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Absolute Return Podcast #60: The New Bull Market: Looking Past the Coronavirus

By March 30, 2020 No Comments

March 30, 2020-A Record 3.3 Million U.S. Workers File for Unemployment Benefits as Canadian Jobless Claims Soar Close to 1 Million. Should Investors be Worried?

U.S Government Approves Historic $2 Trillion Stimulus Package. What’s in it? Is it Going to Work?

Endeavour Announces Acquisition of Semafo in $1 Billion Gold Mining Deal. Has the Coronavirus Affected M&A?

A Discussion on the Paradox of Choice: What to do When it Rains Gold

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Transcript:

Welcome investors to the Absolute Return Podcast. Your source for stock market analysis, global macro musings and hedge fund investment strategies. Your hosts Julian Klymochko and Michael Kesslering aim to bring you the knowledge and analysis you need to become a more intelligent and wealthier investor. This episode is brought to you by accelerate financial technologies. Accelerate because performance matters. Find out more at www.Accelerateshares.Com.

Julian Klymochko: Welcome, ladies and gents to episode 60 of The Absolute Return Podcast, I’m your host Julian Klymochko.

Michael Kesslering: And I’m Mike Kesslering.

Julian Klymochko: Today is Friday, March 27, 2020, so we are right in the thick of all things Corona, COVID-19. Obviously having a massive effect on markets, the economy and just people’s lives. Here we are working from home recording this from my new home podcast studio, but it is working well so far. We’ve got a number of things that we want to touch on this week in terms of things happening in the markets and the economy, off the top.

    • A record 3.3 million U.S. workers filed for unemployment benefits as Canadian jobless claims soar close to 1 million. Should investors be worried about these horrific economic numbers?
    • The U.S. government approved a historic two trillion dollar stimulus package. What is in it? And is it going to work?
    • We are going to chat about some M&A, yes, some deals are still happening in this environment. ENDEAVOUR announced the acquisition of SEMAFO in a one billion dollar gold mining deal. Has the Corona virus affected M&A?
    • Lastly, we are going to finish it up with a discussion on The Paradox of Choice: What to Do When it Rains Gold. We are going to talk to investors about where to invest in the current market environment.

A Record 3.28 Million U.S. Workers File for Unemployment Benefits as Canadian Jobless Claim Soar close To 1 Million

Julian Klymochko: But I mean the economic numbers that are coming out right now, is certainly is scary. Nearly 3.3 million Americans file for unemployment benefits last week. Business is shut down across the country really just to halt the spread of COVID-19. That is what all of this massive economic disruption is about, and to put this 3.3 million job loss into perspective, jobless claims increased by 3 million from the week before. So prior to this, there, 200 some thousand claims up to 3 million and this weekly increase exceeded the previous record set in 1982. So almost 40 years ago by nearly fivefold, so if you look at a chart, this is just a massive, massive spike in unemployment claims. Now, some numbers out of the St. Louis Federal Reserve, the economists, they estimate that fifty two point eight million Americans could be unemployed by next quarter. That represents over 32 percent of the labour force, a nine-fold increase in joblessness.

Previous to this fall coronavirus outbreak, the unemployment rate was about 3.5 percent in the U.S. So if we saw a spike to north of 30 percent. However, temporary. It is just a massive, massive economic disruption. That is affecting everyone nearly everyone globally, but, you know, talking about what has happened historically, this massive jump, it really put an end to this streak that was going on for over a decade of the U.S. economy really have this Goldilocks period where adding jobs month in, month out. A record one hundred and thirteen straight months of job growth for the U.S. basically from 2009 to 2020, where we saw payrolls grow by 22 million. So certainly one of the best economic periods, best periods of prosperity in history coming to a sudden halt with this whole coronavirus pandemic.

As many U.S. businesses announce layoffs, several state and local authorities ordered nonessential businesses to close in response to the coronavirus pandemic, and what we saw in Canada, nearly 1 million Canadians applied for unemployment benefits last week. That represents a stunning 5 percent of the workforce. The previous record for an entire month was 500,000 in 1957 and ironically, if we look at the market action when these horrific jobs numbers came out, clearly the market was expecting something far worse because the S&P 500 went up 6.2 percent for the day. That was on Wednesday when this news broke, and on the Dow Jones, this was it biggest one day gain since 1933. We are talking about nearly 100 years and this week, we actually, in contrast to what’s been happening for the past five years of just investors having to suffer a day in, day out losses on the market, seemingly day after day of nothing but red. We actually had three up-days in a row this week, Tuesday, Wednesday, Thursday, making for the best three-day change in the Dow since 1931. So a lot of craziness, just a ton of volatility in the markets and in the economy. What are your thoughts on what is going to happen like with respect to these jobless claims? Do you think investors should be worried about it? Or is it just going to be temporary?

