05/2019 Market Commentary

Growth Industry

Life insurance! Boy, have we got something you need! Just kidding.

So this is what the road to a trillion looks like: link. Who would have thought an old industry like life insurance was a growth industry again. Here, Blackstone is not bashful acknowledging their primary motivation is your best interest asset gathering. Beware of what these life insurance companies are selling and how they are selling it. Their objective may well not be the same as yours.

Oil & Gas

On the fritz

Oil prices have fallen dramatically in recent weeks from a high of $66 to as low as $53 (both are WTI). The latest inventory reading showed a major build up. This is sometimes associated with weak demand, which could signal broader economic weakness. WTI price chart:

Pioneer: Cutting to Grow

We have always wondered about the business math behind aggressively growing a negative cash flow business whose asset declines/depletes very rapidly – generally two years or faster and often precipitous in the first twelve months of the wells life. Talk about having to work hard to stand still (keep production up). Investors did not seem to mind and fed the industry more and more capital. With the uptick in oil and gas related bankruptcies and industry stock price declines it seems that capital providers are becoming more discerning (ie the capital comes more expensively or with greater strings attached). The question becomes what companies do with what they have. Pioneer Natural Resources seems to be following a new strategy akin to Tesla’s – cutting their way to growth (for all the criticism Tesla gets there sure is a lot of corporate mimicry going on). Things must be going well in the shale oil patch…

Bankruptcy Squared

Triangle Petroleum filed bankruptcy for a second time in three years. What a proud accomplishment for capital providers in the Bakken shale region!

Big Deal

Elsewhere in the oil patch investors are not afraid of recent rumblings (above and previous) or are at least are trying to catch up with rest. Chevron and Occidental Petroleum competed in pursuit of acquiring Anadarko Petroleum. Occidental has won out that bidding competition and with such sound economics management was certain that shareholders would agree so they tweaked the deal terms in such a way that removed the requirement for a shareholder vote. (That’s sarcasm – we think shareholders should vote on something this big) The deal is valued at $56 billion.


More delay in returning the 737 MAX to flight. Getting these aircraft back in the air is critical to Boeing’s operations. Each delay is very costly to Boeing as its working capital deteriorates – aircraft built but not sold is another way of saying cash goes out but does not come in.


  • Tesla expects global shortage of electric vehicle battery minerals (link)
  • US does not exempt Autopilot “brain” from new tariffs (link)
  • Tesla raises $2.7bn capital (link)
  • Solar factory revolutionary cells are being exported and not finding many US roofs (link)
  • Analyst describes “Code Red” situation at Tesla (link)
    • Stock trades below $200 for first time in 2.5 years.
  • Self-driving trucks begin mail delivery test for USPS (it’s not a Tesla) (link)
  • Bullish analyst talks differently on private call (link)
  • Tesla’s Autopilot requires significant driver intervention (link)
  • Analyst warning sends share prices lower (link)

Tesla stock price chart from Bloomberg:

Tesla bond due 2025 yield chart from Bloomberg:

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.


04/2018 Market Commentary

10 Year Treasury Above 3%

Bond bears received a little more fuel on their fire as the ten-year treasury bond rose above 3% for the first time since 2013.

MC Pic

[10-year Treasury Rate, Source: Bloomberg]


Many pundits will have you fear higher interest rates. Ballast welcomes them. We want to earn higher returns, and such returns have been lacking in recent years. While we think inflation remains contained and growth remains tepid, the supply and demand imbalance of treasuries could still send rates higher, regardless of what the economy can bear. That would require willful disregard of the Fed. As stated in February’s Market Commentary, Ballast thinks this will move the front-end of the curve more than the long-end.

Ballast encourages our investor clients to not only embrace higher interest rates for the opportunities they bring, but to also not worry about the mark-to-market bond losses that it may cause on account statements (which is the thing pundits seem most concerned about). Unlike stocks, bonds contractually require return of principal. Any price decline must ultimately trend back to par. In the meantime, coupon payments are contractually made, and investors can reinvest the cash flows at more attractive interest rates, as well as in other attractive opportunities.

Discount Airlines Discounted

It was not a good month for discount airlines (and maybe not for airlines in general).

