries with robust in-home state care programs instead of hospital based focus, that stored up on Pox and on PEP flutter (home lung therapy devices a little more advanced than balloons and incentive spirometry) are finding if they catch the low oxygen before it causes shortness of breath and use home oxygen that the mortality rate plummets. Still preliminary, but the science is good.

Stay safe, stay well, as we slowly take more risks out of necessity. Please feel free to share the information above with friends and family, but if it’s not our immediate relatives then try to copy and paste to keep my name out of it; I don’t want to go viral. Information accurate insofar as I know as of May 2, 2020.”

Asset allocation:

In the BRRRR …. phase of global central banking, any stock with a ticker symbol, save opaque financials, have spouted wings since the March equity lows. Some investors clearly want more, all facets of COVID-19 plays from all corners of the planet vie for your investment dollars. Chose your horse, and you stable carefully, as the majority will likely be glue factory feedstock. With a well proportioned allocation to invest/wager on the outcome, this mosaic is meant to frame the optimal allocation across the COVID-19 field on offer.

Antivirals / Vaccines / Therapies:

There are 224 candidates in development for the treatment of COVID-19 currently. Given the breadth of the product offerings by the “big boys”, an allocation to them has much less risk than the single product “hail Mary”plays. My basket will include ACTIV name hopefuls.

$JNJ Johnson & Johnson – Yet unnamed adenovirus-based vaccine with 2 back ups. $1bln agreement with the US biomedical research unit BARDA to advance efforts. $380bln mkt cap. Subsidiary Janssen key player. Not a 5 banger, but needs to be in your C-19 basket. Spot $77, down 14% ytd. Like placing a wager on the favorite at 7:2 odds. Securing additional capacity deals enabling JNJ to make 1 billion doses by the end of 2021. Please assign a name to your drug, even as a place holder (Ivankavir?).

$GILD Gilead. Most recent Remdesivir test results show broad but subtle improvement in human trials versus placebo. Not enough cowbell for a $1k/treatment drug with IV only as a means of administering. 1.5mm initial doses to be donated, enough for 200k patients. It will make the grade for further testing, but will not make the grade for my C-19 basket. Note : owned in May 2020 via calls, since sold (June $70 strike sold $13). Spot $73.34. No C-19 wager, but I’d like Gilead to buy $SGMO for $40 in 2021.

Generic drugs made by $TEVA, Teva Pharmaceutical Industries Ltd., $MYL, Mylan NV, $SNY, Sanofi, $NVS, Novartis AG, $BAYN.BE, Bayer AG and others. Hydroxychloroquine, chloroquine. Hydroxychloroquine and chloroquine are anti-malarial drugs that have been tested in other outbreaks. Decades old, they’re available as lower-cost generics., as in $1/pill. Trump is a fan. Safety concerns abound, but if there is a role, especially on a supervised basis, these drugs should be in the mix. Carrying rocks straight uphill despite the cost advantage as the World Health Organization has temporarily halted testing on hyroxychloriquine in its COVID-19 drug trials pending more data because of safety concerns. The Lancet published a study which linked the drug to an increased risk of death and heart ailments.

$MRNA Moderna is the current COVID-19 darling. $69 and sporting a mkt cap of $25.6bln. Moderna’s mRNA-1273 utilizes messenger RNA to prompt the body to produce a key protein from the virus, creating an immune response. Moderna’s novel approach should have less safety concerns as well. A near term caveat is Moderna’s questionable executives who sold $30 million in stock concurrent with the stage 1 announcement (pre peer review) and promptly issued a secondary stock offering while the ducks were quacking ($1.25bln). Despite investors needing PPE to protect from the slime, it is hard to bet against this mRNA filly. Highly connected with $489 million in government funding (huge support in relation to their market cap). The NIH (National Institute of Allergy and Infectious Disease) ran the phase 1 trial. Phase 3 trials are  expected to commence as early as July 2020. Owned adult portion early (high 20’s) and sold in low $30’s. Seller remorse has impeded my re-entry (humans), but this name will be in the COVID-19 basket. mRNA-1273 will with near certainty make the cut for the “warp speed” program.

The Coalition for Epidemic Preparedness Innovations (CEPI) has granted considerable support to several names:CEPI has moved quickly and collaboratively to rapidly develop vaccines against the COVID-19 virus. CEPI are also collaborating with GSK and will use their pandemic vaccine adjuvant platform technology to enhance the development of an effective vaccine.

$GSK GlaxoSmithKline plc and Sanofi ($SNY) are working jointly to develop a drug Sanofi already employs in one of its flu vaccines. Unnamed viral protein vaccine (yet another, bad move as noted).

$SNY Sanofi. Oseltamivir, sold under the brand name Tamiflu, is an antiviral medication used to treat and prevent influenza. Formerly owned by Roche.

$ABBV. AbbVie’s HIV drug Kaletra is being tested, both stand alone and in concert with other drugs for the treatment of COVID-19. AbbVie have taken the approach of giving up patent rights to the drug to lessen shortages and open the floodgates to generic versions of the medicine.

$MRK, Merck has been quiet overall. Their animal drug Ivermectin (sold as HeartGuard for Dogs) a drug for parasitic infections is getting touted as having some potential. No human testing has taken place yet (i.e. all in vitro).

Edit: ** Merck breaking news** (Big) After me chiding $MRK for being “quiet” they pulled the trigger, 2 actually in the COVID-19 space, 4:45pm Tokyo time (3:45 EST); Merck Says IAVI and Merck Collaborate to Develop Vaccine Against Covid-19 >MRK
Merck and Ridgeback Bio Collaborate to Advance Development of an Oral Antiviral Candidate for Covid 19, EIDD-2801 >MRK, “Oral anti-viral”, Merck (MRK) to Apply its Industry-Leading Vaccine Development Capabilities to SARS-CoV-2 Vaccine Program Originated by Themis and Institut Pasteur, Merck To Acquire Themis >MRK, Merck Says to Make Any Vaccine or Medicine It Develops for Pandemic Broadly Accessible and Affordable Globally >MRK$.

Merck: Deal to Accelerate Development of Themis Covid-19 Vaccine Candidate >MRK
[7:49 PM] KENILWORTH, N.J. & NEW YORK–(BUSINESS WIRE)– Merck(MRK) , known as MSD outside the United States and Canada, and IAVI, a nonprofit scientific research organization dedicated to addressing urgent, unmet global health challenges, today announced a new collaboration to develop an investigational vaccine against SARS-CoV-2 to be used for the prevention of COVID-19. This vaccine candidate will use the recombinant vesicular stomatitis virus (rVSV) technology that is the basis for Merck’s Ebola Zaire virus vaccine, ERVEBO® (Ebola Zaire Vaccine, Live), which was the first rVSV vaccine approved for use in humans. Merck(MRK) has also signed an agreement with the Biomedical Advanced Research and Development Authority (BARDA), part of the office of the Assistant Secretary for Preparedness and Response within an agency of the United States Department of Health and Human Services, to provide initial funding support for this effort.

NVAX Novavax, NVX-CoV2373 has snagged $388 million of CEPI funding for their vaccine which is meant to bock the protein “spike” that the virus uses to attack/infect its host. Up 2x in May alone. $2.7bln mkt cap. Human trials are now underway. The mere mentions of human trials we enough to get the markets to giddy up over the Memorial Day long weekend and it appears this week’s winner’s circle will include a photo op with Novavax. Theoretically rational investors love flocking to the latest craze, crypto, cannabis and now C-19 vaccine hunting. As they say, if you can find a bubble, “buy it”.

$BNTX, BioNTech SE, $PFE Pfizer Inc. BNT162. BioNTech’s BNT162 is another messenger RNA vaccine, the German company is developing the potential preventative treatment with Pfizer. In China, BioNTech is co-developing the vaccine with Shanghai Fosun Pharmaceutical Group. Given the geopolitical situation between the quad tension points of  PRC, Taiwan, Hong Kong and the USA, solutions without a leg in China (esp. USA domiciled) are likely to garner more investment. 50% off its giddy highs of March. No micro-cap at $11.5bln. Makes the grade for the C-19 basket nonetheless.


Imperial College of London (private), unnamed. Researchers have received funding from the United Kingdom for their vaccine project and have said they aim to begin clinical trials in June. Not investable, it should be noted. The other direction is “game on” though. An MIT professor that invested in Moderna early is worth $1bln, on paper.


$AZN. Oxford University (private), $AZN AstraZeneca Plc, ChAdOx1 nCov-19. The vaccine is made from a harmless virus that’s been altered to produce the surface spike protein from SARS-CoV-2. After stating they had an 80% chance of success, lead Dr. Adrian Hill is now back-pedaling hard and stated this weekend that their chances are < 50%. $AZN have said they could have 30 million doses ready by September. There is less apprehension for European involvement than China obviously, but there is still a clear preference for a “made in the USA” label on a successful COVID-19 vaccine.


$VIR Vir Biotechnology Inc., $GSK GlaxoSmithKline Plc, unnamed drug. The companies plan to use the gene-editing technology Crispr to find antibody targets for the disease. (2 discrete candidates). Even the mention of “Crispr” tech has seen those plays catch a bid; $CRSP, $NTLA and zinc-finger leader $SGMO. $GSK stable has a couple of horses in the race and as such gets a full weighting. $VIR with a market cap of a mere $1.7bln, Vir is a baby amongst giants and is worthy of a place on your C-19 betting card. The stock, while up 170% ytd 2020 is 44% of its highs, incl. a -9% “bag tag” on Friday coming into the Memorial Day long weekend. In the C-19 shopping basket it goes.


$FUJIY, Fujifilm (pharma subsidiary). Favipiravir, sold under the brand name Avigan, is an antiviral medication used to treat influenza in Japan. The government has decided to postpone approving Fujifilm Holdings Corp’s Avigan drug for the treatment of COVID-19 until June or later. Shares slumped last week after it was reported that an interim study showed no clear evidence of efficacy for Avigan in COVID-19 cases.


$INO, Inovio Pharmaceuticals Inc.,  INO-4800. Inovio’s experimental vaccine uses DNA to activate a patient’s immune system. $14/sh, $2.2bln mkt cap. Up 4.5x ytd 2020. Testing underway in China, a caveat for me on this one (with Beijing Advaccine Biotechnology).


$BTI British Tobacco. Drug; Tobacco. In April, BAT announced that its biotech subsidiary, Kentucky BioProcessing (KBP), was developing a potential vaccine for COVID-19. Since then, British Tobacco have been completing pre-clinical testing and are pleased to report the potential vaccine has been shown to produce a positive immune response. As such, the vaccine candidate is now poised to progress to the next stage which will be Phase 1 human clinical trials pending FDA authorization.

There are any number of other names, some worthy of vetting, and even perhaps rental from an ownership perspective, but they will not be in the “ACTIV” basket.

$SRNE, Sorrento Therapeutics, Inc.  $4 to $10 and back to $5. Their approach seems “far fetched”.



$REGN Regeneron Pharmaceuticals Inc. and Sanofi.  Kevzara The biotechnology drug targets a pathway known as interleukin-6 or IL-6, which can affect inflammation. It’s already approved for rheumatoid arthritis and could help very sick Covid-19 patients in respiratory distress. $REGN has run like a scolded dog, up 53% ytd 2020. $570/sh.with a $64bln mkt cap.


