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…

06/2018 Market Commentary

How is it July already? In case your summer is flying by as fast as ours, here is a chance to catch up on June’s Market News.

Auto Market

We commented on subprime auto last month. In June, there were a few events that had us scratching our heads. The first – Edmunds said that used-car prices are at a record high – which caused car rental companies like Hertz (ticker: HTZ) and Avis (ticker: CAR) stock prices to surge. The second – Street analyst forecasted a weak outlook for used-car prices – which sent Hertz and Avis plummeting. Ballast would agree with the analyst perspective that bargains are around the corner for vehicles coming off lease.


Hertz Price Chart

General Electric

GE continues to pare its operations to reduce debt and improve profitability. In June, GE announced it would spin-off its healthcare unit and sell its ownership in Baker Hughes. These businesses represent around 1/3 of GE’s revenues. GE will look very different in coming years. Ballast remains interested in the name.

Another mark for GE in June was the historical removal from the Dow Jones Index. GE was a member of the Dow Jones since 1907. Walgreens is the new Dow Jones entrant. Perfect timing…(Amazon acquires PillPack)

Amazon, The Untouchable

Amazon continues to impact other companies. Drug stores, drug distributors, and pharmacy benefit managers just got a tough pill to swallow (or so investor reactions suggest). Amazon agreed to acquire online pharmacy, PillPack, for $1 billion and wiped out $17.5 billion in equity market capitalization from 8 companies. The acquisition is a major step for Amazon into the pharmacy business, where the company plans to deliver medications directly to patients.


OPEC agreed to raise production. To Ballast’s surprise, oil prices surged. This is because the production increase was lower than expected. West Texas Intermediate crude closed out the month above $74, after spending much of June around $65. Amazing.

Mall Apocalypse?

Miami and Florida officials have approved development of what will be the largest mall in the United States – bigger than the eponymous Mall of America. The same owner is building the new mall. Despite malls around the country suffering greatly from reduced foot traffic and sales as e-commerce draws away market share, this mall is designed with major attractions in hopes of drawing shoppers. The $4 billion mall will have 3.5 million square feet of retail space and 1.5 million of entertainment space, which will include rides, trampoline parks, gyms, and other entertainment.


The cryptocurrency’s US dollar exchange rate continues to trend lower, reaching new year-to-date lows of around $5,900 at June’s close. This is a nice segue to share two pieces we think explain cryptocurrency and blockchain. The first is an info graphic by Reuters, and the second is excerpt from Bank for International Settlements (like a central bank to central banks) annual economic outlook.



It was a wild month for investors of Tesla stock. The price moved between $286 and $373, an $87 range. There was plenty of news flow around Tesla during June but no particularly noteworthy events. What we found interesting was this piece, which takes a look inside the company’s factory.

03/2018 Market Commentary

So much happened during March, so bear with us as we walk you through it all. We’ve got a new Market Commentary format for you too this month. While we hope it is easier for you to find those topics of interest, don’t be shy. It’s all important as you charge into 2018.

Market Correction

Recovery complete: Nasdaq hits new record. Well, that was easy.

March 2018 Nasdaq

Warren Buffett / Berkshire Hathaway

The much-anticipated Berkshire Hathaway 2017 shareholder letter from Warren Buffett was published this month. The following bullet points are key highlights by Ballast.

  • Key qualities we seek […] a sensible purchase price. That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high. Indeed, price seemed almost irrelevant to an army of optimistic purchasers.
  • Once a CEO hungers for a deal, he or she will never lack for forecasts that justify the purchase. Subordinates will be cheering, envisioning enlarged domains and the compensation levels that typically increase with corporate size. Investment bankers, smelling huge fees, will be applauding as well. (Don’t ask the barber whether you need a haircut.) If historical performance of the target falls short of validating its acquisition, large “synergies” will be forecast. Spreadsheets never disappoint.
  • The ample availability of extraordinarily cheap debt in 2017 further fueled purchase activity. After all, even a high-priced deal will usually boost per-share earnings if it is debt-financed. At Berkshire, in contrast, we evaluate acquisition on an all-equity basis, knowing that our taste for overall debt is very low and that to assign a large portion of our debt to any individual business would generally be fallacious (leaving aside certain exceptions, such as debt dedicated to Clayton’s lending portfolio or to the fixed-asset commitments at our regulated utilities). We also never factor in, nor do we often find, synergies.
  • Our aversion to leverage has dampened our returns over the years. But Charlie and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need. We held this view 50 years ago when we each ran an investment partnership, funded by a few friends and relatives who trusted us. We also hold it today after a million or so “partners” have joined us at Berkshire.

This last point should settle in. Leverage can help you get somewhere, but reducing leverage will allow you to stay there.

If you heed Mr. Buffett and have been an excited equity investor in the recent year, we would encourage you re-read the first bullet point above. The other points provide excellent expert perspective of general activities we are seeing in the market place.


We have commented on Netflix in previous newsletters. An analyst at UBS upgraded Netflix recommendation, and the stock price and company market capitalization set new records. Speculators may play, but the gravitational pull of cash flows and earnings will eventually have its way.