Michael Kesslering: Well, I mean, it is worrying in the sense that many people are out of work. Obviously, that is a huge impact on the real economy. When you separate that from financial markets. Now what is interesting and we are going to be talking about it in the next section, but what is interesting about these numbers is that they are likely to kind of remain at elevated levels just because the US stimulus package that they’re bringing in, well, actually is looking to allow gig economy workers to obtain unemployment benefits. So you’ll see areas such as that will be applying for these benefits as well, but I mean, in the short term, this this was expected. It is really just a matter of, I guess, where the market is being made in terms of pricing equities. Especially as well as fixed income.

Julian Klymochko: I was actually surprised. I thought the U.S. numbers would be quite a bit worse. The Canadian numbers; the nearly one million jobless claims in Canada came out before, so, you know, if you’re comparing that analog to the U.S. that would indicate up to 10 million and you saw whisper numbers, so-called whisper numbers, are analyst forecasts, 5 to 10 million. So perhaps the market is a bit of a relief rally, perhaps some short covering. Who knows?

Michael Kesslering: Yeah, absolutely, and I mean, at the end of the day. Like you had mentioned, the best three day run since the 90s as well on a week over week basis, the S&P being up 10 percent this week at its best week since March of 2009. But in the context of, you know, you did have some selling into closed today on Friday here with the S&P down 2.75 percent and the TSX down just over 5 percent. If you are looking at it on a holistic basis, the S&P is still down 25 percent from its February peak, so this has been a relief.

Whether it is sustainable will probably rely on what the market makes of some of these fiscal measures, as well as if they continue to announce these fiscal measures and bring them as the economy worsens. I mean, you did mention the one chart, and I believe that was from the St. Louis Fed, that The Wall Street Journal showed the jobless claims. I really encourage our listeners to take a look at the chart as it was tweeted out, I believe, I re-Tweeted today. But it’s just crazy to look at it. You have everything in the lower part of the graph, and it is just a massive spike. That is just crazy to see him in graphic form, but yeah, long story short. It is really difficult to read too much into these jobless claims currently as this is going to be evolving. You know, in a in a very real way over the next couple of months.

Julian Klymochko: Investors really need to understand that the economic data is bad. It will continue to be bad. In fact, it will probably get worse in the short term. So just, accept the fact that the numbers will be bad for the next quarter or so. You can definitely expect the next couple of months in which we see pretty horrific economic numbers as we did this week. So look for that to continue as we go through this troubling economic period and this sort of health crisis that you got to remember, it’s just going to be temporary. You know, pandemics typically last a few months. Seems like we were starting to get the handle on coronavirus outbreaks in certain jurisdictions, certainly not yet in North America. However, it’s looking at the data you got to remember and this is important fact that markets always bottom well before the data does, we saw that in 2009, you know, on previous brutal bear markets and as you indicated, indices down 25 to 30 percent, fully recognizing a tough slog in the near term.

However, you know, investors should not be too worried. I saw an interesting data point that looks like at previous recessions and the concurrent market drawdown, clearly we are in a recession. There is no arguing against that, but it is important for investors to know that historically, by the time the officials, the economists officially recognize it as a recession, it is likely over. And by the time the recession is over, stocks are already up on average, 50 percent. That is 5-0 percent and if we are talking about a 50 percent rally, that’s representative of like 5 to 10 years of market gains, so it is important to be invested right now and trying to stay in cash and pick the bottom.

You are never going to perfectly time it, and so that is something to keep in mind. If you are waiting for the data to improve, you have missed the bond and by a significant double-digit percentage, which is highly likely. But as you indicated, Mike, the markets are highly reliant on the massive amount of monetary stimulus, which we touched on last week and this new historic two trillion dollar fiscal stimulus package signed by the U.S. government today.

