20/09 – September Market Commentary


Oh, Argentina! See our previous posts here. Earlier this month, after arduous negotiations, Argentina reached a breakthrough in debt negotiations when greater than 90% of bondholders agreed to tender their defaulted bonds for new, non-defaulted bonds. By the end of the month bond prices were signaling trouble anew. Well that was fast.

One of the new bonds pays 1/8% coupon and matures in 2035. Par is 100. The price fell from more than $46 to around $38 by month end. Chart of the new bond described above:


Here is another fun one that is rarely seen. Currency markets are considered some of the last efficient markets with numerous forces determining clearing level – of course some currencies are pegged and therefore heavily manipulated, but generally in favor to local needs. Chart: Argentinian Peso


Chart: Argentinian Peso 20-year


It has not been a good new millenia for Argentina. For reference, the beginning of the latest chart showing ARS/USD starts when the Peso was parity to USD, or 1-for-1. It’s now almost 77. That’s substantial devaluation and it continues each day.

Countries around the world might take note and get their policies in order.

Oil &Gas

While bankruptcies in energy continue to mount the remaining strong and semi-strong companies are looking for ways to move forward. Devon and WPX are merging in a no-premium all-stock deal. This is the type of maneuver you see in an industry in distress. Normally one company takes over another and there is a clear premium with some cash paid and rationale for consolidation et cetera. Here, there is a merger of equally poorly positioned companies looking to diversify oil assets, realize synergies through cost cutting. As with most merger strategies this does not seem like a strong one, but is viewed as a template for others in a seemingly rudderless energy market.

Elsewhere in the shale patch, Occidental announced it would pay its current preferred dividend to Berkshire in the form of cash. The previous dividend was in the form of common stock, which Berkshire promptly sold. Paying in cash now does not seem like a great use of liquidity for a highly leveraged company in a struggling sector. Occidental also just announced it is selling Colombia assets at a big discount. Selling assets to pay debt is generally not a good position to be in. Seems like, without meaningfully higher oil prices, this enterprise may be under water.


What a month for Nikola, a would-be electric vehicle rival to Tesla. A research report was published September 10th that leveled powerful allegations among others: a couple of the trucks used as demos either at shows or in commercials were never operational – they were just used as props. The company managed to raise billions of dollars and complete a public listing in June, achieving a whopping market capitalization of $28.7 billion before falling – it is now around $9.3 billion. The critical research piece has led to the resignation of founder, CEO, and chairman, Trevor Milton. There is some question as to whether there is a path forward for Nikola, which also managed to ink a big deal with General Motors during the month. To be determined.

R-V-Shaped Recovery

RV manufacturers are performing well as sales exceed production. With the pandemic shutdowns, social distancing, et cetera people are buying recreational vehicles and camper trailers to work remotely, to see the country, to get out of the city. And why not. It is creating an economic windfall for RV manufacturers that no one could have anticipated at the beginning of the year.


One of the biggest mall investors, Brookfield, has called time as several of its properties are struggling. The mall operators will dispose of several properties and cut its workforce by 20%. Curiously, Brookfield is simultaneously attempting to rescue one of its bigger tenants, JCPenney…

Macro – China/US

The US and Taiwan are pursuing arms deal.  This will surely rattle relations with China. Recall that China views Taiwan as a territory of China, akin to Hong Kong prior to 2020. Hong Kong is now explicitly part of China. Some have speculated that China may seek similar action in Taiwan to completely pull Taiwan under China’s direct influence.

Macro – China/India

We had previously raised the specter of conflict between the two nuclear powers (see Kashmir). September brought the first fire exchanged between troops in 45 years. News has been quiet since, but the escalation is there with neither side seemingly prepared to back down.

    20/08 – August Market Commentary

    Berkshire Hathaway

    Several major actions were taken in the Berkshire portfolio during August, breaking an extended period of quiet. This is especially noteworthy because, for all the cash on hand, Berkshire has not made any major acquisitions following the panic brought by the pandemic. Instead, Berkshire has only now announced a massive rotation in its public equity holdings. These combine to signal a major sentiment shift of the long-term and steadfast investor.

    The most recent announcement was that Berkshire bought 5% of each of the five major trading houses in Japan (Mitsubishi, Mitsui, Itochu, Marubeni, and Sumitomo). By buying the Japanese trading groups Berkshire is, at the investment’s core, selling dollars and buying exposure to commodities. This appears to be an inflationary “hedge”. Similarly, Berkshire has acquired a sizable stake in Barrick Gold, one of the largest gold miners in the world. Elsewhere in the Berkshire portfolio were sales of several bank positions – Goldman Sachs outright and significantly reduced holdings in JPMorgan and Wells Fargo.

