Spaccine hesitancy

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MR. MICHAEL CEMBALEST:  Good afternoon, and welcome to the August 2021 Eye on the Market podcast.  Two quick topics this week, SPACs and Vax.  The tagline here is that if people avoided SPACs instead of avoiding Covid vaccines, whose efficacy is often underestimated in the rush to release data, the US would be wealthier, and also closer to herd immunity, so what do I mean by that?

Well, let's see, let's do the SPACs first.  Last February, I wrote a piece that had a pretty dour outlook on the SPAC market.  Way too many young, risky, unprofitable companies coming to market, very strange and abnormal incentives for sponsors to close transactions, even if the stocks tank afterwards, overreliance on company projections, rather than actual historical data, and a sign from the early SPAC market that even though some of the returns were positive in absolute terms, they didn't look good relative to the market. 

Well, we did an update on all the SPAC mergers, around a hundred of them that we analyzed that closed or liquidated over the last couple of years.  Talk about red tides.  This--it looks even uglier than when we looked at it last time, while the sponsors and some of the arbitrage investors who cash out of everything before closing are still making money, it's a very unsightly picture for everybody else in the SPAC ecosystem, whether you're a buy and hold or investor at the original SPAC, a pipe investor, post-merger investor, you know, you name it, the--almost all of the absolute and relative returns are negative, so you can take a look.

These poor outcomes weren't just the case for the hundred SPACs we looked at.  We ran the same analysis for the 85 SPAC mergers that have taken place since March of this year, and the same patterns hold enormous returns for the sponsors, low positive absolute returns for the arb investors, and then negative returns for everybody else, and what that's doing is, of course, institutional pipe financing which guarantees to fund at closing, is drying up, which is going to force some of the sponsors to allocate more of the economics to them to--otherwise, you can't close a deal, and the sponsors are also going to face the risk that they can't even find a merger partner before two years is up, in which case the SPAC gets unwound, the SPAC investors receive their capital back, because it was put in escrow, and the sponsors would lose all of their upfront investment.

So anyway, that's the SPACs.  Now, we shall move to the vacs.  You've all seen the data on the infection and hospitalization surge, and vaccine hesitancy in the hotspot states, and the issue with the high Trump voting shares and its connection to low vaccination and high levels of hospitalization.  We have all those charts on our web portal, and so we don't need to reproduce them here.

I did want to mention something important on vaccine efficacy.  Given the reports that have come out over the last couple weeks from the Israeli Ministry of Health and the Mayo Clinic, be careful when you're interpreting this vaccine efficacy data, since sometimes, the reported numbers can underestimate just how well these vaccines are working, so to understand why, let's talk about how vaccine impacts are reported.

The first one is shares of outcomes.  Right, so if you find out about this thing on Cape Cod where 74 percent of all infections occurred in vaccinated people, well, that doesn't help me very much, because the more that a population is dominated by vaccinated people, it's not surprising that more vaccinated people were infected than unvaccinated people, and one example of that in the UK is that around two thirds of all hospitalized people over 50 were vaccinated, but that's a meaningless statistic without adjusting for the relative size of that cohort relative to unvaccinated people over 50, and so that's why people generally--vaccine companies, virus researchers, they tend to describe the impact of vaccination and reducing disease and other adverse outcomes using an efficacy statistic.  Now, what does that do?

Well, you adjust the outcomes for the population sizes in both cohorts, so for example, in England, you had--you have 31 million people fully vaccinated, 17 million not vaccinated, so you adjust the size of hospitalizations by each population share, and then you get some numbers, and then you can measure the decline in the ratios, and the ratio of the declines is about 75 percent, and that's what efficacy measures, so in other words, .017 percent of unvaccinated people have been hospitalized, and .0042 percent of fully vaccinated people were hospitalized, and that's a decline of 75 percent, so that's that efficacy measure, it's a percent of a percent, and that's what it's meant to do, and the financial press and the regular press, and even a lot of science reports are teeming with estimates right now of what these efficacy numbers are.

