20/10 – October Market Commentary


The price for a barrel of crude oil fell to close the month of October at $35.79 (WTI) after spending much of October above $40. This is causing chronic pain in the energy markets where a long list of companies have filed for bankruptcy protection, other companies are trading at historically low values (sector weight as low as 2% in S&P 500), and the oil majors are straining to maintain dividends with low cash flows.

The causes for the fall in price of crude are numerous. Chief among the causes, energy demand expectations shifted lower as countries moved towards greater restrictions to ward off virus spread. Other contributors to the decline are rapidly
rising production in Libya, currently in civil war, and US production does not seem to be in balance yet as storage levels continue to rise to levels that previously scared market participants.

Meanwhile, a frenzy of business consolidation has swept the US shale patch. Pioneer Natural Resources agreed to acquire rival Parsley Energy, ConocoPhillips is acquiring Concho Resources, Chevron acquired Noble Energy, and Devon Energy is merging with WPX Energy. It is a busy sector.


As cases increase and hospitals experience increased admissions several countries reimplemented varying degrees of lockdown/restrictions. Some US states are contemplating varying degrees of restrictions as virus cases rise. While we (and we think the market does too) did not think we would get back to lockdown-like conditions, current trends of several state hospitalizations may lead us there. Hopefully not. Even without state-imposed restrictions human behavior (staying home more, avoiding public spaces, etc) is having a severe impact on the economy.

What can be said is that the economy has not recovered – life is not as it was before. Just looking at industries around travel and vacation as example, we could be years away from previous norms. A new wave of lockdowns and restrictions could prolong any economic recovery, not just travel and leisure. We are not sure markets are priced for this.

Hopefully, Oxford scientists are successful with their 5-minute test. It would go a long way to shortening quarantines and alleviating lasting anxiety from potential exposure.


PayPal, perhaps one of the most widely known financial technology companies, has announced it would open its network to digital/crypto currencies (the realm of bitcoin, ethereum, etc). Square is similarly positioning itself for transactions. This could give new wind for a bubble to blow. Recall that back in 2018 cryptocurrencies experienced an extraordinary runup in prices that was considered by many to be bubble-like. We may see another speculative move in related prices. This is speculative. We watch with bewilderment as markets continue to behave in ways we consider irrational.


The nay-sayers were wrong again. Or were the yay-sayers? Tesla reported another profitable quarter and everyone got what they were looking for – Elon Musk has unlocked another cool $3 billion in stock for himself, the critics saw another poor underlying performance quarter, enthusiasts saw strong profit and cash flow, and Tesla got another shot at making primetime inclusion into the S&P 500 index. On the latter, the index committee skipped over Tesla’s inclusion, waiting for greater maturity from the company. We wonder if the recent credit ratings upgrade is an extra push of confidence. Combined with another profitable quarter maybe inclusion is in the offing. Who knows. It was certainly another interesting month and the company remains very highly valued relative to all other automobile manufactures combined.

06/2018 Market Commentary

How is it July already? In case your summer is flying by as fast as ours, here is a chance to catch up on June’s Market News.

Auto Market

We commented on subprime auto last month. In June, there were a few events that had us scratching our heads. The first – Edmunds said that used-car prices are at a record high – which caused car rental companies like Hertz (ticker: HTZ) and Avis (ticker: CAR) stock prices to surge. The second – Street analyst forecasted a weak outlook for used-car prices – which sent Hertz and Avis plummeting. Ballast would agree with the analyst perspective that bargains are around the corner for vehicles coming off lease.


Hertz Price Chart

General Electric

GE continues to pare its operations to reduce debt and improve profitability. In June, GE announced it would spin-off its healthcare unit and sell its ownership in Baker Hughes. These businesses represent around 1/3 of GE’s revenues. GE will look very different in coming years. Ballast remains interested in the name.