    A look at the Macro Economy:


    Prices of precious metals have been relatively calm over the recent couple weeks – at least the metals have not continued their parabolic path from July. Where do we go from here? Maybe sideways, but if central banks remain committed to achieving inflation, we suspect the ultimate destination of precious metal prices is higher – much higher.

    Of note, we call your attention to the opportunity that may have been created earlier this year when gold and silver seemed to disconnect. The gold/silver ratio blasted through 100, well above its historic level. It remains somewhat high to date. There are no rules that say the ratio must be any particular number at any determined time but we wonder if the general attraction to precious metals as an alternative currency would ultimately lead arbiters to adjust the ratio to something we have seen before. This may well explain silver’s extraordinary run in July and could mean there is more to come. We are not speculators so our interest here is not to trade that possibility so much as interest in attractive relative value when buying investments for long-term theses.

    We continue to develop a plan/allocation around this theme.

    Gold Chart:


    Silver Chart:


    Chart Ratio:


    In June we called your attention to the Kashmir border between India and China after several soldiers were killed in a sudden escalation. The border had enjoyed decades of quiet – certainly, no military deaths. Fast forward to August and we have learned more about the region and situation. It is a bit more troubling. The troops on each side remained unarmed (no firearms) since the 1970s by mutual agreement to avoid accidental deadly conflict. Let that sink in – dozens died in a brawl in June. These soldiers were not shot. Not anymore, India has said it will no longer honor that mutual agreement and both sides have since increased military presence. China has stoked flames again with provocative maneuvers. This region is on the brink of conflict.

    Remember, these are two nuclear powers. And on the other side of Kashmir is Pakistan (also a nuclear power), also party to the territory disputed. Since Kashmir is light on resources it is a wonder what China wants. What stands out is that Pakistan and China have a strengthening alliance that dates back to the 1950s and although Pakistan and China share a border, complete control of Kashmir would be more helpful, especially considering Pakistan is an important cog in China’s belt and road initiative – infrastructure build-out to supply robust trade from Asia to Eastern Europe. Plus, Pakistan’s Muslim interests there and India’s recent revocation of Kashmir’s autonomous status would create stronger reason for Pakistan to cooperate with China more broadly, but especially from the other side of Kashmir.

    We worry the situation between China and India may not go away. Despite little direct economic importance of Kashmir to the global economy, we would view armed conflict there as important for the signals it sends – China’s expanding power and influence, three nuclear powers in conflict is dangerous, China’s improved access to the Gulf of Oman and Persian Gulf improves their resources supply chain, et cetera.  

    Turkey Rising in the East

    There have been plenty of things to be distracted by here domestically, but Turkey has just caught our attention internationally. It may be little noticed but several of the country’s involvements could alter the macro landscape. The most imminent is in the eastern Mediterranean Sea, an area with many maritime boundaries of dispute and conflicting claims on the resources beneath the sea. The primary conflict appears to be between Greece and Turkey, but Israel, France, and Egypt also enter the fold with various interests at odds with Turkey. There is naval build-up in the region and hopes are for diplomatic resolution. If resolution cannot be solved peacefully, we could see war near the Suez canal. Any military fighting here could dramatically reshape global trade flow and drive energy and goods prices higher.


    New jobless claims have held at around one million. Yes, one million. Those currently considered unemployed were most recently reported at 16.3 million for a 10.2% unemployment rate. This does not include those “underemployed” and those that have “left the workforce”. Yet we see record high equity indexes, near record low yields, etc, none of which seems to square with the fundamentals. If the economy is producing, who is the economy producing for? To boot, before leaving for recess congress did not come to agreement on an extension of protections and benefits to keep people in their homes and receiving unemployment benefits. There is a lot that could be said here (for and against), but we will settle with things are very messed up right now and we do not think this ends well for capital markets.

    Insurance / Reinsurance

    The pandemic catalyzed some much-needed insurance pricing shifts and as a result more capital has flooded in. The problem is – as we see it – that although company values and risk premiums were somewhat impacted back in March and April insurance companies were facing problems on both sides of their balance sheet – investment losses and insured claim losses – that can put tremendous pressure on company and industry capital. Capital market expectations appear to have discarded the former concern (investment losses) and underwritten the latter (insurance claim losses).

