Bond bears received a little more fuel on their fire as the ten-year treasury bond rose above 3% for the first time since 2013.

[10-year Treasury Rate, Source: Bloomberg]

Many pundits will have you fear higher interest rates. Ballast welcomes them. We want to earn higher returns, and such returns have been lacking in recent years. While we think inflation remains contained and growth remains tepid, the supply and demand imbalance of treasuries could still send rates higher, regardless of what the economy can bear. That would require willful disregard of the Fed. As stated in February’s Market Commentary, Ballast thinks this will move the front-end of the curve more than the long-end.

Ballast encourages our investor clients to not only embrace higher interest rates for the opportunities they bring, but to also not worry about the mark-to-market bond losses that it may cause on account statements (which is the thing pundits seem most concerned about). Unlike stocks, bonds contractually require return of principal. Any price decline must ultimately trend back to par. In the meantime, coupon payments are contractually made, and investors can reinvest the cash flows at more attractive interest rates, as well as in other attractive opportunities.

It was not a good month for discount airlines (and maybe not for airlines in general).

The first adverse airline event this month was when CBS 60 Minutes aired an episode questioning Allegiant’s maintenance and safety track record. Allegiant’s stock (ticker: ALGT) promptly fell in value by as much as 12% over a couple of days, moving from $165 to $145, but then, it moved back up to $160 by the month’s end. Roundtrip, it was hardly an event, despite risks of serious consumer preference shifts. The one-month price movement was 6% lower.

The next, adverse event struck Southwest Airlines (ticker: LUV), but it likely carried far broader implications if anything serious were to result from the investigation that is currently taking place. This includes the possibility of more problems for General Electric. A Southwest flight from New York to Dallas experienced an engine explosion, and debris from the explosion penetrated the aircraft, leading to depressurization of the cabin, which nearly sucked a passenger from the aircraft. The aircraft landed safely, but the injured passenger tragically died, despite efforts of the crew and fellow passengers.

The serious, broader implications (we think) relate to the engine, which is a very common piece on that type of aircraft. The engine is manufactured by a joint venture between General Electric and France-based Safron. The joint venture is called CFM International. If a flaw were to be found with the engine and if it were to be a common flaw among that particular engine or others (both of which are hypothetical as the investigation is ongoing), it would be bad for CFM, ergo General Electric. It would also be bad for most other airlines who then might need to take aircraft offline to fix engines. In the meantime, the aircraft could be filled with liabilities if another engine were to experience a similar catastrophe. This may well be tail-risk (low probability and high impact), but Ballast is not convinced market prices reflect this risk in prices of GE stock or the other airlines.

Ballast maintains little investing interest in airline equities, but we are, however, interested in and own several aircraft securitizations issued by US airlines. These structures are secured by the airlines’ aircraft and produce attractive intermediate-term yields.

The consumer staple sector has had a few uneasy years. The narrative varies – e-commerce, natural brands, cost inflation, etc. – but the trend has been the same: lower share prices. Take Kimberly Clark (ticker: KMB) as an example. Kimberly-Clark makes Huggies, Depend, Kleenex, and Kotex, to name a few. The share price is 21% lower for the trailing 12 months ending April 30. At the latest quarterly earnings release, the stock fell to a five year low of $97. This is a stock now valued at a modest (by today’s standard) 15x price-to-earnings ratio, the company has high quality single-A credit ratings, shareholders receive a dividend yield of more than 3.85%, and the company produces consumer staple products. Ballast finds this attractive.

One doesn’t have to look hard for similar stories. Proctor & Gamble, Newell, Kelloggs, General Mills, etc. all have similar tales, prices charts, credit ratings, and dividend yields.

Are investors really panning companies like Kimberly Clark because of, or in favor of, exciting companies like Amazon? Where are Amazon’s margins? Amazon doesn’t pay a dividend. What does Amazon have to offer besides the hope of someday expanding margins by selling products made by the Kimberly Clarkes of the world?

