The 10th Man

Notes from the Asylum

October 22, 2015

First, a shameless plug. Please follow me on Twitter.

Now on to today’s topic. You probably heard that Dreamy McDreamerson is the new Canadian prime minister, opening a can of Canadian whoop-ass on Harper. Here is the crux of it.

Harper, in some ways, had an accidental 10-year reign. Canada is about 60% left-wing and 40% right-wing, but has two left-wing parties (the Liberals, who are center-left, and the NDP, who are allegedly far left) that have been splitting their votes in every election. Canada is slipping into recession, and Harper, sort of a Canadian Sean Hannity, has worn out his welcome over time with his hawkishness/paranoia.

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Going into the election, people were talking about the idea of “strategic voting.” There was a dominant theme of Anybody But Harper, so it was just a matter of whether the votes would go to the Liberals’ Trudeau or the NDP’s Mulcair. Trudeau, who had been languishing throughout the campaign, had a late surge, and everyone piled on, driving him to not only victory, but a parliamentary majority.

Now what?

Trudeau, I think, is a little further left than people give him credit for, with a clear authoritarian streak. Aside from legalizing marijuana (which has everyone all revved up), Trudeau’s other concrete proposal is to intentionally run a deficit by raising taxes (on the rich) and spending even more money on infrastructure.

Classic Keynesian stuff, countercyclical fiscal policy. Theoretically, Canada is in recession, but it has been pretty mild so far, and if Trudeau wants to build a few dozen bridges between Vancouver Island and mainland B.C., I can’t imagine what’s going to happen when Canada slides into a deep depression.

Actually, I can. Canada’s budget—which is basically balanced—will, in a few years, reach a deficit of 10% of GDP.

That’s not good for the Canadian dollar, which has been in a two-plus-year bear market. And I am aggressively shorting it.

Trudeau has a reputation of being somewhat of an empty suit, a know-nothing—and these are the sorts of things that his own supporters acknowledge. Canadian investors have told me privately that they believe this outcome to be even worse than if Mulcair had been elected, which is really saying something.

The CAD has been basically unch (trader talk for “unchanged”) over the last two days, leading the FX reporters at the news bureaus to report that international capital flows don’t seem to be fazed by the Trudeau election. Maybe not in the short term, but certainly in the long term.

Model D for Done

I’m a huge Elon Musk and Tesla fan, but there is trouble afoot.

The Model X was unveiled, and it is proving to be a disappointment.

  • The base price is $80,000-$90,000, but to get the car you want, most people are going to have to pay $130,000.
  • It’s essentially a minivan.
  • Nobody is going to pay $130,000 for a minivan.
  • It’s a cool minivan, but it’s still a minivan, just with fancy doors.
  • On top of it all, they delivered it two years late.

If you’re TSLA, with a $30 billion market cap, with zero earnings as far as the eye can see, and a very fragile valuation case, you can’t do these sorts of things. This is a strategic screw-up. But with maybe a different word instead of “screw.”

Then, a week later, Consumer Reports comes out and says that Tesla cars are not especially reliable.

Down goes Frazier.

The bull case on TSLA is not that the cars are electric. Nobody cares that the cars are electric. People like Tesla because the cars are awesome and the engineering is spectacular.

But if the cars really aren’t awesome, as Consumer Reports alleges, that kind of kicks out the one remaining bullish leg of the chair.

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Whenever I talk about being bearish on TSLA, people usually tell me that Tesla is worth something to someone and will get bought eventually. By whom? At what price? Can you think of a scenario in which Elon would sell? Things would have to be pretty dire.

So there is a lot more downside, potentially.

The chart looks like death, and there is a confluence of bad news. This stock was a short-murderer for years. Not anymore.

The Pace of Medical Innovation

My wife and I were watching TV last night and the Opdivo commercial came on—the lung cancer immunotherapy drug by Bristol-Myers Squibb (I am the unhappy holder of the stock, which hasn’t done much in the last 6 months).

Yes, Opdivo is the first FDA-approved immunotherapy drug. It is essentially a cure for cancer, although they can’t really say that on TV. They say that it lengthens your life… yeah, by curing cancer!

All kinds of biotech companies are working on immunotherapy treatments. There are about 300 different kinds of cancer, and each one needs an individual cure.

In my lifetime (assuming no whammies, which we will discuss in a second), getting cancer will be little more than an inconvenience. Incredible.

As you know, health care and especially biotech have taken a massive hit over the last three months. In the case of biotech, it was about a 30% drawdown.

And if you were paying attention, you know that was because there is an increased focus on drug pricing. Hillary Clinton proposed outright drug price controls on the campaign trail, and the entire health care sector took the Metamucil.

Prices are signals. The reason we are getting all these great drugs is because… prices are high! People are incentivized to find cures for stuff. Some people have this idea that cures for cancer should be developed by these Jonas Salk-type lab rats toiling in anonymity, out of pure altruism, but that isn’t how it happens.

