09/2018 Market Commentary


What will people do with their time when all of Tesla’s issues are resolved? Like August, so much happened in September that we will simply provide a brief comment following this short list of events.

That was a lot to fit into a month. Although we have a lot to say about each point, we’ll just say the month of September increased our skepticism of Tesla as an investment, and we want to refer you to past Ballast commentary.

U.S. Agriculture

The trade war with China has provided additional hardship for the agriculture sector following a 3-year rut after a decline in primary U.S. agriculture commodity prices. Industry leaders expect a protracted trade war. The math behind soybean trade suggests that China cannot replace all of U.S. soybean imports, but this has not stopped China from thinking otherwise. Chinese thinking on the matter is interesting, but success seems improbable. For farmers, unfortunately, you cannot take that to the bank, and the trade war is likely to continue near-term.


A bellwether of the FANGs? The founder of Instagram (yes, owned by Facebook) left Facebook in September. The founder of popular mobile messaging app WhatsApp (yes, also owned by Facebook) left the company earlier this year. Facebook itself was embroiled in scandal earlier this year when its usage of personal data came to light. Facebook’s stock price quickly recovered during the spring, rallying from $150 to $220 in July and then quickly selling off to $175 after its earnings release in late July, ultimately sliding to $165. The fact that the stock has not received the trading support to lift off again, in combination with other matters, should have investors thinking twice about this Silicon Valley giant – and maybe others.


The country has its challenges. Elected in 2015, Mauricio Marci won out over long-time family control and latest leader, Cristina Fernandez. Marci was to implement significant reforms and push the country in the right direction. His first order of business was to settle the country’s 14-year battle with debt holdouts from the country’s last default in 2002. Settling the outstanding legal battle opened markets to Argentina, who promptly borrowed $15bn in the global capital markets. One short year later, the country borrowed an astonishing $2.75bn century bond from yield-starved investors. All was well – bygones. But as with any country in the world, significant reforms do not come easy, especially not after decades – maybe centuries – of precedent. To boot, Argentina’s economy has fallen on hard times and the currency has significantly devalued as inflation runs and as overnight interest rates have been hiked to 60%. Argentina has had to request emergency funds from the IMF – hat-in-hand – twice in recent months to calm its markets. All is not well. The century bond, originally priced at discount to par at $90, now trades at $78.

General Electric

We would be remiss to not comment on news occurring after September close (this is a September newsletter) that GE has ousted John Flannery as CEO and Chairman. Shares promptly rallied 15%. Mr. Flannery was on the job just longer than a year. The decline at GE rises above his control, in our opinion, and we feel that the act of replacing him after just one year could represent one of three things – simple 1) wallpapering over problems; 2) Mr. Flannery was put in place to be a janitor of sorts and do the clean-up, where he takes the necessary action, takes the blame, and the next CEO enters with a clean slate to move the company forward; or 3) the situation at GE is desperate. In the first case, it will never work. In the second case, it still seems like issues abound, and now would not yet be the time for a new CEO. The final case seems self-explanatory.

GE cannot seem to get things moving in the right direction. At this point, with all the asset sales, accounting charges from obscure corners of the company, and ongoing challenges in various divisions GE stock remains untouchable, in our opinion. One does not know what they are buying and that keeps us hesitant, new CEO or old.

Oh yeah, and this happened during September.

Insurance & Reinsurance

The year 2017 brought severalThis year, the balance sheets could become weaker, but probably not by much. So far, it appears the soft market that has ailed the industry will continue overall. There will be some loss to be realized. For hurricane Florence and insurers providing cover on the east coast, losses are likely to stem from claims under business disruption cover.

Wells Fargo

Another month, another scandal. Some culture…

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?