02/2019 Market Commentary


Some quick background for anyone new to the thread: Tesla is an electric car manufacturer with $53bn market capitalization, has yet to produce annual profit and currently has lower volume manufacturing capability as compared to established US-peers Ford and GM, which report profits and have global volumes to go with their market capitalization of $35bn and $56bn, respectively.

As usual, we’re listing some top stories concerning Tesla with minimal comment:

  • Model 3 price cut: Read Story >
  • Tesla buys sketchy penny-stock company Maxwell Technologies: Read Story >
  • Tesla cuts North American delivery division workforce: Read Story >
  • No software updates available for mechanical service needs: Read Story >
  • Can’t sell them here so let’s try to sell them there: Read Story >
  • Amazon invests in rival electric vehicle company Rivian: Read Story >
  • SpaceX (Tesla sister company) reports layoffs: Read Story >
  • SEC asks judge to hold Musk (CEO of a public company) in contempt of court in violation of his agreement with SEC in October: Read Story >
  • Judge says Musk has until March 11 to explain his position: Read Story >
  • More electric vehicle competition coming: Read Story >
  • Convertible debt maturity of $920mn due March 1 with stock below conversion: Read Story >

Macro: India and Pakistan on the Brink

An old conflict just resurfaced between India and Pakistan in the Kashmir region. The two countries are sparring after a terrorist attack against India and subsequent downing of two Indian air force jets. The two countries are nuclear powers. Any more escalation could be market moving.


General Electric

Agreed to sell its biotech division for $21bn, a major step as the company focuses on de-leveraging. Ballast continues to monitor GE for investment opportunities.


Oil and Gas: To Frack or Not to Frack

It’s a big debate with billions of dollars in capital at stake. The reporting and opinions are mixed. It’s difficult to argue with industry experts, but we tend to think benefits will be fleeting, at least in terms of ultimate score-keeping of long-term returns on invested capital. Here is a quick look at the two sides – to frack or not to frack.


To Frack

Chevron, a major oil producer and former part of the Standard Oil empire that Rockefeller built, is shifting capital expenditures away from semi-traditional offshore plays and towards shale in the Permian basin. This Bloomberg piece covers a bit more than the preceding sentences.


Not to Frack

Other reports continue to surface indicating that years of losses in the shale oil patch have finally caused capital providers to think twice about investing. New capital flow into the sector is decreasing dramatically and it’s being reflected across much of the sector’s public stock prices. This WSJ piece covers a swath of them.



Perhaps a case study on its own is Alta Mesa Resources Inc (ticker: AMR) and all related parties involved. An energy-focused (specialist) private equity group sponsored a Special Purpose Acquisition Company (SPAC) – essentially a publicly traded blank-check company – for the purpose of acquiring assets on the cheap coming out of the oil and gas rut that ended circa February 2016. This blank-check came with an all-star CEO. A deal was consummated in early 2018 (a year ago) in which the SPAC paid $3.8bn to acquire two separate assets Alta Mesa Holdings LP and Kingfisher Midstream LLC. Fast forward one year and everything is seemingly fine according to how the fourth quarter earnings release reads except for the often ignored “Corporate Items” section at the bottom where management discloses a $3.1bn write-down of the assets just acquired… For those that don’t want to do the math it’s 81.5% of the aggregate market capitalization at the time of acquisition – again 12 months ago. Bravo!


AMR is a story not widely discussed in the news but represents a red herring in the ‘to frack or not to frack’ debate and highlights the preposterous nature with which capital is gathered, deployed, and destroyed in the capital markets. All of this is done under the perceived veil of safety from a publicly traded company (blessed by and registered with the SEC) and the big-time investors involved.


Do these Unicorns have Wings?

Profits need not apply. Unicorn IPOs are back with Pinterest, Lyft, Uber, Airbnb, and others scrambling to become publicly traded stocks this year.

Negative Yields

Yes, negative yields do exist. Yes, there are a lot more than you realize. No, Ballast does not invest it’s clients capital in any negative yielding bonds.

