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Weekly Market Pulse: Wrong Again

There were some very smart people a year ago saying that you couldn’t kill inflation without a big rise in unemployment. Last October, Larry Summers -…

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There were some very smart people a year ago saying that you couldn’t kill inflation without a big rise in unemployment. Last October, Larry Summers – former Treasury Secretary and President of Harvard – said we’d need a recession and an unemployment rate of 6% to kill inflation. In the summer of last year he said we’d need 5 years of 5%+ unemployment to kill inflation. He may be right someday but right now this is looking like…well, it’s looking like what I’ve come to expect from people like Larry Summers.

The revision to Q2 GDP last week showed that real GDP rose by 2.1% annualized while the GDP deflator (a measure of inflation) rose 2% annualized. While the GDP deflator isn’t the Fed’s preferred inflation gauge, if I were them I’d declare victory and send a Bronx cheer to Larry Summers. There are lots of economic policies I’d change if I were in charge but it is hard to argue that this isn’t a pretty darn good outcome. And no, I don’t think the Fed had a lot to do with it even if they do, at some point, claim credit.

The bigger question is, of course, whether this little nirvana period can be maintained or improved upon. I can’t say I have much insight on that except to say that I’m not much a fan of industrial policy or crony capitalism or whatever moniker we’re giving it this week. Government spending is the perfect economic tool for politicians. It looks like economic growth while it’s happening and the day of reckoning is somewhere after the responsible parties have trotted off into the sunset. Well, that used to be true. Today Congress looks a lot like a remake of Weekend at Bernie’s.

I’ve been reading for over a year about how Americans are spending the “excess” savings that was built up during COVID. There’s been another spate of these articles over the last few weeks because the SF Fed put out a paper saying that it is likely to be depleted by the third quarter. But one thing I’m sure of is that Americans will spend given the income and/or savings and time. Last I checked, the amount of cash on the American household balance sheet was still substantially higher than it was pre-COVID. And Americans will continue to spend when this mythical “excess” savings is gone. Remember when we managed to do that prior to COVID? You know, prior to the existence of this made up metric of “excess” savings?

Personal consumption rose in July by 0.8%, outstripping the gain in personal income (+0.2%) and well in excess of inflation (+0.2%). This time it was goods spending that drove the gain with real PCE of goods up 0.9% and real PCE of services up 0.4%. I’ve been writing about the normalization of the economy, and more specifically consumption, for over a year now. The COVID period first saw a surge in goods spending which then moderated and stagnated for a year while services spending caught up. Now, services growth is falling back and goods spending is picking up again. This is the seismograph economy and the oscillations around “normal” apparently aren’t done yet.

To be even more specific, it is the growth of durable goods spending that is driving the gains. That certainly isn’t what the narrative has been – “experiences over things” – but that’s what the numbers say. Durable goods are up 5.8% over the last year while non-durables are up just 0.9% and services 2.0%. Amazing what you can find out if you just look rather than assume. 

Of course, consumption isn’t the root of economic growth but rather the consequence of it. The production side of the economy is still struggling some as the COVID inventory shock is still being worked off. But if this rate of growth continues, production will have to pick up at some point. We may be starting to see the early signs of that in the PMI and regional Fed surveys. The Dallas Fed manufacturing survey reported an improvement last week while we’ve also seen better readings recently out of the KC Fed, the Richmond Fed and the Philly Fed. The ISM manufacturing survey also improved along with the Chicago PMI. Most of these readings are still in contraction but improved from their worst levels. And it is usually rate of change that matters for economic growth and therefore stocks and other risk assets.

The economy has defied the naysayers for over a year now and it looks like, for now, it will continue to do so. We will get a recession at some point but there is nothing currently that points to an imminent contraction. With growth at trend and inflation back down to 2%, there is good reason to be optimistic right now. The emphasis should be on “now” though because things can change quickly. The old rules, like the inverted yield curve, may seem like they’ve failed but I suspect it is only the timeline that has changed.

