Avian Flu Investor

How Things Have Changed

2009-04-27T13:22:00.000-07:00

When I started this blog several years ago, the world was focused on bird flu. It now appears the inevitable influenza epidemic -- possibly a pandemic -- has arrived in the form of a swine flu, or more correctly, a bird-pig-human flu that contains genetic markers for all three species.

More original recommendation to short Borders Books and Starbucks don't make as much sense now. Borders could be weeks, even days away from going out of business. And at 13.50, SBUX is well off it's recent highs. But then, what isn't?

I'm sticking with my recommendation to buy Del Monte (DLM). Panicked Mexicans are already stripping store shelves bare. If frightened Americans hole up - or are forced to by curfews or quarantine - expect the same here. As a leading manufacturer of canned foods, DLM will profit.

[swine flu]

4 Champions -- 3 At Risk

2006-04-25T20:42:00.000-07:00

What do Starbucks, Borders and Barnes and Noble have in common? Yes, they all sell coffee and music. But the key to their success is they are all comfortable places to go and hang out and, while you're hanging out, you buy some stuff.

Starbucks is so much more than a place to buy coffee. We use it as a reading room, a place for business meetings, a hookup spot, and -- thanks to WIFI -- an internet cafe. Personally, I don't like their coffee, but I love the ambiance and the ubiquity of a known commodity. My local Borders is packed on weekend afternoons with people who seem to stay for hours. Some evenings they host live music. There's a coffee bar too. It's a watering hole for the new mellenium.

We could all live without them, but they're an enjoyable luxury.

And that's why I believe they'll be slammed in the event of a pandemic. A comfortable place to go and hang out will be a place called home when people become deathly afriad of catching bug from any passing stranger. I don;t own any of these stocks, but I'm keeping them in mind as possible short plays.

Then there's Netflix (NFLX). The stock is on a roll and trading at frothy levels, but I like it. Now let's imagine a flu pandemic that had people holed up in their homes, as a majority say they'll do if bird flu strikes. It'll be scarey and it'll be depressing. We'll want more entertainment than we have now. What better than current movies delivered to your door? No need to interact with anybody. Assuming the company can keep operation going during a flu pandemic, I believe this stock could do well unless the market tanks so badly that we start throwing the baby out with the bath water.

[avian flu]

Latest Trades and Trends

2006-04-21T21:52:00.000-07:00

As big a threat as avian flu is to investors, we've got even more pressing issues to deal with now. Soaring oil and gas prices, and the prospect of worse to come. Unrest in Nigeria, tensions with Iran.

The best plays now are where they've been for months. Gold and energy are playing like dotcoms did in the late 90s. Peabody Coal (BTU) up over 15 points from 50 to 65 almost overnight. I missed that train, but there are others that you can catch. PVX is a Canadian energy trust paying a 10% dividend. The share prices is climubing slowly as well. PGH is another trust paying over 10%. I like Canada - politically stable and right next door.

Suncor is a way to play the vast Alberta oil sands. SU is on one wild ride. I've been playing Sept 80 calls. You gotta love the leverage you get with options.

For gold, GLD tracks the spot price nicely. 1 share = 1/10 ounce of gold. I also like Goldcorp (GG) and Newmont (NEM). Low, low production costs for GG. Jim Cramer ("Real Money") is pimping KRY, a Venezuelan gold mine, and sees 10 a share on the horizon. I bit for 100 shares.

My avian flu plays have been mixed. Vaccine maker Chiron was bought out for $48 a share; I was in at 45.50, so no complaints. SNY is also up several points. Kimberly Clark is slightly under water from where I recommended, but the gains there are likely to come after a pandemic begins. And the bear market funds? Down, down, down as the broad markets are up, up, up. Are they blind to the impact of soaring energy prices on the economy, on inflation? Don't they care about the falling dollar? Inflation? War costs out of control? A White House hell bent on conflict with Iran? More upside is possible, but I think there's a ceiling at Dow 12,000 and this might be a wise time to add some BEARX or RYURX as a hedge.

[avian flu]

Avian Flu? It's Your Fault!

2006-03-28T21:31:00.000-08:00

I figured it was just a matter of time before the blame game began, but I didn't think it would happen this soon. PETA, People for the Ethical Treatment of Animals, is blaming non-vegetarians for avian flu.

The cramming together of thousands of chickens in buildings where the birds are never allowed outside and live in their own filth was an ideal breeding ground for disease, the group said in a statement.