Kraft Problem

The packaged foods group, not the Patriots owner…

Kraft Heinz (ticker: KHC) reported a massive asset impairment after concluding the calendar year 2018. Kraft and Heinz merged in 2015 for a combined value at the time of around $45bn. The merger was met with general market celebration. Then in 2017 Kraft Heinz attempted to acquire Unilever, a major UK-based consumer products group, for $143bn (could you imagine). Fast forward one and a half short years later and KHC is taking a $15.4bn impairment charge on some key brands. That’s 34% of the initial combined value of the merger. Someone got the price wrong.


The merger was a partnership between two icons in the investing world: Warren Buffett and 3G Capital, the Brazilian investment group that brought zero-based budgeting back in the limelight. There is a lot of criticism to level here on this approach (it even duped the master of investing), but suffice it to say that financial engineering is not a long-term strategy and certainly not something to apply to mega-corporations with end buyers and ultimate consumers that are not at all concerned with how many billions you think you can squeeze from a budget.


01/2019 Market Commentary



Netflix (NFLX) has a new CFO and his first objective is to address the cash flow conundrum. The company’s cash flow is negative because it spends more than it takes in. Netflix is buying and building content at a rapid pace – while the payoff profile of the content occurs over an extended period (and often does not begin for at least two years). This means NFLX will not know if its strategy is successful until it is too far the wrong way. Most peers grow at a much slower pace and can rely on cash flows from existing content to fund content development. Investors in Netflix’s stock and bonds are risking their capital on the prospects of the returns on the content. Time will tell, but Ballast thinks its unwise to place high value on something that is unproven, unpredictable, does not cash flow, and whose outcome is several years into the future.


Netflix did notch one victory. The film Bird Box was a major success – at least based on viewership. It is important to note that the movie is not pay-per-view so its comparison to traditional film release via movie theaters is not possible. It may be a case study in how the future of movie release and promotion will look. The film’s success was the result of viral social media promotion among other things.


Also happening in January was Netflix’s announcement that it would raise subscription prices. NFLX stock price roared on the news. Then, the company’s earnings were released, and the stock price fell back to earth as analysts were disappointed by earnings. NFLX is growing revenue but it can’t seem to meaningfully grow earnings. Some conundrum…




Another month of headlines. We will stick with recent months’ format and list some top stories with minimal comments:


General Electric


As GE dismantled what was the financial operations of the company over the past few years, there were a few units that would always be retained. GE Capital Aviation Services, or GECAS, was one such unit. January brought the possibility that the unit would be sold, and it attracted a trove of private capital to bid. The unit’s fate is yet unknown, but it is expected to fetch as much as $40 billion. GECAS is the largest aircraft leasing company in the world – bigger than Air Lease Corp and AerCap – leasing to the world’s major airlines. It appears nothing is sacred to the new CEO, Culp, as he works to deleverage the company. GE’s challenges remain, nevertheless.




Pacific Gas & Electric (PCG), California’s largest utility company, filed for bankruptcy after careful consideration of its liabilities. It was a volatile month for PCG. As required by California law, PCG announced 15 days in advance of filing for bankruptcy that it intended to file towards the end of January. By the end of the month it did so, despite state investigators finding PCG not at fault for the wildfire that caused significant damage to Napa Valley and surrounding communities in 2017 (Tubbs Fire). What remains, though, is the liability from the 2018 wildfire, Camp Fire, which is estimated to be as much as $30 billion (an amount less than the implied equity value of PCG before the fire). So many equity investors are left wondering why PCG has filed for bankruptcy. Our thoughts are many but here are a couple primary thoughts:


1) Liquidity – Although PCG appears to be solvent, it is short on liquidity and would be in that position for a prolonged period (whereas bankruptcy will allow the company to recapitalize to a structure where liquidity is built-in).