    Capital formation has taken the industry by storm with some $13 billion in capital raised, according to Willis. As we alluded to, we think this only addresses the liability side of the business with an eye on attractive new policy pricing (hardening market). With this in mind, we think insurance sector valuations remain in the speculative zone.

    Remember this is STILL the year 2020 and we are seeing a pandemic still working its way around the globe and there have been wildfires, earthquakes, floods, Beirut explosion, derecho in the Midwest, etc. And what about the casualty policies that cover any misdeeds of current market excess – D&O, E&O? Wirecard is the best example currently. What about bad actors in the now broadly defunct US energy sector – various energy lines of coverage? We also recognize that although policy rates may be hardening the volume is likely to be much lower – reduced economic productivity means reduced insurance need – so any price gain may be offset by volume decline. In other words, it is wholly possible that recent price action is just to keep the insurance market treading water.

    Then there are still large numbers of workers unemployed around the world, which will have varying economic impacts as we move forward. We think next year will be when the “real” economic effects come home to roost as we are still burning through life support of previously set capital budgets that will end around the calendar year end. This may well bring rationality to capital markets (the other side of insurance company balance sheets not yet reckoned with) and by then who knows what kind of insurance market we will be in. It could be that the losses from the pandemic are minimal and no other major insurable events occur, but it could also be – and this is how 2020 seems to be working out – that other major events occur… we are in hurricane season. Louisiana and Texas were just exposed to a rare double hurricane. Nevertheless, we think we are one dramatic step closer to an attractive, investable insurance market – one with investment and underwriting tailwinds. Such news could be positive for capital markets generally. 


    We should be conditioned by now, but Tesla never ceases to amaze. Each month is more spectacular than the last. Tesla is not only now the most valuable automobile manufacturer in the world by equity market capitalization, but it is now among the 10 largest publicly traded companies by the same measure – bigger than Walmart and Johnson & Johnson. Wow. So here is a recap of August:

    • Share split effective 8/31
    • Targeted by cyber-attacks: link
    • He’s a rich guy – worth more than $100 billion: link
    • Pig brained – computer chipped pigs, what will Elon think of next: link
    • Battery capacity increase in the works: link
    • Shares surge to record high ahead of stock split: link
    • Tesla to split stock 5-for-1: link 



    It seems like we live in an alternate reality. Cisco warned of weaker sales as customers plan to cut spending on IT. The company’s stock price promptly fell from around $48 to just less than $43, a more than 10% price move. Surprise. What is odd to us though is that thematically, IT is the “in” trade – work from home, cloud, servers, etc. All this stuff of the future runs on networks – often supplied by Cisco – whether at home, at work, or over a server. We wonder if similar expectations should be applied to the rest of the technology industry.


    Bankruptcy Bonuses

    You know what they say, “get rich trying, or get rich failing”. No, they do not say that. Or maybe it’s, “heads I win, tails you lose.” No, anyways… But that seems to be the mantra of the energy industry lately. Pay yourselves generously during good times all the while producing no economic profit but perpetuating the hope that profits will soon be realized if only we all just hold on. Then, suddenly, time is called, and liquidity is gone. Bankruptcy is now commonplace in the oil patch. Just as common is the pre-bankruptcy incentive package to company executives. Their brave and bold leadership needs to be rewarded so that they are incentivized to stick around and lead the reorganized company out of bankruptcy into a brave new world. While all such bonuses should be considered newsworthy, none have been as much as this recent one. These executives were given retention bonuses – you know, to keep them around to help run the company through and after bankruptcy – only to have management announce departure during bankruptcy. Wow. Great value.


    Intel vs AMD

    The title match of the past two decades rose to new glory closing out July with Intel’s bombshell announcement that it had botched development of its latest chip technology and in an effort to salvage its lead will no longer insource all manufacturing. Instead, it will turn to Taiwan Semiconductor as outsource manufacturer. (We discussed this a bit more last month) Intel’s shares have suffered as a result and AMD’s have gained. To us, this may be the age-old fantasy that maybe AMD will become a worthy competitor of Intel after at least two decades of false hopes. Let us look at the situation in this simple way (data is LTM and pulled as of 9/1/20): 

    Intel has 10x more sales, 28x more income, and 35x more free cash flow than that of AMD. Yet Intel is worth 2x more than AMD. AMD does not pay a dividend. These are the investing times we live in.


    Bezos Still Selling

    On a lighter note, it is somewhat amusing that despite Bezos continued selling of Amazon shares, the share price rise in AMZN makes Bezos even more wealthy. In other words, despite selling more than $3 billion shares at a time, his net worth goes up by more. How magical.

