Day 1432 – Do Three These Things Today!

Monday December 21, 2020 (4 days til Christmas)

Election Day -48

31 Days until the Inauguration on January 20, 2021

Okay, now that I have your attention:

1. – Remember that December 21^st is the shortest day of the year. Review in your mind why that is and go out tonight as soon as it gets dark and look at Jupiter and Saturn in conjunction. That’s the Christmas star! (If you miss it don’t worry it’ll come around again in 800 years.) 

2. – Play this game with me, and this is the main point of this post as I’ll describe below: buy, or pretend to buy, 2 shares of Moderna stock (MRNA) and remember the price. That’s really what I want you to do – remember the price.

3. – If you don’t know the song “I know an old lady that swallowed a fly,” yell at your Siri or Alexa and ask her to play that song by Burl Ives.

Our niece Claire was over yesterday. She wanted to bake cookies with Shelby and wrap presents with me. ( I stayed masked. She did too, most of the time. ) I tried to describe to Claire why Dec 21^st was the shortest day of the year and why Jupiter and Saturn could line up ever once in awhile so we could see them as one. I spoke about “wandering stars,” retrograde, and The Star of Bethlehem. She looked at me and said, “Are you done?” 

I think it was a pretty successful conversation even though I got tangled up on why it’s the shortest day of the year, spring, fall, equinox, etc.

She also didn’t know the above mentioned song and I was surprised when Siri not only knew it but played it. Burl Ives has a very distinctive fatherly type voice. He’s the one singing in the Subaru commercial where the couple is getting the twins ready to back out of the drive way and the car slams on the brakes. Oh wait that’s Volvo. 

Okay, so that takes care of 1 & 3 now onto 2, but before I explain let me say this, “Trump was right!” Well, kind of, apparently UV light can kill the corona virus. You want one around 265 wave length. I think that’s what this little thing I have in my office does. I brought it down to the kitchen and plugged it in and hope to hell it’s killing any germs, viruses, and bacteria. That’s the problem with this virus; you don’t know. Better to be cautious or as they say, “risk adverse.” 

Which brings me to today’s topic. Why isn’t the Moderna stock price going through the roof? The reason is that I told people that I was buying it and suggested they do too. A few listened to me and bought in around $150 a share. The stock immediately went down to $138. This has led to some soul searching on my part, ( “Why do I tell anybody anything?” ) and my search for answers, because I’m a curious person. I’m more curious than smart.

One skill I have is that I’m interested and curious about a lot of things. Or as my wife and others say about me I’m an “Oh look! A chicken!” kind of guy. Or as I prefer to think about it, “I have a wide and diverse group of friends and acquaintances with whom I am willing to ask questions of and share information.”  In short, I’m willing to look like an idiot.

I, like Einstein, like to construct thought experiments and develop easy to understand models and explanations for complicated things. I do this until I understand them, the question at hand, to some degree of satisfaction. Many times I have to let the pieces of the puzzle sit in my lap for a long time. I, btw, have no problem understanding Einstein’s models and thought experiments – that’s easy. It’s the conclusions he comes to that is mind blowing.

Okay, where was I, oh yeah, why isn’t Moderna’s stock going up? And why did it go down right after I suggested to buy it? One explanation is God hates me and is trying to teach me a lesson. However, after some investigation and thought, both of which are ongoing I am willing to say this, I believe Moderna is like the fully field rocket sitting on the launch pad ready to take off, and that we are in the final days of the countdown. (There that should kill off any price rise in the stock.)

I have been schooled recently, or some might say taken to the woodshed of modern economic theory and had my behind paddled. Not really, but I have learned some new terms to impress my niece with, and I’ve begun to ask questions about how fund and money managers look at stocks. Let begin with the idea of risk aversion: you want to make money, but more importantly you don’t want to lose money.  How can you maximize your profit while minimizing your loss? How can you be sure you are getting the best deal, the best of both worlds? (Max profit, Min loss?)

It all comes down to what Clint Eastwood asked, “Do you feel lucky?”

If you don’t then you are highly risk averse and want something guaranteed with no hope of losing, that’s called Treasury Bills or T-Bills. The assumption is they always pay off. So whatever amount you invest you know how much you are going to make – no question. All the fancy economic stock models use T-Bills as their basis of comparison. As in, “Well you could invest in Fly-By-Night Homeopathic Lawn Chairs which pays 75% in a year, if they are still in business or you could get a T-Bill that pays 2%” Which do you want? Well, what do you know about FBNHLC? The guy has already left town? Better go with the T-Bill. 

So what we are talking about is risk and payoff. How much are you willing to risk for what payoff? You could buy a lottery ticket. Someone wins, what are your chances? Maybe you buy one ticket, just in case, but most people will say that it’s probably no likely. 

Here’s another example from the real world, kind of, I was listening to a show about re-insurance. Yeah, I know, I live an exciting life. But the example they gave was this: suppose you own a car dealership and you get hit by a hail storm and all the cars on the lot are ruined, or at least have to be sold at a reduced price. Wouldn’t you want to be insured against that? Of course, but the problem is that it’s a once in 100 year situation so are you willing to forego it for this year? (How many times have you heard about a group that buys the same lottery ticket every week and it hits one week only to discover the person who was supposed to buy the ticket that week didn’t make it to the convenience store to do so?)