2) Efficiency – The process of litigating and settling $30 billion in claims would be time consuming, cumbersome, and lead to volatility (whereas filing for bankruptcy brings more order).


Jack Bogle


Jack Bogle passed away in January. Jack was one of the fathers of passive investing, having founded Vanguard, the investment manager eponymous with low cost index funds. At the helm of Vanguard, Jack set off a revolution (and an industry-wide trend of cutting investment fees) as more investors came around to Jack’s passive investing. No one has perhaps done more for investors than Jack – through Vanguard. Jack, we salute you.




January was a tough month for the Brazilian miner, Vale. A tailings dam it was working on decommissioning failed, killing nearly 100 people and requiring substantial environmental cleanup. This isn’t the first dam failure for the company. Three years ago, a joint venture of Vale (called Samarco) experienced a dam failure that led to 19 deaths and several billion dollars in damages. To compound matters for Vale, the company has numerous other mines with potentially problematic tailings dams. Vale has taken the bold step of significantly reducing production at those mines and will decommission the dams over the next three years. The initiative will cost as much as $5 billion, and although all dams are characterized as inactive, Vale will have to cut back on production. The combined costs of cleanup and decommissioning acutely shifted Vale’s credit profile. Vale has suspended its dividend, and its credit ratings are under review for downgrade. Ballast is monitoring the situation for investment opportunities.




Abbvie (ABBV), a major pharmaceutical company that was spun out of Abbott a few years ago has suffered a few setbacks in recent years as it tries to shift away from a concentrated revenue stream (the majority of which come from sales of blockbuster drug Humira). Pushing its drug development pipeline to growth and shifting away from Humira, AbbVie has made several acquisitions lately. One such acquisition was Stemcentrx for $10.2 billion($5.8 billion cash and stock with the rest in milestone payments). Fast forward two years and ABBV announced it would take a $4 billion charge when the key drug that they acquired failed in clinical trials. Several peers have had similar experiences lately.


Bristol-Myers Squibb (BMY) announced that it would acquire Celgene (CELG) for approximately $74 billion. By comparison, BMY had a market capitalization of $81 billion. This is a large acquisition. The break-up fee for the acquisition was set at $2.2 billion. Ballast has discussed CELG in the past and highlighted its tough path forward. This transaction is a major bailout for Celgene, whose share price fell from $145 in late 2017 to a recent low of $59. Because the challenges of Celgene’s drug portfolio remain, this transaction could spell disaster for BMY if completed. BMY will increase leverage to complete the deal, which will compound any problems. BMY equity investors seemed to agree with our take as the stock price fell immediately on the news, dropping from $52 to $44.


As if January was not busy enough for pharmaceuticals, Eli Lilly (LLY) announced it would acquire Loxo Oncology for $8 billion. This comes after long focusing its efforts internally through R&D. LLY recently shed its animal health unit (Elanco in September 2018). The Loxo acquisition marks a major shift in strategy for LLY as it joins peers in scooping up smaller companies – whose primary asset is intellectual property of unproven drugs. The industry has been busy scooping up drugs through business acquisition, and as of lately, it seems many acquirors have charged off the acquired assets (AbbVie as example). Unlike BMY, at least LLY equity investors were lukewarm and the share price did not budge. The $8 billion will be easier to digest than what BMY is doing.


It’s tough out there, but using debt to acquire unproven or troubled drug portfolios is not prudent.


Current Investments – November

This post discloses two investment ideas we had this past month.  We hope this communication 1) helps you understand how your hard-earned capital gets invested in today’s turbulent marketplace and 2) sheds light on how our process and activity is quite different than traditional retails advisors. Whenever headlines grab our attention, we investigate and tend to look for opportunities.  Two such headlines occurred recently, one pertaining to General Electric and the other Pacific Gas & Electric.  Below are our thoughts and how we transacted in each scenario.

General Electric - A Go

What we bought:  GE 4.125 34 @ +275/olb.

Why did we buy it?

