September 2024

The New Shot Caller

There’s nothing like a little competition to shake things up in the vaccine world, and it looks like Vaxcyte (PCVX) just lobbed a serious challenge at the reigning king of pneumococcal shots, Pfizer (PFE).

You know that satisfying smack when a basketball, held under water, bursts free and cracks you in the nose? That’s what’s happening in the vaccine market right now.

Vaxcyte just threw down the gauntlet with its experimental pneumococcal vaccine, VAX-31, going toe-to-toe with Pfizer’s Prevnar 20 in an early-stage trial. And let’s just say, the results are giving Pfizer’s brass plenty to worry about at their next earnings call.

VAX-31 didn’t just keep pace—it outperformed Prevnar 20, showing a stronger immune response against 18 out of 20 strains of those pesky streptococcus bacteria. This isn’t just a pat on the back; it’s a flashing neon sign that a market shake-up is on the horizon.

For those not yet familiar with Vaxcyte, let’s break it down. This biotech upstart is developing next-generation vaccines designed to do more than just fight infections—they’re engineered to outsmart them.

Vaxcyte’s secret weapon? That would be their XpressCF platform, a game-changing cell-free protein synthesis technology that’s rewriting the rules of vaccine development.

Unlike conventional methods that rely on live cells to produce proteins—a process that can be as slow and finicky as trying to bake a soufflé in a wind tunnel—XpressCF takes a completely different approach.

Essentially, XpressCF makes it possible to create complex proteins in a controlled environment without the need for live cells.

By extracting and using only the essential components from Escherichia coli bacteria, Vaxcyte can synthesize proteins with a level of precision that’s simply unattainable with traditional cell-based systems.

This not only speeds up the production process—cutting out the unpredictable nature of working with live cells—but also allows Vaxcyte to fine-tune the proteins to be more effective against the bacteria they’re targeting.

And as for the result? Vaccines that are not just produced faster, but are also more precisely engineered to take down the most stubborn pathogens. It’s like swapping out a sledgehammer for a scalpel—more targeted, more effective, and less room for error.

This leap forward in technology means Vaxcyte can potentially offer broader protection with fewer side effects, all while dodging the common production headaches that have plagued traditional vaccine development for decades.

And, as expected, Vaxcyte’s pipeline is packing some serious heat with VAX-31 and VAX-24, targeting 31 and 24 strains of IPD, respectively.

These vaccines are aimed squarely at protecting the most vulnerable—infants and adults over 50—from these dangerous infections.

While VAX-24 is leading the charge with Phase 2 trials already showing promising results, VAX-31 is closing in fast and could be the breakout star when it hits the market.

And here’s where it gets even more interesting. Vaxcyte has its sights set on a Phase 3 trial for VAX-31 in adults by mid-2025, with data expected to roll in by 2026.

If everything goes according to plan, Vaxcyte could have not one but two blockbuster vaccines ready to rock the market by 2027 — just as Pfizer and Merck (MRK) might be getting a little too comfortable in their respective corners.

Now, let’s pivot to the bigger picture. Pfizer’s Prevnar 20 and its predecessor, Prevnar 13, are nothing short of cash cows, raking in $6.4 billion in 2023—more than all but two other Pfizer products.

Merck isn’t just sitting on the sidelines, either. Their Vaxneuvance and Pneumovax 23 contributed a cool $1.1 billion to the bottom line last year.

With VAX-31 stepping into the ring, though, it’s like David just found a very large and very effective rock.

But before we get too far ahead of ourselves, let’s remember that biotech is a high-stakes game. The risks are real, and the path to FDA approval is littered with potential setbacks.

Still, Vaxcyte’s got a few things going for it that could make this a winning bet.

For starters, they’ve got $518.7 million in cash, $934 million in short-term investments, and zero debt. That’s a war chest of $1.5 billion to fund their march toward FDA approval without breaking a sweat.

