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Punch-Drunk Investors Will Keep Ignoring Reality…Until It’s Too Late

Punch-Drunk Investors Will Keep Ignoring Reality…Until It’s Too Late

Submitted by QTR’s Fringe Finance

Back in January 2020, I was pointing…

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Punch-Drunk Investors Will Keep Ignoring Reality...Until It's Too Late

Submitted by QTR's Fringe Finance

Back in January 2020, I was pointing out that the coronavirus was going to wreak havoc on markets weeks before it ever happened.

As I’ve noted many times on this blog, those days were immensely frustrating.

I waited for a collective market ethos that only viewed the news through a backward looking rearview mirror, with the attention span of a fruitfly and the collective IQ of a wooden ping-pong paddle, to catch up to a news story that was unfolding and evolving, by the second, right in front of their eyes. The news - and the ensuing chaos it would create - couldn’t have been more obvious if it was bludgeoning the market over the head with a wooden club, Bamm-Bamm Rubble style.

Can You Identify All 100 of These Classic Cartoon Characters? | Classic  cartoon characters, Classic cartoons, Bamm bamm

Ultimately, I was proven right in my prognostication when the market crashed in March, before the Fed came in and launched unlimited quantitative easing and the public started to wrap their head around the fact that Covid wasn’t necessarily a death sentence.

Current markets seem hell-bent not just on once again ignoring the obvious right now, but spitting the obvious back in the faces of those who use reality as a guide to their decision making. And the real kick in the nuts is that the Fed, the broadest influencer of our economy and market sentiment, isn’t even a tailwind this time. On the contrary, it is a massive headwind.

The market is simply still hanging around - like a Mortal Kombat character stunned, but still on his feet, waiting for the Fed to deliver the final blow.

Every Mortal Kombat Fatality Ever, Supercut Into One Gruesome Video - UNILAD

Old habits die hard. As I pointed out many times just over the last several weeks, it is difficult to break the psychology of market participants who have been conditioned to buy the dip without consequence for the last 15 years. So, in that respect, I’m not surprised the market is rallying despite economic reality. But to say that the market has been grasping for straws when it comes to reasons to rally would be a vast understatement.

Take this week for instance. The market is rallying based on nebulous words Jerome Powell used or omitted from his presser on Wednesday despite the fact that he very clearly stated that more rate hikes were on their way. Its tea leaf reading on top of tea leaf reading, ignoring the very stark reality that interest rates are nearing 5%. There’s nothing to guess or speculate about with rates - they’re most certainly at their highest levels in decades.

But instead of the market getting swallowing that pill in advance, we have seen short term whiplash higher in the form of a short squeeze, because there’s too many people that can’t believe the market isn’t responding to the obvious reality that our economy is slowing down and monetary policy isn’t going to help. In other words, these people got caught flat-footed by clearly seeing reality and being short the market as a result. Then, the market does the “wrong thing” by squeezing higher and all of a sudden these people have a crisis of confidence and are mired in FOMO, seduced by the idea that buying the dip is once again the comfort of investing strategy home that we can all return to, akin to a warm blanket and a fireplace on a wintry New England day.

And as I said earlier this week in a portfolio/macro update, perhaps, for the very long term, buying the dip is the right plan. Will markets be decidedly higher 10 years from now? Probably. It doesn’t mean that the currency is going to hold up though, but that’s another discussion for another day. I talk about how I invest for this anyways here.

But taking a mid-term view, I still believe that this week’s move is nonsensical.

Market behavior today centers around ignoring reality. This is a product of 40 years of Fed intervention in markets. When you constantly have somebody at the ready to bail out the market the first half second one person feels discomfort, it creates a foundation of irrational expectations from investors, namely that things are always better than they seem.

In my time in markets, I’ve listened to a decade of stories about how “king dollar will never die”, how the market will always go up and how the United States will continue to be the world’s super power, no matter what.  Those statements are made with certainty despite the fact that, mathematically, none of these things are certainties. In fact, just the opposite is true.

And so the only way we can try to gauge how close we are to something eventually “breaking” and sending markets lower is to continue to follow the news, objectively, and think critically about it on our own.


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Perhaps you are looking at the same group of facts that I am looking at and you have come to starkly different conclusions. If that’s the case, you likely made a lot of money over the last few weeks and I salute you – that’s what makes a market. However, the reality behind the scenes that the market continues to ignore doesn’t look as though it’s going to get any better anytime soon.

