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Oxford research shows influence of social contagion on stocks such as Tesla and GameStop

From the US Capitol to Wall Street, the power of social media to mobilise crowds is evident everywhere. It has introduced a new risk to the effective functioning of markets as it has to politics, exposing the limitations of politicians and regulators to manage viral campaigns.

The recent price explosion in the stumbling GameStop was portrayed on the r/WallSteetBets sub-forum on the Reddit platform as a just redistribution that took gains from the pockets of “parasitic” hedge funds that had bet against the struggling US video games retailer into the hands of “ordinary” people.

But the GameStop surge also shows the extent to which financial markets are susceptible to the mobilisation of investment crowds on social media. Investors and policymakers urgently need to understand the implications.

Investor mania is an established topic in economics, but research by Valentina Semenova and Julian Winkler at Oxford university reveals how interest in a stock can form on social media. Through hype and contagion, it then can underpin the retail investor bull runs we observed in GameStop and elsewhere.

We have tracked r/WallStreetBets’ rise from 2015. During last March’s stock market crash, users ardently advertised their purchasing of put options on the popular S&P 500 index — bets on a large stock market downturn.

At the time, their size, relative to the S&P 500, meant any influence was small, and r/WallStreetBets was largely dismissed as a curiosity. However, as the forum exploded in size (it currently boasts 8.8m self-described “degenerates”), its influence has grown more pronounced.

Social contagion is a well-documented phenomenon: people adopt others’ behaviour, from smoking to product purchases. r/WallStreetBets was able to channel this into financial decision-making, attracting those with a particular taste for high-risk bets on stock-specific options that are often at odds with rational economic theory.

Users are encouraged to gamble, with redditors displaying their oft collapsing but occasionally ballooning trading losses and profits, galvanising their peers to adopt similar positions.

The likelihood of persuasion increases as an individual is exposed to more and more discussions on a given asset. It takes a while for interest in a given stock to take off, but once it does, it becomes a self-perpetuating force to be reckoned with.

Our text-based sentiment measures strongly suggest that r/WallStreetBets frequenters strive to adopt the directional positions of their peers.

In other words, they buy (or sell) a stock, not because of any fundamental pattern or news, but because other users also buy (or sell) the stock. This effect is especially large in bouts of selling, pointing to interesting psychological models of investor panic during a downturn.

Over 9,000 different stocks are discussed on the forum, but given these dynamics, only a handful, such as Tesla and GameStop, rise to prominence with potential to have an impact on the market.

Given this herd behaviour, it was just a matter of time for a situation like the GameStop frenzy to unfold. And given the dynamics of the social media investor platforms it is likely to happen again.

How to address this is now an urgent challenge for regulators. The champions of free markets, and the users, argue that the platforms allow the markets to work as intended and that hedge funds were caught making bad bets, which they otherwise would have got away with. Silencing the forum for the sake of market stability would be a draconian solution, and unlikely to endure. Anonymity on Reddit makes it harder to pursue market manipulation charges against individuals.

Few in the Biden administration would wish to use political capital defending Wall Street against a Redditor army. However, doing nothing is likely to create unacceptable risks which could threaten financial markets.

Fortunately, social contagion takes time to develop and is possible to track. This means the regulators need not be caught out. Trading limits should be tightened on stocks which display frenzied activity, preventing destabilising market moves. Margin requirements should be increased for stocks that are subject to retail investor herding.

Regulators need to act now to ensure that financial markets are properly capitalised and that this new market development does not provide a new source of systemic risk.

That has led to a sense among investors that messenger RNA is the future of vaccines. Shares of biotechs specializing in messenger RNA have skyrocketed, with Moderna (ticker: MRNA) shares up 771% over the past 12 months. BioNTech (BNTX) shares are up 289% over the same period.

But Paul Hudson, CEO of Sanofi (SNY), one of the world’s largest vaccine makers, says that expectations that messenger RNA will come to dominate the vaccine landscape in the coming years are overblown.