Environment

The trend for the 10 year Treasury note yield remains up but I think it is important to note that the yield today is no higher than it was last October. That’s almost a year of rates going nowhere so while there’s been a lot of talk about the Fed being on hold, the market is already there, on hold for nearly a year.

The 2 year note yield trend is also up but less pronounced than the 10 year. It is no higher today than it was in March so it hasn’t been on hold as long as the 10 year but that is still nearly 6 months of sideways action. Bond investors, short and long term have been collecting coupons for nearly a year with no price change. At current yields that isn’t bad for a nearly risk free asset.

The dollar was essentially unchanged last week and like the 10 year yield is essentially unchanged for nearly a year. Even more interesting, to me at least, is that, outside that move up to nearly 115, which I would argue was driven by the Russia/Ukraine war, the buck is unchanged since May of 2022. And if you look back further, the dollar’s change since its 2017 peak is negligible. There are smaller cycles within that time, from a low around 88-90 to a high of 100-104, but the fact is that with all that is going on in the world, the dollar has been pretty stable. I continue to believe that it will ultimately revisit the low end of that range again but the timing is impossible to know in advance. For now, the dollar is still in a long term uptrend since 2011 and a neutral trend on an intermediate and short term basis.

From an economic standpoint, I think these trends reflect the underlying truth about the US economy, namely that it is growing at trend and outside of the COVID period, has been for quite a while. Whether that is good, bad, acceptable or unacceptable is probably a political conclusion rather than economic one. I would just point out that the average year over year change in real GDP since 1990 is 2.4% and as of last quarter we’re at 2.5%. You can go back further but for the entire post WWII period the average is just 3.1%. And that includes the immediate aftermath of WWII when we were about the last economy standing. Real US GDP expanded by over 4% per year from 1948 to 1969. With population growth today a fraction of 1%, we’re almost entirely dependent on productivity growth so I’d say this is about as good as you’re going to get from a GDP standpoint.

Markets

We had a number of weeks during August where everything was down and in the first week of September we got the opposite. Everything was up last week with US Small Cap stocks leading the domestic issues and Japan leading internationally. Actually China performed even better than Japan but we don’t generally track China separately, only as part of EM which was dragged down last week by Latin America.

Stocks are still below their July highs but with sentiment moderated since then and interest rates off the boil, we may well see those again soon. Earnings have been quite a bit better than expected and estimates for 3rd and 4th quarters are rising. If S&P 500 earnings come in as expected for the second half (a big if I suppose) full year operating earnings would be up about 12% for the year and reported earnings by 16%. Yes, the index is expensive but double digit earnings growth in large company stocks usually is.

The more interesting – and under the radar – development may be in commodities. They have underperformed the S&P 500 this year but have outperformed over the last 3 months and especially since the beginning of July when crude oil started to rally. I don’t think a lot of people are aware of it but commodities have actually outperformed stocks over the last three years by a wide margin. They spiked after the Russian invasion of Ukraine but that wasn’t sustainable so they’ve spent the last year digesting those gains. And now it appears the bull market in commodities may be resuming. Crude oil was up 7% last week and natural gas tacked on 4%. Copper and platinum were also higher and so was much of the ag complex.

Growth outperformed last week by a small margin but as I keep saying, value is still winning over the last 3 years. That may not last if the dollar stays well bid but so far the buck is just back up to the top of its recent trading range. A break higher, over 105, would probably flip the script and put the dollar in bull mode. If that happens, growth stocks will likely continue to outperform. A compromise position right now would be large cap value and small or midcap blend (which is what we’re doing). Mid-cap growth and large cap growth both have expectations of 12% long term earnings growth but mid-cap is 16 times earnings while large cap is 23. Seems like a simple choice to me.

Technology surged to the forefront again last week but materials and energy, both commodity related, were in 2nd and 3rd place. Defensive stocks brought up the rear.

There are still no signs of recession in the data or the markets. Credit spreads remain tight although slightly off the lows. Interest rates, as noted above, have stalled for most of the last year but are still in uptrends. The data last week was generally positive for growth and inflation. The jobs market has cooled but it certainly isn’t falling apart.