The first adverse airline event this month was when CBS 60 Minutes aired an episode questioning Allegiant’s maintenance and safety track record. Allegiant’s stock (ticker: ALGT) promptly fell in value by as much as 12% over a couple of days, moving from $165 to $145, but then, it moved back up to $160 by the month’s end. Roundtrip, it was hardly an event, despite risks of serious consumer preference shifts. The one-month price movement was 6% lower.

The next, adverse event struck Southwest Airlines (ticker: LUV), but it likely carried far broader implications if anything serious were to result from the investigation that is currently taking place. This includes the possibility of more problems for General Electric. A Southwest flight from New York to Dallas experienced an engine explosion, and debris from the explosion penetrated the aircraft, leading to depressurization of the cabin, which nearly sucked a passenger from the aircraft. The aircraft landed safely, but the injured passenger tragically died, despite efforts of the crew and fellow passengers.

The serious, broader implications (we think) relate to the engine, which is a very common piece on that type of aircraft. The engine is manufactured by a joint venture between General Electric and France-based Safron. The joint venture is called CFM International. If a flaw were to be found with the engine and if it were to be a common flaw among that particular engine or others (both of which are hypothetical as the investigation is ongoing), it would be bad for CFM, ergo General Electric. It would also be bad for most other airlines who then might need to take aircraft offline to fix engines. In the meantime, the aircraft could be filled with liabilities if another engine were to experience a similar catastrophe. This may well be tail-risk (low probability and high impact), but Ballast is not convinced market prices reflect this risk in prices of GE stock or the other airlines.

Ballast maintains little investing interest in airline equities, but we are, however, interested in and own several aircraft securitizations issued by US airlines. These structures are secured by the airlines’ aircraft and produce attractive intermediate-term yields.

Kimberly Clarke and Other Staples

The consumer staple sector has had a few uneasy years. The narrative varies – e-commerce, natural brands, cost inflation, etc. – but the trend has been the same: lower share prices. Take Kimberly Clark (ticker: KMB) as an example. Kimberly-Clark makes Huggies, Depend, Kleenex, and Kotex, to name a few. The share price is 21% lower for the trailing 12 months ending April 30. At the latest quarterly earnings release, the stock fell to a five year low of $97. This is a stock now valued at a modest (by today’s standard) 15x price-to-earnings ratio, the company has high quality single-A credit ratings, shareholders receive a dividend yield of more than 3.85%, and the company produces consumer staple products. Ballast finds this attractive.

One doesn’t have to look hard for similar stories. Proctor & Gamble, Newell, Kelloggs, General Mills, etc. all have similar tales, prices charts, credit ratings, and dividend yields.

Are investors really panning companies like Kimberly Clark because of, or in favor of, exciting companies like Amazon? Where are Amazon’s margins? Amazon doesn’t pay a dividend. What does Amazon have to offer besides the hope of someday expanding margins by selling products made by the Kimberly Clarkes of the world?

As an investor, would you rather receive a dividend and wait for opportunity or receive no dividend and hope for opportunity? Ballast strongly favors the former.


The race to renegotiate NAFTA is on, and the deadline for terms are due in early May. Canada and Mexico are expected to concede ground, but whether this can be done by the deadline is the question. Mexico is in midst of an election that could present risk for the NAFTA delay. It is assumed that if there is any chance for NAFTA to survive (and in its renegotiated form), it must meet the deadline and be signed into law before Mexican elections this summer. New NAFTA or no NAFTA, the potential disruption to supply chain will be something to watch, and it has Ballast’s attention.

Tesla Model Y?

Tesla was discussed in the last month’s newsletter piece, and Ballast remains skeptical of Tesla’s high valuation, given the scaling and cash flow challenges. We think it is likely that Tesla will need to raise more capital, and we see the company’s ability to access capital as becoming more difficult. Historically, Tesla seems to have relied on excitement about future products, as well as prospects for bigger, bolder ideas, as distractions from operational and financial shortcomings. This month (of bad news, in our opinion) marked perhaps another attempt at distracting stakeholders with the announcement that Model Y would begin production in November 2019. Remember, Tesla has not realized any prescribed timeline we are aware of, and the Model 3 production and production ramp has been abysmal – Tesla’s CEO has even acknowledged this.

All of this is just to say that we are astonished that a company struggling on the bread-and-butter product (Model 3) is even entertaining moving forward with the next model.