From a valuation standpoint, Vaxcyte’s market cap is sitting pretty at $12.5 billion, and while some might balk at their price-to-book ratio of 6.3 compared to the sector’s median of 2.4, I’d argue that you get what you pay for.

After all, you’re not just buying into a company. If anything, you’re actually buying into a potential industry leader. And in a market where the reigning king is starting to sweat, that might be the most valuable investment of all.

September 10, 2024

Diary, Newsletter, Summary

Global Market Comments
September 10, 2024
Fiat Lux

Featured Trade:

(IF YOU SELL IN MAY AND GO AWAY, WHAT TO DO IN SEPTEMBER?)
(ONSHORING: THE NEW GLOBAL TREND)

If You Sell in May and Go Away, What to do in April?

Diary, Newsletter

That is the conundrum facing traders, investors, and individuals as we enter the home stretch for the year. For some hedge fund managers, Q3 2024 is clearly turning into the quarter from hell.

I have been in the market for almost six decades, long enough to collect an encyclopedia's worth of words of wisdom. One of my favorites has always been “Sell in May and Go Away.” On close inspection, you’ll find there is more than a modicum of truth in this time-worn expression.

Refer to your handy Stock Traders Almanac and you’ll find that for the last 50 years, the index yielded a paltry 1% return annually from May to October. From November to April, it brought in a far healthier 7% return.

This explains why you find me with my shoulder to the grindstone during the winter, and jetting about from Baden-Baden to Monte Carlo and Zermatt in the summers. Take away the holidays and this is really a four-month-a-year job.

My friends at StockCharts.com put together the data from the last ten years, and the conclusions on the chart below are pretty undeniable. They have marked every May with a red arrow and Novembers with green arrows.

What is unusual this year is that we went into September with markets at all-time highs and on top of a prodigious 11% gain in the S&P 500 (SPY), one of the sturdiest moves in history. History also shows that the bigger the move going into such a peak, the more savage the correction that follows. From my other profession the term “Bombs away” comes to mind.

Being a long-time student of the American, and indeed, the world economy, I have long had a theory behind the regularity of this cycle. It’s enough to base a pagan religion around, like the once-practicing Druids at Stonehenge.

Up until the 1920’s, we had an overwhelmingly agricultural economy which accounted for 50% of our GDP. Farmers were always in maximum financial distress in the fall, when their outlays for seed, fertilizer, and labor were at a peak, but they had yet to earn any income from the sale of their crops. They had to all borrow at once, placing a large call on the financial system as a whole. This is why we have seen so many stock market crashes in October. Once the system swallows this lump, it's nothing but green lights for six months.

Once the cycle was set and easily identifiable by low-end computer algorithms, the trend became a self-fulfilling prophecy, even though only 2% of our economy comes from agriculture. Yes, it may be disturbing to learn that we ardent stock market practitioners may in fact be the high priests of a strange set of beliefs. But hey, some people will do anything to outperform the market.

Bombs Away?

Onshoring: the New Global Trend

Diary, Newsletter

By now, we have all become experts in offshoring, the practice whereby American companies relocate manufacturing jobs overseas to take advantage of low wages, missing unions, the lack of regulation, and the paucity of environmental controls. The strategy has been by far the largest source of new profits enjoyed by big companies for the past two decades. It has also been blamed for losses of US jobs, with some estimates reaching as high as 25 million.

When offshoring first started 50 years ago, it was a total no-brainer. Wages were sometimes 95% cheaper than those at home. The cost savings were so great that you could amortize your total capital costs in as little as two years. So American electronics makers began filing overseas to Singapore, Thailand, Hong Kong, Taiwan, South Korea, and the Philippines. After the US normalized relations with China 50 years ago, the action moved there and found that labor was even cheaper.

Then, a funny thing happens. After 40 years of falling real American wages and soaring Chinese wages, offshoring isn’t such a great deal anymore. The average Chinese laborer earned $100 a year in 1977. Today, it is $6,563, and $24,000 for trained technicians, with total compensation rising 20% a year. At this rate, US and Chinese wages will reach parity in about 10 years.