$RHHBY Roche Holding AG, Chugai Pharmaceutical Co.,  Actemra, alone or in combination with the flu drug Avigan. Actemra is an arthritis medication that also targets IL-6, like Kevzara does. Roche is enormous, > $300bln mkt cap. In the basket, but equal weighted (not cap weighted as most ETF’s are).


$TAK,  Takeda Pharmaceutical Co.,  Convalescent plasma (TAK-888). Takeda is exploring whether blood plasma from recovered Covid-19 patients, which can contain infection-fighting antibodies, can be used against the illness. Similar treatments have shown promise in treating other serious infections. The Japanese drugmaker plans to start clinical trials in July and could file for approval of a plasma-derived treatment for Covid-19 in some regions by the end of the year. U.S. studies will be done with the NIH. The FDA has also offered guidance to researchers and hospitals that want to use convalescent plasma on an experimental basis.


$INCY  Incyte Corp., $NVS Novartis AG, Jakafi. Jakafi, or Jakavi as its called outside the U.S., belongs to a class of drugs known as JAK inhibitors that target inflammation and repress cellular proliferation. In April, Incyte and Novartis started a 400 patient trial to address a potential deadly reaction to the disease, called a cytokine storm, in which a patient’s immune system kicks into dangerous overdrive while trying to kill the virus. The drug will also be available for emergency use for Covid-19 patients in the U.S.


$LLY Eli Lilly & Co.,  Baricitinib.  Baricitinib, an existing rheumatoid arthritis drug marketed by the brand-name Olumiant, also belongs to the class of drugs known as JAK inhibitors.


Sources: Bloomberg, Company Websites., Press Releases



Test kits (PCR):

$QDEL; 4 key investable names; $TMO Thermo Fisher $340, $134bln mkt cap. Roche $RHHBY $44.70 mkt cap $310bln. $QDEL Quidel Corp, $173.50, mkt cap $7.3bln and $QGEN Qiagen NV $43, mkt cap $9.8bln. As only 25% of the C-19 allocation is to “picks & shovels” inclined to go with $QDEL for full allocation. USA baby, San Diego, CA headquarters and the Cadillac player in the diagnostics/testing space.

Thermal imaging:

$FLIR $45, mkt cap $5.9bln. Orders up 7x yoy. GM latest big order and more on the follow as the US re-opens. Turn key solution. Little upside for going cheap on this equipment in the current environment. Demand, pricing power, service contracts. Winner winner chicken dinner. Get in the C-19 basket FLIR Systems.


$MMM, 3M Down 19% ytd. Sales down 11% in Q1 in the middle of a pandemic. No thank you as an investment, but keep those critical N-95 masks coming.


$IBB iShares Nasdaq Biotechnology ETF is up 11% ytd in 2020. A stellar result without the idiosyncratic risk of bespoke single name exposure, but it does not give one much COVID-19 name exposure. The ETF hold 8.9% in Gilead, $GILD which as noted I would not buy presently. Also included is 6.6% in Regeneron, $REGN, 2.5% in $INCY, Incyte Corporation and 2% in Moderna, $MRNA.

$IBB monthly returns. etfreplay.com


Arm you immune system, regardless of age. Sleep, sun, a good diet, vitamin C, vitamin D (indicated low in 90% of COVID-19 patients), zinc and Quercetin. It is possible that no vaccine is found, or the ones that are developed work with efficacy levels that render them near useless. I’m no authority, nor a doctor, but remain hopeful that progress will be made on the slated timetable and that we have some pharma cover by the first half of 2021. The global A team is on the case.

Japan has lifted the State of Emergency for the nation and international travel restrictions should be relaxed by month end (China and S. Korea had been pressing on this point). Japan has had a total of 16,581 COVID-19 cases and 830 deaths.  The US is 2.6x bigger from a population perspective, but is still adding a comparable amount of cases per day (1,700,000 total cases and 100,000 deaths). As previously noted, obesity rates are 4% in Japan versus 35%+ in North America. BGC vaccination for TB seems to result in milder cases for countries that employ it.

Doctors/scientists  have successfully mapped the genome for Cov-SARS2, the strain of the coronavirus that causes the COVID-19 disease. It is spliced like a satanic DJ might mix his favorite rap, a bit of HIV, a touch of SARS, a dash of MERS and an Ebola finisher. It is no coincidence that the “B-side” of formerly attempted drug approvals for these maladies are getting airtime once again. Drugs used in combination are likely to have greater success, given the complexity of the riff, but the time line for testing is obviously elongated if this path is eventually deemed optimal. 6 choose 2 has 15 combinations. 7 choose 2 has 21 combinations. 7 choose 3 has 35 potential combinations, you get the idea. Vaccines are hard.

Europe’s COVID-19 cases crested well before the USA and even though Europeans are more inclined to go on vacation than back to work, their economic numbers should get “off the mat” ahead of the USA. (Near term € positive).

The 16 highlighted names (i.e. names in bold) on the vaccine / therapies / anti-virals space should give you broad of the exposure to the space (equal weighted despite marked market cap differences). The 2 ancillary names ($QDEL & $FLIR) should do well stand-alone, regardless of who comes out #1 on the vaccine.

Trade safe. Allocate prudently. Set stop losses. Casting such a wide net, re-balance periodically, increasing the weight in winners and cutting under-performers. This is going to take some time, with perhaps 4 core name long by early 2021 as you pare the laggards. A fast moving space. Correct as I could make it at press time, 4:22pm Tuesday May 26, in the year of our Lord 2020.

Regards, Caleb Gibbons, CFA, FRM


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As last outlined in 2017, the State of Illinois is insolvent with shrinking options to avoid filing Ch.9 (the section of the US bankruptcy code available to financially distressed municipalities). Illinois has a population of 12.7mm, making it the 6th most populous state after CA, TX, FL, NY and PA. The Il. population has fallen 6 years in a row as people flee the highest state & local tax burden in the country (yes even higher than the “left” coast CA).

Start here:


Without significant public employee pension reform, bankruptcy is a near certainly for the State of Illinois (18 mths – 2 years). As outlined below, pension reforms have been stymied to date, there is no credible case to throw good money after bad in Illinois.

The long required pension reforms are largely common sense; lower payout levels, paid later for those still working, no COLA until 90% funded status is achieved (+3% fixed per annum fixed currently), and gate the defined benefit plan for new workers who will receive comparable support in a defined contribution 401k like plan (like the bulk of the US working population). Pension reform is happening on a broad basis across the country, especially for new public sector employees, but Illinois legacy plans remain sacrosanct.

The average public pension funding level in the US was 70% as we entered 2020. Public pensions garnered positive returns in the last 6 months of 2019 of 6.1%, but have given back approximately 9% in the first 4 months of 2020 (The Year of the Rat, and the Bat bred COVID-19 coronavirus pandemic). The USA country-wide, (i.e. all states) pension shortfall stands at $4.1 trillion. Illinois has a current pension shortfall of $137 billion (against a current pension liability of $214 billion for a 36% “funded status). The rating agencies have acted accordingly, taking Illinois to the precipice of junk at Baa3/BBB- (negative outlook with both). Affordability of retirement programs remains a long terms source of municipal credit stress. Other post-employment benefits (OPEB) account for up to 28% of current unfunded pension liabilities, with the provision of healthcare coverage accounting the the lion’s share. Illinois has never reported their OPEB liability, but is expected to do so from 2020, according to the Governmental Accounting Standards Board. Given the generous public pensions in Illinois, their OPEB liability is 2x the national average on a per capita basis and is largely expected to take their total unfunded pension liability to $210 billion from the current $137 billion (+$73 billion, not “new” by any means, but recognized for the first time).  This level of chicanery might be considered comedic to some, but to me it increased the inevitability of Illinois bankruptcy. Illinois have funded their OPEB liabilities at 0%, with 20 other US states in the same leaky boat.

As noted in my prior write-up municipal bond investors are a conservative lot. 2/3 invest via mutual fund and ETFs, rather than in individual bond issues. Some of these funds have strict investment guidelines to only hold investment grade bonds, leaving the municipal high yield space to specialists in that area.  Little new money is getting put to work in Illinois municipal bonds given the perilous rating, sinkhole pension system, gross mis-management, rampant crime, bottom quartile education system and untenable tax burden at all levels. Most portfolio managers expect Illinois selling pressure as longs seek skinny exit doors on a loss of investment grade ratings.

The City of Chicago situation is even more dire, with the pension plans funded at 23%. The pension underfunding issue is serious in many states, but Illinois is a special case of financial co-morbidity. Illinois incorporated a pension protection clause in their constitution, going forward pension can not be “diminished or impaired”. Illinois pensioners have case law to back them up as well; in May 2015 the State Supreme Court rule unanimously ruled that no cuts to pension are possible, overturning a 2013 pension reform bill which planned to reduce pension costs by upwards of $160bln over 3 decades (i.e. they know what has to be done, but they can not do it, full stop). The other issue that has turbocharged the pension shortfall numbers is a “hard-wired” 3% increase in benefits per annum (this was approved in 19909), having the stand-alone effect of doubling the state pension liability every 25 years. Few will pity those pensioners found in harm’s way when the jig is up. The number of Illinois pensions with payouts > US$100,000 per annum have increased by 74% since 2015. It appears that from a base case of “zero pension” is the only viable starting place for Illinois, and this can only happen with a Ch.9 bankruptcy filing. Taking a quick look in the rear view mirror, in 2008 Illinois was rated Aa2/AA with a pension shortfall of $54.8bln (1.5x bigger in 2020, 12 years later).

Illinois has 5 discrete state pension systems:

Teachers’ Retirement System (TRS). The biggest covering teachers across Illinois (ex Chicago), 130,000 active members, 95,000 retirees (total membership 406,000). The largest pension in Illinois. $122 bln liability, 40% funded 2019.

State Employees Retirement System (SERS). 87,500 members. $47bln liab. 36% funded 2019.

State University Retirement System (SURS). 231,000 members. $42bln liab. 44% funded 2019.

Judges’ Retirement System (JRS). 972 members. $2,7bln liab. 36% funded 2019.

General Assembly Retirement System (GARP). 470 members. 371 million liab. 15% funded.

Illinois Municipal pension plans:

Illinois Municipal Retirement Fund (IMRF). The 2nd largest public pension plan in Illinois. 410,000 members. $44.5bln liab. 90% funded 2019.

Global pension asset stand at $46.7 trillion, approximately 52% of GDP. Asset allocation is fluid, but a snap-shot reflects 45% allocated to equities, 29% to fixed income, 12% to alternative investments and 3% in cash. Low interest rates and higher volatility in risk assets, such as equities, clearly increase the risk profile for public pension.

Global GDP stood at $88 trillion coming into 2020. The negative impact of COVID-19 is estimated to impact global GDP by -5.8 to -8.8 trillion in 2020 (-6.6 to -10% GDP) according to the latest estimates by the ADB this week.

