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.

12/2018 Market Commentary


Like months past, December had a lot of news around Tesla, Musk, and sister companies. Here are some of the key items that caught our attention:


In case you were living under a rock or just returned from an off-the-grid vacation some place nice, stocks were down in December. What a month. We did say at the beginning of the year that counting on a repeat of 2017’s strong stock market performance was not a good bet. Our caution looked off for much of the year until October when the selloff began. It’s amazing what global central bank shrinking balance sheets can do to asset prices. Throw in rising interest rates, and you have a toxic mix. There are no current plans for central banks to stop the tightening, so stay tuned because the ride down will likely continue.


Much like our commentary earlier this year, we do not yet care for general price levels. We remain cautious and think you should be too. There are select opportunities though, and your team at Ballast continues to look for them.

Credit, Rates, & Commodities

Rates (10yr treasury) and major commodities continue to slide. Credit spreads have widened (risk premium increasing) substantially over the past few months. All of this has happened during what many pundits are saying is a strong economy. However, these things don’t tend to occur during a strong economy. Conversely, they tend to signal weakness. Meanwhile a portion of the interest rate curve has inverted, and an inverted curve commonly signals an imminent recession. Stay tuned.

Hindsight Capital

This piece is entertaining and provides a good perspective. Maybe someday Ballast will have the abilities to launch a hedge fund, Hindsight Capital.


Everyone is doing it. AB Inbev (parent of Anheuser Busch) and Altria (parent of Marlboro) have entered the cannabis fray. The former is forming a joint venture (pun?) with Tilray, a Canadian cannabis company, to research nonalcoholic beverages. The latter paid $1.8 billion to acquired 45% of Canadian cannabis company Cronos Group. There has been interest elsewhere in the market of large consumable goods as well. All relevant industry groups appear to be gearing up for a different future in the U.S. We think that future is coming but remains, generally, not investible.

China, What's Wrong?

Chinese companies have had great success raising capital lately through IPOs. What’s alarming though is that Chinese company IPOs in the US now exceed those in the mainland. Wait! What!? What’s wrong with China?

Buyer beware. And that means you too, index investors. Your index might contain things you otherwise might not want.


We discussed Netflix previously. Basically, this company spends billions more than it earns to rapidly buy up content in order to appease its subscribers (so they don’t go somewhere else). What’s weird though is that Netflix’s top viewed programs are content owned by others (see chart in middle of page). These shows are owned by other major networks – many of which are building out their own streaming services. If their own shows are not ranking well, then what’s the return on investment for Netflix owned content, you ask? Maybe when the Federal Reserve’s balance sheet is much smaller, we’ll find out.

Absurdity finds limit?

We wrote about SoftBank and WeWork in October, highlighting the high valuation the former has placed on the latter despite the lack of earnings of the latter. It seems absurdity may have found a limit. Key capital partners to SoftBank’s Vision Fund are balking at the latest valuation and proposed investment into WeWork.

CLOs & Leveraged Loans

We have previously discussed leveraged loans and CLOs separately. They are related markets – the latter invests in the former. There has been a lot of commotion recently.

Many market participants are shedding risk in the space.  In fact, some of these groups are beholden to investor redemptions/contributions (or fund flows in industry speak). Flow has been one way for a while, and now it’s going the other way – out. Another market participant, banks, have been unloading leveraged loans to protect their balance sheet. This is causing pricing to fall and discounts to grow.

By the way, banks have been happy to oblige the lending boom to date because the fees have been so good. This is a contributing factor to how you can get risk skewed too far the wrong way. But don’t worry, everything is fine.

This loan market dislocation can present good investment opportunities. Ballast continues to monitor the situation.

08/2018 Market Commentary

Trade War Continues

Neither the United States nor China were willing to back down this month, and so, tariffs continue to increase on each side of the ocean. The two countries agreed to relaunch dialogue, but that did not stop president Trump from threatening new tariffs. Much like a kinetic war, many are harmed in the effort to win. So too, in a trade war, many are harmed before a victory may be claimed. At first, casualty in the United States hit farmers. Already affected by a pullback in the Ag cycle, crop prices have dropped even more in response to China’s tariffs. Trump has asked farmers to take the long view for the country, but that can be difficult to do as their livelihood suffers. Realizing the pain, the present administration has provided USDA assistance.

Consumer Unstaples

It used to be that consumer staples were defensive investments because consumers would reliably purchase these products, and the companies would produce stable results. (Think personal paper products, beverages, or even breakfast cereals) Each of these have been under attack lately, with sales at mature companies declining, as marketing schemes of new companies chip away at old brands. In the case of beverages, consumers are not drinking less. They are just shifting to “healthier” choices. Global soda sales are declining, and this has led Pepsi and Coca-Cola to take decisive action. The former has acquired Soda Stream to participate in the healthy shift, while the latter has made its own acquisitions and market experimentation. Coca-Cola announced that it would acquire UK-based coffee house Costa, putting Coca-Cola in competition with Starbucks.