PETA even has a web site to drive the point home: http://www.avianflu.cn/index-en.asp

The splash page begins: "If you haven’t gone vegetarian yet, you need to read this now. When we asked nicely, you didn’t listen. We spent years exposing the cruelty of factory farms and the dangers of eating fat-, cholesterol- and drug-laden animal flesh. We appealed to your sense of compassion, but you didn’t care enough to make the switch to a cruelty-free diet. And most of you ignored the warnings about animal-borne diseases such as mad cow and SARS."

The good news for PETA is, avian flu will turn a lot of people into vegetarians. No harm there. I've been a veg for 30 years and I'm in excellent health. But it's bad news for farmers and industries that depend on raising and killing birds to survive. In some countries those businesses are suffering huge lossses -- and the flu hasn't even mutated yet. The time to get out of investments in ANY poultry-related company is now.

And I'd stay away from beef too. That sneaky mad cow stuff is still a potential threat.

Good buys? A while back I mentioned Del Monte (DLM) as a buy. People buying canned fruits and veggies for their food stockpiles could benefit Del Monte. For a tired old big board stock, DLM's on a tear these days, up some 8%.

http://finance.yahoo.com/q/bc?s=DLM&t=6m

There's a little pullback today and we could see some more softening, but I'm keeping an eye on it.

[avian flu]

Strip Clubs and Naughty Bankers

2006-03-24T19:58:00.000-08:00

The other day on his AM radio program, Mad Money stock guru Jim Cramer revealed that many Wall Street deals are made not in corporate boardrooms or swanky restaurants but (are you ready) in strip clubs. Yup, there's nothing like an evening of liquor and lap dances to get the client to sign on the dotted line. And the best part is, you can write off that $3,000 tab because it's all tax deductible.

Cramer went on to sing the praises of the only publicly-traded chain of strip clubs in the US: Rick's Cabaret International Inc. (RICK), That's right guys, you can invest in titty bars and you might even get away with writing off an evening of debauchery as a business trip to check on your investment. At $6+ a share, Cramer didn't think RICK had much room to grow unless they opened more clubs.

But in the event of a lethal flu pandemic, the lap dance business will probably drop off faster than a dancer's thong, and the idea of a hottie gyrating in an N95 particulate respirator and latex gloves ... well, you get the idea.

RICK could make a good short play in a pandemic though. Most people will be avoiding any more public contact than is neccessary and a bird flu could do what Bible thumpers have failed to do, shut the doors on the clubs and send the birds packing.

*********

While I'm on the subject of debauchery, here's a true story about a high-level Canadian banking executive shocked to learn he'd been fired after he drank 10 beers and 14 rum and cokes, then brought a prostitute back to the office and left her there unattended while he staggered home. He's suing for wrongful dismissal. Still, within days of getting sacked, he landed a new gig at (attention investors) National Bank Financial (TSX:NA), and took about one-third of his $125-million book of clients with him. Good times.

[avian flu]

Planning for a 50 percent mortality rate

2006-03-17T20:06:00.000-08:00

The most common scenario painted for a possible worldwide flu pandemic is 150 million deaths, with perhaps 2 million of those in the United States. But that's not the worst case scenario. Not by a long shot.

One scientist who's not afraid to speak the unspeakable is Robert G. Webster, the man credited with discovering the link between bird flu and human flu.

"Society just can't accept the idea that 50 percent of the population could die. And I think we have to face that possibility," Webster says. "I'm sorry if I'm making people a little frightened, but I feel it's my role."

Webster may be basing this blunt declaration on the fact that roughly half of those known to have caught the avian influenza from bird have died.

Imagine if 1 in every 2 people living on the planet today were to die in the space of 18 months? That would cut world population from the current 6 billion to 3 billion. That's more than enough people to run the planet. We did quite nicely with only 1 billion at the dawn of the industrial age in the 1800s. But a downsizing that big in such a short timespan has enormous ramifications.

First, we can throw out the possibility of hunting for the winners in the market basket of stocks. Sooner or later all the markets will tank. Stock market and bank "holidays" are a strong possibility. It won't be business as usual.

The psychological blow would be unprecedented. Everybody will lose loved ones - close family members. Society will be ripped apart. Tens of millions of children will be orphaned. Hundreds of millions of families will lose their wage earners. Economic activity will grind to a halt. Faced with a 50/50 chance of dying if you go to work, who wouldn't stay home? Fear and depression will have a huge impact on consumer behavior.

Housing markets worldwide will collapse as entire families die or are forced to abandon their homes. Demand for everything from food to oil to coal to steel to concrete will collapse.

Al Queda will be giving props to the flu for doing what they could only dream about: bringing western civilization to its knees. And this will make some environmentlists very happy. In one short, sharp blow, we'll radically reduce greenhouse gas emissions and the exploitation of natural resources. And solve the population problem too. There will be a lot more of everything to go around, which means you'll see deflation like you've never seen before.