As an investor, would you rather receive a dividend and wait for opportunity or receive no dividend and hope for opportunity? Ballast strongly favors the former.

The race to renegotiate NAFTA is on, and the deadline for terms are due in early May. Canada and Mexico are expected to concede ground, but whether this can be done by the deadline is the question. Mexico is in midst of an election that could present risk for the NAFTA delay. It is assumed that if there is any chance for NAFTA to survive (and in its renegotiated form), it must meet the deadline and be signed into law before Mexican elections this summer. New NAFTA or no NAFTA, the potential disruption to supply chain will be something to watch, and it has Ballast’s attention.

Tesla was discussed in the last month’s newsletter piece, and Ballast remains skeptical of Tesla’s high valuation, given the scaling and cash flow challenges. We think it is likely that Tesla will need to raise more capital, and we see the company’s ability to access capital as becoming more difficult. Historically, Tesla seems to have relied on excitement about future products, as well as prospects for bigger, bolder ideas, as distractions from operational and financial shortcomings. This month (of bad news, in our opinion) marked perhaps another attempt at distracting stakeholders with the announcement that Model Y would begin production in November 2019. Remember, Tesla has not realized any prescribed timeline we are aware of, and the Model 3 production and production ramp has been abysmal – Tesla’s CEO has even acknowledged this.

All of this is just to say that we are astonished that a company struggling on the bread-and-butter product (Model 3) is even entertaining moving forward with the next model.

Aluminum prices have whipsawed with recent tariff actions. Stocks of companies involved in the production and processing of the commodity have tracked the commodity price. Alcoa (ticker: AA) saw its stock price move from $45 at the beginning of April to a mid-month high of $62 (+37%) only to fall to $52 (-16% from the high) to close out the month. That is volatile, and Ballast is not sure investors have any clearer of a picture on what to expect for the industry.

Apple is said to be exploring building its own microchips. This would be detrimental to the chip industry, including Intel. Various speculations as to reasoning have been floated, but we wonder why building their own chips makes sense. Building the capacity and expertise, while trying to eke out a profit, is doubtful. Neither set of investors – the Intels or the Apples – appears to be very rattled by the revelation.

As we’ve previously highlighted, although we have expected status quo for oil prices, industry minds that we respect have called for dramatically higher oil prices, and the market seems to be trending this way. West Texas Intermediate, the US benchmark price per barrel of oil, reached $69, a price not seen since 2014. As recently as July 2017 the price was $42.

Whether oil prices are high or low, Ballast has been interested in the offshore drill rig companies. These companies are asset-intensive, and they suffered immensely in the oil price downturn (since oil and gas exploration companies stopped unprofitable projects, dropping rig utilization). The offshore oil rig industry appears to have rightsized and is treading water until oil prices rise and exploration companies begin to pursue new projects

Ballast wonders if we are beginning to see the green shoots. Exploration auctions have taken place around the globe, namely in Mexico and Brazil, and BP announced it would drill two projects in the North Sea.

Sprint and T-Mobile, number 3 and 4 US wireless carriers, agreed to merge after what seemed like an on-again/off-again relationship. We’re not sure whether it is good for the pair, but we suspect it is at least marginally negative for their larger competitors AT&T and Verizon. Primarily, it likely means the wireless plan pricing war is set to continue.

What caught Ballast’s attention and why we write about the pair here is that ordinarily, the market knee-jerk reaction of investors following a merger and acquisition announcement is often telling of who the winner is. Sometimes, both stock prices rise – win-win. Other times one rises, and the other falls – win-lose. This time, the price of both stocks fell dramatically – lose-lose. This is rare. T-Mobile’s (ticker: TMUS) share price fell from $64.50 just before the announcement to around $60.00 by mid-day April 30, or down 7%. Sprint’s (ticker: S) share price fell from $6.50 just before the announcement to around $5.50 by mid-day following announcement, or down 15%. Investors do not seem impressed.