Marginal Buyers

Last month, we discussed marginal buyers in a high valuation market. This month, we noticed an article highlighting one of the more highly valued real estate markets in the United States. In New York City, the luxury apartment market had soared for a few years, and then, it stagnated. In recent months, sales have declined, and prices have plummeted with them. We think this is a sign the marginal buyers are leaving. This can be either bad or good – bad because prices will fall or good because those with liquidity will have better buying opportunities. Will this show up in the rest of the market? We hope so. When? We don’t know.

Leveraged Loans

This leveraged loan cycle won’t be like the last one. Recovery rates are expected to be lower because the market has reached a larger size, and loans are of lower quality (fewer covenants) relative to past cycles (according to research by Moody’s Investors Service). Further, the previous cycle and the current cycle were all underwritten on assets, producing income in a declining interest rate environment. We wonder what happens to the debt service of companies struggling to make money as interest rates rise. The Moody’s warning should make investors cautious about owning BDCs, CLOs, and high yield funds through any downturn.


Another month, a lot more Tesla. The month kicked off with Tesla’s CEO burning short sellers by announcing boldly via Twitter that he planned to take the company private for $420 per share. The stock price soared until analysts began penciling out how it could be done… it couldn’t, it wouldn’t. The price fell back to its previous trading range after a week or so of active news flow. It turns out when the CEO boldly said “funds secured” that was not the case. It also turns out that he did not discuss taking the company private with the board before making the announcement – nor with any investing group. Other circumstances surrounding this event cause plenty of head scratching. The Securities Exchange Commission is now investigating the matter. We do not expect much to result from the investigation, but we think if nothing to date gives pause, then this should cause investors to press for better governance at Tesla. This CEO needs a leash; at the very least, take his social media away or require that he screen his posts through the legal department first. Big money managers have a fiduciary responsibility to their clients’ capital. What about Tesla? It is up to investors to force corporate responsibility through governance.

Tesla has made plenty of splashes during the month over whether it could meet production goals (which have been elusive throughout the company’s entire history) for the month of August and the rest of the year. Evercore analysts toured the production facilities and concluded Tesla was on track for producing 6,000 Model 3s per week by the end of August. Then, Tesla concluded August by missing the Model 3 production target by 30%. Don’t worry. They still expect to meet third quarter production goals…

Elsewhere, a UBS analyst says the $35,000 Model 3 cannot be made profitable, but then again, did Tesla ever intend to sell a $35,000 mass market car? Not without tax credits, it seems.

Here is one final note related to Tesla, referencing this article. Something you should never be caught saying, especially not quoted as saying is: “I was impressed with their negative free cash flow.”

Bond Bubble

The bond bubble rhetoric continues. Although not the point of this article, often we hear “don’t buy bonds because there is a bubble, buy stocks”. However, if we are to believe there is a bond bubble, then why own stocks and why no mention of a stock bubble? Stocks are a residual, junior claim of the earnings and assets of a company. If one is to expect losses to bond holders, then what are we to expect of stock holders? At least with bonds the holder can expect to be paid regular cash flows and have contractual claim to principal value. What do stocks holders get? higher prices? We think not, but we’ve been wrong before.

Cognitive Biases

WSJ Numbers explored some flawed consumer thinking that we found interesting and thought we would share. What’s better – 50% more product or 33% lower price? Here is the article.


We have not talked about Teva Pharmaceuticals in a while. The major news during August was that Teva’s competing product to EpiPen was approved by the FDA. Now, we will wait for the business execution. EpiPen is a commercial name that is ubiquitous for the product, which we think could make it a difficult market to penetrate. We are hopeful, and the timing couldn’t be better since EpiPen (parent company Mylan) has experienced a few controversies in recent years and is currently suffering a supply shortage.


Apple’s market capitalization reached $1 trillion during August. A first for the market. Wow. That is twelve zeros and one big company. A quarter of the trillion value sits on balance sheet as cash.

07/2018 Market Commentary

Triple C Priced to Perfection

We opened a market brief on Bloomberg (no public link available; for anyone with a terminal: {NSN PCQ8R66K50Y0 <GO>}) by accident to close out the month on July 31, but it made us pause. Key lines of the brief are as follows:

  • CCC yield fell to 7.89% (lower since Sept. 22, 2014) after the steepest drop since Dec. 30, 2008.
  • CCC spreads are closed at a 4Y low of +512, the biggest decline in 10 years.
  • Morgan Stanley warned investors about ‘significant potential downside’ in CCC credits.