U.S. Government Approve Historic $2 Trillion Stimulus Package

Julian Klymochko: So basically, what happened in response to this massive economic fallout caused by coronavirus? U.S. Congress approved a landmark two trillion dollar stimulus package really aimed at aiding individuals and businesses through this bit of a rough patch that we are having here.

Clearly, the focus of everyone should be on staying safe, staying healthy, self-isolating, quarantining, whatever it has to be, just such that we are not spreading the coronavirus. We are not overloading the health care system. We are not making more and more people sick, so that is really the number one priority. But to make that happen, we need to make a temporary economic sacrifice, and that’s where that stimulus package comes in to sort of make up for that. It had overwhelming bipartisan support for this legislation. The vote was unanimous at 96 to 0. I don’t know if we have ever had that before, I certainly can’t recall.

Now to get into some details. This 2 trillion dollar stimulus plan, it involves so-called helicopter money. That is right, direct payment to Americans. Individuals will get twelve hundred dollars for each adult. Five bucks per child. Married couples getting thirty four hundred dollars. Payments are phased out for higher income earners. IRS indicated that they could start issuing payments within three weeks. How additional payments going out, so those payments in individuals account for about three hundred billion dollars. There is an additional four hundred and fifty four billion in loans to businesses. Three hundred and fifty billion in loan to small businesses. Two hundred and fifty billion in unemployment insurance. Two hundred and twenty one billion in tax deferrals. Hundred fifty billion in aid to states. Three hundred billion dollars as an airline company bailout. In addition to hundreds of billions to other stakeholders. Now, before we go on to the next topic, I wanted to mention that the size of this 2 trillion fiscal stimulus package, unprecedented, and it represents 9.3 percent of GDP. If we look to the last big bailout that was in 2008 where the fiscal stimulus package there was 5.5 percent of GDP. So on a relative basis, this 2 trillion dollar aid package is nearly double that of the Great Recession, the fiscal stimulus package put together back in 2008. Now, the government recognizing that more than two thirds of the cash payments will go to households in the bottom three income quintiles, but perhaps that’s why we’ve had quite a bounce off the lows in the markets.

You saw it as of yesterday. The Dow and the TSX were both 20 percent off the lows, some calling it a new bull market. I am not so sure what your thoughts on it here. Do you think that the stimulus package is going to work to get us through this rough patch?

Michael Kesslering: It is definitely, as you mentioned, it is unprecedented. What else? I mean, today the news did keep coming as Trump. The most recent news is that Trump has ordered GM to start making ventilators under a defence’s production law, which is very interesting. A Republican government, which, you know, in the US, the Republicans are very you know, they do have libertarian aspects and, you know, free enterprise and whatnot. So this is a very interesting move by a Republican president coming in and ordering a private company to shift their focus of production, which is very interesting. You have seen that in some of the Asian economies, such as, I believe South Korea and Singapore were quite active with measures like that. For the folks, some of our listeners that are more of a libertarian bent, probably not a fan of that, but this is drastic times. I did also just want to touch on the Canadian fiscal measures as well as the monetary measures from the Bank of Canada. So on the fiscal side they are being forty thousand dollars and interest free loans from the banks to small and medium sized enterprises with ten thousand dollars of that forgivable by the government as well as wage support.

So an increase what they had previously announced with a 10 percent wage subsidy for companies to ensure, I guess to incentivize them to lay off less workers or hopefully zero, but increase in that from 10 percent to 75 percent. What I would add there is it will be interesting to see where the caps are as previously announced; deal of 10 percent had a cap per employee of around fourteen hundred dollars and twenty five thousand dollars per company. So it’s not quite as good as the headline would make it out, but still some relief for small, small, medium sized enterprises as well as there is additional funding now for from the BDC. about twelve point five billion dollars from the BDC and Export Development Canada to help small businesses with their working capital.

The other thing on the monetary side, the Bank of Canada announcing an emergency rate cut down to 25 basis points. And it’s something that we briefly discussed. I pose the question to Julian last week whether the Bank of Canada would look at quantitative easing here, and I guess the answer was yes. That they did and that they are now going to be purchasing a minimum of five billion dollars per week of government securities and short term corporate bond.

Julian Klymochko: With no cap, unlimited quantitative easing.