Most insurance companies that are local don’t want to cover the risk either. What if it happens? Yikes! However, if you take a larger view and say, “Well, someone who owns a dealership will get hit with a hail storm this year what if I get all the potential car dealerships to chip in a few bucks just in case?” Okay, now you’re talking. You are willing to put in a few bucks, but not hundreds or thousands. That’s the idea behind re-insurance. They spread the risk over a large group, over a large area: fire, flood, volcano, that type of thing. Might not happen for one hundred years, but when it does, you’re covered.

The problem with picking one stock is, “What if you are wrong?” Better to pick a bunch of stocks. Better to pick them in areas that if one area is down another is up, etc.

How do you know which stocks to pick? Here is where all the fancy economic ideas come into play. With an existing company, one that’s been around for awhile, you can read it’s financial stuff and get a number that relates to how profitable it is. If it’s been doing well consistently over time you can make some assumptions that it will continue to do that well and you can derive a percentage of profitability. You can compare that to a T-Bill and look at the difference and ask yourself if it’s worth it to you. This is the basis of all the money management EFTs and managed accounts. They differ on what to pick and why and how to weigh various things but that’s the idea.

These models, philosophies, and formulas have various names: EMH, MPT, PMPT. Typically you take the profitability minus the T-Bill rate and get a rate of return or you express it as a ratio. That number is divided by either The Standard Deviation (The Sharpe Ratio) or by the Variance (the square of the Standard Deviation). The latter is supposed to be a better predictor of risk. (Standard Deviation is a way to look at the of a bunch of data, while variance tells you more about whether it is all clumped together or not. An example of Standard Deviation would be to look at SAT scores and describe how most people do relative to others. A percentage will be plus or minus within one standard deviation to the median (like average) score, then two , then three standard deviation. Three standard deviations will cover 99% of the scores. There will be a few outliers ( + and – ), but all the other scores are contained within three standard deviations.

But, all these formulas and theories are based on assumptions that a person makes. The formulas have gone a long way to eliminating human folly, so much so that many financial firms use computer programs to do most of their trading. So now you have ETFs (Exchange Traded Funds) which gather up a basketful of various securities and have certain weighted averages and things they invest in. That way, if you are a money manager, you can suggest to a client to get this or that fund based on what they say they are interested in and how much risk they want to take on. So if you are interested in biotech you could buy XBI or BIB. They are both market cap weighted ETFs in the biotech arena.

BIB is the more aggressive of the two. There done.

But this doesn’t answer my fundamental question of “How would you price a Moderna?” It had terrible downward financials. The company was founded by folks wanting to make a buck. They switched around what they were doing to focus on vaccines. Donald Trump supposedly invested in them and likes them. Yikes. 

On the positive side: they have developed a vaccine for the corona virus in 42 days using mRNA technology. It highly effective. It’s been approved by the FDA and it’s starting to ship.

So here we sit without the traditional formulaic stuff you need to invest in this company by the models that most traders use. Those models are based on risk aversion and this company does not qualify because they have no history or a bad history financially. But wait a second, there are pictures that came out this weekend that show boxes of the vaccine, ready to ship. None of that is in the equations that the financial models are using because they are based on history. So can we do some calculations as to how much money they will be making? I’m willing to say they will sell everything they can make until the world is vaccinated and that will take awhile. According to one news article 5.9 million doses this week are being shipped in this country. How much are they charging? The numbers I’ve seen say between $10 and $50 per dose and two doses are needed per person. 

At $10 that $59 million for the week for Moderna. At $50 it’s $295 million. Either way they are making money.

I think once some of those sales numbers are factored into the models the stock will take off. But I’ve been wrong before. I just think it’s a question that it will take a little longer than I thought. So much for “all knowledge is factored in already.” I think that statement doesn’t take into account believability or maybe it’s future events that aren’t considered objectively?

To my knowledge there are three vaccines available in the western world. I have heard that Russia has one and Australia but I’m not confident about either one. Here are the three and the prices being charged per dose:

Pfizer/BioNTech $20

Moderna $10-$50

Astra-Zeneca $4

That’s a pretty wide range. From what I have gathered AZT’s is aimed at the developing world and is part of a consortium to get vaccine to people cheaply. It’s efficacy is 70% not in the range with the other two, which are at 94-95%. However, 70% is good enough if enough people get vaccinated and the number can be higher if folks get the second shot as directed.

In China Fosun Pharmaceuticals is paying Pfizer $250 million for 50 million doses. That’s $5 a shot. They have an agreement with Pfizer.

The big disparity in prices depends on who backed them and for how much etc. Moderna supposedly got $1B from the U.S. Government for development. I haven’t confirmed that, but it would greatly reduce the price I would think.

However, to my major point. It seems that none of these stocks have moved up much since the announcement that they have a vaccine and are shipping it. Actually, they have gone down a bit. I contend it’s because the sales figures aren’t figured into the various pricing models – yet.