Now, in some studies, these efficacy numbers are representative of the underlying efficacy of subpopulations within them, but sometimes, that's not the case, but there's this weird mathematical paradox that can happen when there's some other variable that explains the highly divergent outcomes across the subpopulations and is known as Simpson's Paradox.

So, for example, when you're looking at a chart or some data where one of your variables is vaccination and the other one is hospitalization rates, there's something weird that can happen when age is a confounding factor that is a stronger driver of the actual outcomes, and so what you have is, when you actually look at the numbers, and you should look at the tables in this week's piece, the vaccine efficacy of the under and over 50 cohorts is actually higher than the efficacy computed for the population as a whole, so this may sound like just a bunch of weird math, but I think it's pretty important, because in the case of England, the reported efficacy of the vaccination process there is showing up in the press as 75 percent, whereas the actual efficacy for the over 50 people is 94 percent and the efficacy for the under 50 people is 87 percent, again, both numbers higher than when you compute it for the population as a whole, and I think that's important because it affects behaviors, public policy, inclination of people to be vaccine-resistant, the desire for people to get booster shots, there's a whole lot of stuff that comes out, and I think the big takeaway here is that during the vaccine trials, they do all sorts of matched groupings by age, gender, comorbidity, like weight, obesity--they do all sorts of groupings so they can compare like populations to like populations to see if the vaccines are working versus a placebo.

So, for health ministries, or drug companies, to rush out with an efficacy measure for the entire population that's not stratified by anything, I understand why they're trying to do that given the spike in the delta variant, but some of these headline numbers are a little bit misleading, and I think underestimate and under-convey just how well some of these vaccines are actually doing, and England is a good example of this, and it was a little disappointing that the Israeli data, which showed a really sharp decline in Pfizer efficacy for people that got it in January and February, was not stratified by age, because that could have been a massive driver of that outcome, rather than fading immunity of an mRNA vaccine after six months, and most of the people in my science advisory group think that there is enough information in the Israeli data to justify booster shots on the notion that there is some level of fading immunity, but not nearly as much as what the Israeli Ministry of Health reported.

They reported a 16 percent efficacy rate for January vaccine recipients.  The FDA only approves vaccines that reach at least 50, so that 16 percent was a strange number, and my guess is that when that data is eventually stratified on all of the different levels that it needs to be, that the deterioration in Pfizer efficacy won't be nearly as much as what it was initially reported to, so--but to reiterate, most members of my Covid science advisory group that I've been working with for the last year and a half, do believe that booster shots are merited as a better safe than sorry measure, and combined with T-cells and other responses that fully vaccinated people with a booster should be reasonably well-protected against hospitalization, against the delta variant.

So anyway, I know it's an unkind thing to do to drop a load of math on you at the end of an August summer week, but I do think it's important, given the rush of all of these efficacy numbers.  A quick thank-you to my son, Max, who is at the Harvard Graduate School of Engineering and Applied Science for bringing this Simpson's Paradox to my attention in the first place, and in the appendix here, we have tables on all of our SPAC returns, definitions, and assumptions, as well as a table of vaccine efficacy as reported against infection, hospitalization, ICU admission, and mortality, so that's it for this time, and I look forward to talking to all of you again after Labor Day.  Bye.

AUTOMATED RECORDING:  Michael Cembalest Eye on the Market, offers a unique perspective on the economy, current events, markets, and investment portfolio, and is a production of JPMorgan Asset and Wealth Management.  Michael Cembalest is the Chairman of Market and Investment Strategy for JPMorgan Asset Management, and is one of our most renowned and provocative speakers.  For more information, please subscribe to the Eye on the Market by contacting your JPMorgan representative.  If you'd like to hear more, please explore episodes on iTunes or on our website.  This podcast is intended for informational purposes only, and is a communication on behalf of JPMorgan Institutional Investments incorporated. 

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