    20/07 – July Market Commentary


    The dollar has declined to recent lows, as measured by the DXY index. The DXY index is measured against major trade partner currencies. It fell to $92.50 to close out July, a lower low than March when the year-to-date high of $102.50 and previous low of $94.60 were reached. That was some month. Treasury yields (as measured by 10-year yield) have fallen to new lows 0.52%. The previous low was achieved in March – some month. Silver is near this year highs of $24 while gold is hitting new all time highs around $2,000 per ounce. Equities are storming ahead… Nasdaq is achieving new all time highs around 11,000 while S&P remains just short of all time highs set in February when it was around 3,375. Put these together – bonds up, stocks up, precious metals up, and dollar down – and they do not seem congruent.


    DXY Index:


    10-Year Treasury Yield:


    Silver $/oz:


    Gold $/oz:


    Nasdaq 100:


    S&P 500:

    We have long (internally) discussed the investment case around gold and precious metals – whether they are good for portfolios and how best to have them in a portfolio. Investors have many ways of owning gold ranging from jewelry, coins, and bullion to trading futures, buying gold funds, or owning mining stocks. Our discussions have dramatically changed this year. We think we have witnessed unmatched, global government and central bank interventions at the same time investment value propositions have declined. We are likely to see more. These governments and central banks are using a global economic defibrillator – money printing. The merits are neither here nor there. Government and central bank census are set on getting things going again: get credit turning over, get money turning over – get inflation going again – or die trying. There are no certainties in life or investing but – in our minds, at least – most scenarios of the current setup lead to gold (precious metals) as a prudent wealth reserve asset.

    But what to do with this view… We are working on that.


    TAMD is the microchip processor maker that was always on the verge of catching up to Intel but never did. That describes the last two decades anyways. Now investors are treating them as if it may happen again. AMD is worth more now than it ever has been. Intel is sputtering and suffered a major fall in share price following recent earnings release when the company announced another delay in chip development and has lost valuable ground to Taiwan Semiconductor (TSMC), the outsourced manufacturer of choice for most chip designers. Throwing up the flag of surrender, Intel signaled a shift in long-held policy from all manufacturing in-house to outsource some manufacturing to TSMC.


    There is a catch though. Most of Intel’s chip manufacturing is done within the United States and most of the plants outside the United States are not in China. Outsourcing the latest technology chips to TSMC could be seriously problematic. With mounting tensions between the US and China, sending the latest technology to Taiwan seems untenable. We are in the middle of a national supply chain rethink because of our vulnerabilities to concentration in China. Then just look at what has happened to Hong Kong – China recently recaptured control. The situation in Taiwan is very similar – like Hong Kong, China has viewed Taiwan as its own whereas the US and other nations have treated Taiwan as sovereign. Given the rising tensions between the US and China, having a technology powerhouse like Intel concede defeat only to send high value technology to Taiwan seems untenable considering the national security risks. We would expect government intervention.

    Will AMD’s new-found advantage disappear again?


    Boeing may currently be implicitly nationalized. Soon it could be explicitly nationalized. Its order book is shrinking while it tries to get 737 MAXs back in the air. Setting aside the autopilot problems that crashed two aircraft killing all on board, the global airline industry is reeling from a collapse air travel and that is likely to remain status quo. What airline wants to buy new aircraft at a time like this? Sure there are some older aircraft where the economics justifies new versus old, but capacity is so large the newly built aircraft may have no real need for another year or two. Some are saying it may take as long as three years to restore travel. Others say we may never get back to previous highs. Will Boeing return to its previous greatness – color us skeptical.


    This month’s big stories:

    •   Government loans to offset shutdowns: link
    •   SpaceX raises money at $44 billion valuations: link
    •   Quarterly profit opens door to S&P 500: link
    •   California registrations halved: link
    •   Electric car manufacturer Fisker to go public through SPAC: link
    •   Slashing Model Y prices: link
    •   Honda invests in CATL batteries: link
    •   Rival Rivian raises capital: link
    •   Could get into S&P 500: link
    •   Annual meeting delayed date announced: link
    •   Musk net worth surpasses Warren Buffett: link

    ·   Tesla still very close to level 5 autonomous driving: link

    Kodak Moments

    Yellow Roadway Company, a national freight shipping company, received a $700 million loan bailout from a government fund intended for defense contractors. The US government will receive 29.6% stake in the trucking company. The company’s shares are publicly traded and rallied by 75% on the news. The trucking company had recently seen weaker cash flow and increased debt, possibly putting the company in perilous position. Have no fear, the government is here.  