Michael Kesslering: Yeah, yeah, exactly. So it it’s very interesting and it’ll be interesting to see what that does to spread, especially on the corporate side, like what proportion are they going to be buying of government vs. corporate bonds? It remains to be seen, but it will be really interesting to watch how that unfolds.

Julian Klymochko: Yeah. It is not as extreme as what they are doing in the US in which the Fed is actually going into the market and buying corporate bond ETF, which is certainly something that is unprecedented. So monetary policy continues to evolve and adapt to the modern times. But really all this fiscal stimulus is monetary stimulus. The government is recognizing that, you know, the economy is going through a rough patch for a limited amount of time and they’ve got to come in as a stopgap to really smooth things over because you don’t want all these companies firing everyone and going under. And meanwhile, we beat coronavirus by the summer and there are no businesses for workers to go back to. So really, it is focus on keeping companies solvent and being able to kind of reset everything once we get past this pandemic, which shouldn’t be too long. So, you know, it’s certainly positive, and we saw it in the markets this week. Positive to know that we have this sort of buyer of last resort that smooth things over and makes it easier for individuals and businesses to manage to this really, really tough time when we should really be focused on the health of society and keeping everyone safe.

Endeavour Announces Acquisition of Semafo in $1 Billion Gold Mining Deal

Julian Klymochko: But wanted to touch on some M&A. What happened in the mergers and acquisitions space is that Endeavour Mining. Canadian listed Endeavour mining in announcement of friendly acquisition of Semafo for 1 billion bucks in a deal to create the largest gold producer in the Burkina Faso and Ivory Coast regions of Africa. This will be a pretty big Pro Forma entity. It will produce 1 million ounces of the yellow metal per year. This was an all-stock deal, no cash involved. It represented a nearly 55 percent premium ticket to the target’s share price.

And really, it’s signalling to the market that corporations are still confident enough to announce transformative M&A during a period of market panic. Other interesting aspect of this deal is that the Pro Forma Company’s cash position, it is going to be helped by a concurrent hundred million dollar equity financing, a cash injection from Endeavour’s top shareholder. This is private gold investment firm Lamantia, so you definitely still have investors being aggressive here, putting money to work and what is…and we’re going to touch on this, a highly opportunity rich environment. Endeavour shareholders will own about 70 percent of the Pro Forma entity. Now, I really wanted to touch on that M&A market in general. Had a comment from global miner BHP this week. They said that they are in good shape to act if disruption from the virus brings M&A openings. Basically large companies such as Endeavour, perhaps BHP. They are looking to be opportunistic. They are looking to be countercyclical type buyers, be somewhat contrarian perhaps. Now the target shares in this transaction, they have got cutting in half since the start of November. That really was caused by violence in one of their mines in Burkina Faso, where a bunch of people were attacked and killed. Unfortunately, so Endeavour here really capitalizing on some perhaps temporary drama, being opportunistic.

And that is a really good representation of what’s going on in mergers and acquisitions. We have had this, you know, Corona panic for the past month or so. And I see a lot of people concerned because they at the merger arbitrage spreads, which we’ve touched on ad nauseam, just how they’re ultra wide. You can have low risk, 20 percent-annualized spreads, just amazing opportunities. People look at that. They say, oh, all these deals are going to break and if they don’t break, they’re going to be repriced downwards.

But people who are not well versed in the M&A space, they tend to grossly overestimate how easy or how they think it is easy for an acquired to back out of a deal, which is extremely difficult when you sign a definitive agreement. It is very, very hard to back out of the deal and it is very, very hard to re-price the deal. That is why historically over the past 10 years, we have seen 1% of M&A transactions reprice downwards and 6% of M&A transactions break.

Not saying that we won’t see any of that. I just think that market participants are overly sensitive to that at this point and what we look at, we want to look at actual facts and figures, not fear and hearsay in the market. So if we look at facts, well, what has happened is over the past month, since this coronavirus panic has emerged. We have seen 12 deals announced, so perhaps deal activity is down a bit, certainly from private equity buyers. They are nowhere to be found, aside from that one KKR deal that we talked about last week and that Cincinnati Bell deal. However, private equity firms have, you know, been quiet just given they have their own problems. Nonetheless, 12 deals largely on the strategic side being announced and more importantly. Fifteen deals in North America have closed with zero broken deals so far. Certainly one on the ropes.

