Mad Hedge Biotech & Healthcare Letter
March 26, 2020
Fiat Lux
Featured Trade:
(PFIZER PUSHES AHEAD WITH A CORONA CURE),
(PFE), (BNTX), (MYL)
Pfizer (PFE) has been widely recognized as one of the leading and largest vaccine makers in the industry.
Now, one of America’s biggest biotechnology companies will throw its weight behind German firm BioNTech (BNTX) in its quest to develop a COVID-19 vaccine.
Prior to this announcement, BioNTech has already been working inside China in collaboration with Chinese biopharmaceutical company Fosun Pharma (SHA: 600196).
Its partnership with Pfizer will entail efforts outside China and will be in collaboration with the University of Pennsylvania and the Bill and Melinda Gates Foundation. Specifically, the work will be done at sites in the US and Germany.
What we know so far about this experimental COVID vaccine is that it’s called BNT162.
Like the experimental vaccine from Moderna (MRNA), BioNTech’s version is also based on messenger RNA. Clinical trials will start by April.
BioNTech shares were up 55% following the announcement of this collaboration with Pfizer. Meanwhile, the giant biotechnology company’s shares jumped by 3.8%.
Before this coronavirus vaccine collaboration, BioNTech and Pfizer were already partners.
In 2018, the two companies agreed to work together in developing flu vaccines based on mRNA.
However, this recent expansion of their partnership gained more attention because of the intense focus on the efforts to combat the novel coronavirus.
The output of this partnership won’t be kept within the confines of the companies though.
According to Pfizer, any information or tool it comes up with will be shared with the entire scientific community.
The company also pledged its assistance to small biotechnology companies working on COVID-19 treatments and vaccines, going as far as offering its manufacturing power to help speed up the process.
Aside from its coronavirus efforts, the giant biotech has been working on plans to bolster its revenue streams.
Addressing the loss of exclusivity for seizure disorder drug Lyrica, an issue that weighed on the company’s top and bottom lines last year, Pfizer has been gearing up to merge the Upjohn unit with Mylan (MYL).
The merged companies will be called Viatris.
This is a good strategy. Since Upjohn is home to Lyrica and several older drugs nearing the end of their patent exclusivity, separating this unit will allow Pfizer to streamline its portfolio.
Instead of holding on to Lyrica as an anchor, the “new” Pfizer will focus on its new line of blockbuster drugs like breast cancer medication Ibrance and blood clot treatment Eliquis.
Apart from these, Pfizer is investing more on marketing its rising stars like Vyndaquel. The company’s pipeline is also filled with potential blockbusters particularly its 20-valent pneumococcal vaccine.
Although the Upjohn-Mylan merger will inevitably lower Pfizer’s dividend, shareholders of the giant biotech will still own part of Viatris. That means they would have a share in the dividend of the merged companies as well.
The combination of the dividends from both Pfizer and Viatris would total to roughly the same amount as the “old” Pfizer, which currently yields 5%.
What we’re experiencing right now is definitely unprecedented. COVID-19 has mutated from a respiratory disease affecting a single province in China into a global threat endangering everyone’s physical and financial well-being.
However, there’s always good news.
From an objective perspective, this coronavirus crisis has provided a rare opportunity for investors. After all, stock market corrections are actually quite common occurrences.
Looking at each correction in equities in the past, you can see that these were eventually triggered by a bull-market rally.
Remember, the ongoing vaccine research conducted by companies worldwide will yield results sooner or later. So even if COVID-19 is here to stay, it will no longer be a deadly threat in the long run.
In times like these, I think it’s more prudent to consider major biotechnology stocks when looking to invest.
This is because they have a higher capacity to keep trucking through this health crisis and to deal with its aftermath.
Despite the growing fear that this pandemic will lead us to a recession, Pfizer can still be easily categorized as a profitable company.
Considering that it’s trading at merely 13 times its expected earnings, this stock is quite a bargain.
Pfizer has a strong cash flow. Its long history shows that it has also weathered economic storms.
More importantly, it has a product pipeline that we find essential regardless of pandemics and strict quarantines. It doesn’t hurt that they’re priced attractively as well.
Global Market Comments
March 26, 2020
Fiat Lux
Featured Trade:
(REVISITING THE GREAT DEPRESSION)
(EXPLORING MY NEW YORK ROOTS)
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to a six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three-day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
AGNC, like a lot of stocks, has made a nice bounce since it bottomed out with the rest of the market.
There is a good possibility it may have peaked out here in the short term.
Therefore, I would like to take this opportunity to collect some call premium.
The last price for the April 3rd - $13.50 call for $0.80
My suggestion is to sell them at $0.80.
These are the calls that expire next Friday.
Assuming you collect the 80 cents, it will mean you would have collected $1.20 in call premium on this position.
If these calls are assigned next Friday, the total return would be 13%.