“I think everyone’s getting very excited that there is a new platform,” Hudson told Barron’s on Monday. But he noted that some messenger RNA programs had struggled before the pandemic. “So before we all, you know, declare a fundamental shift ... Where I’m excited about mRNA is in targets that have never been treated before.”

Sanofi is collaborating with the messenger RNA-focused biotech Translate Bio (TBIO) on a Covid-19 vaccine. The companies also signed a $425 million deal this past June, worth up to $1.9 billion in potential milestone payments, under which Sanofi obtained the rights to manufacture and commercialize infectious-disease vaccines using Translate’s technology.

“I think in a pandemic where speed is one of the key ingredients, I think we have to accept that in a single antigen pandemic, mRNA is probably the first go-to,” Hudson said. “But in regular times, I think we also have to be clear, that if you’re coming into a market with mRNA, say [the] influenza [vaccine market], and you’re competing with current influenza [vaccines], it’s very different when you have to compete with the standard of care with a well-characterized safety profile. So that bar is high.”

Sanofi sold €2.5 billion worth of flu vaccines in 2020, up 37.9% from the previous year.

When Hudson took over as the CEO of Sanofi in late 2019, the company was in need of a turnaround. Its Nasdaq-listed American depositary receipts traded at a multiple on the low end of its peer group. As Hudson said to Barron’s a few months after taking the job, the company had “sort of lost a little bit of its mojo.”

A year and a bit later, there are some signs that mojo is coming back. While the company’s Covid-19 vaccine programs have yet to bear fruit, sales of its eczema and asthma blockbuster Dupixent were up 54% in the fourth quarter of 2020 compared with the same quarter the year before. Sales of its flu vaccines were up 24.6%.

“You can see we’re making real progress,” Hudson told Barron’s on Monday. “We’re on track to be a leading company in immunology. We’ve signaled high single-digit EPS growth in [20]21 after a full year of a pandemic ...s ahead of where I thought we thought we would be in normal times, let alone in a pandemic.”

The company’s American depositary receipts (ticker: SNY) still trade around 13 times earnings expected over the next 12 months, according to FactSet. That is below peers like Johnson & Johnson (JNJ), which trades at just over 17 times, but above Merck (MRK), at 11.5 times earnings. The stock is down 5.1% over the past 12 months.

When he arrived at Sanofi, Hudson signaled he would be narrowing the company’s research and development focus, initially announcing a plan to discontinue diabetes and cardiovascular research. The company has continued to focus on cutting costs, announcing savings of €1.7 billion in an earnings report last week, and the cancellation of a number of pipeline programs.

“Our pipeline is rejuvenating, our top line is coming with Dupixent, our efficiencies are allowing us to reinvest,” Hudson said. “I think it would be hard for people not to notice that we’re making progress.”

While other leading big pharma firms have pushed Covid-19 vaccines through the development process this past year in record time, Sanofi has stumbled. Sanofi’s lead vaccine candidate, developed in collaboration with GlaxoSmithKline (GSK), was an adjuvanted recombinant protein-based vaccine based on the same platform as one of its flu vaccines. The vaccine returned disappointing results in December; data from a Phase 2b trial is now expected in the end of April.

“We were a little disappointed a little while back,” Hudson acknowledged. But he noted that vaccine development timelines are usually many times longer than the 12 months in which the company’s Covid-19 vaccine has been under development. “I said to the team, a few weeks late, but we’re still three years early,” he said.

Without a Covid-19 vaccine of its own, Sanofi is helping to manufacture the Covid-19 vaccine developed by Pfizer and BioNTech.

In the midst of the pandemic, Hudson says, the transformation he sought for Sanofi is underway. “This company is really starting to gather speed,” he said.

Of the 26 analysts tracked by FactSet who cover Sanofi, 17 rate it Buy or Overweight, while eight rate it at Hold. One rates it at Sell.

No matter how you slice the data, the car in your driveway is an emissions asterisk.

