Topics: if people avoided SPACs instead of avoiding COVID vaccines, the US would be both wealthier and closer to herd immunity. An update on our SPAC analysis from last February, and a look at the strange mathematical paradox that ends up understating some critical COVID vaccine efficacy data
Spaccine hesitancy. Last February, I wrote a piece with a dour outlook on the SPAC market: too many young risky, unprofitable companies coming to market; abnormal incentives for sponsors to close transactions even if the stocks collapse after closing; over-reliance on company projections rather than historical data; and a warning that poor SPAC merger returns relative to the market were a bad omen"1. Well, here’s an update on the 98 SPAC mergers we analyzed that closed or liquidated from January 2019 to March 2021. Talk about “red tides”: while SPAC sponsors and “SPAC Arbitrage” investors are still making money, it’s an unsightly picture for everyone else in the SPAC ecosystem. See Appendix I for the full table showing average, median and 85th/15th percentile returns, and all of our assumptions and definitions.
These subpar outcomes are not just the case with 2019-March 2021 SPACs. We ran the same analysis for the 85 SPAC mergers since March 2021, and the same patterns hold: enormous returns for SPAC sponsors, low positive absolute returns for SPAC Arbitrage investors and negative returns for everybody else.
The latest SPAC news: institutional “PIPE” financing has dried up, forcing sponsors to allocate more of their economics to securing institutional commitments that are guaranteed to fund at closing; and increased risk that SPACs do not find a merger partner before their 2 year lifespan, in which case the SPAC would be unwound, SPAC investors would receive their capital back and sponsors would lose all of their upfront investment. For arbitrage-oriented investors, SPAC dislocation can create attractive opportunities; but that requires minimizing directional exposure to a group of clearly underperforming and usually unprofitable companies.
Implications. While we are very optimistic on the US growth outlook, the primary driver of some assets might be liquidity instead. As the Federal Reserve lays out its plans to start slowing its asset purchases (perhaps by the end of the year), areas like the SPAC market that rely heavily on abundant liquidity may be early casualties. The portion of the stock market that is highly sensitive to liquidity conditions has been rising, just as the share highly sensitive to economic conditions has been falling (see chart below); SPACs may be an exaggerated preview of what lies in store for other overpriced assets unsupported by earnings growth.
Vaccine efficacy understatement and the amalgamation paradox
You’ve seen the data on the US infection and hospitalization surge and vaccine hesitancy, particularly in hotspot states and counties with high Trump 2020 voting shares. We have all those charts on our web portal so no need to reproduce them here, other than this first chart showing how some US states are suffering the highest infection spikes on earth right now.
I want to highlight something important on vaccines given recent reports from the Israeli Ministry of Health and the Mayo Clinic, since their efficacy data came in lower than prior reports. Be careful when interpreting vaccine efficacy data releases, since reported numbers can underestimate what you expect them to measure in the first place. To understand why, let’s walk through the two ways a vaccine’s impact is often reported: “shares of outcomes”, and “efficacy”.
“Shares of outcomes” in vaccinated people. This simple measure refers to the percentage of infections or hospitalizations in a given place/time that occurred in vaccinated people. One example is the infection outbreak on Cape Cod Massachusetts, where 74% of all infections were reported to have occurred in vaccinated people. This is the least helpful statistic to think about, since it does not account for the relative number of vaccinated and unvaccinated people. In other words, in a population overwhelmingly dominated by vaccinated people, it’s not surprising that more vaccinated people were infected than unvaccinated people. Another example, in the table below: 31% of all hospitalized people in England were vaccinated, but this is a useless statistic without adjusting for the relative number of vaccinated and unvaccinated people.
Vaccine “efficacy” is used by vaccine companies and virus researchers to measure the impact of vaccination in reducing disease and other adverse outcomes. Efficacy normalizes for population size of vaccinated and unvaccinated groups. In England for example, vaccinated people were roughly 2/3 of the population and a third of hospitalizations; efficacy incorporates both figures by comparing rates of hospitalization. As shown, this rate declined from 0.0172% for unvaccinated people to 0.0042% for vaccinated people, a decline of 75%; that’s what efficacy measures.
Possible vaccine efficacy understatement. If you’re going to rely on the concept of efficacy, you also have to accept the possibility that it may understate what you expect it to measure. There’s a mathematical paradox that can happen when a third variable (a “confounding factor”) applied to sub-groups results in substantially different interpretations than when looking at the overall group without this third variable. This is referred to as an amalgamation paradox2, and in the vaccine efficacy case, the confounding factor is age which is strongly associated with higher vaccination status AND a higher likelihood of being hospitalized.
There’s a real life-example in the next table: if we divide the English population into under and over 50 cohorts3, we find that vaccine efficacy vs hospitalization was actually higher for both age cohorts (87% and 94%) than efficacy for the population as a whole (75%)! According to biostatistics professor Jeffrey Morris at the University of Pennsylvania, this also occurred in Israel: vaccine efficacy vs severe disease was higher for under and over 50 cohorts (92% and 85%) than for the population as a whole (67.5%). This is one of the strangest mathematical outcomes I’ve run into; evolutionary biologist Carl Bergstrom from the University of Washington and epidemiologist Marc Lipsitch from Harvard have discussed this very issue over the last few days on Twitter.
The important takeaway: vaccine efficacy may be significantly higher for people over 50 than commonly reported numbers. Hopefully, country health ministries will follow up with age stratifications that make this point clearer. Until they do, we will not have a clear picture on how well vaccines are actually performing and how much fading immunity is taking place. A recent Israeli Ministry of Health report showed sharp declines in Pfizer efficacy for January and February recipients (see Appendix II). However, this data was for the entire population of vaccinated and unvaccinated people. When it is eventually adjusted for age and other factors, Pfizer efficacy may look a lot better. Even so, most members of my COVID science advisory group believe that booster shots are merited as a “better safe than sorry” measure. This may have led Israel to adopt a booster policy for its over 50 population already, and to recommend boosters for everyone as early as next month.
Vaccination in England: an example of the amalgamation paradox and understatement of vaccine efficacy
Appendix I: SPAC return table with definitions and assumptions
Appendix II: efficacy data by vaccine and efficacy category
1 “Hydraulic Spacking”, Eye on the Market, February 8, 2021
2 For more information, see this article by Biostatistics Professor Jeffrey Morris at the University of Pennsylvania. Morris refers to this as Simpson’s Paradox. Thank you to Max Cembalest (Harvard Paulson Graduate School of Engineering and Applied Sciences) for bringing this to my attention.
3 The over/under 50 stratification may still understate vaccine efficacy given the enormous effect that age has on hospitalization. According to the CDC, hospitalization risk for people over 64 is 2x-4x higher than for people aged 50-64. A more detailed stratification would yield even more accurate efficacy results.
[START 08-19-2021 Spax and Vax_Mixdown]
FEMALE VOICE 1: This podcast has been prepared exclusively for institutional wholesale professional clients and qualified investors only, as defined by local laws and regulations. Please read other important information, which can be found on the link at the end of the podcast episode.
MALE VOICE 1: 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.
FEMALE VOICE 1: 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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[END 08-19-2021 Spax and Vax_Mixdown]