For starters, we don’t often find ourselves in the camp on Morgan Stanley, and yet here we are. Investors are still evidently zealous for yield. This surprises us with all the talk of bond bubble, record weakness in covenants, and zombie companies. We think there are a lot of places to not be invested at this point in the cycle and this part of the credit curve is (generally) one of them.

We think yield-starved investors continue to push capital wherever yields surface. We suspect the biggest conduits and investors to be Business Development Corporations (publicly traded small and medium enterprise lenders) and Collateralized Loan Obligations (CLO), and they are the primary enablers for this market. The former is available to and popular with retail investors, while the latter has been hot with institutional investors.

CLO's are Forever

Until they are not. Quantitative minded investors have been effective at observing historical losses of the asset class and calculating excess returns. If you are an institution looking for good relative value, this has been the place to be. With the recent resurgence in CLO interest (since the last cycle end – Great Financial Crisis), many new CLO managers have surfaced and met rising demand for their product. The problem is the CLO owner is beholden to many things out of their control, and when the market turns, liquidity goes away. It is not until then that investors will find out how good their CLO manager is – only with hindsight. And those historical losses – we’ll see if the next is the same as the last. In the meantime, sounds like the CLO market started to flash warning signs.

Tesla Tesla Tesla

A reference to the Brady Bunch or summoning Candyman? Elon Musk was summoned by a critic of Tesla, writing under the pseudonym Montana Skeptic on Seeking Alpha, and Musk silenced the critic. The analyst and an editor of Seeking Alpha both commented on the event and confirmed. Montana Skeptic, to keep his employer from public scrutiny, as well out of legal wrangling, agreed to cease writing about Tesla.

That was not it though, as a lot happened during July for Tesla. Remember, Tesla’s cash flow has been of critical focus, and many suspect the company will need to do raise capital – which Musk has strongly denied. In addition to the silencing mentioned above, we summarize the month here:

  • Tesla is thinking about building a Tesla Gigafactory in Europe. This could provide cover for capital raise…even though it is not needed…
  • Tesla is thinking about building a Tesla Gigafactory in China. This could provide cover for a capital raise…even though it is not needed…
  • There were more high profile executive departures.
  • There was distraction with sending help (ultimately determined unneeded) and equipment to the Thai cave rescue.
    • Elon Musk then, very publicly, skirmished with the rescue lead and certain divers about ego things.
    • Elon Musk disparaged at least one diver in an unacceptable way, deleted the Tweet, and publicly apologized.
  • Car sale prices increased in China.

The FANG index, comprised of the crème de la crème of tech high fliers (Facebook, Apple, Netflix, Google, Amazon, Twitter, Tesla, et al), was soaring, but it hit turbulence in late July and has plummeted to correction territory. Leading the charge lower was Netflix, Facebook, and Twitter with poorly received quarterly financial results. While the index may not be Icarus, some of the constituents may be. The result is something we recommend staying away from. We continue to strategize ways of expressing our views around these select names in ways that are productive to accounts, but these are expensive times in the tech investment world.

GDP Hits 4.1%

Where is the beef? It is one quarter, and the reading spikes on occasion. Not to mention, it is often later revised as lower. The annual reading is likely to be no different than the previous few years. While headline unemployment is giving people something to cheer about, employment slack is a huge overhang for the next few years. Wages, in real terms, have treaded water (at best) for the last decade. Inflation is not budging. Celebrate not. We are not out of this yet.

Marginal Buyer. Minsky Moment?

For several years, China-based investors were the marginal buyer in capital markets. In real estate, market valuations are viewed in terms of cap rates (or the discount rate with which to value a property given its net operating income). A lower cap rate translates to a higher value and vice versa. Rewind a few years and US investors were already taking pause at the historically low cap rates. Then, China-based investors entered, and they drove cap rates even lower. Risks were mounting at home in China, and investors were prepared to take big risks overseas. In an already highly valued (real estate) market, they became the marginal buyer and were seemingly prepared to pay anything. Fast forward to today and these China-based investors are now sellers. But who is the marginal buyer today? Will they pay even lower cap rates?

10/2017 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 October events to highlight some of the things we have worked on and thought about on behalf of our clients:


Here is a mini-case study in Celgene stock ownership. We are not currently interested in owning the Celgene stock or bond, but we think this is a topical example that highlights the perils of equity versus bond ownership.