Illinois Debt:

Illinois debt clock; https://www.usdebtclock.org/state-debt-clocks/state-of-illinois-debt-clock.html

With $165 billion of General Obligation (GO) debt and a state GDP of $868 billion (1% of global GDP and 50% of Canada’s GDP), direct debt is optically manageable at 19% of GDP ($13k per resident). The 2nd layer of the onion lays bare the reality that Illinois is an ill-funded pension plan with a small state government attached. Of their annual budget, a full 25% is now consumed by pension servicing (the avg. of all states is 4%). Of the last $10bln contributed to the state pension, $4bln went toward new pension accruals (ARC, actuarially required contributions) and $6bln was expended for servicing. Illinois has issued $25.8bln of pension obligation bonds in aggregate, which are issued as taxable instruments. Illinois has more aggregate pension debt than 41 states. General obligation bonds are tax-exempt with respect to income tax (Federal for all, as well as state and local exempt for Illinois residents). Illinois recently (May 2020) issued $750 million in 2045 maturity GO’s that were 4x oversubscribed. The issue printed at 5.85% yield with reference 10 yr UST yielding 0.652%. With the top federal tax rate at 37% this has a taxable equivalent basis yield of 9.28% (double digit yield for Illinois residents).

The yield on $HYD, the Market Vectors High Yield Muni ETF is 4.64%. $HYG, iShares High Yield Corp Bond ETF yields 5.56% presently ($15bln AUM). The largest investment grade municipal ETF is $MUB with $15bln AUM and it yields 2.39%. The grey-haired investors in muni bonds to date have preferred mutual funds to ETFs, as reflected in their assets under mgmt (AUM). The biggest, Vanguard’s Intermediate Term Tax Exempt Fund has $70bln in AUM, is flat over the last 12 months and yields 2.58%. Nuveen’s High Yield Municipal Bond Fund (18bln AUM) is -9.5% over the last 12 months and yields 5.62%.

Chapter 9:

Municipal bankruptcies are relatively rare. Defaults in the municipal space have largely been restricted to bespoke revenue bonds which rarely affect the upstream, ring-fenced GO issuer. Detroit filed Ch. 9 on 2013 with $18.5bln of debt, the largest default to that point in US municipal finance. Puerto Rico had $70bln of debt in their bankruptcy in 2016 (their pensions were funded in the mid teen’s at the time of tap out, 14% blended).

Illinois will  be a different kettle of fish altogether, much bigger, more complex with more potential knock-on effects. An investment grade rating (just I might add, with a negative outlook by both agencies) is hardly warranted at this juncture and few portfolio managers would buy the credit in the perilous environment we find ourselves. Should Illinois file Ch. 9, the recovery rate would not be stellar (loss given default, LGD) as they have already been to the pawn shop and monetized what they can. Examples include revenue bond secured from everything from toll roads to tobacco settlements. Illinois has even gone so far as to sell their prisons to private operators.

Illinois pensioners might wager that they would be able to secure a higher recovery rate than general unsecured creditors (namely general obligation bond holders) as we saw in the Puerto Rico case, but the degree of “outperformance” might seem moot when GO bond holders get 50¢/$1 and pensioner get 55¢/$1.


Of the 4,058 COVID-19 deaths reported thus far in Illinois, a full 50% have been nursing home residents. This theme has been prevalent across the country, and the world. Japan’s population is 10x bigger than Illinois at 128 million yet COVID-19 deaths stand at 725 (yes, seven hundred and twenty-five). To have a comparable case fatality rate (CFR) experience, Illinois would have 73 deaths (roughly equiv. to two month of gang violence in Chicago). Japan has an older demographic than any country in the world. Rather than effect a hard lock-down, Japan has chosen a “cluster” C-19 treatment approach. Some credit has been given to universal BGC vaccinations (for TB) and that the COVID19 strain in evident in Asia appears less virulent, but all remain perplexed at the marked CFR discrepancies between countries. Notably, rates of obesity in Japan are 4.3% versus 36% for the USA and in the “at risk” demographic of 65+ I would argue the obesity rates in Japan are below the 4% average. I’m not a Doctor, this will be a subject of great debate and study as well navigate the “new normal” in 2H 2020 and beyond.

Illinois residents, save essential services,  have been largely home bound since March  7th (Shelter-in-place order remains in effect). Government spending, esp. for healthcare have skyrocketed while sale tax revenue have plummeted (state income taxes to follow). Illinois, via Senate President Don Harmon has requested a $41.6 billion bail-out from the federal government (largest items include $14bln to close the state revenue shortfall, $9.6bln to aid Illinois cities, $6bln for the unemployment trust fund aid and $10bln for “kick the can”pension servicing.

Pictured: Illinois Governor Pritzker continues to press that the Illinois remain effectively closed until the novel coronavirus is all but defeated (BMI undisclosed, seems high).

Senator Majority Leader Mitch McConnell has been vocal in pushing for the bankruptcy route for failing states, rather than kitchen sinking state pension bail-out in future COVID-19 relief bills. Mitch’s home state of Kentucky makes Illinois look financially prudent with the worst funded pension of the contiguous states with a laughable 16% funded rate. Kentucky is gracefully a small state in terms of significance and the unfunded pension liability is $36bln in absolute terms, a paltry 26% of Illinois $137bln shortfall (Puerto Rico was blended at about 14% across their 4 plans when they tapped out, for reference).

Public sector employment in the US averages 14.5% (State & local government employs 20 million in the USA). The 30 million currently filing for unemployment claims are largely from the private sector with a heavy weighting in the  food & beverage, entertainment, transport and hotel sectors. None of the hundreds of thousands of Illinois public sector workers have been furloughed and the pension benefits continue to grow at a factor of 1.03 per annum.

14% or 1.8 million Illinois residents collected food stamps in 2019.

The latest government largess proposal, the $3 trillion HEROS Act, approved by the House of Representative last week, includes sweeping support for a pension plan bail-out via Division D, Title I, the Emergency Pension Plan Relief Act of 2020 (there are no benefit cuts proposed in the formula, big surprise). There are very long odds on this bill garnering broader support in its current form (as in ZEROS, a more appropriate bill name than the flag-wrapped swill the lobby groups try to pass off as 1st growth wine).

The Federal Reserve balance sheet has gone from $2.7 trillion to $7 trillion with remarkable speed (quantitative tightening to quantitative easing infinity). Monetary policy (short rates) went from the early innings of a tightening cycle in late 2019 (2.25% Fed funds) to zero inside of 6 months. Unemployment went from record lows (full employment) to 15% (20% + if fully reported) over the same time sub 6 month period.


Is is premature to think we are “out of the woods” and the global municipal finance implications have not been fully vetted , let alone understood and absorbed. Those modeling “cliff risk” should have a delta of > 0.7 assigned to a State of Illinois default on an 18 month timeframe. EM will have more than enough fireworks as well, but I see Illinois as the “big 1” in the US municipal market. China’s lack of access to USD swap lines mean that devaluing the Yuan ($CNY) is their only near term course of action. The word for 2021 in global municipal finance will be austerity. MMT is poppycock. The near term demon to be slain is deflation. The only trade I like for more than 5 trading days is short the € versus the USD.

There is not enough yield pick up to venture into IG (taxable or tax-exempt), let alone HY, even with the goosing the Fed has effected with their announced and recently under taken HY ETF purchase program. A municipal credit support program is in the works, 100%. The last highly effective program for munis was the Build America Bond (BAB) program which, while limited in size and tenure ($147bln 2008-2012), the program had the desired effect of bringing in muni credit spreads, flattening the muni credit curve and providing funding to liquidity starved sectors of the muni market (healthcare/acute care in particular). The follow-on program linked to an infrastructure build out, America Fast Forward (AFF) never came to fruition, but most, including the writer, believe that infrastructure will be the next and on-going focus.

Trade safely. Cash is a viable investment alternative.

Follow me on twitter @firehorsecaper


Caleb Gibbons, CFA, FRM


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Carvana, the “disruptive” used car dealer, aka the “Amazon of used cars”, has had a tumultuous 2020 and it is only May. Entering the Year of the Rat at $88.00/share, the well-baited trap of mid-March saw a 65% swoon to sub $30.00 before a miraculous resurrection to the current $98.00 print  (hundy roll intra-day 8th May 2020), now sporting a market capitalization of an eye-watering US$16bln (within 15% of ATH). Nausea inducing moves are not new for the “Glengarry Glen Ross” of the on-line car business. $CVNA IPO’d a mere 3 years ago in May 2017 at $15.00 (15mm shares, raising $225mm for early backers and still Chairman, Ernie Garcia III). Day 1, $CVNA trade went over like cotton candy at a diabetes convention, -26% to close at $11.10. Most IPO’s are “priced to perfection” to allow for a 20% bounce out of the gates, as Cloudera $CLDR did on the same day, co-incidentally at the same offering price base of $15. Cloudera may have had a heavenly “cloud” story, but the stock has swooned 44% since, and it currently trades $8.50/sh., much in contrast to the near 9 banger Carvana has delivered since that inaugural trading day in 2017.

The cloudy macroeconomic forecast need not be outlined here, COVID-19 has the USA in a near cryogenic state. Hertz may file Ch. 11 in May as 500,000 rental cars sit idle across the country. Even the daft can connect the dots with respect to the knock on effects. Used car values will fall as the ranks of the unemployed swell and many still “working for the man” do so from a distance. 30% of the gasoline usage in the US  ̶i̶s̶  used  to be attributed to commuting, for work. Things will come back gradually as shelter-in-place orders are lifted, clearly. Delinquency numbers in the auto space were not looking good in Q1 2020, before COVID-19 hit. Delinquency rates will certainly take out the previous highs of 5.27% and may well crest in the low double digits, depending on what Mnuchen and his merry men have in reserve (Cash for clunkers II, et al). Carvana does not bear the full brunt of this, they are after all in the moving business, not the storage business. Conforming loans are securitized, largely through Ally Financial (GMAC beginning with a couple of “bolt on’s”). The CRVNA ART (Auto Receivables Trust) has been used liberally, netting >$2bln in aggregate funding. A well timed follow on equity offering (13.3mm shares at $45) also raised $600 million. Survival through 2021 is not in questions, but valuation is another matter all together.

There is no “e” as in earnings with Carvana yet, this is a disruptor/unicorn after all.  Price to book is 157x. Profitability was slated for as soon as 2023, on the pre C-19 glide path.

The flashy, impressive Carvana car vending machines may not have their buttons pressed for some time. Great marketing for certain and might even make the Idiocracy II sequel for visual effect. Adam Neuman will not be picking up his Softbank financed Cerulean 2021 McLaren at a Carvana fulfillment “vending machine”. This is exclusively a “used” car business, despite the median 71 month loan term and interest rates from 13.47-13.84% for their “prime” (FICO 635, sub-prime is < 620) rated borrowing customers. Sub-prime APR, as per their latest securitization (1st in the sub-prime category) is 19.2% (should your credit card already be maxed).  There are 24 bespoke car vending machines in operation presently and their most recent regulatory filing notes new vending machines are “on hold”. The difficult to re-purpose structures are 8 stories high and can inventory 32 cars each for a paltry 768 automotive treasures ($18,400 avg. price in 2019). LTV 101.85% (assume fees blended in). $CVNA’s average customer is not the typical prime FICO score customer preferred by the money center banks. 700 FICO scores can finance a new car in the low 5% range and used in the mid 5’s for reference. An $18,500 used car financed at 100% LTV for 71 months has a monthly payment of $380 for a Carvana “prime” loan, sub-prime is $440 ….. for almost 6 years. Even with extended and enhanced unemployment benefits, there is a high probability that many car payments do not get made (more than was modeled in any event) and the now discounted car comes back for eventual resale. The arms-length owners of the Auto ABS will also be affected of course, but funding avenues will narrow for Carvana and those still open will be more expensive. Financing via the bond markets unsecured would be difficult given Carvana’s CCC rating.