I’ll spare you guys the lecture about how 5% interest rates are eventually going to cause the economy to implode. I’ve prattled on about this way too much and continue to believe that it’ll be the case, and that it’s only a matter of time.

Let’s only take a look at what’s new. On Thursday night, Apple - the bellweather for tech stocks - reported awful earnings that missed expectations, a rarity for them. Google and Amazon did the same. As far as a gauge for technology stocks goes, that’s about as clear of an indication that we are going to get of an economy that’s slowing down and a technology sector where things are not OK.

These reports stand at extremely stark odds with the 16% rally in the NASDAQ that has taken place to start 2023. For a restrictive monetary policy environment, these moves simply don’t make sense.

Perhaps it is my fault for expecting that the market would understand and process this and act rationally – after all, the market never acts rationally.

And I don’t want to prattle on again about the geopolitical risk I see heading into this year, either. But, for fuck’s sake, yesterday we found a goddamn Chinese spy balloon flying over Montana.

The balloon was discovered right about the same time U.S. Central Intelligence Agency Director William Burns was talking about China’s ambitions towards Taiwan:

Burns said that the United States knew "as a matter of intelligence" that Xi had ordered his military to be ready to conduct an invasion of self-governed Taiwan by 2027.

"Now, that does not mean that he's decided to conduct an invasion in 2027, or any other year, but it's a reminder of the seriousness of his focus and his ambition," Burns told an event at Georgetown University in Washington.

"Our assessment at CIA is that I wouldn't underestimate President Xi's ambitions with regard to Taiwan," he said, adding that the Chinese leader was likely "surprised and unsettled" and trying to draw lessons by the "very poor performance" of the Russian military and its weapons systems in Ukraine.

His concluding remarks were notable: “Competition with China is unique in its scale, and that it really, you know, unfolds over just about every domain, not just military, and ideological, but economic, technological, everything from cyberspace, to space itself as well. It's a global competition in ways that could be even more intense than competition with the Soviets was.”

If you haven’t read my 2023 outlook, here it is summarized in two pieces: first is my 23 Stocks To Watch in 2023 which explains my macro view and what stocks I’m buying heading into the new year. The second is a piece I wrote a couple weeks ago about several catalysts unfolding that continue to act as waypoints, dictating to me that my thesis is on point - and a piece I wrote last Friday reaffirming additional waypoints.

As I have said in many of my pieces, I strongly believe markets in 2023 are going to be driven by both a residual crash coming from this year’s rate hikes and then an eventual Fed pivot, with a fair amount of geopolitical risk on the side.

When I put together the 23 Stocks To Watch In 2023 (Part 1 here, Part 2 here), I tried to keep all of this in mind - I wanted to create a somewhat diversified, risk adverse, plan for myself heading into the new year. Whether or not I’m right, we’ll know in about 12 months.


So, anyways, I digress. I guess we can just add both balloons (the Chinese spy one, and the stock market bubble) to the long list of things that markets will continue to ignore until they cross the line from prophecies into action.

Only at that point (when it’s too late) will the market be able to understand reality, and only because it is literally being forced into not ignoring it anymore. After all, how are you going to make the argument that China isn’t going to invade Taiwan while China is actually invading Taiwan?

When it’s too late, the market will finally get it. This is what happened with Covid in February 2020, this is what happened when Lehman Brothers went under and the housing market crashed and this is what happened leading up to the tech bubble crash in the 2000s. 

Markets never crash as warning beacons are making their way out. In the case of the housing market, the market didn’t crash when delinquencies started to tick higher, it just ignored it. In the case of the Covid crash, the market didn’t crash based on the news that Covid cases were spreading in the U.S., it just ignored it. In both cases, the market crashed once the the public was forced to confront the reality of what was happening, and I don’t expect 2023 to be any different.

Bulls can have their last couple of weeks and their great start to 2023 and celebrate. If you’ve been a short term trader and have made money off this move, I commend you – it’s part of the reason why I like having long exposure in certain select names and sectors. But I still hold firmly in the camp that we are in unprecedented monetary territory and, most importantly, we are there without the backing of the central bank.