The Joe Biden administration will be piling a lot of chips on electric cars, the most popular and least useful way of fighting climate change. How much do the cars you and I drive actually contribute to emissions?

Don’t ask the Union of Concerned Scientists, an EV promoter habituated to quickly changing the subject to “transportation” emissions. Many inventories also ignore the full range of greenhouse emissions, focusing on CO2 to foster a nevertheless-untenable illusion that passenger cars provide leverage over a global climate problem. No matter how you fiddle the data, personal EVs are a single-digit factor and belong low on any sane list of priorities.

If the Environmental Protection Agency is right, the average light vehicle racks up 11,500 miles a year and sits idle 96% of the time. The World Resources Institute says passenger vehicles account for 7.5% of all emissions, but this includes buses, taxis, etc. Rental cars average 31,000 miles. Other fleet vehicles average 23,000 or more. Heavy trucks average 63,000 miles. One finding that appalled fleet operators is that their vehicles spend up to 33% of their time idling, which is not how people treat their personal vehicles.

The International Energy Agency in 2016 estimated that if 50% of all new cars were electric, petroleum use would continue to grow because of “trucks, aviation and the petrochemical industry and we don’t have major alternatives to oil products there.”

Exxon Mobil estimated more recently that if all new cars were electric by 2025, and the world’s entire fleet were electric by 2040, liquid-fuel demand in 2040 would be the same as 2013’s.

Few talk about it, but mining battery-related minerals generates emissions too. An electric car that’s sitting in your garage, not displacing a significant amount of gasoline-powered transportation but still sucking power out of a wall socket, can be a net emissions contributor when all is said and done.

Which brings us to another wrinkle. Tesla could likely make its electric cars profitably but instead scales its business to break even on fuel-economy credits sold to conventional car makers. Follow the money. Tesla is dipping into the same pickup-truck revenue stream that Ford and GM use to subsidize their own electric vehicles.

When GM recently waved a press release saying it might produce nothing but electric cars in 2035 given the right government policies, it was essentially boasting of its relationship with Mr. Biden, whose favorite line was once “bin Laden is dead, General Motors is alive.”

GM expects to do well under revamped Obama fuel-economy rules that, yes, have put more EVs on the road. By the EPA’s own calculation, any emissions gains have also been offset five times over by the pickup truck and SUV boom that Team Obama facilitated to ensure a successful auto bailout.

Lesson: When government seeks to do complicated things while appeasing multiple constituencies, it usually produces absurd results. And even less talked about is the 57-year-old U.S. pickup truck tariff that further entrenches this Detroit business model.

EVs are wonderful for many reasons but not for the reasons that climate-sanctimonious politicians promote. I won’t repeat an earlier column on climate policies that might actually be worth pursuing. Notice that the one innovation that greens opposed, fracking, has done more to reduce emissions than all government efforts combined.

Everybody’s behavior here is explicable except the greens, who have sold out to the EV distraction for rewards unrelated to progress on climate change. Mr. Biden himself is a nice man and politician of the type who seldom sees that what is popular and sounds good isn’t necessarily good. He spent the ’70s and ’80s pushing legislation to worsen America’s energy crisis and, incidentally, promote coal globally though scientists even then warned about acid rain and climate effects.

Let’s end with a look at GM’s Super Bowl ad, featuring the comedic actor Will Ferrell envying Norway’s love affair with electric vehicles. What the ad lacked in wit it also lacked in informational value.

Norwegians are indeed keen EV buyers because their politicians ladle on tax handouts, free parking, half-price tolls and even free charge-ups in some jurisdictions. These indulgences are financed how? Tiny Norway, with 0.07% of the planet’s population, exports 3% of the world’s oil and 14% of its natural gas. Its sovereign-wealth fund, where these riches accumulate, tops $1.3 trillion, or $245,000 per citizen.