Speaking of speculators… Tesla has its work cut out for it.

General Electric

We discussed GE in our January newsletter. In it, we explained an adverse scenario that we had heard from a hedge fund manager. We had disagreed on it and sought comment from GE, as well as the hedge fund, for clarification. The hedge fund never responded, but GE Investor Relations talked to us about recent insurance charges in the Capital unit, as well as the long-term service agreements, the importance of credit ratings to sales, and company commitment to deleverage.

A GE related headline hit the press in March. General Electric – industrial conglomerate and manufacturer of electricity generation turbines, jet engines, healthcare equipment, oil & gas equipment, and a lot more – market capitalization fell below that of each of the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google) for the first time. What GE produces is the backbone of the economy.

We continue to monitor GE with interest.

Dollar Tree

The economy is strong, and inflation is about to rise – or so popular market narrative goes. However, Dollar Tree (the owner of chains, Dollar Tree and Family Dollar) shares fell as much as 15% on March 7 due to a weak outlook that was provided during the company’s latest reporting to investors. The company is not exactly the bellwether for the stock market, but how can things be looking down for Dollar Tree while inflation, wage, and earnings expectations continue to rise and drive the narrative? We wonder. To us, this would suggest one of two scenarios: 1) that low-wage earners are doing well and upgrading consumption or 2) that they are not doing well and tightening belts. Gas prices and rent (key expenses for most households) have increased in the past year (CPI was +2.2% in February), while average hourly wages increased 2.5% y/y.

Dollar tree

Oil Market

Many seem to have an opinion on which direction oil is going. In fact, last summer, Ballast said, “our opinion is for status quo or lower near-term” but that was back when oil (WTI) was $50. Now it is $65. While we feel somewhat the same today, we’ve seen a few industry leaders make some points that are difficult to ignore.

Mark Papa, an industry titan and former CEO of EOG Resources, was recently recruited out of retirement to run a new company formed by private equity to acquire shale assets out of the energy distress in 2016. We think he is worth listening to. Mr. Papa has made waves with public comments about the promise of the shale revolution. His point is that it’s not as promising as many think – the low hanging fruit has been picked, and it gets worse from here. The article linked above highlights, among Papa’s points, the best drilling locations in both North Dakota and South Texas have been tapped, rivals are being too optimistic, operational challenges abound, and high returns now demanded by investors are leading to squeeze. Papa expects the US will not fulfill oil production projections. The bottom line, according to this thinking, is that oil prices are set to go higher – and soon. If correct, it seems like significantly higher oil prices would choke US economic growth prospects.

Cigna & Express Scripts

More mind-bending activities in the health care markets… In December, CVS announced it would acquire Aetna, a major health insurer. This March, Cigna, another major health insurer, agreed to acquire Express Scripts, a pharmacy benefit manager. We won’t layout the background of each here, only that our immediate reaction to the news was, “huh!?” and our reaction was matched by the equity markets. Cigna’s stock promptly fell in price. The price began the month at $195, and it has settled to around $167 now. In fact, Cigna’s stock price reached its apex of $225 in late January 2018. The Express Scripts acquisition will represent a major leveraging event, and we see no clear value in the combination. To the contrary, we suspect there will be value destruction. We shall steer our clients clear of this heap.


Buying things that “might be” is not generally a good policy. It’s especially not a good policy at high prices. A few years ago, there was an “arms race” of sorts for companies to buy potential block buster drugs in the pharmaceuticals industry before peers did. At the beginning of 2018, that arms race seemed to have kicked off again with big acquisitions by Celgene (Juno and Impact) and others as risks have mounted in existing drug portfolios. These risks have become pronounced with big headlines of drugs failing in trials or being pulled. Biogen and Abbvie took their multiple sclerosis drug off the market after patients were suffering severe complications from the treatment. Not long after, Abbvie announced that a key drug in its pipeline had disappointed in drug trials. Both Biogen and Abbvie stock prices have suffered greatly in March. Several other pharmaceutical companies have too. We only highlight this here as risks lurk, and in our opinion, many investors have not been paying attention.

Insurance & Reinsurance

Continuing previous comment pieces on the insurance and reinsurance market, here we point out the AXA acquisition of XL Group for $15.3 billion. Now, Aspen Insurance Holdings may be placing a “for sale” sign up. The reinsurance market is clearly consolidating, but there is no evidence yet that capital is leaving. This means high competition and status quo of undesirable profitability.

02/2018 Market Commentary

Market Risk and Volatility

The life insurance industry is being blamed for the market volatility experienced in February due to their volatility-controlled products. Much of this rests on variable annuities, which experienced trouble during the financial crisis. Since then, life insurance companies have acted to “de-risk” products so as to minimize their balance sheet risks. But risk is only transferred and/or not correctly evaluated (bottled up even). Sure, volatility-controlled products and practices erupted in February, but it is hard to blame what happened on the life insurance companies alone. They exasperated the results, but they did not cause them. It is akin to blaming sellers for lower prices  (it is a required condition of lower prices but not a fundamental cause). The cause, as we will find out, is that market values are high, and investors became fickle.