Of the listed car rental companies, Avis has proven more savvy to date, building a war chest through new 1st lien debt ($400mm 5 year, 10.5% coupon priced at $97.00). Avis is rated B+, Tesla B3/Caa1 in comp.  Hertz ($HTZ $3.00 $434mm mkt cap) has one foot in the grave and the other on a banana peel. Lenders have given Hertz 2 weeks to figure out a viable option(s). Carl Icahn is in the mix in a big way and I think a solution will be found, one that is good for Carl, if nothing else. When GM was bailed out after the GFC it was largely to salvage the 250,000 pensioners. Hertz in comparison has 38,000 employees (few defined benefit, presumably) and Carvana has 3,900 car sales concierges, as a point of reference.

I last looked at establishing a short in the used auto space in mid 2018 via $CACC (Credit Acceptance Corp) which currently sits at $314.80 with a mkt cap of $5.7bln with a 9 p/e (sub 3 price/book to boot). https://ibankcoin.com/firehorsecaper/2018/06/17/sub-prime-auto-loans-get-off-the-gas-short-via-cacc/#sthash.1Cc2E7LK.dpbs I was talked off the ledge at the time (short never established) by sage fellow Exodus members (Pelicans Room members), it should be noted.

Much of the story the Carvana “believers” lean into is the tremendous growth Carvana offers. They have doubled revenue every year for the last 6 years. Carvana is eventually hoping to sell > 2 million cars per year, heady aspirations indeed. The 2020 estimate was 255-265k prior to COVID-19, up from the 177.5k  sold in 2019. Cash flow was negative 990 million in 2019 (-280mm in 2017, the year of the IPO for reference). The other revenue drivers for Carvana, beyond 100% gross margin advances revenue are vehicle service contracts (VSC’s) and GAP (Guaranteed Asset Protection) waiver coverage (topping up insurance payout to amount owed). Management is also a questions mark for me as the Garcia clan have a checkered past (go figure, used cars to “dented” credits, Forbes Magazine seems to have the most in-depth coverage on the inter-web). Base salaries of key execs; Ernie Garcia III $885,000, Mark Jenkins, CFO $735,000, Ben Huston, COO $735,000.

Ernie Garcia II, billionaire used car salesman, on the day of his son’s $CVNA IPO in 2017. Ernie Garcia III, CEO & Co-Founder was 34 at the time of the IPO (not pictured, he was feeding).

Used cars in the USA have an aggregate valuation of $1.5 trillion with $1.3 trillion of debt against it and with the likely impairment going forward, at best, they now match at $1.3 trillion (on paper), negative after Carvana facilitation. JD Power reported wholesale auction value for the week ended April 12th at  -83% yoy.

Key competitors: #1 CarMax Inc. ($KMX), Group 1 Automotive ($GPI), Cars.com Inc. ($CARS).

Much of Carvana’s growth has been through expansion of their coverage markets;


Note: NOT a COVID-19 chart, Carvana corporate slide; markets/penetration.

I think the curve flattens for Carvana quicker than it does for COVID-19, and would not be surprised to see their coverage platform turtle back to Q1 2019 levels and < (i.e. sub 100 from 150). Carvana has a very high short interest and many potential shorts run for the hills when the short interest exceeds 1/3 of the float, let alone 50%. Availability of borrow and the cost of same are critical factors when juggling sticks of dynamite. This appears to be priced for near perfection in the midst of a horror film, for all facets of the automotive sector. One for the watch list in any event. Uber (pun intended) bulls think that Bezos might tuck Carvana into the fold for a run at yet another critical “artery of the American consumer”, but I think Jeff would dry heave at the valuation and deem the Carvana moat puddle-like in terms of both breadth and depth. 100 key automotive hires along with some online mojo wave-ins like www.bringatrailer.com and/or Vroom and Amazon would be off to the races in the space without a Softbank/Visionfund like check being written.

No position at the time of writing in Carvana $CVNA. Vetting a 2% “starter” short. Target price $25.00 (-75% from spot $98.00). Having a measured downside is important with some of these high flyers, just ask anyone short $BYND, $W, $SHOP,  or $PTON this week. Option based strategies to be given prime consideration. I’ll post eventual trade entry via Twitter with an update to this blog post as well.

Trade safe. Get under the hood. Analyze, reflect, size, act, & hedge.

Follow me on twitter @firehorsecaper


Caleb Gibbons, CFA, FRM

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Should the insurance sector be left for dead, or is there any semblance of value beneath the multi-layered COVID-19 ruble?

No sectors were immune from the March 2020 left-tail quickening that brought global equities to their knees in a snap reaction to the “Chinese virus” (POTUS’s term), COVID-19’s seemingly inevitable global roll-out, still underway.

Chart: total return, by year: $KIE, the SPDR Insurance ETF, while smartly off recent lows, sits -26% ytd in 2020 (updated through 29 April 2020). $XLF, the much larger and broader Financial Services SPDR ETF $XLF is down 23.4% ytd in comparison (largest weighting in $BRK.B at 15% with 12% in $JPM).

Early estimates for COVID-19 insured losses for the global insurance industry come from UBS which estimates a wide range of US$30-$60 billion. Included in this estimate is $7-$22bln in non-US business interruption losses and $8-$16bln in credit insurance losses, primarily re-insurance. The lock-down has hit the service led US economy particularly hard. Paycheck-to-paycheck has taken on new meaning for throngs of employees caught in the maelstrom. Not enough time has passed to see the full repercussions. Decisive action has been taken for certain, with the USA leading the charge. Monetary policy has spent its wad at this juncture, save negative rates which perhaps can not be ruled out in the “upside-down” MMT world. The fiscal stimulus measures announced have been awe inspiring with respect to both size and breadth, the tally in terms of cost now within a stone’s throw of 30% of GDP. As Canada’s Poloz (BoC Governor, this week) noted at their last meeting, “A fireman never gets accused of using too much water.”

Chubb Insurance ($CB), headquartered in Zurich, Switzerland, CEO Evan Greenberg cautioned last week that the industry is at risk of insolvency if open-ended business interruption claims (even those policies where losses from the peril were explicitly excluded from coverage) are enforced.

Source Bloomberg, “Lawmakers in states including New Jersey have considered legislation forcing insurers to pay out certain interruption losses for small businesses, with some bills requiring insurers to pay out even if policies explicitly excluded losses from viruses. The American Property Casualty Insurance Association has estimated that companies with 100 employees or fewer could see business continuity losses of as much as $431 billion a month, compared with the $800 billion in total surplus for all U.S. home, auto and business insurers.” Mr. Greenberg expects eventual COVID-19 claims to be the biggest ever recorded for the industry, which would tighten the UBS estimate band considerably to US$45.1-$60bln.

Greenberg, clearly sensing the legal landmine that lies ahead, urged Congress to grant some broad legal immunity for the insurance industry. Insurance regulation is a combination of State and Federal responsibility in the USA, roughly weighted 70%+ State. Court decisions are extremely important and historically when it comes to policy language interpretation, the courts often rule in favor of the insured. Evan further noted that the  loss potential from a pandemic are infinite and that insurance company balance sheets are finite. His father Hank Greenberg ran AIG, the name should be somewhat familiar. Chubb has a mkt cap of $51bln and is 32% of its 52-week highs versus the more opaque AIG, sporting a market cap of $23bln and an oil like 50% off its early 2020 pinnacle.

Chubb CEO Greenberg is correct in noting that the insurance industry is a critical part of the plumbing of the economy. Global insurers manage over US$25 trillion in assets, the majority allocated to bonds (credit risk).

Chart credit Twitter; @the _chart_life

GFC; AIG Financial Products

AIG was the biggest seller of credit default swaps on the street in 2007. Their comments as we rolled through the summer of 2007 were like a fortuneteller. “It is hard for us, without being flippant, to see a scenario within any realm of reason that would see us losing 1 dollar in any CDS position.” A short 5 months later AIG wrote down their CDS book by > $5bln. AIG’s $20bln Muni GIC (aka Investment Agreement) book soon took write downs as well as they guaranteed “make-whole” on a loss of AAA/Aaa. The initial Troubled Asset Relief Program (TARP) was sized at US$700bln. It was a source of a great deal of consternation as the time, the gob-smacking size of it. Those were the days. Instead of taking equity stakes in the targeted firms, a full 1/3 ($235bln)was clawed back via various and sundry fines for all forms of malfeasance. There were no perp walks and Martha Stewart served more time solely that the lot of them collectively.

To get back on point, 9-11 was the largest single insured loss in history, to date. $45bln in insured loss were paid. 2/3 of the eventual losses were paid my re-insurers (the mechanism by which insurers lay-off/hedge their risk). In a parallel to COVID-19, legal matters became paramount. Most policies at the time were “All-Risk Policies” (covering all possible risks, save those explicitly excluded in the policy text) versus what has now become more common, namely “Named Perils” policies. A long standing exclusion on insurance policies is war, but there can be others, such as flood, earthquakes (if covered, often at a lower absolute level here in Japan, given the prevalence, “Ring of Fire” and all).

