09/2018 Market Commentary

What will people do with their time when all of Tesla’s issues are resolved? Like August, so much happened in September that we will simply provide a brief comment following this short list of events.

• Electric Mercedes opens German assault on Tesla 
• Tesla CEO smokes marijuana on camera while interviewing for a podcast
• Tesla signs lithium supply pact with Chinese company
• Tesla, citing “extreme shortage”, begins manufacturing its own car carrier trailers
• Tesla is providing incentives on car sales in end of quarter push
• Auto haulers are dubious of Musk’s “extreme shortage”
• Another executive departure, and the Others listed
• SEC sues Elon Musk for fraud over “funding secured” tweet from August
  • The SEC suit asks that Musk not be CEO or Chairman of any public company
• Elon Musk settles with the SEC, paying fine and agreeing to step down as Chairman of Tesla

That was a lot to fit into a month. Although we have a lot to say about each point, we’ll just say the month of September increased our skepticism of Tesla as an investment, and we want to refer you to past Ballast commentary.

The trade war with China has provided additional hardship for the agriculture sector following a 3-year rut after a decline in primary U.S. agriculture commodity prices. Industry leaders expect a protracted trade war. The math behind soybean trade suggests that China cannot replace all of U.S. soybean imports, but this has not stopped China from thinking otherwise. Chinese thinking on the matter is interesting, but success seems improbable. For farmers, unfortunately, you cannot take that to the bank, and the trade war is likely to continue near-term.

A bellwether of the FANGs? The founder of Instagram (yes, owned by Facebook) left Facebook in September. The founder of popular mobile messaging app WhatsApp (yes, also owned by Facebook) left the company earlier this year. Facebook itself was embroiled in scandal earlier this year when its usage of personal data came to light. Facebook’s stock price quickly recovered during the spring, rallying from $150 to $220 in July and then quickly selling off to $175 after its earnings release in late July, ultimately sliding to $165. The fact that the stock has not received the trading support to lift off again, in combination with other matters, should have investors thinking twice about this Silicon Valley giant – and maybe others.

The country has its challenges. Elected in 2015, Mauricio Marci won out over long-time family control and latest leader, Cristina Fernandez. Marci was to implement significant reforms and push the country in the right direction. His first order of business was to settle the country’s 14-year battle with debt holdouts from the country’s last default in 2002. Settling the outstanding legal battle opened markets to Argentina, who promptly borrowed $15bn in the global capital markets. One short year later, the country borrowed an astonishing $2.75bn century bond from yield-starved investors. All was well – bygones. But as with any country in the world, significant reforms do not come easy, especially not after decades – maybe centuries – of precedent. To boot, Argentina’s economy has fallen on hard times and the currency has significantly devalued as inflation runs and as overnight interest rates have been hiked to 60%. Argentina has had to request emergency funds from the IMF – hat-in-hand – twice in recent months to calm its markets. All is not well. The century bond, originally priced at discount to par at $90, now trades at $78.

We would be remiss to not comment on news occurring after September close (this is a September newsletter) that GE has ousted John Flannery as CEO and Chairman. Shares promptly rallied 15%. Mr. Flannery was on the job just longer than a year. The decline at GE rises above his control, in our opinion, and we feel that the act of replacing him after just one year could represent one of three things – simple 1) wallpapering over problems; 2) Mr. Flannery was put in place to be a janitor of sorts and do the clean-up, where he takes the necessary action, takes the blame, and the next CEO enters with a clean slate to move the company forward; or 3) the situation at GE is desperate. In the first case, it will never work. In the second case, it still seems like issues abound, and now would not yet be the time for a new CEO. The final case seems self-explanatory.

GE cannot seem to get things moving in the right direction. At this point, with all the asset sales, accounting charges from obscure corners of the company, and ongoing challenges in various divisions GE stock remains untouchable, in our opinion. One does not know what they are buying and that keeps us hesitant, new CEO or old.

Oh yeah, and this happened during September.

The year 2017 brought severalThis year, the balance sheets could become weaker, but probably not by much. So far, it appears the soft market that has ailed the industry will continue overall. There will be some loss to be realized. For hurricane Florence and insurers providing cover on the east coast, losses are likely to stem from claims under business disruption cover.

Another month, another scandal. Some culture…