Cheap Vaccine, Growing Stocks

It has been suggested by multiple news outlets that Moderna, if they do get their vaccine ultimately approved, would not be that profitable. 

The problem is as follows: if Moderna were to market their approved vaccine, they would be looked at like greedy animals for overcharging for it. They would probably spend a boat-load to get it approved, but could not price the vaccine exorbitantly to take advantage of that work and capital put into doing so. Optics would prevent Moderna from “overcharging”. 

On the other hand, if Moderna were to charge only a small amount for the vaccine, it may be heavily used across the globe but Moderna itself would not show a very high profit, even though they caught lightning in a bottle. Chances are that they would be pressured by governments, domestic and foreign, to lower the price as much as possible.

If Moderna’s profitability is most likely capped, then what is the upside for them? 

There is a lot of hype around their vaccine and that hype be unwarranted given what we talked about above. However, a more nuanced look might show that large asset managers, like BlackRock, Vanguard, and State Street, could (should) be rooting for Moderna to work out their vaccine. 

The theory goes that as soon as a vaccine can enter the market, other stocks will benefit as consumers gain confidence, revenues increase, and subsequent earnings grow. If investors have large portfolios of companies, supporting one company where the profits would be minimal but whose product is impactful to the economy, should raise the values of all of their other holdings. Moderna’s stock could go to zero and the large asset managers would still do very well.

This brings about the second-level thinking that, if large asset managers were to take a seat on the Moderna board, and guide their corporate strategy, that the Moderna employees could potentially receive incentives that are not typical. Why would an asset manager want Moderna to maximize profits if that a) would limit the vaccine’s positive impact that it could have on the economy and b) not maximize benefits to thousands of other companies they may also be invested in? Instead, as we said in the last paragraph, they could manage Moderna to an extremely low, unprofitable value, but pay Moderna’s staff based on how well other company’s do? It would make sense for Moderna to do so. If you are a Modrona employee, why take a $2MM share price surge on Moderna stock when you can get a bonus from your rich diversified shareholders of $10MM…and look like a good guy for selling your vaccine at dirt-cheap prices?

One does not have to own Moderna stock in order to benefit from their hopefully positive vaccine trial, but everyone, particularly in the stock market, should be rooting that they are successful. A positive vaccine is a big step towards the economy and stock market fully recovering. 

The Effective Executive

Today’s book review is in regards to The Effective Executive by Peter Drucker

The Effective Executive is a book that I would recommend to any white-collar worker. Drucker was a great writer on management having written 39 books over 60+ years. This book, written in 1966 is probably his best known book and focuses on managers in business “getting the right things done.” While many aspects of the business world have changed, particularly in regards to technology, the principles at the core of this book have not.

As will be the case going forward, while I took many pages of notes on the books contents and it has informed my workflow greatly, I have gone deep on only a few concepts below. 

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Adverse Selection

When one side of a transaction knows more about the sale than the other, the result is adverse selection. The information advantage allows for one participant (Amy) in the trade to benefit from the transaction at the expense of the other party (Betty). The party without the information, Betty, knowing that the transaction likely includes adverse selection, is concerned that the trade may be unfair towards her. Betty may be so worried about that information disadvantage that she will adjust the pricing for that transaction to be more in their favor to her or Betty may simply decide to not do the transaction at all with Amy. If enough transactions for that type of trade are rescinded, then the volume of trades in the market diminishes, which has a greater effect on the market for those transactions in general. In short, distrust leads to inefficient markets.

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Brain Rules

This is the first of many planned book write-ups. I’m thinking of calling these type of posts BookMarc’s. Speaking of horrible humor, in addition to being a hacky comedian, I am also a real geek and often take lots of notes when reading a book. 

Regarding the structure of these posts, what I don’t like in a book review/recommendation is for someone to simply highlight passages of a book in their kindle and then spew it into a synopsis about the book. Additionally, bulleted lists of contents from the book are also lazy and lacking. Articles like that a) don’t make me want to read the book as I already have a synopsis of it and b) aren’t that enjoyable to read anyways. 

Instead, what might make sense is to take a few concepts from a book and then elaborate on them with my thoughts or connections that I have made from other resources. My process may start off looking like a top ten list but then a few items emerge that cause my thinking to expand on the subject matter. My thoughts may not even largely come from the book in question. The hope though is that you as a reader are interested enough in the book to read it. 

As far as the quality of the books, I won’t waste my time or yours with any books that I don’t recommend. So it should be implied that any book that I do write about is a good one. 

This post is about Brain Rules by John Medina.

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Mythbusting

I wanted to put together a number of additional theories that are both new and old. Through some argument, those truths may come to be proven false, if they haven’t already. The previous memo, “Betting and Boredom” was originally part of this memo but started to become too long and could stand on its own.