Those of us working/living in lower Manhattan on 9-11 thought it our last loss, as in the “final loss”. I was working that morning at One Liberty Plaza across the street from the WTC towers, already in the thick of it and gazing on a brilliant blue sky in lower Manhattan between morning market updates calls. I was on the phone selling the days wares when the 1st plane hit the North Tower , changing our lives henceforth. More screens than a sports bar were reporting perhaps an errant Cessna struck the formidable 1 WTC tower. From our close proximity the sounds, the evidence of it all (i.e. flames, debris falling)  told another story all together, a more sinister version of events. Our trading floor was gracefully on the 2nd floor and a small grouping of us escaped One Liberty Plaza (OLP), pulling the fire alarm as we exited, well before 9am. I had just moved into a flat on Park Row and was concerned my fiancée might be in harm’s way, walking our dog in the vicinity. Most colleagues were held inside OLP to reduce the risk of injury from falling debris. From my bedroom window I saw the 2nd plane strike the South Tower ….. this is a terrorist attack honey, let’s get to street level. We watched the ferocious fire burning 4/5th up the North Tower and mused how it could possibly be extinguished. It took less than 2 hours for One WTC (WTC 1) to succumb to the litany of hell like temperatures. Fire & rescue loudspeakers warned a few minutes prior and we backed our way towards Brooklyn Bridge which Park Row filtered directly into. I was filming the tower at the time of the critical “break”, when the substructure could no longer support itself. The building fell straight down, like a demented Wile E. Coyote cartoon. I spun on my heel and tucked the Frenchie (Yukon) under my arm as we jetted for escape across into Brooklyn. News of the concurrent strikes blared from car radios with doors ajar and early estimates were that as many as 50,000 American may have perished in the co-ordinated attacks. The dust cloud unleashed by the collapse of the North Tower was tremendous and given the sinister, other worldly funk we found ourselves in my thoughts as the cloud enveloped us were “Did these terrorists fill these planes with Sarin gas to boot?” (As Aum Shinrikyo had perpetrated in Tokyo subway 6 years prior, killing 13). The air was gritty, but breathable. We made it eventually to our disaster recovery site in Long Island City and found organized chaos. Our chairman was at the disaster recovery site are noted he had one of the few hotel rooms in the area booked, flipping me the card key with directions. French bulldogs and paring risk in dollops of a few million $ per basis point of risk exposure did not mix well, apparently.  We never did make it to the “fancy” hotel and caught a few hours sleep at a flea-bag motel in one the worst of neighborhoods, undetermined miles north. Kick-out early morning because of the mutt, we eventually made to a friend’s place in Hoboken the morning of the 12th. The first flight to Japan was Sept. 19th and my fiancée was on the flight. The dog was in cargo and I’m sure the wedding would have been cancelled if the dog had not made it. Japan waived their quarantine (30 days) with the ability to inspect the animal at regular intervals. The final certificate we needed to get the dog in was issued exclusively by an office in the former 1 WFC. The wedding took place the first week of October. While under a high degree of stress, dressed in a kimono (borrowed from Gojoro, a sumo wrestler with links to the family), reciting Shinto vows it was a miraculous win, esp. for me. My team was temporarily moved North to Toronto, Canada which was certainly difficult for key staff, being away from family in a time of uncertainty. Less fortunate firms had their “back up” data centers and even disaster recovery centers in the adjacent WTC tower. Margins reflected the turmoil and management gave thought to keeping up permanently in “T zero”, as Toronto was affectionately known. The Royal York, while close by, was not home and the lads were getting restless to return to the “Big Apple”. Mike Bloomberg saved the day and granted us some space in a trading room fashioned out of a converted warehouse in Tribeca (Bloomberg terminal at every station) in early 2012 and we re-entered OLP on Valentine’s Day 2012. Almost 800 windows had to be replaced and all soft materials down to the carpets were re-fitted, but we were back. Despite being across the street from the outlined direct hit, we suffered no fatalities. 9-11 was the worst ever event with respect to loss of life for firefighters, 343 having perished, along with 72 law enforcement officers and 55 military personnel. On-going ailments from first responders and clean-up crews are on-going, with extended benefits just granted in 2019 for some.

The eventual 9-11 loss of life was a horrendous 2,977, tallied many weeks/months after. The 13 acre WTC site was a smoldering, caustic mess and over 1 million square ft. of office space was zeroed out in one go. Insurance losses were quite evenly split between commercial liability, group life and business interruption. The courts were involved in the settlement of the WTC tower coverage as the insurer sought to cap their payout at US$3.55bln with the key clause being whether it was 1 event or 2. Silverstein eventually settled in 2007 for $4.55bln. The lawyers always make out OK, it seems. A full 2/3 of the loss fell to re-insurers.

The property & casualty  insurance industry was in shambles, not because of the insured losses per se (a war exclusion does not cover idealogical differences), but losses from terrorist acts became effectively un-insurable with private insurers from that day onward. The white horse arrived  in the knick of time in the form of the Government sponsored TRIP (Terrorism Risk Insurance Program) program, not to be confused with Stephen King’s Captain Trips from “The Stand”. The Federal loss sharing program was well crafted and was tweaked on a couple of iterations as the plan life was extended. In a nod to law enforcement and Homeland Security there has never been a terrorist claim in the USA since 9-11. Quite remarkable, historians will attest. We perhaps have a template for global pandemic coverage to boot (Acronym to follow).

Post GFC a complex web of regulations were put in force globally. Of the current top 100 financial companies in the world, 40 are insurers. The list of G-SII’s (Globally Systemically Important Insurers) issued by the FSB (Financial Stability Board) existed from 2013 through the beginning of 2020 (no longer required, impeccable timing). The exit list included 8 global insurers (market cap US$):

Allianz (German), parent of PIMCO, mkt cap $73bln

AIG (US), mkt cap $24bln

Aegon, (Netherlands) mkt cap $6bln

Aviva (UK), mkt cap, mkt cap $13bln

AXA (France), mkt cap $43bln

Metlife (US), mkt cap $34bln

Ping An (China), mkt cap $227bln

Prudential (UK), mkt cap $38bln

Aggregate mkt cap $458bln. Ping An 50%. USA (2) 13%.


Supreme Court

The courts do not always rule against the insurers. Just this week, a long standing case came down on the side of the health insurance industry (aka Obamacare Insurers) where it was decided the $12 billion promised them by the Obama administration to aid in the 3 year implementation period  of the Affordable Care Act (ACA) in 2014 must be paid. The vote was not close 8-1 in favor of the insurers, the government must make the payments to effected insurers.

In a famous event cancellation policy case, a Lloyd’s of London underwriter refused to pay the US$17.5 million Michael Jackson’s concert promoter AEG took out on the “This Is It” tour in 2009. At the time of the purchase of the policy key details were withheld with respect to the “King of Pop”, his poor health, drug use and prescription. The court case was not settled until 2014. Insurance companies must protect themselves from adverse selection, a higher than average risk seeking coverage at the average risk. The only real protection in this regard comes from prudent underwriting practices. Lloyd’s of London is not actually an insurance company, rather it is a syndicate of underwriter. A study unto itself, individual underwriters used to carry unlimited liability until a few individual members (family offices effectively) were forced into bankruptcy by 1999 asbestos claims. Yet another example of an open-ended liability, asbestos isa generic term for a fibre that has a length 3x its width. When working in environments where asbestos is prevalent workers can easily breath in the fibers which can lodge in the lining of the lungs, over time (20+ years in some cases) forming a pearl, which is often cancerous. To ensure their longevity as a company. Lloyd’s capped the liability of individual underwriters thereafter.

In 2020, Wimbeldon collected £125 million (US$145mm) on a pandemic insurance cancellation policy they put in place 17 years ago after the SARS outbreak in 2003. Their annual premium for the policy was £1.5 million and they have paid out £25.5mm in policy premiums to date.

Moral hazard is another key concern with insurance fraud costing as estimate $80bln per annum.

Total annual insurance premiums in 2018 were  $5.2 trillion (6% of global GDP) with 54% life insurance and 46% property & casualty. The US is the biggest insurance market in the world, accounting for 29% of the total with a penetration rate of 7.1% (premium as a % of GDP). China is the 2nd largest insurance market ($575mm in 2018 premiums), followed by Japan ($441mm) and the UK ($337mm).

Director and Officers Insurance (D&O). Elon Musk has increased his shareholder loans to over 50% to “self-insure” Tesla’s D&O insurance, which Musk this week deemed too expensive. The Tesla board (10 strong) includes Elon’s brother Kimbal Musk. Considerable risk exist from the ongoing class action lawsuit relating to the 2016 acquisition of sister form Solar City to the on-going self driving experiment involving live crash test dummies. Firms like Toyota and Nissan, that have spent considerably more on self driving technology than Tesla caution that the current tech is not ready for “prime time” beyond closed loop applications. It is a good thing that Elon has deep pocket to backstop and/all lawsuits that might be brought against the Tesla board. They have a degree of “wrong way risk” with the war chest of fiat US$ margined against his holding of $TSLA stock (he owns 27%), but I’m sure it will be fine.

Globalization of the insurance industry over the last few decade have seen waves of consolidation as mutual insurers largely de-mutualized to become stock corporations. Many jurisdictions have seen the lion’s share of market fall to half a dozen players. In the USA almost 4 million people (3.8mm) work in some facet of the insurance industry (>5,000 insurance companies). There are over 750 life insurance companies in the US (down from >2k in the 90’s) and > 2,500 property & casualty insurers and 860 health insurance companies. There are still 85 fraternal insurers (8% of in-force life insurance policies) in the US with Thrivent being the largest (founded by the Lutherans).

A basic tenent of insurance is the concept of indemnification, i.e. putting the insured in a similar position as they were prior to experiencing a loss. Some categories of insurance are not suited to the public insurance markets, unemployment insurance being one such category. It has been reported that in some states >50% of workers on unemployment insurance are making more on a take-home basis than they were when working. Such largess can only be found by the folks running the printing presses and obviously must have a terminus once shelter-at-home orders are lifted. “At risk” populations must clearly be protected as restrictions are lifted across the globe, but clearly the medicine (extreme behavioral modification/ lock-down as a vaccine is developed and the Ro is brought to a manageable level) is not supposed to be worse than the disease. Fail we may, sail we must.


COVID-19 global prevention measures affect the various business lines of global insurers in distinctly different ways. Commercial, Speciality & Personal lines:

Auto insurance. Caught in the grips of shelter-in-place orders, few are driving. Claims have plummeted, leading leading insurers to rebate customers auto insurance premiums. Allstate has pledged to return $600 million in premiums to policy holders. State Farm, who insure 10% an Americans will be rebating as well, a total of $2bln. Berkshire’s GEICO appears to be less enthusiastic, offering 15% off of renewals.

Business interruption insurance will be the big category for COVID-19, very open ended and a potential tail risk for P&C insurers. The early data from the UK allows for some extrapolation with £1.5bln  in BI claims paid thus far in 2020. With a UK GDP of 2.9tln this scales to $13.125bln for the USA ($20.5 tln GDP). The UK has also paid out $275mm in trip cancellation insurance. Heavy pressure is being applied to insurance companies pay claims promptly and to take an “insured friendly” interpretation of contract terms (from the UK Treasury Committee). It seem to have fallen on deaf ears thus far, with 71% of business interruption claims declined upon submission.

Credit & surety markets will see higher claims as the construction industry globally has been heavily delayed. All specialty lines; aviation, marine, construction and energy have been negatively affected.

Life insurance. Even with global deaths from C-19 approaching 229,000 and US at 61,680, overall death rates are at a 6 year low. The double digit COVID-19 case fatality rates have been evident in those >65 and esp. in those with comorbidity (obesity, diabetes, heart disease, renal disease). 78% of the aggregate reported COVID-19 deaths are from those aged > 65. The UK has seen a life policy surrender rate spike  of 4% since the onset of COVID-19. Whole life currently has a surrender rate approaching 50% by the 10 year anniversary. For many, term life (2x base for each dependent) is often the way to go to cover that critical age 25-65 year period. Underwriting standards are changing rapidly, with John Hancock now only selling new life policies on those that agree to wear a Fitbit (or equiv.). 40% of all the life insurance in force is group life which is all term life underlying.

Dr. Peter Attia, podcast “the drive”.

Early numbers out of China are dire from an earnings perspective with China Life reporting -34% for Q1 2020 and Ping An -43%.

