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Money Stuff: A Vaccine Could Cure Airlines

July 16, 2020
Money Stuff
Bloomberg

Vaccine trading

The most interesting correlation in the stock market right now is the one between (1) the prices of airline stocks and (2) the amount of antibodies produced by coronavirus vaccine candidates in clinical trials. So far the vaccines are experimental and uncertain. If you knew that they'd work really well—protect everyone perfectly, no side effects, easy to produce, etc.—then you'd know with a pretty high degree of certainty that airline stocks (and cruise ships, hotels, casinos, retailers, etc.) would go up. If you knew that they'd be a disaster then you'd probably be short airlines.

Meanwhile let's say you knew with certainty that one public company's vaccine candidate would work really well. Let's say that company was Moderna Inc., the U.S. biotech company that has one of the leading candidates. Would you buy Moderna stock? Having a really good vaccine would probably be profitable for Moderna. But it would be tricky. It's a high-profile situation and there will be huge pressure—from governments and maybe even shareholders—to distribute the vaccine widely and affordably. If you make a product that lots of people want, you can charge a lot of money for it and get rich; if you make a product that everyone needs, being too greedy with it might get you in trouble. A working vaccine would be good for Moderna, but it would not be an unmixed blessing.

So on Tuesday Moderna announced good news, and yesterday:

Signs of progress toward a coronavirus vaccine by Moderna propelled most corners of the stock market higher. … Most of the gains followed the release of a new study suggesting Moderna had reached a breakthrough with its coronavirus vaccine, setting the stage for a larger trial at the end of this month. Cruise-ship operators, airliners and other stocks sensitive to the coronavirus crisis led the stock market higher. Shares of Moderna rose $5.18, or 6.9%, to $80.22.

Royal Caribbean Cruises Ltd. was up 21.2%. Norwegian Cruise Line Holdings Ltd. was up 20.7%. Carnival Corp. was up 16.2%. American Airlines Group Inc. was also up 16.2%. United Airlines Holdings was up 14.6%. The biggest gainers were the vaccine-sensitive industries, not Moderna itself.

We have talked about this phenomenon from various angles before but, uncharacteristically, we have not talked about it from the insider trading angle.[1] A reader emailed to ask:

Would it be insider trading for [Moderna] to set up a prop trading desk to buy short-dated out-of-the-money call/put options to speculate on publicly traded airlines / cruise ship / etc. companies based on its impending future publications regarding its mRNA vaccine trial results?  Seems like an easy way to fund further research or pivot the business if trial fails!

Would it be insider trading for a [Moderna] researcher to buy short-dated out-of-the-money call/put options to speculate on publicly traded airlines / cruise ship etc companies based on their personal view of how the science is developing?  

The thing to notice here is that if you were a Moderna scientist and you had advance knowledge of the vaccine trial results:

  1. It would obviously be illegal insider trading for you to go buy call options on Moderna.
  2. It would … let's say … less obviously be insider trading for you to go buy call options on Royal Caribbean instead?
  3. You would make more money with the Royal Caribbean call options.

Point 1 is, I hope, obvious. Point 3 is what we discussed above: Not only did Royal Caribbean in fact go up more than Moderna on Moderna's news, but that was predictable. A coronavirus vaccine can only be good for Royal Caribbean's business; it is complicated for Moderna's.

Point 2 is my reader's question. A related question that I get asked a lot is: If you know that Company X will announce really good earnings (because you work there, etc.), and you know that when Company X announces good earnings then Company Y stock usually goes up (because they have closely comparable businesses, etc.), can you buy Company Y stock with your inside knowledge of Company X earnings? My usual answer is:

  1. This is not legal advice.
  2. The U.S. Securities and Exchange Commission will probably take the position that it's illegal insider trading: You have nonpublic information, it is (indirectly) material to Company Y, and you have some duty of confidentiality to Company X to keep it secret. 
  3. But they are less likely to catch you than if you trade your own company's stock.
  4. Really, this is not legal advice!

I am tempted to say the same thing here, except that if you get rich in the stock market while working on a coronavirus vaccine, the SEC is more likely to notice. And if you brag about this being your plan they'll definitely get mad.