We could argue over whether or not the next rate hike is going to be 25 basis points, 50 basis points or nothing at all, but it’s immaterial. Stocks are expensive on a PE and market cap/GDP bases, rates are already near 5%, and that’s that. Even cutting rates to zero tomorrow wouldn’t reverse a lot of the trends that have already started economically at this point - they would still have to play their way out of the system before the cut took hold of the economy.

Like I said, if you’ve been a bull while I’ve been a bear over the last couple of months, you’ve made money. Congratulations. There’s two ways to look at what the market is doing over the last couple of weeks: either we have firmly shifted into a new era, where we are at the beginning stages of a bull market once again and the fundamentals have changed (this, obviously, I don’t think is the case), or we are drifting further and further off the path of reality, which will eventually only lead to a bigger snap back when the time comes and the market can no longer turn its a blind eye to the obvious, wretched financial reality our country faces.


Thank you for reading QTR’s Fringe Finance. This post is public so feel free to share it: Share

QTR’s Disclaimer: I am an idiot and often get things wrong and lose money. I may own or transact in any names mentioned in this piece at any time without warning. This is not a recommendation to buy or sell any stocks or securities, just my opinions. I often lose money on positions I trade/invest in. I may add any name mentioned in this article and sell any name mentioned in this piece at any time, without further warning. None of this is a solicitation to buy or sell securities. These positions can change immediately as soon as I publish this, with or without notice. You are on your own. Do not make decisions based on my blog. I exist on the fringe. The publisher does not guarantee the accuracy or completeness of the information provided in this page. These are not the opinions of any of my employers, partners, or associates. I did my best to be honest about my disclosures but can’t guarantee I am right; I write these posts after a couple beers sometimes. Also, I just straight up get shit wrong a lot. I mention it twice because it’s that important.

Tyler Durden Fri, 02/03/2023 - 09:45

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Four burning questions about the future of the $16.5B Novo-Catalent deal

To build or to buy? That’s a classic question for pharma boardrooms, and Novo Nordisk is going with both.
Beyond spending billions of dollars to expand…

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To build or to buy? That’s a classic question for pharma boardrooms, and Novo Nordisk is going with both.

Beyond spending billions of dollars to expand its own production capacity for its weight loss drugs, the Danish drugmaker said Monday it will pay $11 billion to acquire three manufacturing plants from Catalent. It’s part of a broader $16.5 billion deal with Novo Holdings, the investment arm of the pharma’s parent group, which agreed to acquire the contract manufacturer and take it private.

It’s a big deal for all parties, with potential ripple effects across the biotech ecosystem. Here’s a look at some of the most pressing questions to watch after Monday’s announcement.

Why did Novo do this?

Novo Holdings isn’t the most obvious buyer for Catalent, particularly after last year’s on-and-off M&A interest from the serial acquirer Danaher. But the deal could benefit both Novo Holdings and Novo Nordisk.

Novo Nordisk’s biggest challenge has been simply making enough of the weight loss drug Wegovy and diabetes therapy Ozempic. On last week’s earnings call, Novo Nordisk CEO Lars Fruergaard Jørgensen said the company isn’t constrained by capital in its efforts to boost manufacturing. Rather, the main challenge is the limited amount of capabilities out there, he said.

“Most pharmaceutical companies in the world would be shopping among the same manufacturers,” he said. “There’s not an unlimited amount of machinery and people to build it.”

While Novo was already one of Catalent’s major customers, the manufacturer has been hamstrung by its own balance sheet. With roughly $5 billion in debt on its books, it’s had to juggle paying down debt with sufficiently investing in its facilities. That’s been particularly challenging in keeping pace with soaring demand for GLP-1 drugs.

Novo, on the other hand, has the balance sheet to funnel as much money as needed into the plants in Italy, Belgium, and Indiana. It’s also struggled to make enough of its popular GLP-1 drugs to meet their soaring demand, with documented shortages of both Ozempic and Wegovy.

The impact won’t be immediate. The parties expect the deal to close near the end of 2024. Novo Nordisk said it expects the three new sites to “gradually increase Novo Nordisk’s filling capacity from 2026 and onwards.”

As for the rest of Catalent — nearly 50 other sites employing thousands of workers — Novo Holdings will take control. The group previously acquired Altasciences in 2021 and Ritedose in 2022, so the Catalent deal builds on a core investing interest in biopharma services, Novo Holdings CEO Kasim Kutay told Endpoints News.

Kasim Kutay

When asked about possible site closures or layoffs, Kutay said the team hasn’t thought about that.