Another mark for GE in June was the historical removal from the Dow Jones Index. GE was a member of the Dow Jones since 1907. Walgreens is the new Dow Jones entrant. Perfect timing…(Amazon acquires PillPack)

Amazon, The Untouchable

Amazon continues to impact other companies. Drug stores, drug distributors, and pharmacy benefit managers just got a tough pill to swallow (or so investor reactions suggest). Amazon agreed to acquire online pharmacy, PillPack, for $1 billion and wiped out $17.5 billion in equity market capitalization from 8 companies. The acquisition is a major step for Amazon into the pharmacy business, where the company plans to deliver medications directly to patients.


OPEC agreed to raise production. To Ballast’s surprise, oil prices surged. This is because the production increase was lower than expected. West Texas Intermediate crude closed out the month above $74, after spending much of June around $65. Amazing.

Mall Apocalypse?

Miami and Florida officials have approved development of what will be the largest mall in the United States – bigger than the eponymous Mall of America. The same owner is building the new mall. Despite malls around the country suffering greatly from reduced foot traffic and sales as e-commerce draws away market share, this mall is designed with major attractions in hopes of drawing shoppers. The $4 billion mall will have 3.5 million square feet of retail space and 1.5 million of entertainment space, which will include rides, trampoline parks, gyms, and other entertainment.


The cryptocurrency’s US dollar exchange rate continues to trend lower, reaching new year-to-date lows of around $5,900 at June’s close. This is a nice segue to share two pieces we think explain cryptocurrency and blockchain. The first is an info graphic by Reuters, and the second is excerpt from Bank for International Settlements (like a central bank to central banks) annual economic outlook.



It was a wild month for investors of Tesla stock. The price moved between $286 and $373, an $87 range. There was plenty of news flow around Tesla during June but no particularly noteworthy events. What we found interesting was this piece, which takes a look inside the company’s factory.

12/2017 Market Commentary


The cryptocurrency, Bitcoin, had a very active month, and each day we watched in amusement. The month started with Bitcoin climbing to dizzying heights, and by December 18th reached an intraday high of 19,511 (up from 9,654 at the beginning of the month). For anyone that does not want to do this math, that is almost exactly 200% price appreciation. Millionaires were seemingly minted every minute. Does that remind you of markets past? Things have certainly become chaotic price peak. You will recall in our previous month’s commentary we highlighted the introduction of Bitcoin futures, which debuted December 18th on exchange CME. Bitcoin crashed to an intraday low of 10,775 on December 22. That is 45% off the high – Merry Christmas. It has been volatile, to say the least, so we will see what January brings.


December was another major month with big headline for Teva. The company announced that it would move forward with layoffs, cutting 25% of its worldwide workforce, closing manufacturing plants, and suspending its dividend to save a projected $3bn in annual costs. Credit spreads widened (indicating rising risk) over the announcement period while the stock traded higher over the same period. We think one of the groups is thinking about risk incorrectly.


It is not surprising that Israeli workers, citizens, and politicians are not happy. Teva is like a national champion for Israel. Although we do not see Teva as having a choice with the restructure, these conflicting stakeholders could gum-up cost-cutting initiatives, setting the timeline back.


Moody’s followed up by putting the credit ratings of Teva on review for possible downgrade, citing the execution risk, the potential negative ramifications of cost cuts, and the impact of restructuring on cash flows through 2019. The bonds currently have a Baa3 rating, which is the lowest notch of investment grade. Just one notch downgrade would put Teva in “junk” territory. If this happens, combined with Fitch’s current BB+ rating, Teva would likely be considered high-yield, and it could face greater hurdles as it refinances some of its heavy debt burden.


Disasters in Insurance and Reinsurance

As we have previously written, the insurance and reinsurance industry has been in soft market (and lower profitability), marked with excess capital and competitive pricing. Historically, the insurance market moves from soft to hard in cycles. Deficient capital is what pushes the market back to hard pricing (and higher profitability). What typically leads to capital deficiency are record catastrophes (Hurricane Katrina 2005) or major reserve deficiencies (Asbestos in late 1990s).


The current situation may be a little different since many non-traditional reinsurers that were not in previous cycles are now in the market. These non-traditional competitors include hedge-fund and pension-fund backed reinsurance companies and insurance-linked securities and catastrophe bonds. The backers were drawn to higher potential returns not available elsewhere in capital markets. They have indicated commitment to reinsurance even in the face of heavy catastrophe losses. So, it seems that it may take both heavy catastrophe losses and capital market losses to draw the non-traditional capital providers back to their normal state.