My moral compass says that anyone who develops a cure for something that cures a bazillion people should get to be a bazillionaire.

Lots of people knock on Obamacare, but mercifully, it leaves intact (mostly) the price signals that allow the drug market to function. We go to single-payer—no more fancy drugs. The pace of medical innovation drops to zero.

I’m still bullish on health care, but you can’t put the drug price genie back in the bottle. This will be a topic of conversation throughout the campaign. Expect tape bombs galore.

Jared Dillian
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Mitch Ma

Oct. 23, 2015, 1:21 a.m.

The Canadian dollar has been in a two year bear market, during which time Stephen Harper was the prime minister. And you are, and presumably have been, aggressively shorting it. That’s all you need to know about the outgoing government and it’s leader. The devaluation of the Canadian dollar speaks volumes as to the effectiveness of his governance. If Canada is a shambles, the blame lies squarely at the feet of this man. So tell me, how much worse can this get? You may consider J Trudeau a lightweight and a bit of a fluff but one could say the same about R Reagan when he took office in 1981 and how did that turn out? Just as the Tea Party has managed to hi jack the Republican Party in America, the Reform Party infiltrated the Conservative Party in Canada and it became the party of hate; that tried to foment fear among the people and turn one against the other. This was a vile and despicable strategy which was not successful, and this election result is proof of that. There is a huge sense of relief among Canadians that Stephen Harper is no longer in charge. Who knows what the future will bring? All one can do is make a decision based on the information one has at hand today. And this is what Canadians did on Monday. A year or two from now, economically, maybe we’ll be worse off, maybe things will be better. But today, Canada is better off than it was a week ago.

Daniel Wenzke

Oct. 22, 2015, 2:28 p.m.

This statement is not true: “Opdivo .... is essentially a cure for cancer, although they can’t really say that on TV. They say that it lengthens your life… yeah, by curing cancer!”

Unfortunately, this drug improves survival but is not a cure for the cancers for which it’s been approved (numbers from FDA, see links below):

1) squamous non-small cell lung cancer (NSCLC): Median overall survival = 9.2 months with Opdivo (vs 6 months for current therapy). The ORR [objective reponse rate] was 15% (95% CI: 9, 22)  All were partial responses. At the time of analysis, 10 of the 17 responding patients (59%) had response durations of 6 months or longer. 
2) other NSCLC: Those treated with Opdivo lived an average of 12.2 months compared to 9.4 months in those treated with docetaxel (current therapies).
3) Melanoma: The ORR (objective response rate) was 32% (95% CI: 23, 41) with four complete responses and 34 partial responses. Five responding patients have progressed, while the remaining 33 patients (87%) have ongoing responses (range 2.6+ to 10+ months).  Thirteen patients have ongoing responses of 6 months or longer. 

NOTE: Complete response means you can’t detect the cancer or tumor metabolic activity with imaging tests, etc, but that doesn’t necessarily mean it’s completely cured or won’t come back; partial response means the tumors got smaller but remain visible and/or metabolically active.

Some cancers can be completely cured with chemotherapy while others cannot (yet). For some of these terrible, not-yet-curable cancers, I offer the following analogy:

Your hometown (your body) has been invaded by enemy troops (cancer cells). You’d like to wipe out the enemy and reclaim your hometown without destroying it. So you fight back.

Attack 1: You use snipers (i.e., targeted, less toxic drugs) and kill off a huge number of the bad guys. Their numbers really dwindle and you can’t find any more to shoot (a complete response! Hooray!). There are a few bullet holes in the windows and walls but the town is fairly intact. Unfortunately, your snipers didn’t get ALL of the bad guys. A small percentage know how to evade snipers and stay hidden. Even worse, they multiply. After a number of months, the enemy force is back up to strength and growing. And they all know how to avoid snipers. Time for Plan B.

Attack 2 (Plan B): Snipers don’t work anymore so you need something else. You call in some air support. You drop a bunch of bombs, taking out a large part of the enemy but also damaging the town (less-selective targeting means drugs are more toxic, worse side effects). You’ve set the bad guys back a ways but hurt the town and guess what? Some small number is unfazed by the bombings. Worse yet, those guys multiply. And now they all know how to avoid bombs. And snipers. After a number of months, the enemy is back up to strength. Time for Plan C.

Attack 3 (Plan C): Only two options left. Option A: Halt the attacks, accept the outcome, use our remaining resources to savor what’s left. Option B: Drop the Daisy Cutters. We’ll kill some bad guys but the town will really get hammered (least-selective targeting and therefore worst side effects). We might buy some time but we razed the town and feel just awful. And then… cancer wins. Cancer sucks.

What about these new drugs? They’re giving us more options (hopefully Plan A options). More rounds of time-buying. But… can they completely eradicate the enemy? Opdivo represents a promising new treatment option. Which is great. But a cure? We haven’t seen that. Not in these trials, not for these cancers, not from this drug. But my hat is off to the arms dealers. May you live long and prosper.

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