Hard markets lie ahead in the insurance industry. Tighter underwriting standards and higher prices. In the P&C sector the major risk categories include tornadoes, thunderstorms, hurricanes, draught & wildfires. Economic losses in the USA exceeded $650bln over the 2017 – 2018 period. Insured losses were the highest ever over the same period $136bln in 2017 followed by $50bln in 2018 (and $41bln in 2019).

Across some business lines insurers will be dealing with an existential crisis. A deemed lack of value-add is a real risk. A threat of relevance is also a risk  if policy exclusions are broadened going forward. While there are less global fixed income securities trading at negative yields, more in aggregate trade closer to the zero bound as well, threatening to make long-tail lines uneconomical at current rates.

Expense ratios for insurers will go up as they outsource help to assist with claims adjustment in an environment of lock-down.


Insurance is a key global sector. It is both  complex sector and a difficult one to assist via direct programs given its international nature (footprint, ownership, & multi-line nature).

The average equity drawdown in a recession is 33% and the recent BRRR … inspired bounce has us inside of 10% down from the February 2020 highs (almost flat in the tech heavy NASDAQ). When the risk guys are modeling the fallout of an Illinois or Italy default it is probably not the time to daydream about multiple expansion or S&P earning flat to 2019.

Dry powder, in the form of a larger allocation to cash are prudent in the current environment. Gun to my head to allocate new $ in the insurance space, I’d buy Berkshire Hathaway ($BRK-B), $818bln balance sheet with $130 of it liquid, with direct premiums received of $38.4bln and a 6% auto insurance market share (#2 to State Farm at 10%). Life Insurers that get too beat up will be worth a look, but I’d give P&C focussed insurers a wide berth until the COVID-19 dust settles.

Safe trading, as always.


Follow me on Twitter; @firehorsecaper




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I last wrote on the uranium market in February 2017, “Supernova Investing: Uranium”. Please start here for full background, before you go down the nuclear/uranium rabbit hole; https://ibankcoin.com/firehorsecaper/2017/02/06/supernova-investing-uranium/#sthash.0jGcPuHC.dpbs

Envelopment of the globe by COVID-19 has been swift, and unforgiving. Most markets, especially commodity markets (save gold), are beset by demand destruction never seen in modern times. The workings of the global nuclear energy market do allow such respite for the uranium market, higher prices ensue. The 447 global active nuclear reactors (99 reactors or 40% in the USA, providing 20% of the USA energy needs) require their 140 million lbs. of U308 uranium per annum. New reactors planned in China, India, UAE and Russia will be the thumb on the scale demand wise. COVID-19 has led to the closure of critical uranium mines, with more announcements expected. The near term drivers of spot (out to 1 year) uranium prices will likely be supply driven. Uranium mines are typically remote, fly-in affairs with workers on monthly cycles in camps. Not ideal for social distancing, as you might guess. Cameco, Canada’s largest producer, and operator of the only operating uranium mine in Canada, Cigar Lake (18mm lbs/yr) is currently closed. There are only 40 operating uranium mines in the world.


Getty images. Very clean uranium miners. The ties are a dead give away, “mgmt”.

U3O8 uranium currently trades at $32.25lb. down 76% from the 2007 high of $136/lb., but up smartly from the high to mid $20’s where it languished for years. The entire uranium ecosystem is worth < US$10bln, down from a peak of US$130bln.

The uranium market has been in a funk ever since the 2011 Fukushima disaster in Japan. Fukushima is in the Tōhoku region of Japan, a couple of hundred kilometers north of Tokyo.  It has been reeling not just from the earthquake and tsunami, but from the clean-up of the nuclear plant site. Japan used to get 40% of their energy from nuclear power, pre-Fukushima. Few Japanese nuclear plants have come back on-line in the interim, with LNG and coal providing the bridge fuel. The country with the highest % of power produced from nuclear power is France at > 70%. Globally, nuclear power is a stable 10% of the global energy mix.

The uranium supply chain web is complex and secretive. JV’s, off-take agreements and bi-lateral contracts. There is no futures market for uranium. Data on reserves is scant and dated, but all prognosticators see inventory levels at both the producer and utility level as relatively low and headed lower. EIA data from end of 2018 saw utility reserves at 110mm lbs., about 27 mths supply. They are assumed to be < 100mm now, hence inside of 24 mths. 1/3 of the nuclear plants uranium needs are replaced on an 18 month cycle. Plants only close for scheduled maintenance, otherwise it is a 24/7/365 day commitment. Producer inventories are lower than historical; Cameco used to run 24mm lbs. before the McArthur River mine was closed and is now at 6 (2-3mm lbs. shy of their target). Barring the ability to negate some contracted volume via the enforcement of Force majeure clauses in individual contracts (due to COVID-19),  Cameco is expected to be a buyer of uranium in the spot market through 2020.

The uranium investment choices have expanded considerably since my 2017 missive. I’m now more keen on the producers, like Cameco Corporation (recommending the TSE listed Canadian dollar denominated shares, i.e. long the stock, short the currency) $CCO.TO, despite the idiosyncratic risk. Cameco’s prior tax woes with the CRA were resolved and their cost base is considerably lower than in prior cycles. Lower oil prices and a weaker Canadian dollar both improve margins considerably (20% +). The uranium market is in many way a duopoly, with Canada’s Cameco and Kazakhstan’s KazAtomProm accounting for 60% of world supply. I’m less keen on the Uranium ETF $URA due to a lack of sophistication in their portfolio construction.  70bp seems like a big fee to buy a handful of names, let alone to go “off piste” with names like Barrick Gold (5.75% weighting). $URA’s weighting is 24% in National Atomic Co Kazatomprom and 21% in Cameco. $URA has a paltry $160mm in AUM, perhaps reflecting the underwhelming changes since 2017.


$URA price chart. Not early, 200 day moving average calling?

A couple of listed physical uranium plays have entered the fray. Uranium Participation Co. (UPC), ticker symbol $U.TO has a market cap of C$693mm (US$495 million with USD/CAD at 1.4020 …. 1.45 to be re-visited soon, in my view). Uranium Participation Corp has had a wild ride in 2020, swinging from a ytd loss of 21% the 3rd week of March (a 30% discount to the NAV of the uranium they held I might add) to a 25% gain on the year. Even in a home made ETF construct I’d likely keep the weighting modest in anything that can deviate from intrinsic that far, but such was the dislocation evident before Powell and Mnuchin re-painted our Potemkin village (BRRRR). The volume, including block trades as high as 400k, which we have seen in Uranium Participation Corp stock in recent days implies some incremental institutional involvement in the space. The other listed vehicle for physical uranium is LSE listed Yellow Cake plc, ticker $YCA.L with a market cap of £199mm (US$240mm). IF I allocate to this I will certainly hedge the currency (i.e. I do not want to be short British pound sterling, but I’d gladly short the Cdn Loonie ,as noted). You might recall the term yellow cake from the Uranium One scandal where it was alleged that Hillary Clinton brokered a deal for 20% of the US uranium reserves to Russia for a $145mm “donation” to the Clinton Foundation. The allegations have not been proven, I might add. Yellow cake, also called Urania, is “semi-processed” uranium (post mining, but before fuel fabrication or uranium enrichment).

As inferred by Yellow Cake’s clever logo, all uranium is used for clean energy, hence it passes even the finest Environmental, Social & Goverance (ESG) filters for investment. Few things have gone off the radar as completely in a pandemic as ESG, there is likely more concern about MSG in your Chinese take out order, but it is an important metric in terms of staying power for the rally in uranium prices, beyond the current supply-driven price shock. The USA needs 56mm lbs. of uranium per annum to feed its active nuclear reactors and only produces 4.5mm lbs. Secure supply is likely to trump a pure price based procurement strategy going forward. Supply chain re-engineering post COVID-19 will favor producers like Canada’s Cameco and a much needed “wind in the sails” for Saskatchewan, Canada.

Mr. Pompeo’s will be in the mix going forward as well, both uranium and rare earth metals will fall under increased national security scrutiny. If the US wants to develop autarky in these critical areas, investment will be required. Higher spot prices will create an incentive to grow domestic uranium production via in situ methods (i.e. uranium’s equivalent of fracking where solutions are injected into wells, leaving the rock in place but extracting the ore). Soy beans to China and Japan is not enough.


Other uranium supply concerns:

BHP’s Olympic Dam mine is Australia is still operating, but some expect the Australian government to allow some closures going forward, depending on how their COVID-19 containment efforts go. With 6,500 cases and 63 fatalities Australia is fairing much better than Canada which has 30,000 cases and 1,195 dead from C-19 at the time of writing (17-4-2020).

KazAtomProm of Kazakhstan have announced delays in well field development, a reduction in their operating cost base and lower capex. This is from the biggest and lowest cost producer. They produce 59mm lbs. per annum and recent announcements will see this fall by 10.4mm lbs.

France’s Orano has a mine in Niger which may see closure.

Uzbekistan Navoi mine (6.5mm lbs/ per year) may close due to C-19.


Demand flat to upward sloping. Resilient to any demand destruction given the highly regulated and fortress nature of global nuclear power installations.

Inventories are approaching critical levels at  both the producer and utility level.

USA, the  biggest uranium buyer (40%) is likely not keen to rely too heavily on Eastern Bloc for critical uranium supply.

Supply is reduced due both to mine closures due to COVID-19 and natural inherent constraints in the uranium supply chain (mine deletion, prices not supportive of greenfield investment).

Small % allocation warranted. The same skull & cross-bones warning as in 2017. Stops in place.

@numerco on Twitter for spot U308 prices and charts. I’m @firehorsecaper. Do your own due diligence. I’m giving you the scent, you must find the quarry.

Ways to position longs:

Cameco Corp, $CCO.TO C$5.4bln mkt cap, >1mm shares traded daily. $CCJ in USD for those that do not want the currency worries.

Uranium Participation Corp. Canadian dollar denominated, U.TO on the TSE. Recovered smartly from March lows, note deviation from NAV in the roughest seas.

Yellow Cake plc $YCA.L in £.

KAZATOMPROM ADR in £ KAT.L Scant volume, but worth monitoring. Sperbank is the only Russia single name stock I would own, as an aside.

$NLR VanEck Uranium ETF. Avoid, small, no volume. Odd construction. Should be de-listed.

$DML.TO Denison Mines on TSE in Cdn dollars. Solid uranium development projects for those playing the long term thesis.

$NXE.TO NexGen Energy on TSE in Cdn dollars. same as Denison, promising uranium projects on the come.

Trade safely. Socially distance.

Regards, Caleb Gibbons, CFA, FRM

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Zoonotic pandemics were not on the list of tail-risks for investors coming into 2020. In hindsight, the timing of Chinese New Year, the world’s largest annual migration (US Thanksgiving x26, 1.3bln Chinese travel for CNY vs. 50mm Americans for Thanksgiving), could not have been worse. Closing borders, once a pandemic has started, has more limited utility.

In mid-February the global equity market was blissfully ignorant of the potential negative effects of the public health emergency, spawned by the infectious disease COVID-19, caused by the SARS-CoV-2 virus.

The Dr. Tedros led World Health Organization (WHO) has not made the global “pandemic” call yet, but this certainly could be the week. The range on unreported cases, due to the lack of testing outside of S. Korea (165k tested, 18k per day pace) is 10x (Johns Hopkins) to 38x (Lancet).

