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.
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.
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?
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.
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.