Aluminum Price

Aluminum prices have whipsawed with recent tariff actions. Stocks of companies involved in the production and processing of the commodity have tracked the commodity price. Alcoa (ticker: AA) saw its stock price move from $45 at the beginning of April to a mid-month high of $62 (+37%) only to fall to $52 (-16% from the high) to close out the month. That is volatile, and Ballast is not sure investors have any clearer of a picture on what to expect for the industry.

Apple Chips

Apple is said to be exploring building its own microchips. This would be detrimental to the chip industry, including Intel. Various speculations as to reasoning have been floated, but we wonder why building their own chips makes sense. Building the capacity and expertise, while trying to eke out a profit, is doubtful. Neither set of investors – the Intels or the Apples – appears to be very rattled by the revelation.

Oil Price and Projects

As we’ve previously highlighted, although we have expected status quo for oil prices, industry minds that we respect have called for dramatically higher oil prices, and the market seems to be trending this way. West Texas Intermediate, the US benchmark price per barrel of oil, reached $69, a price not seen since 2014. As recently as July 2017 the price was $42.

Whether oil prices are high or low, Ballast has been interested in the offshore drill rig companies. These companies are asset-intensive, and they suffered immensely in the oil price downturn (since oil and gas exploration companies stopped unprofitable projects, dropping rig utilization). The offshore oil rig industry appears to have rightsized and is treading water until oil prices rise and exploration companies begin to pursue new projects

Ballast wonders if we are beginning to see the green shoots. Exploration auctions have taken place around the globe, namely in Mexico and Brazil, and BP announced it would drill two projects in the North Sea.

Sprint + T-Mobile: 1+1 < 2

Sprint and T-Mobile, number 3 and 4 US wireless carriers, agreed to merge after what seemed like an on-again/off-again relationship. We’re not sure whether it is good for the pair, but we suspect it is at least marginally negative for their larger competitors AT&T and Verizon. Primarily, it likely means the wireless plan pricing war is set to continue.

What caught Ballast’s attention and why we write about the pair here is that ordinarily, the market knee-jerk reaction of investors following a merger and acquisition announcement is often telling of who the winner is. Sometimes, both stock prices rise – win-win. Other times one rises, and the other falls – win-lose. This time, the price of both stocks fell dramatically – lose-lose. This is rare. T-Mobile’s (ticker: TMUS) share price fell from $64.50 just before the announcement to around $60.00 by mid-day April 30, or down 7%. Sprint’s (ticker: S) share price fell from $6.50 just before the announcement to around $5.50 by mid-day following announcement, or down 15%. Investors do not seem impressed.

Tesla: A Case Study

Tesla’s financial position is weak due to ongoing and cumulative losses from operations. Because Tesla continues to lose money, it is reliant upon new capital to support its continued operations. The weakened financial position and growing capital needs put the company in a precarious position, with the very survival of the company left to the whims of the capital markets (the providers of capital).

With its lack of earnings and large cash burn, Tesla has relied on raising new capital at regular intervals to continue with ramping production. To date, the capital markets have obliged with fresh capital. In our assessment, capital markets have done so with very cheap credit, especially considering the company’s up-until-now single-B credit rating (this is very weak). With such a high equity market capitalization and no earnings, the company cannot consider (though we think it should) raising equity without driving share prices off a cliff. Successive investors would demand a more favorable entry price, and existing investors would seek to avoid dilution so that the stock price would respond adversely.


Without reasonable access to equity capital, Tesla is left to just borrow more. Except, creditors seem to have finally awoken from their slumber. Negative cash flow, limited value assets (again, negative cash flow), senior management departures (we counted three in March alone), quality control issues, ongoing failure to meet production targets, et cetera are causing creditors to rethink Tesla’s risk premium. Helping wake creditors, Moody’s downgraded Tesla’s senior unsecured credit rating deeper into junk territory from single-B to triple-CCC (B3 to Caa1), citing production shortfalls of the Model 3 and pending maturities of convertible bonds. We don’t think Moody’s is wrong in doing so because Tesla is precariously close to bankruptcy. The bond price collapsed, and yields spiked higher as a result.