But wages won’t have to reach parity for onshoring to accelerate in a meaningful way. Investing in China is still not without risks. Managing a global supply chain is no piece of cake on a good day. Asian countries still lack much of the infrastructure that we take for granted here. Natural disasters like earthquakes, fires, and tidal waves can have a hugely disruptive impact on a manufacturing system that is in effect a highly tuned, incredibly complex watch.

There are also far larger political risks in keeping a large chunk of our manufacturing base in the Middle Kingdom than most Americans realize. With the US fleet and the Chinese military playing an endless game of chicken off the Tawan coast, we are one mid-air collision away from a major diplomatic incident. Protectionism constantly threatens to boil over in the US, whether it is over the dumping of chicken feet, tires, or the latest, solar cells.

This is what the visits to the Foxconn factory by Apple’s CEO, Tim Cook, are all about. Be nice to the workers there, let them work only 8 hours a day instead of 16, let them unionize, and guess what? Work will come back to the US all the faster. This week, the Chinese press was ripe with speculation that Apple-induced reforms might spread to the rest of the country like wildfire.

The impact of a real onshoring move on the US economy would be huge. Some economists estimate that as many as 10%-30% of the jobs lost to offshoring could return. At the high end, this could amount to 8 million jobs. That would cut our unemployment rate down by half, at least. It added $20-$60 billion in GDP per year, or up to 0.4% in economic growth per year. It would also lead to a much stronger dollar, rising stocks, and lower bond prices. Is this what the stock market is trying to tell us, rising by 34% off the October lows?

Who would be the biggest beneficiaries of an onshoring trend? Si! Ole! Mexico, which took the biggest hit when China started soaking up all the low-wage jobs in the world. After that, the industrial Midwest has to figure pretty large, especially in gutted Michigan. With real estate prices there below their 1992 lows, if there is a market at all, you know that doing business there costs a fraction of what it did 20 years ago.

I Hear They're Offering $2 an Hour Across the Street

September 10, 2024 - Quote of the Day

Diary, Newsletter, Quote of the Day

“The only surprise to me is that so many people were surprised,” said Nobel Prize winning economist Joseph Stiglitz, about the financial crisis he predicted.

GUARDRAILS FOR THE FUTURE

Mad Hedge AI

(AAPL), (GOOGL), (MSFT), (NVDA), (IBM)

In the immortal words of Yogi Berra, “The future ain't what it used to be.” And if Ilya Sutskever has his way, it's going to be a whole lot smarter—hopefully less apocalyptic.

As the former chief scientist at OpenAI, Sutskever is no stranger to pushing the boundaries of artificial intelligence.

After a dramatic exit from OpenAI in May that shook up Silicon Valley, he's back with a bold new venture: Safe Superintelligence Inc. (SSI).

And here’s the kicker—he’s already secured a cool $1 billion in funding.

Now, you might be wondering, what makes SSI worth a billion-dollar bet? For starters, it’s co-founded by a trio of tech heavyweights.

Besides Sutskever, who’s practically a legend in AI circles, there’s Daniel Gross, who sold his startup to Apple (AAPL) back in 2013, and Daniel Levy, a former OpenAI researcher who knows a thing or two about AI safety.

This dream team has one mission: to develop AI systems that are not just powerful but safe enough to avoid any Terminator-style scenarios.

The company’s mantra is all about balancing safety and capabilities—tackling these twin challenges as if they were two sides of the same Bitcoin. Sutskever puts it this way: SSI aims to advance AI capabilities “as fast as possible while making sure our safety always remains ahead.”

In other words, they want to create AI that’s smarter than us but not smart enough to go rogue.

And let’s talk about that $1 billion. Investors aren’t throwing their cash around for fun—this is serious money from serious players.

Andreessen Horowitz, Sequoia Capital, DST Global, SV Angel, and NFDG (run by Nat Friedman and SSI’s CEO Daniel Gross) are all in. It’s like getting the Avengers of venture capital to back your startup.