    Eastman Kodak – you know that photography and imaging company of yesteryear – received a $765 million loan from the US government to make drug ingredients. This project – if it gets off the ground – will not bear fruit for years. Kodak has been a money losing publicly traded company desperately trying to reinvent itself. Back in 2018 it made a splash by riding the fad that was crypto, when Kodak announced it was going to produce a blockchain, digital coin, and digital coin mining equipment. Like anything else associated with “crypto” the stock price rose sharply, if temporarily. This company is just a promotion company. If you wonder about expertise in pharmaceuticals, so do we. And do not confuse Eastman Kodak with Eastman Chemical, where there might be a modicum of experience – that company was spun from Kodak in 1993. If you would like more perspective we recommend this piece.

    Molycorp is a little-known rare earth elements miner and processor based in remote California. Its assets have a history as part of the Chevron Corp, back when the US mined and processed its own rare earths – the elements on the lower part of the periodic table. These elements have become essential to technologies like consumer electronics and national defense systems. China has become a dominant producer and consumer. Molycorp assets were of little importance for several decades of dormancy until China’s appetite grew in a disruptive way a decade ago. At that time Molycorp began mining operations again and accessed the capital markets to open a processing facility. Shortly after, the company went bankrupt because it could not make the economics work. As a result, the US continues to source rare earth elements from foreign sources. Molycorp is once again set to become a publicly traded company with some thanks to a US Department of Defense funding.

    For a billion dollars we would happily start any business we have no experience with and make things deemed of national security interest. We just forgot to raise our hands. We are for draining the swamp unless it enriches us, then we are against it. Just kidding. If you do not know us, we find each of these and others like them to be dubious.








    20/06 – June Market Commentary

    What a year to be alive. Pandemic. Global political turmoil. Military aggressions. Global central bank interventions on an unprecedented scale. Massive public market frauds – some realized, some unrealized. That was only the first half of the year. Six more months to go. Oh boy!

    Shale Revolution

    Bankrupt! Much of the shale oil and gas sector have fallen on hard times and dozens of companies have filed for bankruptcy protection. One of the latest is an industry bellwether and considered a pioneer in the fracking technique. Chesapeake Energyfiled for Chapter 11 bankruptcy protection to close out the month of June. Times are tough for the industry. We have observed and noted the difficulty of these firms to produce positive free cash flow. It is sad that we have to say “positive” to emphasize the point about cash flow. What amazes us is that this is but one industry now paying the pied piper. We can look around and see public companies enjoying high valuation multiples and market capitalizations despite an inability to generate economic returns for capital providers – not now and not for the foreseeable future.

    Wirecard Fraud

    AMAZING! Wirecard was a member of the DAX 30 which is like the Dow Index of Germany. For years now several groups have accused the company of fraud (example). Despite majorprotective actions taken by regulators, the fraud issue came to ahead in June when the company’s auditor concluded it couldnot verify nearly $2 billion in cash balances. Shortly after, management acknowledged that some2/3 of sales were fake. What!? The company isnow insolvent and filed for bankruptcy protection. For many reasons we believe the year 2020 will be the year of frauds…being exposed that is. Hindsight is always 20/20, but we may not want to look back to the year 2020 when all is done.


    Some major news of the month:

    •   Amazon acquires self-driving car “start-up”: link
    •   Timely email leak suggests okay quarter: link
    •   Annual meeting delayed – workers must work but directors need wait: link
    •   But we thought TSLA was an ESG company: link
    •   Buying cobalt…still: link
    •   Struck new battery deal with Panasonic: link
    •   Semi pump again: link
    •   Seeking incentives: link
    •   Musk wants Amazon be broken-up: link


    First or second wave,COVID-19 cases are on the rise and some states and cities are starting to lockdown again. It does not seem like this is positive from an economy and market standpoint but neither credit nor equity markets seem to be moved by the reality rolling across the United States. We think central bank and treasury stimulus play a part, but we do not believe they can dam the surging waters that is the economic reality of COVID-19 forever.

    Military Conflict

    War potential has risen anew in this forgotten disputed territory. Many have loose familiarity with the disputed territory between India and Pakistan, referred to as Kashmir, the dispute is also between said two and China. Tensions between India and China have reached new danger. The two sides – India and China – have been tense after the recent buildup of troops on the Chinese side. Most recently, at leastthree Indian soldiers were killed. China has claimed casualties as well. Understand that Pakistan, India, and China are all nuclear powers. China has recently been asserting its growing power by expanding territory and laying influence over other countries – belt and road initiative connecting China to Europe, infrastructure funding in Africa and South America, and maritime activities in the South China sea as but three examples. Add economic conflict with the United States and the various trade skirmishes between the two economic powers now being labeled as Cold War 2.0 and you have an explosive macro environment. Hopefully, these are not the seeds of WWIII.