Recent market activity – namely, bonds repricing for much greater risk – seems to have shuttered another door for much needed capital. As its cash burn continues, Tesla has a tall order ahead for replenishing liquidity. While we suspect Tesla has another trick or two up its sleeve to raise capital, each successive round will require ever more pounds of flesh, which comes at the expense of existing capital providers – both equity and creditor. Creditors assuredly woke up, and now, equity investors may be waking up too…

In the latest SEC 10-K filing (annual report covering the year ended 12/31/17), Tesla reported a net loss of -$1.96 billion attributable to common stockholders (its biggest ever loss) and cash flow from operations of -$60 million. The latter number seems almost refreshing when framed against the $4.97 billion accumulated deficit reported in the shareholders’ equity section of the balance sheet. This is because it implies Tesla is $60 small-million away from breakeven operations – from a cash flow standpoint anyways. But this figure comes before considering cash needed for investing activities. Even mature companies spend large sums refurbishing fixed assets just to maintain operations. During 2017, Tesla spent $3.41 billion on capital expenditures (how else would Tesla manufacture cars, if not with equipment?) and $660 million on other equipment purchases related to long-term sales financing of solar panels. (We won’t delve into solar financing, which is under the Solar City brand, here because the explanation is too wordy for purpose of this writing.) The combined automobile manufacturing and solar equipment expenditures totaled more than $4 billion. Because cash flow from operations has been negative in each year (with exception of 2013) going back to 2009, Tesla has relied on new capital to finance capital expenditures. Economic law dictates that (in the long-run) cash flow from operations must exceed capital expenditures if capital providers are ever to get their hard-earned money back. With ever increasing losses and continued cash burn, investors must make value judgments of when, if ever, and by how much cash flow from operations will exceed capital expenditures. Without such rational assessment, an investor is speculating – and likely to face – permanent loss on their investment.


Tesla’s current equity market capitalization is $42.5 billion, but it reached a high of $60 billion in January and February this year. As noted above, Tesla lacks earnings and positive cash flow, does not pay a dividend, and carries a credit rating of triple-C. For context, here are profiles of Tesla’s American competitors:


  • General Motors (GM): net income of $10.6 billion, cash flow from operations of $17.3 billion, which exceeds $8.4 billion of capital expenditures for $8.8bn free cash flow. General Motors pays a dividend, currently yielding 4.25% at $35.70 share price. The credit ratings are triple-B (investment-grade). Market capitalization is approximately $49 billion.
  • Ford Motors (F): net income of $6.4 billion, cash flow from operations of $18.0 billion, which exceeds $7.0 billion of capital expenditures for $11.0 billion free cash flow. Ford pays a dividend, currently yielding 5.55% at $10.80 share price. The credit ratings are triple-B (investment-grade). Market capitalization is approximately $43 billion.


We ask rhetorically, why should investors be willing to pay more for Tesla than General Motors and Ford?


In the old days, growth capital came from equity financing. Once an asset was proven to generate reliable cash flow, credit could be applied to the asset to create leverage and increase returns to equity. Nowadays, in the era of central bank monetary easing, credit has flowed easily and depressed risk premiums in both credit (low interest rates) and equity (high multiples) markets. Investors seemingly couldn’t find business ideas they didn’t like. In the case of Tesla, credit was applied to assets not yet producing reliable cash flows – more than $5.4 billion has been borrowed in the name of Tesla. Without cash flow, the creditors cannot be paid unless more capital is raised. In the old days, without payment to creditors, companies would go bankrupt, and assets transferred from common stock owners to creditor owners.


With Tesla’s current operating profile and capital needs combined with the company’s market price, we think of the situation as akin to running with a noose around your neck. Maybe you won’t trip and fall, but running is quite careless. In Tesla’s case, a stock priced for perfect operational execution (as we think recent price indicates) seems careless. Any operational tumble could result in that noose tightening and an air pocket like drop in stock (and bond price). We wonder if recent drops in price of Tesla’s stocks and bonds may be foretelling.

Producing the Model 3 (Tesla’s mass-market car) profitably and on (the new revised) schedule is, more than ever, critical to Tesla’s ability to raise more capital and continue as a going concern. Even if Tesla can deliver on said requirements, we are not convinced the equity is priced right for the ongoing risks of an immature company competing with established and mature titans – who have decades of manufacturing experience and greater financial fire-power.


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.