COVID-19 cases in China have crested, thankfully. Outside of China the cases have doubled >3 times in 12 days. Japan cases stand at 461 (>1,000 incl. Diamond Princess), USA is at 439, S. Korea 7134, Italy 5883 and Iran at 5823. Global cases stand at 106,200 with 3,600 dead. The epidemiological assumptions of the COVID-19 outbreak are, let’s just say, fluid. The case fatality rate (CFR) quoted most recently by the WHO is 3.4%, the range is a wide 0.68%-3.4% with S. Korea yielding the lowest CFR’s globally. Unreported cases are assumed to be less serious cases, hence it stands to reason that mortality rates will be lower for the broader group of infected sapiens (a terribly wide 7-34x more deadly than the flu, hopefully closer to 7). Spread rate, aka “r nought” est. 1.1-2.6 = 62% of contacts (approx. 2x virulent as flu). Morbidity, 20% will undoubtedly put a strain on global healthcare capacity. Many governments have been reluctant to invest sufficiently in their healthcare systems. Public health systems in less developed countries is of great concern. The cavalry is coming. The IMF has pledged $50bln in aid to assist countries dealing with COVID-19. The WHO has allocated $12bln ($8 new, $4bln re-allocated) and the USA just got approval for $8.3bln, just signed by DJT (not to mention an emergency intra-meeting 50bp rate cut by the Fed, other mopes falling in line on the follow with their short-end monetary spigots primed).

Trump signing $8.3bln COVID-19 spending bill

The potential COVID-19 effect on planet Earth is still being surmised. Listen to those with both skin in the game and involvement in the market (Andrew Brenner “The UST 30 year rate could break 1% by U.S. Sunday night) vs. the talking heads (Rick Santelli of CNBC; “Give COVID-19 to everyone, so we can get past this.”). The IMF released their estimates for China’s forward GDP estimates -0.4% to +5.6% for 2020 (not a chance, more cow-bell), and -0.1 for global GDP. More plausible estimates see the global impact to GDP at -$2.5 tln outright, just shy of 3% of global GDP, which would certainly trigger a global recession of unknown tenor. Price effects; The effect will overall likely be deflationary due to the shock to global consumption demand. There will be inflationary effects clearly with respect to the shock to the cost of production in many key sectors. The negative shock to global equity risk premia is what we have seen thus far (>$5tln), a long overdue re-tracement of multi-year multiple expansion driven by buybacks financed by a +100bln debt orgy post-GFC. The shock to labor supply will likely show itself quickly, especially in the critical global health-care sector. Child-care is another evident global bottleneck  in places like Japan where 13 million public school kids (joined by a couple million more from private school and universities) are homebound (aka self-quarantine, for a month) due to the closing of public school at the behest of PM Abe last week. Even the beleaguered cruise line industry has felt the effects, feeling the need to employ staff from the Yokohama docked Diamond Princess on the sister vessel, the Grand Princess now anchored off the California coast near San Fran (to be confirmed, but Pence, “Mr. COVID-19” has suggested this is factual/likely). The Port of Oakland has agreed to accept the vessel, it has been reported. Best wishes to all aboard for speedy resolution with next years’ resolution  to never board another cruise. Folly of the highest degree.

Financial market reaction:
Re-enforcing the repeated shortcomings of risk metrics like VaR (Value at Risk), the move we have seen in this “stress episode”, a 13% equity risk asset sell-off in 7 trading days is in many ways without precedent. As a “tail event” it would happen 0.1% of the time, running data back to 1896. Setting a confidence interval for VaR at 99% would not capture this event. 99.9% would just touch it. As Nassim Taleb would agree, it is not so much the breach as the magnitude “given breach” VaR falls down on.

The list of stress events of this magnitude is short. I have weathered them all, hence the grey hair!:
1.) Asian Contagion (1997). SE Asia currency crisis, laid at Thailand’s feet, but the MIST currencies, i.e. Malaysia, Indonesia, Singapore and Thailand all played a role.
2.) WTC attack (2001). Across the street at One Liberty Plaza for 9-11. 800 windows out, but no fatalities gracefully.
3.) The Big One (2008-2009). GFC (Global Financial Crisis). Epicenter in NYC, $5bln of credit (long). Indoor fireworks.
4.) Flash Crash (2010). Quite a day. Bonds had a good day, as you might imagine (re-allocation from equities, fear trade).
5.) Eurozone Crisis (2011). Sovereign debt crisis. Forced to sell 2 year Ireland paper at a yield of 14.5% (it eventually traded sub 1% before maturity).
6.) VIX event (2018). Structured, levered VIX ETF to zero. Caveat Emptor. Read the prospectus.

Last week 10 year US Treasury yields stood at 0.96% (0.70% intra-day Friday, 1st time since 1871). Long bonds (30 year UST) yield stands at sub 1.50%. Tough environment for pension fund managers, insurance companies and individuals looking to “build” a retirement income, that is for certain. The tumble in US treasury yields, by 1/2 in the case of the 10 year in less than 10 days (1.6% to sub 0.80%), has greatly increased the fragility of the rates complex (25%+ increase in duration translating to great price risk going forward).

Spread assets, like corporate bonds have experienced a massive sell-off. The US$5.3bn withdrawals from IG corp bonds this week was the heaviest on record. With the number of oil & gas credits in the HY (high-yield) market, this is the area likely to crack first with 7.9bln in outflows. CDX (spec grade credit) moved out (widened, i.e. more risky) by 42 basis points on Friday to +451 (365 recent LT avg.).

If you thought that central banks looked flat-footed in recent days, cast your eyes on OPEC. The break down in R-OPEC talks last week precipitated a 10% swoon in global oil prices, on the day (Friday). The demand destruction in the petrochemical complex is real, China alone will likely account for a 2-3 MMBRD (million barrel per day) demand shortfall versus prior run rate, and there is another 2 MMBPD in lower demand from elsewhere globally. Saudi Arabia plans to boost production is an all-out price war versus the prior expectation of a 1 MMBPD cut back in production. These are heady numbers and might bring back memories of oil with a 2 handle per barrel, as in sub $30 (well above the cost basis for most global conventional oil production). Peak Saudi production is 12 MMBPD, as a point of reference. As Stephen Innes puts it, “There Will Be Blood”. China’s “force majeure” declaration on LNG deliveries is wreaking havoc in the natural gas market with prices in the US now negative through the end of summer (-5 cents per mmbtu). Warren Buffet has reportedly pulled his funding commitment for the $9bln LNG project in Saguenay, Quebec, due to “challenges” in Canada. This, from a man who has been seen running into burning buildings, most recently with an incremental United Airlines stock purchase. Ill timed, rear view mirror, as airlines will have a $113bln revenue shortfall (projected) vs. 2019.

The only things up on the year include;

i.)VIX, largely to be observed, related tradeable instruments can be widow-makers (see VIX event above), if involved, with stops of course, trading sardines, not inventory sardines for certain. The vix stubbornly holding > 30 telegraphs 2-3% daily swings until further notice. Typical size reduction, stop widening strategies will be employed for certain. A Gatlin gun of global liquidity has been assembled, most yet to be deployed.

ii.) 30 year UST, iii.) 10 year UST, iv.) 5 year UST, v.) 2 year UST, vi.) Gold, and vii.) Palladium (20% +).

Analytics / like minds / support:

Within ibankcoin’s “Exodus” (multi-year subscriber, non-compensated post) platform there is a constantly transforming list of existing and emerging CODID-19 equity plays and the Pelican room spends a goodly portion of daily discourse on the topic of coronavirus. Few rooms are positive month-over-month through the lunacy that COVID-19 has triggered. A sampling of names currently on what I’ll call the “spec” basket include; $SPEX (Spherix, up 130% Friday past), $TOCA (Tacagen +57%), $INO (Inovia +44%), $NNVC (NanoViricides +39%) scalped short as what I view as a “suspect” name/play, akin to cannon fodder $XAIR, Beyond Air, -20% Fri.), $CBLI (Cleveland Biolabs, +25%), $ALT (Altimmune +13%), $OPK (OPKO Health, +13%), $TRIB (Trinity, +9%), $AEMD (Aethlon, +8%), $NOVN (Novan, +10%),  $BCRX (BioCryst, +7%), $VXRT (Vaxart, +7%), $CTSO (Cytosorbents, +8%), $COCP (Cocrystal, +4%), $VIR (Vir, +4%), $HAPP (Happiness Biotech, +6%), $CERS (Cerus, +4%), $VCNX (Vaccinex, flat), $APT (Alpha Pro, -13%), $LAKE (Lakeland Industries, -2% Fri.)., $CODX (CoDiagnostics, -10%), $NVAX (Novavax, -3%), and $ONEM (1Life Healthcare, -1%). All of these % moves are 1-day moves. The inter-web can provide historical and ytd numbers, but needless to say there are endless contenders afoot, many well over their skis. The real contenders will show themselves soon enough. Most will not be successful in terms of their COVID-19 aspirations,  but those with a broader platform will avoid being taken out by failure with respect to CODID-19 efficacy. Best to diversify a bit as well, hygiene, masks, test kits, vaccines, anti-viral, etc. These are all common sense considerations. With the outsized support both provided and promised for global risk markets, skew will favor the assumption of risk versus the shedding of it going forward. It is the timing of when best to ford the river that remains very much in question.


$MRNA. Moderna sports a $11bln mkt cap. A novel (pardon the pun) approach. My only other current long after taking profit on $GILD calls Friday past. Moderna intends to develop a messenger RNA (mRNA) vaccine for the virus. The company will use the CEPI* funding to manufacture the vaccine. Promising, as others are, especially given the high tech nature of their approach (akin to $SGMO, Sangamo one of my long term plays).

*Coalition for Epidemic Preparedness Innovation (CEPI) was est. 2017 with an initial grant of $460 million by Germany, Japan, Norway and the Bill & Melinda Gates Foundation. While I was not negative, I think Bill Gates is “moving on up” as an aside.

$AZN. AstraZenica. $124bln.

Clinical trials:

The big boys (maga big cap) are clearly safer investment vehicles and is where I have focussed my recent due diligence efforts.

1.) $GILD. Gilead’s Remdesivir is currently conducting 2 trials (one mild/moderate, one for severe), 297 patients total. First results April. A failed ebola drug that never got FDA approval. Some promise in treatment of SARS & MERS (good anti-viral activity). Worked on 1 patient in the USA, sample size as small as possible, i.e. N=1. $GILD stock has gone up 17% inside of a month, much higher than pv of an approved drug, but with a $100bln mkt cap and a suite of other drugs, seen as a lower risk play.

Varied success, but just closed out a profitable call option trade on $GILD (Gilead +5% Friday to $80) June $70 strike called sold at $13.00 (basis $3 mid Feb.). Yield 3.7% p/e 19, even after recent run-up. Will re-establish long outright or via calls on a retrace to mid 70’s on underlying.

2.) $ABBV. AbbVie Inc. is a $130bln diversified global pharmaceutical company. ABBV’s HIV drug Ritonavir (Kalentra marketing name) has just completed a 199 person trial and results are expected soon. Another untested drug in their arsenal is Erbevo. HT James Bourne on several items in this blog post.