“That’s not our track record. Our track record is to invest in quality businesses and help them grow,” he said. “There’s always stuff to do with any asset you own, but we haven’t bought this company to do some of the stuff you’re talking about.”

What does it mean for Catalent’s customers? 

Until the deal closes, Catalent will operate as a standalone business. After it closes, Novo Nordisk said it will honor its customer obligations at the three sites, a spokesperson said. But they didn’t answer a question about what happens when those contracts expire.

The wrinkle is the long-term future of the three plants that Novo Nordisk is paying for. Those sites don’t exclusively pump out Wegovy, but that could be the logical long-term aim for the Danish drugmaker.

The ideal scenario is that pricing and timelines remain the same for customers, said Nicole Paulk, CEO of the gene therapy startup Siren Biotechnology.

Nicole Paulk

“The name of the group that you’re going to send your check to is now going to be Novo Holdings instead of Catalent, but otherwise everything remains the same,” Paulk told Endpoints. “That’s the best-case scenario.”

In a worst case, Paulk said she feared the new owners could wind up closing sites or laying off Catalent groups. That could create some uncertainty for customers looking for a long-term manufacturing partner.

Are shareholders and regulators happy? 

The pandemic was a wild ride for Catalent’s stock, with shares surging from about $40 to $140 and then crashing back to earth. The $63.50 share price for the takeover is a happy ending depending on the investor.

On that point, the investing giant Elliott Investment Management is satisfied. Marc Steinberg, a partner at Elliott, called the agreement “an outstanding outcome” that “clearly maximizes value for Catalent stockholders” in a statement.

Elliott helped kick off a strategic review last August that culminated in the sale agreement. Compared to Catalent’s stock price before that review started, the deal pays a nearly 40% premium.

Alessandro Maselli

But this is hardly a victory lap for CEO Alessandro Maselli, who took over in July 2022 when Catalent’s stock price was north of $100. Novo’s takeover is a tacit acknowledgment that Maselli could never fully right the ship, as operational problems plagued the company throughout 2023 while it was limited by its debt.

Additional regulatory filings in the next few weeks could give insight into just how competitive the sale process was. William Blair analysts said they don’t expect a competing bidder “given the organic investments already being pursued at other leading CDMOs and the breadth and scale of Catalent’s operations.”

The Blair analysts also noted the companies likely “expect to spend some time educating relevant government agencies” about the deal, given the lengthy closing timeline. Given Novo Nordisk’s ascent — it’s now one of Europe’s most valuable companies — paired with the limited number of large contract manufacturers, antitrust regulators could be interested in taking a close look.

Are Catalent’s problems finally a thing of the past?

Catalent ran into a mix of financial and operational problems over the past year that played no small part in attracting the interest of an activist like Elliott.

Now with a deal in place, how quickly can Novo rectify those problems? Some of the challenges were driven by the demands of being a publicly traded company, like failing to meet investors’ revenue expectations or even filing earnings reports on time.

But Catalent also struggled with its business at times, with a range of manufacturing delays, inspection reports and occasionally writing down acquisitions that didn’t pan out. Novo’s deep pockets will go a long way to a turnaround, but only the future will tell if all these issues are fixed.

Kutay said his team is excited by the opportunity and was satisfied with the due diligence it did on the company.

“We believe we’re buying a strong company with a good management team and good prospects,” Kutay said. “If that wasn’t the case, I don’t think we’d be here.”

Amber Tong and Reynald Castañeda contributed reporting.

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Petrina Kamya, Ph.D., Head of AI Platforms at Insilico Medicine, presents at BIO CEO & Investor Conference

Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb….

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Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb. 26-27 at the New York Marriott Marquis in New York City. Dr. Kamya will speak as part of the panel “AI within Biopharma: Separating Value from Hype,” on Feb. 27, 1pm ET along with Michael Nally, CEO of Generate: Biomedicines and Liz Schwarzbach, PhD, CBO of BigHat Biosciences.

Credit: Insilico Medicine

Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb. 26-27 at the New York Marriott Marquis in New York City. Dr. Kamya will speak as part of the panel “AI within Biopharma: Separating Value from Hype,” on Feb. 27, 1pm ET along with Michael Nally, CEO of Generate: Biomedicines and Liz Schwarzbach, PhD, CBO of BigHat Biosciences.