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to a six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three-day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Mad Hedge Technology Letter
March 25, 2020
Fiat Lux
Featured Trade:
(ALGORITHMS RUN WILD)
($COMPQ), (TWTR)
Don’t underestimate trading algorithms.
The “Buy the Dip” psychology is broken and computerized trading has completely flooded the market with its personality.
That is exactly the dynamic of the current tech market, and it will mountain of generous offerings to reverse the trend in the form of monstrous stimulus and cash handouts.
As we entered 2020, the sentiment was sky-high, geopolitical tensions relatively calmed and three recent interest-rate cuts from the Federal Reserve drove tech stocks to record levels.
For 10 years, traders and the algorithms they harnessed were handsomely rewarded by aggressively betting against elevated volatility.
Cogent chart trends are the algorithms’ lustful partner in bed and now that every single short-term model is flashing sell, sell, sell - there isn't much bulls can do to fight back.
Many tech hedge funds have settled on similar conclusions - the best defense right now is unwinding portfolios to return to cash.
Incessant margin calls roiling any logical strategy has struck fear into many traders who levered up 10X.
What you could possibly see is the Minsky moment: That stability ultimately breeds instability because the only input in which becomes the difference make is volatility producing massive violence on upside and downside moves.
The ones who can absorb elevated risk are nibbling and unleveraged hoping to time the turn when stocks finally react positively to good data.
The current battle in the fog of war is that of two different economic scenarios that have direct influence in which ways the algorithms flip – either shutdown the country ala Wuhan, China for an extended period of time or send the troops back to work.
Hedge fund billionaire Bill Ackman gave his 2-cents restating his passionate plea for a 30-day-shutdown to fight the coronavirus pandemic.
Former Goldman Sachs CEO Lloyd Blankfein is in favor of sending back the asymptomatic younger generation workers sooner than later.
Initially, Blankfein gave his backing for “extreme measures” in order to flatten the curve, but promoted healthy workers returning “within a very few weeks.”
Blankfein's argument rests on that if people don’t go back to work, the economy might become too damaged to recover from inciting another crash.
This contrasts starkly with Ackman’s idea of “testing, testing, testing”, which would theoretically dismantle the potency of the virus but take longer for the economy to restart.
U.S. President Donald Trump has relayed his desire to open up business by Easter Sunday.
So as mostly professional politicians hash out a towering aid package of over $2 trillion, firms will get more of an indicator of how and when the business world opens up again.
Trading algorithms are on a knives edge because of the uncertainty – until they are illegal – it is something we are stuck with.
These trading formulas are preset based on biases that start with a series of inputs and the most critical input is volatility or better known as the fear index.
If the lockdowns are extended, the flood of negative news will force algorithms to sell on the extra volatility.
When things go bonkers, many of these preset formulas sell which exacerbates the down move further simply because more than enough people have the same preset algorithm.
Cutting position size when market volatility explodes is not a farfetched theory and is quite a common trading nostrum.
Even if many of these trades would be good long-term bets, many trading algorithms are focused on short-term trades and by this, I mean milliseconds and not days.
Another input into trading algorithms are Twitter feeds.
The platform is scraped for keywords from mass media news sources and synthesized into a specific output that is fed into a computer algorithm.
These headlines offer insight into what the sentiment is for the trading day – negative, positive, or neutral.
This scraping of data is especially relevant in today’s chaotic trading world where 10% moves up or down in one day is the new normal.
Because of Dodd-Frank Wall Street reform, many of the big banks have shuttered trading operations hurting the market’s liquidity situation causing spreads to widen and down moves to accelerate.
But now that the Fed has landed the Sikorsky UH-60 Black Hawk on the helipad and the money is waiting to helicopter down as they have announced “unlimited” asset buying and guaranteeing of corporate bonds to aid financial markets.
How does computerized trading roil markets?
Here is an example. A recent trading day included more than $100 billion of selling, the worst week since the financial crisis and was triggered by a hedging strategy called “vol targeting”—using volatility as a central input in trading decisions—and other systematic tactics.
Funds making decisions based on volatility, including some with names such as volatility-targeting funds and risk-parity funds, have risen in popularity.
Risk-parity funds manage an estimated $300 billion.
Risk parity is an approach focused on allocation of risk, usually defined as volatility, rather than allocation of capital.
That is what we have now – a cesspool of risk parity hedge funds layered by high frequency funds layered by short/long vol funds layered by arbitrage funds all levered 15X.
The take into consideration that they are supercharged by massive volume-based computer algorithms and trying to head for the exit door at the same time.
Ironically, this could be one of catalysts for shares to recalibrate and head back up north as traders start to front-run the peak of the health crisis.
Let’s hope that it happens sooner than later and that the government doesn’t manage to screw up delivering the helicopter money.
“If you can't make it good, at least make it look good.” – Said Co-Founder of Microsoft Bill Gates
Global Market Comments
March 25, 2020
Fiat Lux
Featured Trade:
(LEARNING THE ART OF RISK CONTROL)