That is Condor hospitality deal. That small-cap deal that was supposed to close this week and in fact did not. Perhaps the acquire is having trouble coming up with the funds, it was an all-cash deal, so that one is on the ropes. Certainly, price and looking to break, but zero official deal breaks, zero official repricing. Fifteen deals closed, and you are saying when these deals closed, I made a comment this week on social media, on Twitter and LinkedIn. You look at AltaGas Canada rewind last week. This was a 10 percent gross spread and the deal is closing, they got all approvals. It is closing on Monday or Tuesday. Right, so 10 percent growth spread over a week is like a mind blowing annualized return. It just goes to show you how dislocated a merger arbitrage market and it is just, you know, incredibly fruitful. One of the incredibly fruitful markets that investors should be fishing in these days to harvest these massive discounts where you can really make a quick buck, 10, 20 percent in a week or two, so it’s pretty wild there and I don’t know, in my opinion, we’re not seeing a massive effect on M&A. Are you seeing anything?

Michael Kesslering: Yeah, yeah. I mean, you are still seeing definitive deals being announced in March here, so, you know, it is really not changing for the most part. Some of the acquirers that are, you know, strategic acquirers, as you had mentioned, some of the deals that involve financing risk, those become a little bit more tricky here in this environment but definitely share deals as well as well, really, any strategic deal, you know, are typically made with a lot more long term focus on deal.

Julian Klymochko: Yeah, exactly. A lot of these deals are strategically long term and they’re not going to back away if something happens that’s going to affect the company for six weeks, eight weeks. Right?

Michael Kesslering: Absolutely, so not even just financial considerations. There is a certain amount of ego that once a deal is announced, you know, there is human beings that are on the management team and they have already had a definitive deal announced. Just the psychological aspect they are walking away is definitely something that needs to be considered as well. You had mentioned the long term historical amount, the percentage of deals that actually break or get repriced downward. Well, right now you are looking at about the market is pricing in about twenty-three percent of deals breaking, and I had mentioned this last week as well. Both of us had mentioned that. I mean, that is a very high number in terms of 23 percent of deals breaking. That would be a very historic amount, and so, you know, it likely to be a bit higher than the normal, but 6 percent, but really unlikely to approach the 23 percent bound. As well in an environment like this Julian. How did that affect your process of analysing deals, you know? Is there anything in particular that you focus on during a downturn when looking at M&A deals on it on a deal by deal basis?

Julian Klymochko: Yeah. I mean, the easiest thing to consider that top of my list, given tightening financial conditions, is where is the money coming from? Do they have the cash on the balance sheet if it is a private equity firm, you know. Do they have that capital that is ready to go? Or is it contingent on financing? or is it, you know, reliant on bank financing that has certain covenants that could be breached? You know, that’s a big topic of discussion on Cineplex deal, whether it’s this covenant in terms of, you know, their operations such that, you know, they can’t breach the certain operating covenant from a financial perspective. So certainly that is worthwhile considering is the financials of the target company and the acquiring company to make sure that they have the wherewithal to get through this tough period and that the acquire has the capital to actually close the deal. That is why in this environment, share deals are more palatable. You look at this Endeavour deal and it is an all share transaction. Those are less likely to break just because, you know, both companies’ stocks will move with the market, so there really is not as much price risk and they typically don’t involve any cash as an all share deal. So certainly, access to capital and financing and financial performance is something to consider. You want to stay away from highly leveraged companies.

You know, those can be a can be a significant risk, highly cyclical companies as well. You see a distressed, highly distressed deal, which is Air Canada Transat. That one is looking rocky these days just because just that Transat is an airline company and is effectively shut down for the time being. But what people need to consider and this is really, really important is timeline, as we spoke about the Cineplex deal. People are like, well, you know, that business is completely shut down. No one is going to movies. Movie theatres are closed, well, yes, that is what is happening right now. That is what is happening in March. However, you look at the outside date or the termination date of some of these transactions for Cineplex specifically. That is at the end of June, so there is three more months. Who knows what is going to happen in three months? Are things likely to be better? I mean, there is a good chance, and if you get to be that outside date, companies can always extend it. You look at Sprint and T-Mobile. You know, they have extended the outside date pretty significantly where that deal was supposed to close pretty much a year ago, and it’s been extended out a year. Can you forecast how the environment is going to be in one year? Well, there is a decent chance that it is going to be significantly better. Do you actually think coronavirus is going to be affecting us as badly as it is now in four, six, eight, ten, twelve months? So that’s something to consider. Is that, a lot of these merger agreements have a lot of time to work through this temporary blip that we are going through in the economy. The other major considerations is legal. As I said, these definitive agreements are airtight.