General Electric is a company whose products or services we likely encounter every single day – whether turning on the lights, turning up the heat (here in Iowa’s winter), or flying on a plane.  However, it seems lately the market is turning out the lights on GE.


No question – GE has a lot of debt (about $115 billion outstanding).  The company also has a lot of cash ($35 billion) and a lot of assets (think Baker Hughes, lights, jet engines, gas turbines, etc). Unfortunately, GE also has a lot of liabilities – both known and unknown.  In our opinion, they will be spending a lot of time shedding assets over the coming years to pay down the debt and fix those liabilities.


The question is: Do they have time?  GE currently has $20B of undrawn bank lines, which provides liquidity out to 2020.  They also have positive cash flow, and since, they have cut the dividend.  So, how much do they have to deleverage?


The company’s forecasted EBITDA is about $14 billion, and its goal is to achieve a 2.5x Net Debt/EBITDA ratio – a respectable ratio for a low investment grade credit (BBB tier).  This means it needs to reduce net debt to about $35B – or gross debt to $70B (adding back the $35B of cash).  That is a lot of assets to sell.


Consider this –  a sum of parts analysis. Well, at the time of this article, GE was at $9 – which gives you a 22% gain.  We are buying GE debt at $82. If the stock is worth anything positive, the bonds are worth par (only at maturity), and they are still subject to spread and rate risk.  However, the bonds were at $97 before this episode. Hence, there would be about an 18% gain if they go back to where they were (spread and rate wise).  Add in the $4.4 of coupon payments, and you are at 22%.  Would you rather achieve 22% by lending to GE or achieve 22% by owning the equity?  The answer to us is obvious for many reasons…


We legged into the GE bonds during the initial downdraft.  We have room to add, and we have flexibility to optimize economics and tax outcomes.  And while we wait, we are clipping a 5.3% current yield. Oh how the mighty have fallen.

Pacific Gas & Electric - A No

What we looked to buy:  PCG senior debt or preferreds.

Why didn’t we buy it?

Many are aware of the tragic wildfires in California. As some of you might remember, PG&E went bankrupt in early 2000s. At the time, they were short electricity, while Enron was manipulating the wholesale market.  PCG’s investable securities presented many attractive investment opportunities.


Early in the process when outcomes were uncertain, you could have bought the first mortgage bonds in the high 70s/low $80s (remember these are $100 par value).  These securities never missed a coupon payment during the bankruptcy process.  On the other hand, later in the process, you could have bought preferred stock (5% Series C) in the low teens ($25 par) when PCG had disclosed they would pay the accumulated accrued interest (about 3 years worth).   Pacfic Gas filed its plan in January 2003 and emerged in April 2004.  See the $4 payment below for that payment:

Today, the company has only unsecured debt, and there is not much information on the liability.  Based on estimates from Wall Street and California politicians, the liability for PG&E clearly exceeds their financial ability to meet that liability. In other words, they are at risk of bankruptcy.  PCG drew down their bank lines and don’t have a dividend to cut, leaving PCG without liquidity levers. Liquidity is the number one reason companies go b/k. If there were FMB to purchase, we might be inclined to start a position. However, anything besides a secured piece of paper in a company facing imminent threat of bankruptcy is just gambling.  That is something we choose not to do.


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?

10/2018 Market Commentary

Things are going great for companies that have never made money and not-so great for companies that make (or used to make) money. Titans are falling.


We are in an Uber economy. Uber was able to issue $2 billion debt in a debut bond sale during October. The debt is unrated, suggesting it would otherwise be low quality, not unlike no earnings brethren Tesla (B-) and Netflix (BB-). The debt was “privately placed,” meaning only “sophisticated investors” could buy it. But how sophisticated of an investor do you need to be to wonder how a company so successful in recent years could still be reporting NEGATIVE ADJUSTED EBITDA. There is a lot to unpack from the three words, starting with EBITDA, which is generally a highly manipulated number (within the bounds of GAAP*, of course). Then, it is ADJUSTED (non-GAAP*, or outside the bounds of GAAP*) to management’s liking. Despite all these accounting shenanigans, the EBITDA that comes out the other side of Uber is still NEGATIVE. Note that the brethren, Tesla and Netflix, both have positive EBITDA, adjusted and reported. Keep in mind that EBITDA not only serves as the usual measure of leverage (debt-to-EBITDA), but it is also most common proxy for debt service (EBITDA-to-interest-expense or as proxy for cash flow). With Uber, there is the absence of EBITDA. All that remains is hope. That’s not usually a good starting place for credit analysts.

