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.

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?