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…

Liar’s Poker – A Book Review

As some of you may already know, Liar’s Poker is the first book published by Michael Lewis in 1989. It is basically a synopsis of his career at Salomon Brothers in the 1980’s. If you are not familiar with Michael Lewis, he is also the author of Moneyball, The Blind Side, and The Big Short.

Lewis – through acquaintances and the fortune of being seated next to the wife of the managing director of the London office of Salomon Brothers – received an invitation to the highly coveted Salomon Brothers training program.  At that time, it was considered by many to be THE Wall Street bond trader training program.

Salomon Brothers was thriving in the 1980’s as they basically invented the mortgage backed security, and they had a monopoly on the packaging and selling of these securities to banks, insurance companies, pensions funds, etc.  Prior to this, institutional investors shied away from investing their funds in residential mortgage loans, as the homeowner could always prepay if interest rates were going down (and the homeowner could refinance at a lower rate).  Institutions like to know the duration of what they own.

Even though this is a story of happenings 30 or more years ago, there are lessons in this book that apply both to today and to the future.  First, Salomon Brothers was thriving with their newly invented mortgage backed securities that gave investors some comfort in the duration of what they were buying.  They had all of the intellectual capital and the relationships in this space.  A couple of the reasons they didn’t maintain the good thing they had going was greed of upper management and jealousy of people in the organization that weren’t in the mortgage trading department.  Individuals who were integral in the buying of loans from thrifts throughout the U.S.(packaging them into mortgage backed securities and selling these packaged instruments to investors throughout the world) were aware that what they were doing was highly profitable.  Other Wall Street firms also became aware that it was highly profitable.  Competing firms (Goldman Sachs, JP Morgan, etc.) came with 7-digit salary offers to key personnel, and within a short time, many of the key people were successfully doing the work they had done (at Solomon Brothers) at other Wall Street firms.

So, Lesson #1…reward your good people.  Stay in tune to what is going on in your organization culturally, and do whatever you need to do to keep your key people engaged and excited about the growth of the organization as a whole.  In addition, ensure that their production will be rewarded fairly.


Lesson #2… Make sure your investment professional is on the buy side. This lesson is highlighted when Michael Lewis is assigned to the bond trading desk in the London office of Salomon Brothers.  This lesson is one that we (here at Ballast) talk about frequently.  Upon assignment to the London office, Lewis was told to call on investors and get them to entrust their funds to the firm.  He wasn’t great at this, but he did get a good lead one day and called on a local bank that wanted to invest $20 million with Salomon Brothers.  A bond trader within Salomon Brothers told Lewis that he should sell the bank some AT&T bonds.  Lewis went with the trader’s advice and suggested to the bank representative that they invest in some AT&T bonds.  Little did Lewis know that these bonds were in a loss position, and the trader had been trying to get them out of the Salomon Brothers’ portfolio.  The local bank’s first position (the AT&T bonds) with Salomon Brothers was down in price the very first week they owned it.  Lewis felt terrible about putting the bank in a bad investment from the get go and asked the bond trader who suggested it if Salomon Brothers could buy them back from the investor at cost as a goodwill gesture.  The trader responded, “Who do you think you work for, Michael?”


Even though it appears that Lewis was on the buy side for an investor who was definitely on the buy side of the AT&T bond trade, Lewis was with Salomon Brothers who was on the sell side of the trade (therefore Lewis was on the sell side as well). And so the lesson is…if you are working with an investment professional to put your savings to work, make sure they are on the “buy-side.”  I want to reiterate this point, because it’s important: In the example above, Salomon Brothers had the appearance of being on both the sell side (the bond trader telling Lewis to push the AT&T bonds) and the buy side (Michael Lewis trying to do a good job for an investor).  But their strategic interests were purely sell side.

This structure still exists today.  Wall Street investment banks have their own portfolios and are underwriting securities that they are selling to investors.  These same banks (sell side) have thousands of investment advisors in the retail arena advising individual investors (buy side).  The charge of the Wall Street banks is to collect capital via selling debt or equity securities to investors.  The charge of the investment advisor is to act in a fiduciarily responsible manner, investing clients’ funds in positions that are strategically aligned with their clients’ financial goals.  It seems that there is a conflicting set of goals when firms are acting on both the sell side and the buy side, and this is how many Wall Street firms grow their business (Morgan Stanley, J.P. Morgan, Wells Fargo, etc.).  Yet, many individual investors feel comfort and safety when investing with a large, “reputable” Wall Street name.

You, as an investor, are always on the buy side.  Make certain the investment professional you are paying and trusting to put you in good, productive investments that are accomplishing your financial goals is also only on the buy side!!  You want your interests aligned…always!