3.) $RHHBY. Roche is a behemoth, $287bln mkt cap . Oseltamivir (Tamiflu, marketing name) is a tried and true flu drug and esp. if the L and S strains of COVID-19 stay with us on a seasonal on-going annual basis, we will require the full menu of treatments at our avail. At peak valuation (prior) during the SARS breakout a lifetime supply of Tamiflu cost $100k. Rights to Tamiflu now owned by Sanofi, $SNY ($120bln mkt cap).

4.) $JNJ, Johnson & Johnson. Near all time highs, strength to strength, $374bln mkt cap. Steady as she goes.

5.) IBB, iShares Nasdaq Biotechnology ETF. $7bln. Less idiosyncratic risk, buy them all. One way to go. Screen holdings well.

The knife catchers stand at the ready, but never bring a knife to a gun fight. Patience is warranted. Catching the meat of the move is much more important than catching the bottom tick. Central banks must of course show a “chin up” demeanor, but they of course know their runway configuration has issues. Too much accommodation was held for too long a period and they find themselves without stores of ammunition for the battles ahead. Calls for an expansion of Fed mandate, first whispered on Friday last, sparked the valiant final hour recovery. Weekend bookies see much of that final Friday gasp getting retraced before futures open Sunday evening. Rest up, the days ahead will test us all. There will be 5% up days, there will be 5% down days.


Professor Gibbons, CFA, FRM

Follow me @firehorsecaper

PS: Some numbers could be stale due to source and/or passage of time. In most cases meant to signal magnitude, not false precision.


Jan. 27, 2020: (Discord chat history). Do we need a #coronovirus tab for both longs ($ZNO $NNVC $APT $LAKE $NVAC $BCRX $ATHX $AZN, $MRNA $LLIT, etc. ) as well as shorts? (airlines $TCOM).?

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Offshore Drillers: Seadrill Limited ($SDRL); Leap Option on Higher Oil; Drill Baby Drill – Offshore

The 10% rise in Seadrill Ltd (SDRL US) equity to $1.91on Oct. 11, 2019 is rare and masks the 81% drop ytd in 2019. Seadrill has been the laggard, but the other names in the offshore drilling space are down >50% as well (the largest player $3.7bln mkt cap Transocean Ltd (RIG US) is down 45%). Seadrill Ltd. is a micro cap, $190mm.

Macro weakness and high levels of financial leverage are the primary culprits for the performance of the group.

The world needs oil and increasingly the only viable answer is deepsea. Frackers, oil sands, deepsea; Seadrill is a concentrated bet on offshore being deemed the “cleanest dirty shirt”. 5-bagger on an 18th month time frame provides an ample, if not compelling risk:reward profile. Dig deeper in the article that follows.

$SDRL Sunrise or Sunset?

Any discussion of Seadrill Limited must start with its founder John Fredriksen (self made fortune, net worth exceeding 11 billion):

#129 John Fredriksen His offshore drilling rig firm Seadrill emerged from bankruptcy in 2018, with Fredriksen helping to raise about $1 billion in new debt and equity. His biggest holding is Marine Harvest, now named Mowi, which has rolled up competitors to become the biggest fish farmer in the world. (source; Forbes)

Mr. Fredriksen is key to the Seadrill story and is the main driver. Seadrill’s plan of reorganization (Ch. 11) was filed in September 2017 and they emerged from bankruptcy in July 2018 after a protracted negotiation with creditors. Fredriksen had $5 billion of his worth tied up in Seadrill at peak in 2014. As part of the restructuring plan, largely crafted and executed by John Fredriksen and a compact investor group, no draconian DIP financing package was required, importantly;

-Maturities on $5.7bln of secured bank debt were extended (5 years). 97% of secured lenders agreed to the plan. Debt servicing begins in 2021/22.

-Unsecured debt of $2.3bln was converted to equity in the new company (15% ownership stake). 40% of bondholders were onside with the restructuring plan.

-Legacy equity holders were effectively wiped-out (dead last in the cap structure) garnering 2% ownership in equity in newco.

-New money, $1.08bln in fresh capital came from Fredriksen and his investor group, $200mm in equity and $880mm in secured notes;

Seadrill New Finance Ltd. bonds with a coupon of 12% and a 2025 maturity have been holding in despite all the calamity in the listed equity. SDRLNO 12 7/15/25  last traded $94.166 for a yield to maturity of 13.48%. Bond investors are a conservative bunch overall. Seadrill Limited tendered for up to $311million of the noted bond issue in April 2019 at $100.70 (post the tender offer closing just over $476mm remain outstanding). Typically not a move you see from a company experiencing death throws. As a comp, the Transocean bonds of equivalent maturity are trading with a yield of 10.9% (RIG 7 11/1/25 @$85.74).

Seadrill Ltd. reported $1.5bln in cash after the Senior Secured Notes tender offer and an order backlog of $1.bln (Q2 2019, 30 June 2019).

Usually equity holders are the optimists and debt holders the pessimists (as their coupon and par at maturity are their capped upside). In the case of Seadrill Ltd., the roles appear reversed, where the debt is holding in and the equity has been in virtual free fall. When the roles are reversed “hedged high yield” can often be a compelling trade, where one buys the bond and concurrently sells the related equity (notional on the equity short matching the expected recovery rate on a filing). The canary appears to be fine in this example, with the bonds trading in the mid 90’s in price terms.

One potential reason for the recent relative weakness in $SDRL shares (vs. peers) is the recent delisting of affiliate company, Seadrill Partners, by the NYSE. The company has stated they will appeal, but now trade otc (pink sheets). The delisting was due to the low market capitalization of Seadrill Partners.

Seadrill Limited has the newest high spec drillships and semi-submersible fleet in operation globally, with a lease up rate approaching 80% (versus sub 70% for the industry). Drilling contract take up shows signs of recovery (5 of the contract confirmation months in the last 5 years have taken place in the last 15 months, Brazil, Angola and India active). The harsh environment floater market is tight. New, higher spec rig pricing could be the catalyst for an upward trajectory in overall rig pricing (Seadrill Q2 fleet status attached).

Given the skull and cross bones warning of the sector, based on recent equity performance,  and Seadrill Ltd’s track record of flying too close to the sun from a leverage perspective (Ch. 11 exit in 2018), modest allocations are recommended (2% max). Despite recently being re-rated lower due to a combination of multiple de-rating (compression) and EBITDA revisions lower by the street, Transocean and Valaris are the other 2 players in the space warranting further vetting. Their stories are in some ways cleaner, but both are working through ill timed acquisitions which added to their leverage and hence uncertainty.

With respect to John Fredriksen there is certainly some key man risk. While John is in good health and certainly has experience to pull off a Seadrill resurgence, he is 74 presently.

Deepsea competitors:

1.) Shale

Some think the sun is setting on the oil shale revolution. A investment in Seadrill Ltd. is partially a bet on shale’s demise (it costs little comparatively to drill shale). Wells are reaching peak production quicker than modeled before declines set in, requiring a faster drilling pace to maintain production. Some firms expect the maintenance spend to exceed 80% of total as soon as 2021.

Most prime areas have been drilled already in the US shale patch and prospect quality is low. Prime offshore sights have B/E well below shale. Exxon recently announced plans to reconsider long shelved plans to a tap a 100 billion barrel oil field in ultra deep waters off Brazil. Exxon recently expanded the oil resource in Guyana (wedged between Venezuela and Brazil), first announced in 2015 (Liza discovery, 190km offshore Stabroek Block) and with the recent expansion is surely the biggest E&P story of the decade with economics far surpassing the best of US shale, a potential Oman by 2026.

National Oil Co. (NOCs) are active in the semi submersible space whereas the international oil companies (IOCs) tend to dominate the deepwater space in terms of rigs (Exxon, Eni, Shell, Equinor, Oxy, etc.).

2.) Oil sands

Growing restrictions on fracking have US shale players, frustrated by well performance issues and a lack of profits looking north to the Canadian oil sands. The supreme court in Canada changed the law to have environmental reclamation rank ahead of all other claims in bankruptcy going forward. Several of the biggest operators lease their land from indigenous tribes.  Ongoing infrastructure issues abound and while some have been tempted in on valuation metrics, this might me my #1 choice for stranded asset status, at least as long as oil remains < $100 barrel.

Geopolitical backdrop:

Saudi Arabia:

Recent attacks on critical petrochemical infrastructure in Abqaig, Saudi Arabia in mid September has highlighted the fact that the global sheriff, the United States is less omnipresent. While production was brought back on line quickly, the fact that 10 drones could wreak such havoc was a wake up call to the world with respect to potential global oil supply disruptions going forward.

In absolute terms Saudi is the 3rd biggest spender on defense, much of it coming from US suppliers. Only the US and Saudi spend >8% of GDP on military spending. China is the 2nd largest because of the size, but as a % of GDP stand at 1.9%, below the 2% min. threshold recommended by NATO (Canada is 1.5% as an aside).

Saudi Arabian Oil Co., aka Aramco is planning to move forward with their initial public offering (IPO) soon. They will be floating 2% of Aramco for $40bln implying a valuation of $2 trillion for Aramco. Trusted advisors are walking it back to $1.5 trillion given a few factors. While still the world’s largest, the Ghawar oil field is in an advanced stage of depletion. The IPO will be listed exclusively on the domestic stock exchange, Tadawul, not in New York and/or London as initially envisioned. Some of the kingdom’s richest families, some who previously boarded at the Ritz Carleton, have been asked to “dig deep” as anchor investors.

Friday past, the US announced they will be sending an additional 1,800 troops to Saudi Arabia to assist in their defense efforts against and to deter Iran.

An Iranian oil tanker was struck last week on the Red Sea by missiles, less than 100 km from the port of Jeddah, Saudia Arabia on October 11, 2019 (as an aside John Fredriksen ran oil for Iran in the 80’s and was struck by missiles; if you live long enough you get to see everything twice).

Strait of Hormuz:

The Strait of Hormuz is a strait between the Persian Gulf and the Gulf of Oman. It provides the only passage from the Persian Gulf to the open ocean and hence is a both a bottleneck for oil supply and a critical artery for supply to China (>60% passes through the strait).

VLCC shipping rates have skyrocketed in the last week. This is a direct result of the US sanctions on COSCO. A trade deal resolution between China and the US may have seen this relaxed, but as per the latest meeting, much work lies ahead. 11 year highs in crude shipping rates ($11 million for 1 ship topped by $13mm later in the week). Even clean tankers are opting to transport crude at these prices. This hurts China most and helps increase the shipping rates for all.


The offshore drillers perform a critical role. Day rates remain 20%+ below 2014 levels, but signs of life abound, due to issues of supply/demand. Oil prices will be the driver and increased geopolitical risk could be the thumb on the scale going forward.

Global PMI’s drifting sub 50 are signaling global slowing and have stoked fears of a global recession, but the world still needs its 1000 gallons of oil a second.

Offshore drillers, a key oil services supplier, could be due for a day in the sun.

Caleb Gibbons, CFA, FRM


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