    The bankrupt car rental company Hertz decided, on the advice of investment banking group Jefferies, that it could and shouldsell the remaining shares of its SEC shelf registration to public stock investors. This was an unusual move because the company is bankrupt. The move required approval by the bankruptcyjudge who obliged Hertz with approval. The offering of shares was tantamount to lighting wads of cash on fire. You see, common stockholders are the residual interest – the last to receive value – in bankruptcy proceedings. If a company finds itself in bankruptcy it is usually because the debt exceeds the value of the assets. The creditors receive value according to their priority of claim. The size of Hertz’s debt rendered the possibility of value to common equity exceedingly unlikely. You could look at the value of Hertz senior unsecured bonds for cue – those bonds traded at cents on the dollar so you could naturally expect something representing a junior claim (equity/common stock) to be worthless. So the issuance of the shares for – say $3.00 – was just simply someone providing cash to the senior creditor claims and the $3.00 never had more than an intrinsic value of $0.00. Hurts! Thanks for playing! “May I show you another stock offering?” another adviser to the myriad of current bankruptcies might say to these unfortunate shareholders. Fortunately, the SEC appears to have some semblance of a soul andshut down the sale at the 11th hour. But management, the board, the creditors, the bankruptcy judge, Jefferies? Unscrupulous.

    Record Low Borrowing Costs

    Yay! We did it! We cured COVID-19 and everyone is fully employed again and global supply chains are operational and travel is back to normal and … no, not really. None of that has happened except that corporate borrowing costs sank back to record lows this month.

    20/05 – May Market Commentary


    US jobless claims fell at the end of May but unemployment rate likely remains near record high. As has happened in the past, it seems this high unemployment rate will grind lower slowly. Restaurants are probably the most illustrative example – it has been estimated that as many of 20% of restaurants may have permanently closed. And what about other hospitality businesses and airlines?


    For now, there are federal support programs in place to help with lost income across the country. As time passes, however, it is less likely for these programs to remain in place. Unless many of these displaced workers can return to work in a short period of time there is likely to be an adjustment period. These lost incomes will result in credit losses at lenders (banks, mortgages, credit cards, etc) when debts can no longer be serviced and will result in lower consumption (we are a consumption-based economy). These issues will reverberate around other parts of the economy. It is called a recession. With how deep of a cut this second quarter is expected to be, we may be lucky to avoid a depression.


    Investors like to celebrate Warren Buffett and his investment insights. What no one wants to acknowledge is what we have seen the last few months. Berkshire Hathaway has a fortress balance sheet with at least $130 billion in liquidity. Berkshire has announced no deals, something he is known for during market chaos. In fact, Berkshire has been liquidating several large investments – airlines and Goldman Sachs – and trimmed some other positions like JP Morgan and Wells Fargo. Warren Buffett likes to talk positively about long-term outlook for the United States – and we would not disagree, per se… it’s not what the future looks like so much as the path between – but do you suppose he is bullish on the US stock market and economy at these prices? As always, we think his actions speak louder than his words.


    Retailers are reeling from the countrywide COVID-19 lockdowns. Many were struggling before the virus. For some major retailer brands it was the last straw. Neiman Marcus, JCPenney, and J Crew are just a sampling of names to recently file for bankruptcy. Others, like Macy’s, Kohl’s, and Nordstrom, have scrambled to shore-up finances and have completed secured debt deals since March. For an industry (brick and mortar retail) that has been in secular decline, it is tough to look across the landscape now and see opportunity, especially on the equity side.


    US-China relations continue to fray.


    • The Trump administration is blaming China for allowing the virus to infiltrate the United States. To be sure, on the one hand we are to believe that the virus is nothing (just the flu, not even) and on the other hand we are to hold China accountable.
    • The trade deal phase 1 may be in jeopardy. For one thing, China has suspended US agriculture purchases.
    • China has moved forward with tucking Hong Kong under its unified control and the US responded by moving to strip Hong Kong of its special “One Country, Two Systems” policy. This has allowed HK to remain a central financial and economic hub to Asia post the British handover in 1997.
    • The US is threatening to suspend participation in WHO.
    • The US has warships in the South China Sea

    The US is moving toward stricter listing of Chinese companies on US exchanges and restricting Federal pension plan investment into Chinese companies.