Norway is an unrepresentative EV hothouse in every way except one. Like the rest of the world, it’s been unwilling to let EV companies develop free of distorting subsidies from fossil-fuel users that will be difficult ever to remove. Here’s the tragic part: The politics of these handouts is almost guaranteed to suck the air out of the room for things that might actually make a difference, like a carbon tax.

Blocking of takeover of retailer by Canadian suitor gives the illusion of sovereignty

French economic nationalism is as old as mimolette cheese. The hard cows-milk variety was invented at the behest of Jean-Baptiste Colbert, finance minister under Louis XIV, in the late 17th century to rival Edam sold by the enemy Dutch. 

So it is easy to shrug off the French government’s recent decision to block the takeover of France’s largest supermarket by a Canadian retailer as true to a long tradition. But this latest colbertiste intervention on the grounds of “food security” was remarkable nonetheless. Rather than demonstrate the state’s resolve to protect France’s economic sovereignty, it may just show up the hollowness of the promise.

The veto against Couche-Tard’s €16.2bn offer for Carrefour was an avowedly political act. Barely two days after details of the talks emerged, they were killed off by Bruno Le Maire. The French finance minister issued a “courteous but clear and definitive No” at a cursory meeting with Alain Bouchard, Couche-Tard’s Québécois boss, who had flown to Paris overnight. The minister had the formal powers to block the merger under France’s foreign takeover rules — the food industry is categorised as strategically important — but he did not need to use them. The deal was dead.

There was no serious attempt to assess the Canadian group’s €3bn investment plan for Carrefour, the hypermarket pioneer. The French would not understand if the aisles were empty of rice or pasta, Le Maire said, without explaining why this would be any more likely under Canadian as opposed to its current owners.

The government feared a backlash had it allowed Carrefour, the country’s largest private sector employer with 100,000 staff and a big purchaser of French agricultural products, to fall into foreign hands. The coronavirus pandemic has amplified a pervasive sense of insecurity in France and a desire for the country to be more self-sufficient and led by a more protective state, says Emmanuel Combe, professor of economics at SKEMA business school. With a presidential election a little over a year away, the government wanted to send the message that it would defend the French against foreign capitalism.

“It is politically right but economically wrong,” Combe says.

The veto was applauded across the political spectrum. President Emmanuel Macron commended his minister for making “the right decision at the right moment”.

Macron’s change of tune has amazed his political opponents. The former investment banker made big efforts to court foreign investors, refusing, at considerable cost, to reinstate a wealth tax he scrapped when he took office. As a presidential adviser, then economy minister and now head of state, Macron supported the sale of French companies to foreigners, such as Alstom’s power business to GE. He wanted to privatise Aéroports de Paris.

Le Maire’s supermarket veto gives the illusion of sovereignty. Had Couche-Tard been an EU company, the government would have had no grounds to intervene. Combe points out that France’s competition authority, of which he is vice-chairman, recently cleared the purchase by Lidl of Germany of several hundred stores owned by a French low-cost rival. There was barely a political ripple.

The ministerial veto does not make an industrial policy. France’s shortcomings have been laid bare recently by the failure of its scientific-industrial base to produce timely Covid-19 vaccines or to provide its own manufacturing facilities to ensure adequate supplies of those purchased through the EU. France’s prestigious Institut Pasteur abandoned its project while Sanofi’s has been delayed. Valneva, a Franco-Austrian biotech, will make its vaccine in Scotland.

Having blocked a friendly foreign takeover, Le Maire is now objecting to an unfriendly domestic one. The French government would have supported an amicable tie up between Veolia and Suez to create a national champion in waste and water. But with Veolia’s bid turning hostile, it is no longer to its taste. “French capitalism cannot be a war of all against all,” he says. He has called for the market regulator to intervene. 

During the financial crisis, then president Nicolas Sarkozy set out to “moralise” capitalism. His successors want to politicise it. In a recently published book, Le Maire says with the pandemic “politics should reclaim the economy”. Exactly what that means in practice remains a mystery. But if it deters foreign capital, expertise and technology it will prove costly.