The session will look at how the latest artificial intelligence (AI) tools – including generative AI and large language models – are currently being used to advance the discovery and design of new drugs, and which technologies are still in development. 

The BIO CEO & Investor Conference brings together over 1,000 attendees and more than 700 companies across industry and institutional investment to discuss the future investment landscape of biotechnology. Sessions focus on topics such as therapeutic advancements, market outlook, and policy priorities.

Insilico Medicine is a leading, clinical stage AI-driven drug discovery company that has raised over $400m in investments since it was founded in 2014. Dr. Kamya leads the development of the Company’s end-to-end generative AI platform, Pharma.AI from Insilico’s AI R&D Center in Montreal. Using modern machine learning techniques in the context of chemistry and biology, the platform has driven the discovery and design of 30+ new therapies, with five in clinical stages – for cancer, fibrosis, inflammatory bowel disease (IBD), and COVID-19. The Company’s lead drug, for the chronic, rare lung condition idiopathic pulmonary fibrosis, is the first AI-designed drug for an AI-discovered target to reach Phase II clinical trials with patients. Nine of the top 20 pharmaceutical companies have used Insilico’s AI platform to advance their programs, and the Company has a number of major strategic licensing deals around its AI-designed therapeutic assets, including with Sanofi, Exelixis and Menarini. 

 

About Insilico Medicine

Insilico Medicine, a global clinical stage biotechnology company powered by generative AI, is connecting biology, chemistry, and clinical trials analysis using next-generation AI systems. The company has developed AI platforms that utilize deep generative models, reinforcement learning, transformers, and other modern machine learning techniques for novel target discovery and the generation of novel molecular structures with desired properties. Insilico Medicine is developing breakthrough solutions to discover and develop innovative drugs for cancer, fibrosis, immunity, central nervous system diseases, infectious diseases, autoimmune diseases, and aging-related diseases. www.insilico.com 


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Another country is getting ready to launch a visa for digital nomads

Early reports are saying Japan will soon have a digital nomad visa for high-earning foreigners.

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Over the last decade, the explosion of remote work that came as a result of improved technology and the pandemic has allowed an increasing number of people to become digital nomads. 

When looked at more broadly as anyone not required to come into a fixed office but instead moves between different locations such as the home and the coffee shop, the latest estimate shows that there were more than 35 million such workers in the world by the end of 2023 while over half of those come from the United States.

Related: There is a new list of cities that are best for digital nomads

While remote work has also allowed many to move to cheaper places and travel around the world while still bringing in income, working outside of one's home country requires either dual citizenship or work authorization — the global shift toward remote work has pushed many countries to launch specific digital nomad visas to boost their economies and bring in new residents.

Japan is a very popular destination for U.S. tourists. 

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This popular vacation destination will soon have a nomad visa

Spain, Portugal, Indonesia, Malaysia, Costa Rica, Brazil, Latvia and Malta are some of the countries currently offering specific visas for foreigners who want to live there while bringing in income from abroad.

More Travel:

With the exception of a few, Asian countries generally have stricter immigration laws and were much slower to launch these types of visas that some of the countries with weaker economies had as far back as 2015. As first reported by the Japan Times, the country's Immigration Services Agency ended up making the leap toward a visa for those who can earn more than ¥10 million ($68,300 USD) with income from another country.

The Japanese government has not yet worked out the specifics of how long the visa will be valid for or how much it will cost — public comment on the proposal is being accepted throughout next week. 

That said, early reports say the visa will be shorter than the typical digital nomad option that allows foreigners to live in a country for several years. The visa will reportedly be valid for six months or slightly longer but still no more than a year — along with the ability to work, this allows some to stay beyond the 90-day tourist period typically afforded to those from countries with visa-free agreements.

'Not be given a residence card of residence certificate'

While one will be able to reapply for the visa after the time runs out, this can only be done by exiting the country and being away for six months before coming back again — becoming a permanent resident on the pathway to citizenship is an entirely different process with much more strict requirements.

"Those living in Japan with the digital nomad visa will not be given a residence card or a residence certificate, which provide access to certain government benefits," reports the news outlet. "The visa cannot be renewed and must be reapplied for, with this only possible six months after leaving the countr

The visa will reportedly start in March and also allow holders to bring their spouses and families with them. To start using the visa, holders will also need to purchase private health insurance from their home country while taxes on any money one earns will also need to be paid through one's home country.

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