But what’s even more impressive is the company’s rumored valuation—$5 billion. That’s not pocket change, even in Silicon Valley.

So, what’s the plan for all this loot? SSI is gearing up to acquire massive computing power and assemble a top-tier team of researchers and engineers.

Right now, they’re operating with a lean crew of 10, split between Palo Alto, California, and Tel Aviv, Israel. But with this kind of funding, you can bet they’re going to grow—and fast.

Now, let’s get into the nitty-gritty of AI safety. It’s the hot topic du jour, with everyone from tech giants to regulators debating how to keep AI from turning into our worst nightmare.

In California, a bill aimed at regulating AI safety has caused a rift in the industry. OpenAI and Google (GOOGL) are against it, while Anthropic and Elon Musk’s xAI are all for it.

Meanwhile, SSI is keeping its focus on building what they call a “safe superintelligence,” steering clear of the commercial pressures that often lead to shortcuts in safety.

Sutskever, at just 37, is already a big deal in the AI world thanks to his impressive portfolio and having Geoffrey Hinton, known as the "Godfather of AI,” as his mentor.

Alongside Gross and Levy, SSI is poised to become a key player in the race to AGI—Artificial General Intelligence, or as I like to call it, the holy grail of AI.

But here’s the twist: While OpenAI is focused on creating a range of commercial products on the way to AGI, SSI has a singular focus.

They’re all about creating one thing: a superintelligent AI that won’t decide to wipe us out.

But, of course, SSI isn’t alone in this mission. Giants like Alphabet Inc. (GOOGL) and Microsoft Corporation (MSFT) are also deeply entrenched in the AI safety race.

Alphabet, through its subsidiary DeepMind, has been making waves with its groundbreaking research on AI alignment and ethics.

Microsoft, with its Azure AI platform and strategic partnership with OpenAI, has committed to advancing AI technologies with a strong emphasis on fairness, transparency, and accountability.

NVIDIA Corporation (NVDA) is another key player, providing the essential hardware that powers AI advancements.

While their focus is on developing the most powerful GPUs, NVIDIA’s technology is crucial for the safe development and deployment of AI systems.

And let’s not forget IBM (IBM), which has been a pioneer in AI with its Watson platform. IBM’s approach to AI safety revolves around principles of trustworthy AI, emphasizing transparency and explainability.

These companies, like SSI, recognize that AI safety isn’t some buzzword—it’s the cornerstone of responsible innovation.

But let’s be real—AI safety is easier said than done. As AI systems become more powerful, the chances of them going off the rails increase.

Misalignment between AI and human values could lead to outcomes straight out of a sci-fi horror flick. But despite the risks, venture capitalists are still willing to pour money into companies like SSI that promise to push the envelope.

And speaking of pushing the envelope, Sutskever has always been a big believer in the power of scaling—using vast amounts of computing power to supercharge AI models.

This idea was central to the rise of generative AI, like the now-ubiquitous ChatGPT.

Just to be clear though, SSI isn’t copying the OpenAI playbook. Sutskever hints that they’ll be approaching scaling in a “new” way, though he’s keeping the details under wraps for now.

“Everyone just says ‘scaling hypothesis.’ Everyone neglects to ask, what are we scaling?” Sutskever quipped in an interview. It’s a fair question.

Scaling without a clear direction is like flooring the gas pedal without knowing where you’re headed. SSI plans to chart a different course, and if they pull it off, it could be something special.

As SSI moves forward, they’re laser-focused on hiring people who not only have the skills but also the right mindset.

Gross mentioned that they spend hours vetting candidates for “good character” and are more interested in people who are passionate about the work rather than the hype surrounding AI. It’s a refreshing approach in an industry where hype can often overshadow substance.

With $1 billion in the bank and a mission to make AI both powerful and safe, Safe Superintelligence Inc. is a company to watch. They’ve got the talent, the funding, and the vision.