Below are a few myths that I explored this week.

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Hidden Labor Force Fluctuations

What is the unemployment rate made up of? It is fairly simple. The formula is those unemployed divided by the labor force.

Unemployed are those people either actively looking for a job or those that have been laid off but are waiting for a recall.

The labor force are those people on payrolls plus those that are unemployed. 

In tracking unemployment, most people will track those that are in the unemployed group. What are the new weekly unemployment claims? What are the continuing jobless claims? These are what people who track the economy fixate on. 

On the other hand, the labor force is not looked at though it is an important part of the employment figure. The labor force tells us who is working or who intends on working. The fluctuations in the labor force tell us a lot about the psychology of the labor market as well. 

Great Recession Labor Force

Let’s look at the Great Recession which is where I first saw that labor force changes do happen and are impactful. 

In October 2008, the labor force hit its peak at 154.9MM workers. The low in the labor force came in December 2009 at 153.1MM workers. To restate that, 1.8MM workers left the workforce in 14 months. They either did not want a job or were too discouraged to look for one. The economy took until almost four years later, June 2012, to reach that previous peak again. 

The unemployment rates in December 2009 was reported at 9.9%. If those that have exited the labor force are counter, the adjusted unemployment rate would be more like 10.9%.

The Great Recession was child’s play compared to what we are currently experiencing.

Coronavirus Labor Force

Let’s look at the recent employment figures. In January 2020, the labor force was reported at 164.6MM and the unemployment rate was reported at 3.6%. By April 2020, 3 months later, the labor force was at 156.5MM, which is a reduction of 8.1MM. The reported unemployment rate was 14.7%. Once those that temporarily left the labor force were accounted for, the adjusted unemployment rate was 19.0%. 

Of late, the labor force and unemployment figures have slightly recovered. The reported unemployment rate was 11.1% in June 2020. The adjusted unemployment rate, accounting for those that have still left the labor force, is 13.6%

The Labor Force Is Still Evolving

A lot of the employment picture has yet to come. It will be a few years from now where we fully grasp not only the unemployment rate but the overall labor force.

Here are some questions that come to mind that I will leave you with:

  • What happens to employment once the unemployment insurance relief of $600 extra per-week ends after July 2020?
  • When will the labor force get back to previous peak levels?
  • If the pandemic continues, will more people leave the labor force?
  • Will those that have left the labor force need to re-enter it if they run out of savings?
  • Will people that leave the labor force cause the reported unemployment rate to decrease?

Betting and Boredom

The economy has a number of unwritten rules and the coronavirus pandemic has punctured several of them, proving that sometimes rules have exceptions. It would be interesting to catalog a few of those rules (or strongly held opinions I’ve come across lately), and push back on them. By doing so, I hope to establish more myths than facts. 

Today’s memo focuses on the growing sentiment that the stock market activity was driven by circumstances surrounding people’s activity during the coronavirus pandemic and not by the stock market and the nature of trading today itself.

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Head-Scratching

Over the course of the last few weeks, there have been a number of items in the newsfeed that have stumped me. Writing my thoughts down during weird times has been my attempt at trying to sort things out. In this memo, I will try to unpack a few of these recent headlines. Mostly these memos are a way for me to memorialize these things, but it is also a way for me to codify the available information to determine what I truly think is happening. The fact of the matter is that I don’t actually know how I really feel about most of these new issues prior to writing my thoughts down.  The headlines are feeding us the sausage; these memos try to see how they are made.  Let’s get started.

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I Can Be Your HEROES, Baby

The Senate is currently reviewing the second stimulus package (the HEROES Act) and is expected to vote on it sometime between the 4th of July and its August recess. As this legislation would be impactful (despite the fact that we’re becoming desensitized to trillions in aid), I thought it would be timely to review the act and potentially prepare for the outcome. The following questions come to mind:

  • How do we prepare for the HEROES Act?
  • What are the hot button issues?
  • How will the Senate view each of the issues?
  • How does this legislation fit in with the evolving economic climate?

My hope is that at the end of this, there will be some logical steps to take to prepare for this legislation, regardless of how it plays out.

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Mad Men

This memo will be a slight departure. Normally I write my thoughts down by asking questions and sorting out what I think the answers might be, given facts, research, and trends occurring. This thinking out loud is mostly meant to be just that: fleshing out ideas. At most, there is some prediction where I think there could be pressures for trends to move in.

Instead, this may be different and more personal. As a result of my thinking on economic matters, I am going to start to codify some rules for my own views on the markets and my personal appetite for investing, with this memo being the first. Below are some of the thoughts I’ve been having on market participants, followed by a rule that will dictate my personal bias going forward.

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