Insurance and Reinsurance

Two large insurance and reinsurance groups have received takeover interest. Swiss Re has been approached by a large Japan-based investment vehicle about a substantial minority investment. On the other hand, XL Group has received strong interest of possible acquisition from Allianz. Much of recent mergers and acquisitions were between small and mid-sized insurers and reinsurers. Swiss Re and XL Group are mid- to large-sized. Such continued acquisition interest underscores the amount of capital that remains committed to the sector. As previously noted, Ballast does not believe broad insurance market hardening will occur until capital is flushed. This can come in two forms (1) capital market losses (investments on balance sheet) and (2) insured losses. More than likely, this insurance market will require both, but we remain tuned in as opportunities are likely to arise along the way.

General Electric

We wrote about GE previously, and February proved to be another interesting chapter for the company. The SEC announced that an investigation, management cut forecasts on accounting changes, and a major board shake-up are all in the works.


We read a hedge fund piece suggesting that a fundamental business shift would be triggered by a credit ratings downgrade. GE sells long-term service contracts on its industrial products. Purchasers are sensitive to long-term credit ratings because they want the counter party to be around in X number of years to perform on the contract. The hedge fund suggested that a downgrade would be catalyzed by recent deterioration at GE, and sales would suffer following downgrade, creating an air pocket. The implication was that GE now needs to raise equity capital (something GE does not want to do) to prevent a rating downgrade. The case presented was interesting, but we disagreed. To better understand, we contacted the hedge fund and investor relations of GE. Neither have responded yet but we continue to follow GE with interest.

China / Anbang

Many are not likely to recognize the name Anbang, but it is one of the largest finance and insurance groups in China. It was fast growing thanks to the help of Wealth Management Products, a risky financial product used across the country to finance China’s rapid growth. During February, Anbang was taken over by China’s insurance regulator because of market risks it posed on the economy. Observers called it too big to fail. Either way, we see this as an important moment. As one of the largest insurers in China (and certainly not the only one to extensively use the risky products) we think China is crossing over into challenging waters as they attempt to wring out the market excesses while maintaining stability. We are not convinced that an insolvent market as big as this one can be made solvent without reverberations elsewhere.


Another month, another takedown by Amazon. Walmart reported disappointing online performance, and the stock price reacted by falling 10% in a day, which is a very large move for a company as big and stable as Walmart. This caught our attention, but like our commentary on the broad market pullback, Walmart’s price drop was hardly meaningful. It reversed price gains back to November 2017 levels, at which time the stock price jumped 11% on encouraging online sales. The market giveth and the market taketh away… We are still interested in Walmart so long as the price continues to decline and the dividend yield becomes more attractive.

Inflation & Interest Rates

Popular narrative right now is for rising inflation and, as a result, much higher yields. We disagree with the former and doubt the latter.


First, inflation. Inflation has fallen and barely budged since the financial crisis despite herculean efforts of central banks. The only major inflation evident was through asset prices but not very much through consumer or producer prices. The collapse of commodity prices was no help, nor has it created deflation. So, now that the commodity complex appears to have been stabilized, fears have renewed at the (slightest) advance in inflation metrics that inflation will take hold, and interest rates will have to rise dramatically. For a variety of reasons, we think this line of thought is unfounded, and such commentary is inconsistent.


Then, rates. The Federal Reserve appears to be determined to raise rates at the front-end of the curve (includes overnight loans or t-bills) and will no doubt accomplish this. The Federal Reserve will get much help from the Treasury, which now must issue a lot of debt in coming years to fund the US Government’s deficit – expected to be close to $1 trillion (that’s a ‘T’) in 2018. The Treasury has indicated much of this funding will be done with short-term debt. But the long-end of the curve (includes 10- and 30-year bonds) are less likely to move substantially higher. (They could, but we are skeptical.) The major bond market participants in the long-end of the curve are pensions, insurance companis, et al, and their business and underlying demographic situation is unlikely to change near-term – (That is, pensions still need to be invested with the long-term stability of fixed income and life insurance companies continue to grow retirement & income protection products that rely heavily on the security fixed income provides.) If it exists anywhere, the supply and demand imbalance in fixed income markets that could drive rates higher, in our opinion, rests on the front-end of the curve. This is not worrisome to us.


Despite our beliefs that rising inflation is not yet around the corner and that long-term rates are unlikely to rise substantially in the near-term, we are adding positions to portfolios that we think provide protection against either condition, while still rewarding the investor in the interim.


We have discussed Teva nearly every month of the newsletter. February should be not different. Two things occurred (1) Teva reported full-year 2017 financial results that showed revenues falling faster than many analysts expected and (2) Standard & Poors finally joined peers Moody’s and Fitch in junking the credit ratings. S&P downgraded the credit ratings two notches from BBB- to BB. The shift to “junk” ratings is important because it leads to greater constraints on raising capital, and Teva is highly leveraged.


One other noteworthy Teva event during February was that Berkshire Hathaway purchased a chunk of Teva’s stock. When Berkshire (as equity holder) is subordinate to Ballast (as bond holder) we feel even better about our thesis.