Now, it’s up to them to deliver on the promise of creating AI that won’t just change the world—but do so without burning it down.

September 9, 2024

Tech Letter

Mad Hedge Technology Letter
September 9, 2024
Fiat Lux

Featured Trade:

(IS C3.AI WORTH AN INVESTMENT)
(AI)

Is C3.AI Worth An Investment

Tech Letter

I’m not going to write here that C3.ai is the best AI firm in the world.

They are not.

They have been around for a while and that has helped them with the first-mover advantage.

The AI software they develop helps corporations finish tasks quicker and more efficiently.

The stock hasn’t cared much for its business lately causing the stock to be beaten down.

C3.ai stock was trading at $183 per share in 2021 and has now settled around the low $20 range.

Needless to say, a drop that big stemmed from big questions about it’s the effectiveness of its business model and an overhyping of its AI business.

It won’t be the last to drop that hard and I do believe a wide swath of AI stocks won’t be able to meet the lofty expectations from investors.

It currently has a portfolio of over 40 ready-made software applications designed to help businesses accelerate the adoption of artificial intelligence.

C3.ai made a significant change to its business model two years ago, and it's starting to pay dividends.

C3.ai serves businesses across 19 industries, many of which wouldn't typically be associated with cutting-edge technologies like AI. They include manufacturing, oil and gas, utilities, and more. It's because C3.ai offers a unique value proposition - the company can deliver tailored AI solutions to customers in as little as three months following an executive briefing.

Oil and gas giant Shell, for example, deployed over 100 C3.ai applications across its organization. They're used to monitor over 10,000 items of equipment for predictive maintenance, which reduces the probability of a catastrophic failure. Plus, at one of Shell's liquefied natural gas plants, C3.ai's asset optimization software reduced carbon emissions by 355 tons per day. That's the equivalent of taking 28,000 vehicles off American roads.

C3.ai sells its AI software directly to customers, but it also has sales partnerships with tech giants like Microsoft, Amazon, and Alphabet. They offer C3.ai's applications on their cloud platforms, placing them in front of millions of customers the company might not have had access to otherwise.

C3.ai generated a record $87.2 million in revenue during Q1, representing a 21% increase from the year-ago period. It also marked the sixth consecutive quarter of accelerating growth, which is a direct result of a strategy shift inside the company two years ago.

C3.ai came public in December 2020, during a frenzy in the cutting-edge new technology called generative AI.

According to a recent survey by PwC, around 70% of top corporate executives expect AI to significantly change the way their organization creates value over the next three years. PwC also expects AI to add $15.7 trillion in value to the global economy by 2030, so the financial opportunity is enormous.

The company only has a growth rate of around 20% and that won’t cut it in the highest growth subsector in the tech sector.

Its change in strategy is starting to turn around and if they can nudge up the growth rate to 35%, I do believe the stock will go from the low $20 to the low $30.

There is a trade here, with 1-2% of your portfolio, and if we get a big market sell-off down to the teens, I would buy and hold this stock for the medium turn for a profitable trade.

As for a long-term buy and hold, I don’t believe the company has done enough to justify investors giving that much faith in them.

September 9, 2024 - Quote of the Day

Tech Letter

“It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” – Said American Investor Warren Buffett

September 9, 2024

Jacque's Post

(AUGUST INFLATION DATA WILL STEAL THE LIMELIGHT THIS WEEK)

September 9, 2024

Hello everyone.