Another major announcement related to Uber was that it plans to become publicly traded in 2019 (called an Initial Public Offering, or IPO for short). The rumored value the company will seek is $120 billion. Wow! This must be the allure of lending $2 billion to Uber, money is expected to rush in. But at the same time, competitor Lyft announced it also planned an IPO for 2019. The valuation Lyft is seeking is $15 billion, or 1/8 the size of Uber. While rider market share skews to Uber, we wonder which is more prudent for an investor – investing with the hope of keeping market share or investing with the hope of capturing market share in this disruptive (and profitless) industry.

*GAAP is General Accepted Accounting Principles and is a framework within which companies are required to report to the SEC for the benefit of investors.

General Electric

To begin the month, General Electric ousted its 13-month CEO as the company continued to perform poorly (though it was not necessarily his fault, in our opinion). We commented on that as part of the September Market Commentary. To close the month of October, under the new CEO, General Electric announced it would slash its dividend to $0.01 per quarter, down from $0.12 per quarter. For any GE investor holding out for better times, while earning a good dividend yield, the announcement has been a rude awakening. To the new (newest) CEO’s credit, he is not forthcoming with projections or promises. Instead, he has prescribed that his first 100 days will be positioning the company to win “and accelerating deleveraging”. Ballast views these actions as entirely sensible given the situation. However, we do not think stock investors will feel reprieve for some time, considering there is a lot of debt and, therefore, a lot of deleveraging ahead. Also, most of the heavy lifting will come from restoring business fundamentals, something tied more to the economy and less with this CEO’s first 100 days.

A closing thought: Scrutiny of General Electric has reached a number of company segments – including life insurance and power generation – where GE took massive accounting charges in recent quarters. What if General Electric were also to have engine problems in its CFM joint venture? Examples are Jakarta, Southwest, and Southwest 2? Although CFM engines CFM56 and LEAP-1B are different engines, the former is the precursor of the latter, so technologies and processes were likely adopted in the new version. Hopefully that doesn’t mean investors will meet a new CEO next year.


The company has suffered numerous consecutive quarters of revenue decline, despite several initiatives to jump start growth. Watson has yet to take off, and in fact, reviews suggest end-use struggles to be of practical use. Perhaps a major tell is that IBM is marketing through TV commercials to ordinary consumers about the great things that IBM does, but these end consumers don’t buy IBM services – though they might buy the stock. Weird.

Nevertheless, IBM just announced a $34 billion acquisition of Red Hat (ticker RHT), a company that sells services to users of open source software that is used in many servers (think internet, cloud, or virtual). The transaction is part attempt to buy growth and other part attempt to capture more of the cloud services market share. The trick, as always, will be execution – capturing revenue synergies by using IBM’s sales force and keeping major Red Hat customers that also happen to be IBM competitors (Amazon, Oracle, Hewlett Packard Enterprise, et al). Whatever your sentiment on the merits of the deal, the value paid is rich. Prior to the announced acquisition, Red Hat was trading at a market capitalization of $20 billion, though it did reach $30 billion in recent summer months. Still, Red Hat has $3.0 billion revenue and $500 million of net income, making $34 billion enterprise value-paid a high price even factoring in growth. All risk falls to IBM and its shareholders. It is no surprise that IBM price response was lower.

Market Correction Redux?