BTW, in the GDP revision released last week we also got Gross Domestic Income. Last quarter the economic pessimists were touting this measures’ decline as evidence that the economy was more in line with their views. This quarter it was positive (+0.5%) but the pessimists continue to insist that it is the better measure of the economy. Ultimately the two measures should be equal but that is rarely the case on a quarter to quarter basis. Here’s a chart of GDI – GDP:

The economic bears point to the drop in 2008 as evidence that this is bad news but, as you can see, we’ve had recessions start before when GDI was larger than GDP and rising too. It doesn’t really mean all that much and deciphering the source of the difference is difficult to say the least. I looked into this briefly and found that there has been a large drop in “net interest and miscellaneous payments on assets”. What is that? Well, for one thing it includes “Interest payments on mortgage and home improvement loans and on home equity loans” which “are included in interest paid by private enterprises because home ownership is treated as a business in the NIPAs.” Gee, I wonder why interest payments on mortgages have dropped so much since 2020. Does that sound like something bad to you?

I wouldn’t ignore the differences here but you can’t just say there’s a problem because there is a difference. It matters why there’s a difference. And by the way, even the government can’t reconcile all the differences. The last line of the table for GDI is: “Statistical discrepancy”. Last quarter that number was $498.4 billion which seems big enough to qualify as something other than a mere discrepancy.

The stock and bond markets have been telling us for all of this year that the economy is fine. The peak rate of change in the CPI was 14 months ago in June of 2022. The 10 year note yield peaked in October but just as important, the yield hasn’t fallen a lot even as inflation expectations have. The 2 year note yield peaked in March of this year and also hasn’t fallen much. Everyone is obsessed with terminology like “soft landing” for which there isn’t even a definition. Will the economy slow but not fall into recession? How the heck should I or anyone else know? The best we can do is interpret the economy as it is right now. Notice I said “the best”; even that isn’t easy.

What I am also sure of is that, absent some shock, markets will anticipate the downturn even if the Fed doesn’t. To see it all you have to do to see it is pay attention. And ignore Larry Summers.

Joe Calhoun

 

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Glimpse Of Sanity: Dartmouth Returns Standardized Testing For Admission After Failed Experiment

Glimpse Of Sanity: Dartmouth Returns Standardized Testing For Admission After Failed Experiment

In response to the virus pandemic and nationwide…

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Glimpse Of Sanity: Dartmouth Returns Standardized Testing For Admission After Failed Experiment

In response to the virus pandemic and nationwide Black Lives Matter riots in the summer of 2020, some elite colleges and universities shredded testing requirements for admission. Several years later, the test-optional admission has yet to produce the promising results for racial and class-based equity that many woke academic institutions wished.

The failure of test-optional admission policies has forced Dartmouth College to reinstate standardized test scores for admission starting next year. This should never have been eliminated, as merit will always prevail. 

"Nearly four years later, having studied the role of testing in our admissions process as well as its value as a predictor of student success at Dartmouth, we are removing the extended pause and reactivating the standardized testing requirement for undergraduate admission, effective with the Class of 2029," Dartmouth wrote in a press release Monday morning. 

"For Dartmouth, the evidence supporting our reactivation of a required testing policy is clear. Our bottom line is simple: we believe a standardized testing requirement will improve—not detract from—our ability to bring the most promising and diverse students to our campus," the elite college said. 

Who would've thought eliminating standardized tests for admission because a fringe minority said they were instruments of racism and a biased system was ever a good idea? 

Also, it doesn't take a rocket scientist to figure this out. More from Dartmouth, who commissioned the research: 

They also found that test scores represent an especially valuable tool to identify high-achieving applicants from low and middle-income backgrounds; who are first-generation college-bound; as well as students from urban and rural backgrounds.

All the colleges and universities that quickly adopted test-optional admissions in 2020 experienced a surge in applications. Perhaps the push for test-optional was under the guise of woke equality but was nothing more than protecting the bottom line for these institutions. 

A glimpse of sanity returns to woke schools: Admit qualified kids. Next up is corporate America and all tiers of the US government. 

Tyler Durden Mon, 02/05/2024 - 17:20

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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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