The year 2017 added up to be a very expensive year for insurers and reinsurers. According to an FT article, total economic losses are estimated to be at $306bn, and some catastrophes continue to rage on – like wildfires in California. This topic resurfaces in December for couple of key reasons: 1) significant events continue now (the fires mentioned), and 2) January 1st of each year is important for the industry because that is the day most property catastrophe reinsurance policies are re-priced, or renewed (“1/1 renewals”). According to the FT article linked above, “early signs from the negotiations [leading up to 1/1] suggest that prices have not been rising by as much as some insurers were expecting.” The results of the 1/1 renewals will provide clues as to where the market is headed.

CVS + AET and Humana

In early 2017 several major health insurance mergers were blocked by the US Justice Department on anti-competition grounds. The announced acquisitions of Humana by Aetna and of Cigna by Anthem were unwound with billions lost to Aetna and Anthem, but especially the latter. Anthem obliged themselves to pay $1.85bn to Cigna if the deal was called off, and this did not include banker fees for vetting the deal, attorney fees for fighting the Justice Department, attorney fees for merger preparation activities, or attorney fees for lost time in the whole mess. But that is beside the point. A couple of these groups have taken a fresh approach to acquisition, and we are likely to see copycats and investment opportunities.


CVS will acquire Aetna for approximately $69bn in a move that is said to reshape the health industry. Combining the two groups could better address costs by providing basic care and health services at CVS’s existing pharmacies and retail clinics. The move is unlikely to face the same challenges as the Aetna and Humana merger.


Humana has teamed up with private equity to acquire Kindred HealthcareThe Kindred segment for home health, hospice, and community care will be separated from Kindred Healthcare, and Humana will invest alongside private equity partners in the new company. Humana already has significant operations in “home based services” so this acquisition will increase scale and take Humana closer to health care cost drivers.


Will these deals find success or bring copycats? We are watching.


11/2017 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. Here are some insights from November events to highlight some of the things we have worked on and thought about on behalf of our clients:



We have introduced and discussed Teva in previous commentaries. There were a few meaningful updates during the month of November. The new CEO began work in early November, and later in the month, the company named the permanent CFO and announced a major restructuring of business operations.


Teva will be cutting a big chunk of its Israeli and US workforces. Considering Teva is based in Israel, we wonder how well that will go over –  even though it is crucial to righting the Teva ship. The company will not proceed with the sale of previously announced asset sales (offers were not high enough), and the specialty drug division will be consolidated into the generics division. This means that Teva will become a purely generic pharmaceutical company. This latter development does not surprise us, as the key specialty drug of Teva became subject to generic competition, so it would only make sense that it be consolidated into generics. We think this consolidation is the reason for layoffs – redundancy – and is an important step in rectifying the credit situation.


Again, we find ourselves wondering how the credit rating agencies S&P and Moody’s continue to rate the company as investment grade. Each step of the way, results have confirmed Teva is not near the track it laid out for maintaining investment grade ratings at the time of the major debt-funded acquisition of Actavis from Allergan. The asset sales and layoffs may better highlight the challenges to credit rating agencies. Credit spreads traded wider during the month and have signaled that bond investors are seeing through the credit ratings.


Times are good – or so we hear and read about almost daily. Did you know negative yielding bonds around the world reached $11 trillion (yes, that’s a ‘T’) again in November? We ask – why would central banks and investors remain committed to driving interest rates negative when things are going great? Remember, a negative yielding bond is a bond that is guaranteed to lose money if held to maturity. What negative yielding bonds suggest is that the alternatives are worse, and there is a possibility of deflation.…


November was a good month for Bitcoin, as it set a record high of nearly $11,400. This is up from as little as $200 only two and a half short years ago. One record after another, Bitcoin has been a hot and obscure sensation.