For the Nasdaq, yes. The other indexes, no. Here is the math:

  • Dow Jones: high 26,828 on 3 October, low 24,442 on 29 October, -8.9% decline
  • S&P: high 2,930 on 20 September, low 2,641 on 29 October, -9.8% decline
  • Nasdaq: high 8,109 on 31 August, low 7,050 on 29 October, -13.0% decline

Like we said in March, we do not see this as a buy-the-dip moment. Much of that view remains the same, so you are welcome to read that post as a refresher.

AB Inbev (Anheuser Busch)

The owner of Anheuser Busch, Miller, Corona, Modelo, Stella Artois, et al has seen sales and earnings fall short of targets. As a result, the company slashed its dividend to common stockholders and will focus on deleveraging. Debt increased substantially when Inbev acquired SABMiller in 2016. Competition continues to strengthen from craft beers and consumer shift to wines and spirits. Nevertheless, Ballast views commitment to cut leverage above else as sensible. We appreciate a management that gets ahead of a leverage problem by cutting a dividend.


You remember – that retailer in Everytown USA. It finally filed for bankruptcy after years of decline. Sears, at one point in its history, was one of the biggest companies in the world. Surprising to some are the big brands born under Sears. Some of the more obvious are Diehard, Kenmore, Craftsman, et al. The less obvious are AllState Insurance, Discover Financial, and Homart Development (what became a major part of General Growth Properties, one of the largest mall owners). Then, there were companies bought and later sold by Sears, which includes real estate broker Coldwell Banker and securities broker Dean Witter (now part of Morgan Stanley). It’s been a long decline, and we will see if Sears makes it on the other side of Chapter 11 (reorganization) bankruptcy.


More Tesla in October. We assure you we look forward to one day not having anything to say or report about this saga. Here, again, we will list some of the major occurrences of the month:

  • Musk buys $10 million Tesla stock and pledges to buy another $20 million.
  • Tesla’s China factory is said to produce two car models. But wait – it’s still raw ground, going through approvals. The land was acquired this summer.
  • Critical and short-seller, Citron Research, did a U-turn and said he is long Tesla, believing the company would report a strong third quarter. Mind you, Citron is suing Tesla for the “funding secured” tweet, seeking damages for losses incurred. Citron also said they learned a lot about the auto industry, and it is why he changed his mind. Right…
  • Earlier in the month, Tesla announced the acquisition of land in China for a production plant. At the same time, the company stated it would be two to three years before production would begin.
  • The Vice President of Manufacturing left the company.
  • A company in Michigan specializes in tearing cars apart and evaluating the manufacturing quality. The Tesla report, though not terrible, was not good either, especially from a profitability assessment standpoint.
  • Musk bought $20 million more Tesla stock.
  • A Tesla “skeptic” is surprised by how much he enjoyed riding the new model 3.
  • Tesla plans another tent at California manufacturing facility.
  • Record deliveries take place in the third quarter.

Interest Rates

Some believe that interest rates have finally halted their descent and are now beginning ascent. One can hope. Rates have been depressed because of the Quantitative Easing, or bond purchases by the Federal Reserve and other central banks around the world. The 30-year treasury reached 3.40%, and the 10-year reached 3.23% in October. The lows were reached in July 2016 when the 30-year was 2.09% and the 10-year was 1.35%. The Fed Funds Rate target range stands at 2.00-2.25% with an expected Fed raise again in December.

Since interest rates have been low for nearly a decade, we thought we would remind readers what interest rates once were. In the five years preceding (we use October 2002 to October 2007) the financial crisis, which prompted the current “unusual” interest rate environment, the 30-year treasury averaged 4.86% with a high of 5.59% reached on 14 May 2004. During that same period, the 10-year treasury averaged 4.38% with a high of 5.32% reached on 13 June 2007.

Remember: As an example, earning 5.00% is twice as much as earning 2.50%. Imagine what savers could do with higher interest rates.