    Junk Bonds

    Some bonds issued into the junk bond market since the outbreak of COVID-19 and subsequent lockdown are souring.


    Elsewhere in the junk bond world the Federal Reserve is holding worthless bonds it purchased through one of its market support mechanisms. The Fed purchased junk bonds through ETFs in its secondary market purchases and now holds several bankrupt securities like Hertz Global, JC Penney, and Neiman Marcus.


    The dichotomy of haves and have nots in this economic calamity is astonishing. While the credit markets still seem to be sorting things out – bankruptcies and distress on one side of the market and open new issue on the other side of the market – equity markets are screaming higher with NASDAQ 100 a short reach from all-time-high. The S&P 500 has cleared 3,000 but is still down modestly year-to-date.


    We wonder: if credit has trouble lending to some of these companies then what could a rational investor expect from owning the stock? Are indexers not looking through to the underlying? That is rhetorical.


    • Share price tumbles after CEO, Musk, says price too high: link
    • Secures $565 million from Chinese banks: link
    • Tesla sues to reopen California factory: link
    • Tesla threatens to leave California: link
    • Tesla and county reach deal for plant reopen: link
    • NASA human spaceflight chief resigns: link
    • SpaceX inaugural astronaut flight/launch postponed: link
    • Musk gets $775 million stock: link

    SpaceX launches astronauts into space and to the International Space Station: link

    Negative Interest Rates

    Low and negative rates appear to be here to stay.


    • US money market funds are waiving fees to prevent the funds from generating negative returns for investors. What price are you willing to pay for safe storage of your cash?
    • The UK issued its first negative yield gilt. Think of it like I give you a dollar and you give me less than a dollar back. Yay!

    Fed funds futures may foresee negative Fed funds rate.

    20/04 – April Market Commentary


    What we would give to be on a beach sipping a corona with lime.


    Alas, we live in the real world, or so we used to. Now we have entered a new realm of capital markets. One of central bank and government jawboning – examples 1) Federal Reserve saying it will buy US corporate debt, thereby levitating credit markets despite not purchasing a single bond 2) Trump Administration pushing OPEC+ to announce (dishonest and slow) production cuts initially driving oil prices higher only to see building crude inventories and negative (yes, negative!) oil prices a few short weeks later – and one where fundamentals mean nothing – examples 1) unemployment has reached depression levels, surpassing levels reached during the Great Financial Crisis of 08-09, and yet equity index prices are relatively unfazed for the YTD 2) consumer discretionary activity is nil in a shutdown global economy and yet equity analyst forecasts seem generous still, ode to the V-shapers 3) there are two credit markets with an abyss separating them – there is distressed and non-distressed. We are scratching our heads as to how all of these reconcile. We think remaining in the safety of the high-quality/investment-grade space is the place to be.


    Marketing and Advertising

    Ad spending is being slashed in many industries (ExpediaGoogleOmnicom  are example articles), not least those hit hardest by the pandemic. We wonder if that spells trouble for big tech. Every cycle and cycle turn has its defensive sectors where investors scurry towards “protection”. In the past, utilities, defense industry, consumer staples, and healthcare stocks have variously served this defensive role. More recently, technology companies have become the new defensive stocks. But, curiously, many rely heavily on ad spending dollars, or at least on monetizing their “big data” and as budgets are cut at big and small companies alike, what is going to be the marginal demand to upgrade computers, servers, et cetera and how many of those monthly software license services are likely to be renewed in the months ahead? We wonder if some of these high-flier stocks will see a Wile E Coyote over a cliff moment when investors realize the direction of revenues and cash flows and the heights they have taken multiples, which imply rapid-growth. The NASDAQ 100 price was up year-to-date at the April month end! The concentration in the top few companies within the S&P 500 has not been seen since the Dot-Com bubble – the largest 5 names in the index are MSFT, AAPL, AMZN, GOOGL, and FB and account for as much as 20% of the index. The next couple of years will be interesting. Be careful out there.



