11/2018 Market Commentary

41st President

The 41st President of the United States, George Herbert Walker Bush, died this weekend, and he may have been one of the most qualified presidents to hold the office. We invite anyone who did not watch or read any of the videos and print honoring the president to do so. His story is a good one. Ballast salutes 41.

Markets will be closed on Wednesday, designated as a day of mourning by the current POTUS.

Passive Investing Warning

John “Jack” Bogle is often credited as the father of passive investing, or at least creation of and advancement of the index fund. You may not know his name, but you probably know his company and brand: Vanguard. We are several decades later, and his approach is mainstream (perhaps too mainstream). Passive investing has been very successful and helped many investors to date. But is too much of a good thing a bad thing? We think so. And so does Jack Bogle. Don’t take our word for it? Read Jack’s penned warning.

Oil Tumbles

The price of crude oil continued to tumble throughout the month of November. For a moment, West Texas Intermediate, or WTI, the US benchmark for oil, touched $49.41 on an intraday basis November 29. That is a -35.7% decline – a rapid decline – from the multiyear high of $76.90 reached on October 3 of this year. Ballast continues to watch the energy markets for opportunities to invest.

Market Volatility

Equity markets rallied, sank, and rallied again in November, marking another volatile month. Where markets go from here no one knows, but we suspect that an autopilot holiday rally is in the works. It will most likely include light volumes and the prospect of trade deal (or truce) between US and China. It’s the new year that we worry about.

Credit Volatility

Credit markets received a few jolts during November. General Electric (GE) and Pacific Gas & Electric (PCG) were two primary concerns. The former responded to the company CEO saying that GE needed to urgently reduce debt. The latter has exhausted its credit facilities as it faces the second major wildfire liability in two years and may well be on its way to bankruptcy, barring state legislative action to lighten the burden. GE and PCG are two investment grade credits, meaning they are perceived to have a low risk of loss. These big realizations may have awoken credit investors to the risks out there. High-grade credit, which technically still includes GE and PCG, saw risk premiums rising. The low-grade market – high yield market – (the riskiest of the credit market) responded similarly with rising risk premiums.


Sticking with previous months’ format, we will just bullet some key events about Tesla that caught our attention.

  • The competition is heating up. A notable new entrant to competition is a startup auto manufacturer that we had not previously heard of – Rivian. The CEO commentary is telling.
  • Musk expressed interest in partnering with Daimler to use their popular van in a push to electrify the submarket, but this is weird since Daimler is already expected to roll out an electric version in 2019…
  • Panasonic says that profitability is within sight (when isn’t it?) at the Gigafactory, the battery factory supplying Tesla.
  • Musk posted a tweet welcoming the newly appointed chairwoman and, in so doing, implied that she is new to the board. She has been on the board for a few years and has been the lead independent directly. That is a very odd governance slipup.
  • An unverified, independent tweet was circulated that indicated the VP of Legal at Tesla left after nearly 8 years with the company. The person was formerly with the SEC. This does not bode well considering the recent SEC settlement for Musk’s actions in August.

Our previous Market Commentary [link] mentioned Uber’s reported losses, debt deal, and potential IPO. This month, Uber reported slowing revenue growth and worsening losses. Where do investors signup?

Two Things to Consider Before Investing in Individual Stocks or Equity Funds

It seems like no matter where you look, you’ll find an article (or two… or three… or more) about how the stock market either is going to continue to see bullish gains or about how it is edging closer to an impending correction.  There are many different opinions supported by a number of different facts and theses when it comes to this.  In fact, you may even have your own opinion based on how you feel the economy is performing and how certain companies will overperform or underperform in both the near and long term.



All predictions aside, let’s talk about value.  A potential and prudent buyer of a company (or part of a company) is going to do their own analysis and determine what they think the company is worth: VALUE. In determining that value, one will perform various amounts of research (finding comparable company transactions, discounting projected future cash flows, etc.).  We don’t want to elaborate too much on valuation theory though.


The point is that value can be calculated and determined, and there is science behind it.



Then, let’s talk about the amount you eventually have to pay for the company (or part of the company) if you determine you actually want to own it: PRICE.  Many times, the price you have to pay may be much greater than or much less than the value you calculated when performing valuation.


Let’s think about overall supply and demand in the US stock market today.  It seems that based on the overall higher prices, demand is outpacing supply.  So, who is buying?  Who is investing aggressively in the stock market, resulting in higher prices?  On one hand, it makes sense with projected economic growth, low unemployment, rising wages, etc. that investors would be buying at higher prices, expecting more income in the future.  On the other hand, with the baby boomer generation (who relies on fixed income) entering retirement, one would think that they would be selling equities and reallocating into more of a cash-producing fixed income “type” of portfolio.  This transition results in a lot of supply that might push prices down.


The point here is price is much more supply and demand driven, and there is less science behind it than value.


 What is the main point?

It is our belief that as prudent buyers, if you want to own equity in companies, determine value before you even look at the price of the company.  That is, determine the price you would be willing to pay for the value you’ll be acquiring.  Then, go out and see what the stock is actually trading for.  It might be priced at a discount, but in today’s world, it is probably priced at a premium.


If you want to see the wonder of stock pricing, watch the trading for a few days.  Prices of stocks go up and down sometimes for no apparent reason.  A stock may dip in price one week (sellers outpacing buyers) and could rebound the next week (buyers outpacing sellers).  But why?  Sometimes we think no one knows…


Which brings to mind the awesome scene in the classic movie Wolf of Wall Street where a seasoned stock broker (Matthew McConaughey) tells a new colleague (Leonardo DiCaprio) “…nobody, if you’re Warren Buffet or if you’re Jimmy Buffet, nobody knows if a stock is going to go up, down, sideways, or around in circles, least of all stock brokers.” 


The point we are trying to make is that there is so much going on in the market (speculative buying and selling based on what an investor thinks a company is going to make – or not make – in the future, short positions, hedging positions, company stock repurchases, insider trading, etc.) that it is hard to know when and why a stock is going to continue a bull run or if all of the sudden, the bears are going to hit it for a prolonged amount of time.  However, if you want to have equity positions in your portfolio, be careful, be prudent, do your analysis of value, and leave your emotions out of your decision-making process.

Our opinion is that there is a lot being paid for equity in publicly traded companies today based on tomorrow’s value.  The problem is that if you pay for tomorrow’s value today, you may be giving up the potential for exponential returns (e.g. 2 and 3 times your money in 5 to 10 years), which is something you should be hoping for in taking equity risk.