People tend to say. Oh, but what about the material adverse change? Well, material adverse change, it is not going to allow you to walk from a deal, number one. Pretty much everyone you read will specifically carve out an outbreak of illness or pandemic, epidemic. That means that it excludes something like the coronavirus that you just can’t bring it up because they’ve already considered it and thrown it out as a potential MAC or material adverse change.

The other thing is that in terms of historical success and litigating in court on a MAC, Material Adverse Change, there has been one in the history of all M&A. It has happened to once Fresenius got out of their acquisition of Akorn. Just because Akorn business completely fell off a cliff. Meanwhile, it had nothing to do with the industry or the sector. If everyone in the market or everyone in the sector or, you know, everyone in the economy are suffering, then that’s not a Material Adverse change to that company specifically. So that’s something to consider legal. Legally, it is extremely difficult to wiggle out of these deals, and if you try to, I have seen times where they litigate in court and the court actually forces the buyer to go and close the deal anyway, irrespective of how badly they want to get out of it. The other thing to consider is reputational risk. If you are operating your business and your main strategic the way you operate, the strategy is to be a serial acquirer. If you have a roll up strategy and you start backing out of deals, well, that is horrible for your reputation and the chance that anyone can sign a deal with you in the future is greatly, reduced. So that’s not only from a strategic perspective, but if private equity firms start backing out of deals, then their future deal flow will be substantially hindered.

The last thing that I wanted to mention, we’re potentially missed opportunities. If we look back at the last crisis, 2008-2009, a private equity consortium was they had a deal to buy Bell Canada, a phone and cable company in Canada, a huge leveraged buyout and credit markets turned shaky and they actually got out of the deal on this technicality in court, allowed them to back out of the deal. All of them at the time are breathing a sigh of relief. However, you know, in addition to the reputational hit that they took, it turned out to be a massive missed opportunity because, Bell Canada’s stock just went on a massive tear over the past 10 years, and if they are actually able to complete the leveraged buyout, it would have been an unmitigated grand slam. Would have made an absolute boatload of money, so they really missed out by having this short-term perspective, Cloud really, what was tremendous long-term opportunity.

The Paradox of Choice: What to do When it Rains Gold

Julian Klymochko: So those are a number of things for investors to consider when evaluating M&A opportunities, and that is what I wanted to touch on in this next segment. In terms of the blog post I put out this week, it was called Paradox of Choice: What to do when it rains gold, and we wanted to flag for investors four areas to look at. If you are looking to put cash to work, as I say, cash is trash. There is a lot of money to be made in this volatility.

The first one we wanted to look at. We wanted to mention real estate investment trusts. A lot of rates have been absolutely smoked in the market, concerned about tenants not paying rent. Certainly, there is going to be rent holidays. They are in for a bit of pain in the near term, but a lot of rates dropping 30, 40, 50 percent or more, such that they’re at massive discounts to their net asset values and present unprecedented valuations.

Another area that we think is really, really rich in opportunities for investors, and it has been an area, as you know, has been pounded, small cap value stocks. They have really underperformed over the past ten eleven year, bull market and in this bear market, they have been absolutely crushed, plunging more than 40 percent year to date. The Russell 2000, whereas contrarians value investors, people actually looking at the numbers. I read a report out of OSAM; they are calling for a 13 percent annualized returns for small-cap value over the next decade. I mean, 10 years of double-digit returns certainly takes a strong stomach to be able to buy small caps down here, but if you do, I believe you will be richly rewarded.

Saw another report from Verdad calling for 56 percent returns over the next two years from small cap value stocks. So certainly if you are willing to take the risk, a lot of great opportunities in small cap value whose stocks have really been smoked. We have been talking about a ton merger arbitrage where we see average yields now 20 percent annualized, even a very low risk deals, you can get about 10 percent on.