    There is economic and investor wreckage everywhere. We have been surprised by the widespread and dramatic impact. Simply put, because the global economy has suffered widespread shutdown, demand for oil has evaporated almost overnight and no one bothered to tell oil production companies to shut off wells, so the supply just keeps coming. Storage cannot be built quickly and so at some point the industry just runs out of places to put the oil. What you see then is well shut-ins (producer revenues go to zero), oil burning (could look like Iraqi war in the Bakken at some point), and low or negative oil prices. How would it go negative you ask? If you have oil and no place to go with it, you will pay someone to take it from you. Oil is highly toxic, and you do not want this on your driveway or in your pool. We have certainly gone through the thought process of how we might take delivery and store crude oil – alas, it is dangerous and expensive. Sadly, we probably have not seen the end of this problem. Wells are only just being shut-in, and producers are very reluctant to do so because they have bills to pay and dynasties to restore. In the meantime, it is a race to the bottom and speculators are rushing in. The next year will be interesting. Be careful out there.


    Work From Home

    We suspected the lockdown would forever change the way we conduct ourselves – from rapid adoption of new technologies to breaking modesty barriers of to wear a mask or not to wear a mask – but by and large we figured much of our prior behaviors would resume once on the other side of the “V”. But will things go back to normal? One example initially postulated was that offices would be abandoned for more remote work. We thought that ridiculous – and our view was/is anecdotally supported by conversations with business friends and colleagues – yet then there have been rumors of large employers indicating they would pare office space permanently (saving rent) and shift more employees to working remotely. These rumors came without verification, so they had to be weighed against anecdotes and other evidence. But then came actual announcements and news stories confirming other large organizations shifting in that direction (here is an example: Barclays). And so, do we face a market with dramatic excess supply of office space at the exact wrong time. The next couple of years will be interesting. Be careful out there.



    Pandemics and airlines do not work well together. The airlines and related industries are in financial trouble. They are in overcapacity and whatever path you imagine forward; it is going to be some time before travel reaches levels of the recent past. Warren Buffett sold all four of Berkshire’s airline positions – and they were large – during April. Even though that meant Berkshire would incur trading losses Buffett saw the writing on the wall – because of the virus, airline stocks may be terminal.


    Insurance Reinsurance

    topic we’ve visited a few times over the past few years, insurance and reinsurance is likely to suffer a hit to capital which often results in the market flipping from soft to hard. Loss experience may soon be widespread, between recent spate of property catastrophes – global wildfires, earthquakes, hurricanes, etc – and now capital markets exposure on the asset side of balance sheets could create losses at the wrong time. Insurance claims cause increased liabilities and asset losses cause reduced asset value, leading to a double-whammy reduction of insurance company equity/capital. This causes “supply shortage” when writing new policies (reduced capital means reduced capacity to write insurance) so rates generally rise. Further compounding industry turmoil is the pandemic and potential for related claims. Specifically, business interruption claims. As it was, the majority of business interruption policy coverage was tied directly to incidence of specifically named perils – hurricane, earthquake, or wildfire for example – whereby if a business suffered property damage during such an event then the insurance company would also cover business damages as a result of the business being shut down. In a pandemic a big question is raised as to whether business interruption is activated – are many insurance policies that do not name pandemic as a peril while others are more ambiguous. Litigation is underway to find an answer – if some or all insurers are determined liable, the whole industry would quickly find its capital position depleted. At current, insurance industry groups are lobbying US congress for a federal pandemic reinsurance pool/backstop.


    Another potential exposure in insurance company reserves is private mortgage insurance and it has not been much talked about yet. This insurance exposure comes in two primary forms 1) a policy many new homeowners are required to use when they purchase homes at LTV >80 (PMI) and 2) structure products developed after the Great Financial Crisis whereby Fannie Mae and Freddie Mac securitize some of their own mortgage insurance exposure and sell it to licensed insurers and reinsurers. With unemployment rocketing to higher levels, the roll out of several federal help programs, and now mortgage forbearance programs there is a minefield of policy and legal issues surrounding these exposures – namely, who incurs losses, if any?


    Our continued interest in insurance is because soon may be a good time to be a well-capitalized insurance/reinsurance company and we are watching for opportunities to invest. Then again, now is a good time to be well-capitalized in any industry.



    The activities around this company remain difficult to follow but here are some of the headlines we watched during April:

    • Tesla shape shifting – could it be the new Amazon. Building and delivering ventilators: link
    • Production halt and work furlough: link
    • Share price surges: link
    • Lawsuit against Tesla going-private tweet to proceed: link
    • Revenue beats analyst estimates: link
    • $16 million first quarter profit, $750 million second quarter executive comp payday: link
    • Musk wants the virus: link
    • Einhorn questions remain unanswered: link
    • As Model 3’s roll off the lines in China, price cuts…link

    One profitable quarter away from S&P 500 eligibility. Yay…