Currencies are broadly defined as representing store-of-value, unit-of-account, and medium-of-exchange. We do not believe Bitcoin has yet accomplished any of these. Store-of-value is hard to get comfortable with when each day is a 10+% point swing in value. Unit-of-account is obvious, as no one is yet reporting income and financials in stated Bitcoins. As for medium-of-exchange, how many businesses are advertising acceptance of your Bitcoins? Did you know that the transaction fees spending Bitcoin set a recent average of $10.00 USD? That $5.00 latte just cost you $15.00. How is that for medium-of-exchange?


On the other side of these is the investing world (our focus). At current, only individual investors have entered the fray. No asset manager can own it currently. But institutional adoption is not far off. This may soon come to an end as CME Group, the Chicago Mercantile Exchange, has announced intentions to launch a futures contract referencing Bitcoin. CME has futures contracts for everything from S&P 500 and WTI oil to lean hogs. Having such an exchange-cleared product is likely to turn the Bitcoin heat up even more, but we still plug our nose around this hog. Speaking of heat, Bitcoin has redefined parabolic – see accompanying chart. We called your attention to several interesting bubble and market mania books back in August, and will point you there again.

X=Time (Month & Year)   Y=Price
       X= Time (Year)   Y= Price          

Da Vinci

Speaking of bubbles, Leonardo Da Vinci’s 500-year-old piece “Salvator Mundi” fetched $450 million at a recent auction in New York. Maintaining such art work is a negative carry – think costs of insurance, cleaning, security, et cetera. Priceless…


We were struck by an Amazon announcement during November. The company scrapped plans to build a bundled video service, one that would compete with the likes of online video services SlingTV and DirecTV NOW, which compete with traditional cable and satellite providers. Amazon stopped talks with industry partners because the service would not generate enough profit. We laughed and wonder when that has ever stopped Amazon. In the nine month period ending September 30, 2017, Amazon generated $1,176 million income on $117,413 million sales (that’s $1 billion and $117 billion). That’s a 1% net margin. Amazon is 1% margin away from running a benevolent operation.

08/2017 – 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. 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 August events to highlight some of the things we have worked on and thought about on behalf of our clients:



We’ve talked about Teva pharmaceuticals in a past newsletter, highlighting challenges to investing in Teva. The risks finally became pronounced in early August when the company released earnings and surprised investors with weak revenue and poor income results. They took a write-down of $6.1 billion on the $35.8 billion Actavis Plc acquisition completed just 12-months prior. That’s 17% of the value paid. Someone got the acquisition valuation terribly wrong, and that helps to explain why Teva is currently without a CEO, a CFO, and some other key personnel. Needless to say, stock investors reacted by sending the stock price lower [from low $30s on the earnings release date to $18 in a matter of few short days (that’s -44%) and to a recent low of $15.22.]


We were negative in the June newsletter and remain somewhat negative on Teva today. Why, you may ask, do we bring Teva up if we are negative still? – Because Teva is the world’s largest generic pharmaceuticals manufacturer, and we like the fundamentals of that business over the long-term. We would expect the credit to eventually stabilize and provide generous yield to patient and watchful investors. We understood (back in June and earlier) that investors were poised for a very big surprise, and that the reaction would be a very good investment opportunity for prepared investors. That surprise for investors came in early August with the earnings release noted above.


Our focus has been on the credit side – the debt issued by Teva. Teva funded the majority of the acquisition of Actavis with debt, and that debt remains on the balance sheet today. Now Teva’s resources for repaying debt are much lower than investors initially anticipated, and this makes the credit riskier than before. As a result, the price and yield of the bonds are rapidly approaching levels we think appropriate.


The last piece of the investment thesis is the anticipation of the credit-rating agencies (Moody’s, S&P, and Fitch) to cut Teva’s credit ratings from investment grade (“IG”) to below investment grade (high yield, or “HY”). This is still developing, but we remain convinced Teva cannot retain IG ratings for long, given the problems we spelled out in June. If (or when) Teva credit ratings do shift from IG to HY, such a move typically carries major implications for bond trading, which tends to create some of the most attractive technical trading opportunities in credit investing. This happens because many institutional credit investors operate under investment mandates or regulatory capital requirements that limit their ability to own HY credits. This creates “fire sale” situations in the event that a credit rapidly deteriorates due to these institutional investors being forced to sell following the credit downgrade with no ready buyers. As we all know, if there are no ready buyers, then price must fall until enough buyers come forward.