This is a weird answer, by the way. Anyone who works at any company will learn things about how the world works, and that knowledge might be useful in evaluating other companies. It is fairly easy to have a rule like "if you learn something about your company that no one else knows, you can't trade your company's stock." It is much harder to have a rule like "if you learn something about your company that no one else knows, you can't make any correlated bets using that knowledge." Everything is a little correlated; there are a lot of shades of gray there. Still I think the vaccine/airline correlation is tight enough that people would get mad about this.[2]

On the other hand if Moderna, as a matter of corporate policy, using shareholder money, bought some airline call options before announcing its vaccine trial results, I am not sure what the objection would be? I am sure someone would object, but I don't think it's really insider trading. (Not legal advice!) Moderna has no fiduciary duty to the airlines' shareholders, and has not misappropriated any information belonging to anyone else. "Insider trading," I like to say, "is not about fairness, it's about theft," and there's no theft here. Moderna knows something you don't know, not because it cheated, but because it put in the (legitimate and socially useful!) work. Why shouldn't it reward itself?

Of course if the trial results turned out to be misleading—if Moderna announced interim good news, but ultimately the vaccine was a dud—people would sue them for market manipulation. But that will happen anyway! If Moderna's vaccine is a dud, after its interim announcements of good news, Moderna will definitely get sued. ("If the vaccine ends up not working, in about two months look for Moderna in the 'Everything is securities fraud' section of this column," I wrote when we first talked about Moderna, two months ago.) Might as well double down on that risk? But if Moderna just bought airline stocks, announced good news, took some profits, and then produced a working vaccine, I think the only thing to do would be to applaud their creative approach to corporate finance. Not, I cannot emphasize enough, legal advice.

Bank earnings

The basic thing that happened to bonds is that they went down, and then they went up again. A bond is a promise by a company to pay back money that it borrowed; for a while in March it looked like companies wouldn't be able to pay back the money that they borrowed and so bond prices went down, but then the Fed intervened, the companies stabilized, it looked like they mostly would be able to pay back the money and bond prices went up. If you zoom way out, bond prices didn't change that much—the Bloomberg Barclays U.S. corporate bond total return index was at 3,426.50 on March 6 and is at 3,463.39 now, up about 1% over four months—but, if you are a bank in the business of trading bonds for customers, you don't zoom out; that index lost 15% of its value at one point. When the bonds went down—because all your customers were stampeding to sell bonds—you bought a lot of bonds at low prices; when they went back up—because all your customers were stampeding to buy them again—you sold a lot of bonds at high prices.

Buying a lot of bonds at low prices and then selling them at high prices is a good way to get rich, so you did. This week the big U.S. banks reported earnings for the second quarter, and their bond-trading earnings were historically amazing. JPMorgan Chase & Co.:

The firm's fixed-income trading revenue doubled from a year earlier and the equity-markets unit surged more than 30% as trading desks benefited from a roller-coaster year. … Fixed-income traders generated $7.3 billion, a figure that by itself would have set a record for overall trading even if the equities group produced nothing.

Goldman Sachs Group Inc.:

Revenue from trading stocks and bonds surged 93%, surpassing what analysts had expected by about $2.5 billion and mirroring similar gains reported Tuesday by JPMorgan Chase & Co. and Citigroup Inc. … The firm's fixed-income trading revenue more than doubled to $4.24 billion, the highest in nine years, while the equity unit had its best showing in 11 years. 

Morgan Stanley:

Fixed-income trading revenue almost tripled, driving a 73% jump in total trading that surged past expectations. That spurred firmwide revenue and earnings to an all-time high amid wild market swings caused by the coronavirus pandemic. 

Bank of America Corp.:

The bank joined other Wall Street firms in profiting from volatility in financial markets resulting from the pandemic. Fixed-income trading revenue beat forecasts in the second quarter, rising 50% to $3.2 billion, while investment banking fees jumped 57% to a record $2.2 billion.

This oversimplifies, but the basic idea is that whipsawing volatility is mostly good if you are in the business of trading bonds for customers.[3] If bond prices drift slowly up you'll do okay, if they crash to zero you'll do very badly, but if they crash and then quickly recover you'll probably do very well indeed.

You could zoom out. You could characterize all of this as: "Nothing happened." Lots of companies borrowed money. They kept making the interest payments on those borrowings, on schedule. For a while people thought that, in the future, they'd be unable to make those payments and would default on those borrowings. For some companies this worry came true—there has been a wave of bankruptcies—but for most it didn't, or at least it hasn't yet. Then people stopped thinking it, about most companies. The payments continued when people thought they would stop, and they continued when people thought they would continue again. The observable objective facts about who's paying interest on their bonds have been less volatile than people's expectations about who might stop in the future.

The basic thing that happened to banks' loan portfolios is … not that different? Lots of companies and people borrowed money and have to make payments on their loans. Most of them have been making those payments, some have not been. If you are a bank, and you make a lot of loans, you do not just collect the payments that you get and call them income. Instead you think a lot about who will stop making payments in the future, and you estimate how much money you'll probably lose when that happens, and you write that number down as a loss today. And the banks did:

Three of the nation's biggest banks revealed Tuesday that they had set aside billions of dollars to cover potential losses on loans, signaling that they don't expect consumers and corporations to be able to pay their debts in the coming months as the pandemic continues to gut employment and commerce.