Celgene (ticker CELG) is a global pharmaceutical company with concentrated revenues in a key drug, Revlimid. The discerning investor may dig a little bit deeper and become less excited because of ongoing lawsuits filed by competitors trying to allow for generic competition of Revlimid. In other words, if the patent is lost, then so too may the revenues and earnings be lost. In mid-October, Celgene announced it would discontinue a late stage drug trial that would have expanded treatment use of an existing, acquired drug, Otezla. This was an important pivot strategy Celgene had undertaken to diversify revenue and earnings away from the key drug and its apparent business risks. The failed trial of Otezla sent the stock price down 10% from $136 to $122. One week later, Celgene announced quarterly financial statements and revised guidance on revenues and earnings to lower numbers. This sent the stock price down another 18% from $120 to $98. We think this example highlights one of the perils of owning stock – rapid adverse price change.


Alternatively, during the same period (month of October), Celgene’s credit spread for bonds due in 2045 widened from 125bps to 150bps above equivalent treasury rate. This caused the Celgene bond price to decline approximately 4%, but the owner of the bond would continue to expect 4% of annual yield from interest payments each year until principal/par is returned at contractual maturity – so long as the company does not default. (This is unrelated to the price decline.) As we highlighted above, Celgene’s stock price fell 30% during the same period thanks to concentrated underlying business no longer performing well. Celgene does not pay dividends, so the owner does not receive compensation in the interim for holding the risk. The stock owner just hopes that the future will bring higher price. The swinging stock price hurts those that owned it and we think there may be more problems to come for Celgene. Stay tuned.



Spain has made headlines lately because a region within the country, Catalan, took its long-pursued independence campaign to vote and received majority favor. There is plenty of controversy around whether simple majority is sufficient enough to move forward, but political turmoil has resulted, and it could translate to the economy. The independence vote resulted in immediate wrangling with Spain as Catalan began dialogue with the country, which then sought to stifle further progress of independence. The Catalan government responded by declaring independence.


Why does this matter? Spain is the ‘S’ in the peripheral European countries, commonly referred to as the PIIGS (“pigs” – Portugal, Italy, Ireland, Greece, and Spain). These countries have strapped the monetary union with weak economic performance and high debt burden. Spain remains in a challenged economic position to this day, and so, splitting the country would be complicated and likely disastrous. Catalan, the northeast region of Spain that includes Barcelona and that is adjacent to France, is a large economic contributor to Spain. According to The Guardian data, Catalan represents 6.3% of Spain land area, 16% of the population, 25.6% of exports, and comparatively lower unemployment rate.


Separating Catalan creates doubt about Spain’s ability to repay debts, which in turn, reverberates to broader Europe because of the monetary union AND because the European Central Bank has backstopped sovereign debts. Doubt is all that it takes for a crisis to form, and a crisis in Spain, we think, could mean a crisis for all of Europe. We are not suggesting this will happen. We are only suggesting that it is a major risk – one amongst a growing number that make us question price/risk across markets.


The Chinese communist party met for national congress in October, an event that takes place every five years to affirm leadership of the communist party. Xi Jinping, the incumbent president, retained and consolidated power, including elimination of critical voting. The run-up to October was preceded by relative economic and financial market stability – despite major reforms in progress (that include working through some credit losses in what has become a highly leveraged financial system).


It is important to note that China, over the last two decades, has been a global economic driver as a fervent infrastructure builder and commodity consumer. We wonder what having the national congress settled – with consolidation of powers and removal of economic targets – will bring to the investment markets. In the year or two ahead we think there may be some house cleaning (so to speak) of the excesses created during China’s substantial growth period. Moreover, we wonder what this would mean for a global investing community who may have grown accustomed to a continuous growth engine in Asia.


The Teva story, which we discussed in previous newsletters, continues to play out. During October, generic competitor, Mylan NV, received FDA approval for Teva’s multiple sclerosis therapy Copaxone. Competition is expected immediately. Ultimate impact for Teva is to be determined based on the level of discounting from Mylan’s drug relative to Teva’s. Mylan’s ability to convert active users over to the competing drug will also be important. We continue to monitor Teva.

Rivals keep Amazon at bay

We have talked recently about Amazon’s impact on various industries and found this Reuters piece interesting in how certain competitors are keeping Amazon at bay by using the fine print of lease agreements. Because of all the sectors Amazon now operates in, some peers are beginning to use lease document language to block (or limit) Amazon delivery activities, as well as Whole Foods expansion, at certain locations. The Amazon story has progressed seemingly unfettered to date, and although these are small issues, we think this highlights growing challenges at the margin hereafter for Amazon. Execution is always difficult, and Amazon faces a growing number of incumbents.

Closing Note

You may see a theme throughout much of our writing lately – that we are cautious. Some would say we are negative and bearish. Be assured that we look for positive and bullish, but by virtue of our fiduciary responsibility to clients, we worry. With valuations running to high levels relative to risks (we try to highlight these risks throughout our newsletters), we continue to think added caution is warranted.