Somewhat unique to Teva, assuming it crosses into HY – and what we think will be additive to the technical trading opportunity – is its $35bn in debt outstanding. This is somewhat large for the HY market. Such a shift from IG to HY would, for a period of time, be too big to digest in the HY markets, and it could potentially create pricing well below intrinsic value. One final technical factor unique to Teva is that it has 30-year bonds outstanding and that issuance a large $2 billion. The HY market tends to invest at less than 10-years. Crossing over to HY would mean the 30-year bonds may need to be significantly discounted to find a home, and that is the crux of our interest in this Teva story.


Finally, from a trade implementation standpoint, an investor never knows the exact path, lowest price, supply on bonds, etc. over the course of a thesis playing out. With this in mind, our approach is to invest several times over the assumed investment time horizon with the objective of averaging into a strong position. This can mean initial or early trades showing mark-to-market losses for a period time until the credit stabilizes.


These multiple dimensions to the Teva story have us salivating over the potential opportunity. We continue to monitor this situation, as well as others, in order to provide you with strong investment opportunities.


Hurricane Harvey came with much destruction. Our thoughts and prayers are with those left in the storm’s wake.


Much to the dismay of residents and business owners, insurance and reinsurance companies will incur a small portion of the ultimate economic tab. The storm is estimated to have caused as much as $90 billion in economic losses while insurance claims are expected to cover as little as $10 billion.


While catastrophes are undesirable, they do create investment opportunities, especially within the insurance and reinsurance industry. It’s a cyclical industry, and the recent two years are widely characterized as a late cycle. The reinsurance industry has been flush with capital in recent years, causing higher competition – which also results in insurance underwriting being underpriced and unattractive from an investment standpoint –  in our opinion. This can be seen through lower ROEs (Return on Equity) throughout the industry. Catastrophe events tend to cause the cycle to turn by reducing industry capital to a deficit, which leads to attractive prospective returns on business – that is, insurance and reinsurance companies begin to price policies more appropriately to rebuild capital. We are now monitoring these industries for opportunities that may arise from a year of numerous (and large) insurance and reinsurance loss events – wild fires, earthquakes, hurricanes, etc.

Oil Market

We noticed an article discussing an oil bull gambling on $100/barrel oil. Incredible. We see this as unlikely over the intermediate term, barring some natural catastrophe or geopolitical event. As we mentioned last month, our opinion is for status quo or lower near-term.


Segueing to energy sector investing, the pain of 2014-2015 oil price declines continue to work its way through businesses. Seadrill, a large Norwegian-based company that conducts offshore drilling, has filed for bankruptcy after struggling for as many years.


Bitcoin has surged above equivalent $4,000 US dollars. This is astonishing. We remain skeptical and would encourage you to read any of the following great books if you need to check your pulse or sanity: Devil Take the Hindmost, Extraordinary Popular Delusions and The Madness of Crowds, or A Random Walk Down Wall Street. These books do a good job of documenting and discussing historical incidents of investor excesses. While we entertain arguments for some fundamental value to Bitcoin, we think the current exchange value puts price well ahead of currency fundamentals – namely usability. How many retailers or banks do you know that accept Bitcoin?

North Korea

Throughout the month of August, North Korea has rattled sabers with many nations, which is a major geopolitical risk. It presents existential risk for many and an investment risk for all. And so, it baffles us when the stock market sells off by 2% in a day or when interest rates move 5 basis points lower (hundredths of a percent), as well as when pundits talk about markets reacting to the threat of war. War, especially nuclear, would move bond and equity market prices dramatically lower. Such recent movements hardly begin to discount real outcomes or assign suitable probabilities given the missile launches, H-bomb test, and harsh rhetoric. We continue to invest where we think it makes sense, but as with most other things we look at, talk and price regarding North Korea do not correspond.