SoftBank, a Japan-based telecom, is exploring investing more in WeWork, a commercial real estate company that specializes in leasing shared work spaces. SoftBank directly owns 20% of WeWork through a $4.4 billion equity investment made into WeWork in 2017. Now, SoftBank is exploring taking a majority stake in WeWork for as much as $15 to 20 billion, using its $100 billion private fund called Vision Fund, which has the backing of Saudi Arabia and Abu Dhabi wealth funds. Interestingly, a lot of top valuations in the venture capital/tech investing space have been made by SoftBank and its Vision Fund. Here, with WeWork, SoftBank is outdoing itself with an even higher valuation. Its own balance stands to benefit from the new valuation mark at the expense of the Vision Fund balance sheet. All of this is for a company that occupies some of the priciest commercial properties in the world (New York City as prime example) and does not actually own the real estate. WeWork is in a spread business, leasing raw office space at a lower rate and leasing finished office space at a higher rate. They have yet to make money, as improving raw office space does not come cheaply. Risks abound, but it is apparently worth much more than $20 billion.


Are electric vehicle companies and investors thinking through upstream risks? We were struck by the situation brewing in Chile, reported by Reuters. There are two major miners in the world – SQM and Albemarle. These miners operate mines within three miles of each other in the world’s important lithium production regions. The region is in Chile’s Atacama Desert. One of the major miners is accused of using more water from the underground brine water pool than legally allotted, and they have done this (allegedly) for years. The implications could be shorter mine life, and it could cause the government to limit future permitting until the water naturally replenishes, if ever. That means lithium supply could be at risk of constrained supply, which would likely cause prices to rise and increase the cost of producing batteries. The risks are obviously present, but the outcomes remain unknown.

Loss Loan Rule

Banks, according to WSJ, are fighting the new loan loss accounting rule by taking it, through lobby, to congress. Note, accounting rules are proposed, commented on, written, and implemented by Financial Accounting Standards Board (or FASB). The new rule has taken on the name Current Expected Credit Loss Model and the acronym CECL (pronounced Cecil). The primary result of the rule is that companies issuing credit would be required to model credit risks and record expected losses when the loan is made – and over the course of the loans as expectations shift. Banks are “livid” because this is a bit different than they have been doing things. According to the WSJ article, banks claimed “the rule will make them less able to make loans”. Accounting is accounting. If the bank expects that steep losses up front would preclude the bank from lending, Ballast wonders why the bank would be prepared to make the loan even without CECL.

If, like us, you like the backstory of how things work then here is the expanded explanation of the absurdity of the banking industry response now, after years of lead time. Don’t worry, we have left out the accounting jargon.

Many users of financial statements have held the position that loss recognition standards were too loose prior to the financial crisis, and that is why the bottom fell out from underneath the institutions that found themselves on the brink of bankruptcy in 2008 and 2009. However, the process to craft a revised loan loss standard actually began as a joint project with the International Accounting Standards Board (IASB) in 2005. The IASB issued a proposed standard in 2009, and the FASB proposed their own standard a few months later. The FASB claimed they received a lot of negative feedback from users of US GAAP financial statements on the IASB proposal so they drafted their own proposal.  There were a few iterations of drafts and redrafts for the next few years, but eventually the FASB issued an Exposure Draft (ED) in late 2015. An ED is released to the public, and anyone who wants to comment on how they feel about the proposed rules – in any regard – can submit comments directly to the FASB. Note that the FASB holds open meetings in which they discuss staff recommendations on new potential accounting guidance prior to when an ED is even issued. Then, in April 2016, the final credit loss standard was voted on by the FASB and published in June 2016, with an effective date for public companies for periods beginning after December 15, 2019.

Emerging Markets

In crisis? The IMF says it’s possible. We’ve already commented on Argentina. Now Pakistan has requested emergency loans from the IMF. Other countries are struggling. Ballast continues to monitor.

Security Breach

A computer chip, difficult to detect, made its way into critical servers and was able to back-door hack systems that were previously thought to be highly secure. It’s a good read at BusinessWeek.