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.

03/2018 Market Commentary

So much happened during March, so bear with us as we walk you through it all. We’ve got a new Market Commentary format for you too this month. While we hope it is easier for you to find those topics of interest, don’t be shy. It’s all important as you charge into 2018.

Market Correction

Recovery complete: Nasdaq hits new record. Well, that was easy.

March 2018 Nasdaq

Warren Buffett / Berkshire Hathaway

The much-anticipated Berkshire Hathaway 2017 shareholder letter from Warren Buffett was published this month. The following bullet points are key highlights by Ballast.

  • Key qualities we seek […] a sensible purchase price. That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high. Indeed, price seemed almost irrelevant to an army of optimistic purchasers.
  • Once a CEO hungers for a deal, he or she will never lack for forecasts that justify the purchase. Subordinates will be cheering, envisioning enlarged domains and the compensation levels that typically increase with corporate size. Investment bankers, smelling huge fees, will be applauding as well. (Don’t ask the barber whether you need a haircut.) If historical performance of the target falls short of validating its acquisition, large “synergies” will be forecast. Spreadsheets never disappoint.
  • The ample availability of extraordinarily cheap debt in 2017 further fueled purchase activity. After all, even a high-priced deal will usually boost per-share earnings if it is debt-financed. At Berkshire, in contrast, we evaluate acquisition on an all-equity basis, knowing that our taste for overall debt is very low and that to assign a large portion of our debt to any individual business would generally be fallacious (leaving aside certain exceptions, such as debt dedicated to Clayton’s lending portfolio or to the fixed-asset commitments at our regulated utilities). We also never factor in, nor do we often find, synergies.
  • Our aversion to leverage has dampened our returns over the years. But Charlie and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need. We held this view 50 years ago when we each ran an investment partnership, funded by a few friends and relatives who trusted us. We also hold it today after a million or so “partners” have joined us at Berkshire.

This last point should settle in. Leverage can help you get somewhere, but reducing leverage will allow you to stay there.

If you heed Mr. Buffett and have been an excited equity investor in the recent year, we would encourage you re-read the first bullet point above. The other points provide excellent expert perspective of general activities we are seeing in the market place.


We have commented on Netflix in previous newsletters. An analyst at UBS upgraded Netflix recommendation, and the stock price and company market capitalization set new records. Speculators may play, but the gravitational pull of cash flows and earnings will eventually have its way.


Speaking of speculators… Tesla has its work cut out for it.

General Electric

We discussed GE in our January newsletter. In it, we explained an adverse scenario that we had heard from a hedge fund manager. We had disagreed on it and sought comment from GE, as well as the hedge fund, for clarification. The hedge fund never responded, but GE Investor Relations talked to us about recent insurance charges in the Capital unit, as well as the long-term service agreements, the importance of credit ratings to sales, and company commitment to deleverage.

A GE related headline hit the press in March. General Electric – industrial conglomerate and manufacturer of electricity generation turbines, jet engines, healthcare equipment, oil & gas equipment, and a lot more – market capitalization fell below that of each of the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google) for the first time. What GE produces is the backbone of the economy.

We continue to monitor GE with interest.

Dollar Tree

The economy is strong, and inflation is about to rise – or so popular market narrative goes. However, Dollar Tree (the owner of chains, Dollar Tree and Family Dollar) shares fell as much as 15% on March 7 due to a weak outlook that was provided during the company’s latest reporting to investors. The company is not exactly the bellwether for the stock market, but how can things be looking down for Dollar Tree while inflation, wage, and earnings expectations continue to rise and drive the narrative? We wonder. To us, this would suggest one of two scenarios: 1) that low-wage earners are doing well and upgrading consumption or 2) that they are not doing well and tightening belts. Gas prices and rent (key expenses for most households) have increased in the past year (CPI was +2.2% in February), while average hourly wages increased 2.5% y/y.

Dollar tree

Oil Market

Many seem to have an opinion on which direction oil is going. In fact, last summer, Ballast said, “our opinion is for status quo or lower near-term” but that was back when oil (WTI) was $50. Now it is $65. While we feel somewhat the same today, we’ve seen a few industry leaders make some points that are difficult to ignore.

Mark Papa, an industry titan and former CEO of EOG Resources, was recently recruited out of retirement to run a new company formed by private equity to acquire shale assets out of the energy distress in 2016. We think he is worth listening to. Mr. Papa has made waves with public comments about the promise of the shale revolution. His point is that it’s not as promising as many think – the low hanging fruit has been picked, and it gets worse from here. The article linked above highlights, among Papa’s points, the best drilling locations in both North Dakota and South Texas have been tapped, rivals are being too optimistic, operational challenges abound, and high returns now demanded by investors are leading to squeeze. Papa expects the US will not fulfill oil production projections. The bottom line, according to this thinking, is that oil prices are set to go higher – and soon. If correct, it seems like significantly higher oil prices would choke US economic growth prospects.

Cigna & Express Scripts

More mind-bending activities in the health care markets… In December, CVS announced it would acquire Aetna, a major health insurer. This March, Cigna, another major health insurer, agreed to acquire Express Scripts, a pharmacy benefit manager. We won’t layout the background of each here, only that our immediate reaction to the news was, “huh!?” and our reaction was matched by the equity markets. Cigna’s stock promptly fell in price. The price began the month at $195, and it has settled to around $167 now. In fact, Cigna’s stock price reached its apex of $225 in late January 2018. The Express Scripts acquisition will represent a major leveraging event, and we see no clear value in the combination. To the contrary, we suspect there will be value destruction. We shall steer our clients clear of this heap.


Buying things that “might be” is not generally a good policy. It’s especially not a good policy at high prices. A few years ago, there was an “arms race” of sorts for companies to buy potential block buster drugs in the pharmaceuticals industry before peers did. At the beginning of 2018, that arms race seemed to have kicked off again with big acquisitions by Celgene (Juno and Impact) and others as risks have mounted in existing drug portfolios. These risks have become pronounced with big headlines of drugs failing in trials or being pulled. Biogen and Abbvie took their multiple sclerosis drug off the market after patients were suffering severe complications from the treatment. Not long after, Abbvie announced that a key drug in its pipeline had disappointed in drug trials. Both Biogen and Abbvie stock prices have suffered greatly in March. Several other pharmaceutical companies have too. We only highlight this here as risks lurk, and in our opinion, many investors have not been paying attention.

Insurance & Reinsurance

Continuing previous comment pieces on the insurance and reinsurance market, here we point out the AXA acquisition of XL Group for $15.3 billion. Now, Aspen Insurance Holdings may be placing a “for sale” sign up. The reinsurance market is clearly consolidating, but there is no evidence yet that capital is leaving. This means high competition and status quo of undesirable profitability.