Collectively, JPMorgan Chase, Citigroup and Wells Fargo have put aside $25 billion during the second quarter, they said.

JPMorgan had "the biggest loan-loss provision in the firm's history," $10.5 billion, a number reflecting, essentially, estimates of future charge-offs. Meanwhile in the present things were less bad:

Net charge-offs, overdue loans the bank no longer expects to recover, rose 6% from the first three months of the year to $1.56 billion in the second quarter. But that was far less than the $2.78 billion predicted by analysts.

"Next year will be much heavier on charge-offs," Chief Financial Officer Jennifer Piepszak said on the conference call.

Citigroup:

"I don't think anybody should leave any bank earnings call this quarter simply feeling like the worst is absolutely behind us and it's a rosy path ahead," Citigroup CEO Michael Corbat told analysts. "We don't want people leaving the call simply thinking the world is a great place and it's a V-shaped recovery."

There is a disconnect: As lenders, the banks are not expecting a V-shaped recovery; as bond traders, the banks have already been through a V-shaped recovery and made a fortune on it. Part of that is presumably about the borrower universes; small businesses and consumers who borrow from banks might have more problems paying back their loans than big companies that have access to the bond markets. Part of it is about the role of the Fed, which has stepped in to put a floor under bond markets while not actually promising that every borrower will always be able to pay back its debts. Part of it is about incentives: If you are a bank executive, you might as well take big loan write-downs now, when everything is bad anyway and when you have huge trading profits to offset them, so that you can have better earnings later. 

Again, I am abstracting and oversimplifying; bonds and corporate loans and consumer loans all have seen lots of payment defaults and deferrals and bankruptcies and so forth. But broadly speaking a lot of the action, so far, has been in predictions of future problems. Bond markets predicted huge future problems, then changed their minds, and banks made tons of money. Meanwhile in their loan books, banks predicted huge future problems, and did not change their minds, and so they have—now, as an accounting matter—lost tons of money.

The Twitter hack

Yesterday Twitter was hacked and a bunch of famous people's accounts—beginning of course with Elon Musk but running through Warren Buffett and Kanye West and Barack Obama and Joe Biden and others—tweeted out a dumb Bitcoin scam. This scam seems to have raised about 12.8 Bitcoins, about $120,000, which is a pretty poor reward for what seems like an impressive hacking effort. Perhaps the real prize is, like, now they know how to steal an election, or they've got a bunch of blackmail material from the DMs or whatever. Or maybe they just got the Bitcoins.

Obviously if you could control Elon Musk's Twitter account for 10 minutes you could find a lot of ways to make more money, at least on paper. (Not legal advice! Obviously this is illegal!) You'd want that control to come during market hours; in fact yesterday's Twitter hack started at 4:17 p.m. and so was kind of useless. But if you could do it during market hours, you could buy a bunch of Tesla Inc. put options, tweet "I am quitting," watch the stock drop and cash out your puts for a zillion dollars. Or buy a bunch of Tesla calls, tweet "I am taking Tesla private but for real this time," have Warren Buffett chime in "I am pleased to be funding Elon's bid to take Tesla private," watch the stock go up and cash out your calls for a zillion dollars. Or do something more baroque; why not pretend that Tesla is taking over Nikola Corp., or Hertz Global Holdings Inc.? Musk has pushed Tesla's stock up and down with dumb tweets enough that investors might be getting numb to it, but if you used his account to push another stock up you might have something. 

I suppose the objection is that if you did this you'd get caught and the Securities and Exchange Commission would freeze your money, whereas Bitcoin transfers are irreversible, but I don't know. Random weird trading in Tesla (and Nikola, and Hertz) stock is kind of the hallmark of current markets, so I'm not sure why your weird trading would stand out. Sure you'd have bought short-dated out-of-the-money options on Tesla five minutes before the fake tweets, but so would like 100 other people. People are getting insanely lucky trading Tesla every day; how could the SEC tell that your luck was connected to the manipulation?

But in actual fact they ran the dumb Bitcoin scam. It is easy for me to criticize, but it's not like I've hacked into Twitter; it is worth presuming that the people who were smart enough to pull this off were also smart enough to optimize their payoff. Perhaps this really is the best that one could do. Byrne Hobart writes:

This is good news. The fact that cheesy Bitcoin scams work means that hackers have an incentive to break into vulnerable companies. But the fact that they work a lot better than more drastic exploits means that Bitcoin creates a sort of global bug bounty. If Bitcoin scammers hadn't found this vulnerability, maybe North Korean hackers or the PLA would have. 