WEEK AHEAD CALENDAR

Monday, Sept. 9

10:00 a.m. Wholesale Inventories final (July)

3:00 p.m. Consumer Credit (July)

11:00 p.m. China Trade Balance

Previous: $84.7b

Forecast: $83.9b

Earnings: Oracle

Apple’s “It’s Glow Time” event

Tuesday, Sept 10

6:00 a.m. NFIB Small Business Index (August)

2:00 a.m. UK Unemployment Rate

Previous: 4.2%

Forecast: 4.2%

Goldman Sachs’ Communacopia and Tech Conference

U.S. presidential debate

Wednesday, Sept 11

8:30 a.m. Consumer Price Index (August)

8:30 a.m. Hourly Earnings final (August)

8:30 a.m. Average Workweek final (August)

Thursday, Sept 12

8:30 a.m. Continuing Jobless Claims (08/31)

8:30 a.m. Initial Claims (09/07)

8:30 a.m. Producer Price Index (August)

2:00 p.m. Treasury Budget (August)

8:15 a.m. Euro Area Rate Decision

Precious: 4.25%

Forecast: 4.0%

Earnings: Adobe, Kroger

Friday, Sept 13

8:30 a.m. Export Price Index (August)

8:30 a.m. Import Price Index (August)

10:00 a.m. Michigan Sentiment preliminary (September)

Last Friday, the highly anticipated US jobs data came in slightly lower than expected, with only 142,000 jobs added in August. The US$ shrugged its shoulders at the number but was still weaker on the week.

This week brings the euro into focus with an interest rate decision from the ECB on Thursday. Rates are expected to be lowered by 25bps. US CPI data arrives on Wednesday, with inflation expected to tick lower towards the Fed’s 2% target.

This week will also bring the first presidential debate between Vice President Kamala Harris and former President Donald Trump, an event traders will closely watch as the candidates outline their economic policies.

MARKET UPDATE

S&P500

Corrective sell-off in progress. The question on everybody’s lips: Is this a new bear market or a corrective move? At the moment I view the action in the market as a correction, and support around 5,100 should hold. A sustained break below the aforementioned level would question my thesis and risk a move toward the mid 4,000’s.

GOLD

Gold uptrend persists. Resistance = $2,530. Once this level is cleared the uptrend can extend onto the late $2,500s.

As a caution, any sustained break below $2,470, risks a move to around $$2,400.

BITCOIN

Complex Correction in progress. Resistance = $56,250/$58,500. With downside pressure dominant at the moment, we could see the $50,000 level tested and even test the mid $44k.

WHAT IS…?

Beta is a statistical measure of a security’s risk or volatility as compared with the market as a whole.

The market has a Beta of 1.0, and individual stocks are ranked according to how much they deviate from the macro market. If stock (XXX) has a beta of 1.5, then we would expect stock (XXX) to move 50% more than the market. So, if the S&P500 moves up/down 1.0%, we would expect (XXX) to move up/down 1.5%.

A higher beta implies greater risk with the potential for higher returns, whereas a lower beta implies lower risk, but also the potential for lower returns.

How do we calculate Beta?

AUSTRALIAN CORNER

Morningstar says the following companies are stocks that investors could hold for life.

Note: this list does not cater to those who want stocks for dividend income and doesn’t consider valuation. In other words, investors need to look at different stocks for income and should wait for a retracement before scaling into any of the stocks listed here.

The filter that was used included:

Part of the ASX 300 (well established firms with some history of success, which excludes most small caps).
Long runway of growth opportunities (leaning toward companies that have global operations, and/or large markets to operate in).
Economic moats (sustainable competitive advantage: network effects, intangible assets, cost advantages, switching costs, or efficient scale).
Goods return on capital
Sound balance sheet (Not a big reliance on too much debt to generate returns).
Don’t rely on exceptional managers to succeed. (The business needs to stand on its merits).
Unlikely to be disrupted (you are betting on things that won’t change).

James Hardie (ASX: JHX)

Since it pioneered the development of fiber-cement technology in the 1980s, it has dominated the fiber-cement siding category for houses in the US and Australia. It has a long runway of growth and an economic moat based on brand and scale that should keep competitors at bay, resulting in above-average returns for decades to come.

REA Group (ASX: REA)

Owns realestate.com.au – the premier online listing platform for Australian residential real estate. Even during the downturn in listings in 2022, it was able to substantially lift pricing – which demonstrated its immense pricing power and moat.

QI CORNER

Last week…

SOMETHING TO THINK ABOUT

Cheers

Jacquie