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.

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.

U.S. Agriculture

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.

General Electric

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.

Insurance & Reinsurance

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.

Wells Fargo

Another month, another scandal. Some culture…

06/2017 – Market Commentary

Combining our experience and daily focus, we aim to process, distill, and comment on various activities in the market place here in the Market Commentary section. Our purpose is to get you thinking about things in order to avoid just re-presenting otherwise meaningless statistics like unemployment level, S&P 500 closing price, etc. Ballast will provide you this commentary on an ongoing basis with the intent of delivering insight and color that is not readily available through public outlets. We assume that you are familiar with common sources for latest readings of Dow or S&P closing prices and that you see the major headlines like the Federal Reserve Bank having increased or decreased the Fed Funds rate (the Fed increased on June 14th).

In our opinion, a great deal of time and energy from sell-side economists is spent addressing unemployment, ISM Index, payrolls and all the other monthly economic releases, speaking to facts without necessarily instilling wisdom. To us, this is an outcome of the age of Google – anyone now has the ability to quickly search the internet for facts and information (and now disinformation). But knowing facts and information is different than having knowledge and wisdom.

Here are some insights from June events to highlight some of the things we have worked on and thought about on behalf of our clients:

Amazon announced it agreed to purchase Whole Foods for $13.7 billion.  Following this, other publicly traded grocers and food distribution companies were significantly weaker with several seeing stock prices moving 10-20% lower on the news. The simple announcement by Amazon and Whole Foods wiped out several billion of market value across the sector. On the bond side, we saw credit spreads (the premium over risk-free rate) increase by 30-45 bps for Kroger, the largest US grocer.  This implied the market thought it had become 20% riskier to lend money to them.  We viewed this as an opportunity.

Amazon also made another announcement. This time the company reached an agreement to sell certain Nike products. On the news, sport-related retail sold-off significantly. We saw 5-10% lower prices for publicly traded stocks in the sector on the news.

Amazon “killing brick-and-mortar stores” has been the talk for a few years now. Over a long time-horizon e-commerce will likely do so, but we do not currently see disruption taking shape as quickly as market reaction has implied in these two recent events. Instead, we view these market moving instances more as evidence of rich equity valuations (and accompanying investor sensitivity) than as credit to Amazon and the disruption story.

Argentina, a country that has defaulted seven times in the last 200 hundred years and 3 times in the last 23 years, was able to issue a century bond (100-year bond!) during the month of June. What does this mean? We think hubris; we think it signifies how far into the cycle the market has gone. The bond default figures average to defaulting every 28.5 years over 200, or every 7.6 years more recently over 23 years. The debt markets, in apparent search for yield, lent Argentina $2.75 billion (lenders expressed interest to lend $9 billion), a country whose history would suggest could default more than 3 times before that loan matures. Are these lenders intending to hold this debt OR are they just in search of near-term yields due to the bonds coming with a 7.5% coupon and discount to par with initial pricing of $90? Like equity markets, we see lenders getting risky with valuations and counterparties.

Needless to say, we did not view this as an opportunity and we think having an investment team that knows to avoid unattractive investment opportunities will separate you from the market for the better.

TEVA is a large publicly traded, global pharmaceutical company with a story we have been following for potential opportunity. The company manufactures and sells a very successful drug therapy for treating Multiple Sclerosis, and the company has the largest generic pharmaceutical operations in the world. Our interest in the story is in the potential opportunity a confluence of factors could present to the patient and watchful investor. Without getting too detailed here, some of the factors include an increasingly likely chance of loss of critical patents protecting the Multiple Sclerosis drug, a regulatory pricing scrutiny of company and industry, (in our opinion) an ill-fated merger with another large generic pharmaceutical company, a lot of debt, a loss of CEO and CFO, and a weaker profit in the generics division.

We continue to monitor the Teva story, as well as others, to provide you with strong investment opportunities.