If you're a smart hacker who can break into Twitter and take over any account, bitcoin plus bragging rights may be the only payoff you have a reasonable chance to collect.

Lemonade Stand Stuff

Do kids still do lemonade stands? I feel like it was quaint and fake even when I was young, and now if you are an entrepreneurial nine-year-old presumably you are monetizing TikTok somehow. But Country Time, the Kraft Heinz Co. lemonade brand, has this great schtick of acting like lemonade stands are (1) ubiquitous and (2) subject to the same stresses as regular businesses, and that Country Time is somehow their corporate protector. (If you are a kid with a lemonade stand do you not squeeze your own lemons? Do you just sell Country Time at a markup? I don't know.)

So in 2018, when tech-company "regulatory entrepreneurship" was big in business news, we talked about a Country Time marketing campaign in which they promised to pay the fines and permit fees for any lemonade stands that were shut down by regulatory authorities for failing to meet licensing requirements. Was that a thing? Who knows, it was a good press release. And now:

Lemonade stands across the country are closed due to social distancing guidelines, which are hindering the typical foot traffic neighborhood stands receive. With the economic repercussions of COVID-19, the big guys are muscling the little guys out of the way and pushing for bailout funds meant for small businesses. To help the smallest of small businesses, kids' lemonade stands, Country Time is launching the Littlest Bailout Relief Fund, a fund to send stimulus checks to kids who had to close their lemonade stands due to COVID-19.

I feel like right now most guidelines allow for outdoor you know what, never mind, I am sure that my kid would have run a lemonade stand this summer but for the pandemic, of course, that is literally the only thing standing in the way, I'll be applying for my check.

Lunch stuff

I jokingly call myself a "lunch valuation analyst" on Twitter, because I occasionally pretend to put a price on the value of lunch with financial celebrities, but I do not know what sort of discount you'd apply to a financial-celebrity lunch in which you … eat … a sandwich … at your house while … they … eat a sandwich … at their house? I guess you can dispense with the sandwich. The pandemic has been bad for a lot of asset classes, but I'm pretty sure it will be terrible for the financial celebrity lunch market. Or not, what do I know, maybe having lunch with Steve Cohen without leaving your house is more valuable than schlepping to a restaurant to meet with him? Anyway if you want to have a 45-minute video call with Dan Loeb or Steve Cohen, those are now things you can bid on. Maybe you do? I dunno, if you buy one of them let me know what you paid, for my pricing spreadsheet.

Things happen

Apple Wins Major Tax Battle Against EU. At Evercore, a Dean of Wall Street and Washington Elevates New Leaders. BlackRock punishes 53 companies over climate inaction. Dell considers VMware spin-off to boost share price. Wirecard made this short seller right but not rich. Hedge Funds in Gold Futures Market Get Crushed by 'Big Boy' ETFs. Carson Block Warns Tesla Short Sellers: 'I Wouldn't Do That.' Airbnb shakes up management and revives IPO plans. Employees Feel Pressured as Bosses Order Them Back to Offices During Pandemic. Greenwich Mansions With Pools Are All the Rage in Pandemic Era. Sheldon Adelson is mystery bidder who could shake up Mets sale. Boston Scientific Puts Snake Venom Unit Up for Sale.

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[1] I did discuss insider trading in footnote 1 here, but from a fairly narrow perspective (if you were *planning* to develop a vaccine, could you bet on your success by buying airline call options?).

[2] We have talked a little about allegations that Senator Richard Burr insider traded on knowledge that he got in congressional briefings about the coronavirus: Intelligence officials briefed him about the virus, and then he went and sold a bunch of stocks, including hotel stocks. Presumably he had no inside information about any of those companies, but perhaps he had virus information that no one else had. Does that count? The consensus seems to be that yes it does, and that if in fact he got nonpublic virus information through his job as a senator then it would be illegal for him to trade hotel stocks based on that information. But lots of people get some sort of information about the macroeconomy from their jobs, and that doesn't necessarily disqualify them from trading every stock. It is a question of how big the news is, how blatant, how bad it looks.

[3] Incidentally one complaint about bond market liquidity has long been that banks are afraid of risk and no longer use their balance sheets to trade bonds, leaving no one to buy when prices are going down. In March people really did have complaints about bad liquidity, but you could look at the question from another angle. If your hypothesis is "banks do not take any risk to buy and sell bonds from customers any more," then an implication of that hypothesis would be that banks would not make (or lose) a lot of money trading bonds in volatile times. That turned out to be totally wrong! It suggests that some of the liquidity worries might have been overblown.
 

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