Lastly, SPAC Arbitrage, which is, you know the little brother of merger arbitrage. Really, you are just buying these cash rich companies that have no operations. They just hold treasuries, they can buy them at a discount to their NAV, and when they expire, you are offered a redemption at NAV, so you collect full net asset value plus interest such that you can earn spreads of 5 to 10 percent annualized. So pretty much the lowest risk trade getting equity like returns with T-bill risk. What are your thoughts on the opportunity set and do you share the same mind-set as me? Do you think it is raining gold as well?

Michael Kesslering: Yeah, absolutely. I mean, I am not here to attempt to call a bottom, but in certain pockets in the general market, that is but in certain pockets of the market, there is undeniably a good opportunity set for that. Especially Merger Arb and SPAC Arb, what I would say, especially with SPAC Arb, as you have highlighted it a little bit, spreads over the last couple of days have been coming in. So you are no longer able to get the, you know, high double digit returns in some of the SPAC Arb situations. But you’re still looking at between, you know, 5 to 10 percent, which still is a very good spread when considering, as you imagine, they’re just invested in in a trust in treasuries.

One thing I would mention is that when you are actually executing trade with these SPACs, it is important to be a little bit passive in terms of your execution; because they can be pretty illiquid throughout the day. Last week I saw them trading at 2 to 3 percent bid ask spreads, which is a pretty pricey cost of trading costs. That is one thing to consider when trading these is to be very smart about your actual trading and knowing what their return is that you are wanting to get and, you know, being a little bit passive in terms of the execution. But, you know, similar to my question about Merger Arb, Julian, you know, when you’re looking at stocks, are you considering any of the upside potential in these Arb situations or are you just strictly looking at that cash and NAV amount?

Julian Klymochko: Oh, certainly the upside optionality, that is just free money. If you can put on a trade where you are earning a 5 percent baseline annualized return and then the SPAC. What can happen is in a normal environment, say things normalize for SPAC announces a good deal and investors come rushing in. You saw it on that space deal, right. What was Richard Branson and Chamath’s deal?

Michael Kesslering: Virgin Galactic.

Julian Klymochko: Yeah, Virgin Galactic. Which has absolutely skyrocketed. If you own SPAC units, which you can convert to shares plus warrants, you can get warrants in the SPAC as well. You would have had a massive home on that. Just on that upside optionality on a good deal, so your worst case is buying it at a discount and redeeming should the market not be receptive to the deal that the SPAC announces, and by deal we are talking about the acquisition of a private operating company, and so that’s something to keep in mind as well. There is additional upside optionality on these SPAC Arbitrage trades such that, you know, you can have a trade, a far above net asset value if the market is really liking the deal that the SPAC announces, so that’s something to keep in mind.

We do believe that there is great pockets of opportunity in this market. We are not saying the market indices have bottomed or that those offer tremendous value, certainly be selective in your security selections. These are just a few asset classes, I’m sure there’s a lot more that we’re not closely following that could offer some pretty significant investment opportunities. I know that the distressed debt market basically quadrupled over the past week as there’s a lot of fallen angels, a lot of bonds and loans that have declined to less than 80 cents on the dollar.

So investors stay sharp, but that’s about it for us on The Absolute Return Podcast for this week. If you liked it, you can always check out more. At absolutereturnpodcast.com. You should definitely check out Mike on Twitter, your handle is.

Michael Kesslering: @M­_Kesslering.

Julian Klymochko: And mine is @JulianKlymochko that is K-L-Y-M-O-C-H-K-O, what can you expect for our next week? Well more volatility, more crazy economic numbers and probably more stimulus from central banks and governments but until next week, we wish you all the best in your investing and we will chat with you soon. Cheers.­­­

Thanks for tuning in to the Absolute Return Podcast. This episode was brought to you by Accelerate Financial Technologies. Accelerate, because performance matters. Find out more at www.AccelerateShares.com. The views expressed in this podcast to the personal views of the participants and do not reflect the views of Accelerate. No aspect of this podcast constitutes investment legal or tax advice. Opinions expressed in this podcast should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. The information and opinions in this podcast are based on current market conditions and may fluctuate and change in the future. No representation or warranty expressed or implied is made on behalf of Accelerate as to the accuracy or completeness of the information contained in this podcast. Accelerate does not accept any liability for any direct indirect or consequential loss or damage suffered by any person as a result relying on all or any part of this podcast and any liability is expressly disclaimed.

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