We haven't seen a death rate like this since the black plague in the late 1300s, when an estimated 1/3 of Europe's population died. And it wasn't just Europe. The plague cut a swath through Palestine and Syria and entire rural provinces were totally depopulated. Syria lost a total of 400,000 people.

But that was nothing compared to what happened in China. The initial outbreak of plague in the Chinese province of Hubei in 1334 claimed up to ninety percent of the population, an estimated five million people. During 1353–54, outbreaks in eight distinct areas throughout the Mongol/Chinese empires may have caused the death of two-thirds of China's population, often yielding an estimate of twenty five million deaths.

The fallout from that was a sea change in the structure of feudal Europe. I'll cut and paste here from Wikipedia, which explains that "the sudden scarcity of cheap labour provided an incentive for landlords to compete for peasants with wages and freedoms, an innovation that, some argue, represents the roots of capitalism, and the resulting social upheaval caused the Renaissance and even Reformation. In many ways the Black Death improved the situation of surviving peasants. In Western Europe, because of the shortage of labour they were in more demand and had more power, and because of the reduced population, there was more fertile land available."

Before anybody gets too excited, the author goes on to point out that it took about 120 years for these benefits to be realized. But eventually the plague's great population reduction brought cheaper land prices, more food for the average peasant, and a relatively large increase in per capita income among the peasantry.

But there were growing pains. Human beings haven't changed that much since then, and given a similar mortality rate (say a 1 in 3 death rate) we can expect:

Renewed religious fervour and fanaticism

A turning away from religion

Persecution of anybody held to be responsible. Given the human penchant for ignoring the facts, this could be anybody. The 1918 flu was known as the Spanish Flu, even though it started in Kansas. Back in the 1300s, Jews were the whipping boys. If this flu starts out in China, all Asians could suffer in the blame game.

Looting, piracy and a thriving black market.

Fixation on death and morbidity which will be reflected in art and culture. Attention goths. You'll fit right in.

If it looks like we're headed down a road like this, your best investments might be a piece of fertile land, basic tools for building and farming, a few guns and plenty of ammo, a couple of Euell Gibbons wild food books, some rabbits and chickens and a few Amish friends who know how to get things done without cars or electricity. For the short term, bear market funds and PUT options will do well, so long as you cash in before everything collapses or "profiteering" becomes a crime. Gold has always held value as a means of exchange, so unless the rules are completely rewritten, that should still hold true.

Robert Webster, by the way, says he's got 3 months worth of food and water stocked away, enough for a 150 million death pandemic, but certainly not enough for a slaughter in the billions. Not even the Mormons have enough to ride that out.

So stay flexible and be prepared to adjust your investment strategy quickly as events unfold. And have a nice weekend. :)

[avian flu]

Tuna Options Anyone?

2006-03-13T18:08:00.000-08:00

After Health and Human Services Secretary Mike Leavitt suggested Americans stash extra tuna and powdered milk under their beds, I wonder if I should be checking out tuna futures. Or buying Call options on powdered milk.

Stashing supplies for an emergency is a good idea, bird flu or no bird flu. Floods, hurricanes, terror attacks ... you never know what's coming down the pike.

You could buy Del Monte (DLM). They manufacture, market, and sell fruit, vegetable, tomato, broth, infant feeding, tuna, and soup products. But the boost will be shortlived. People might stock up, but they won't eat more.

But how about Kimberly-Clark Corp? (KMB) manufactures disposable face masks and is a leading maker of disposable medical goods, including surgical gowns and face masks. We'll all be using a lot more of those.

[avian flu]

The VLJ Alternative to Airlines

2006-03-12T11:48:00.000-08:00

I've blogged a few times about how an avian flu pandemic will batter the airlines, especially international carriers with a focus on trans-Atlantic and trans-Pacific routes. The air within a modern jet cabin is recirculated frequently (I thinks it's between every 3.5 to 7 minutes), but not frequently enough. People are packed tightly together. It's a great place for a highly contagious virus to find a new host. (Pilots have their own air supply.)

A lethal pandemic will give a huge shot in the arm to the nascent air taxi/VLJ industry. VLJs are Very Light Jets, a new generation of jets that are smaller and lighter than conventional business jets. VLJs have a minimum take-off weight less than 10,000 pounds (4,540 kg) and are approved for single-pilot operation.

A number of entrepreneurs are planning to launch on-deamand air taxi services that could provide service at a per head cost comparable to full-coach or business-class fares on commercial airlines. And they can land where the big jets can't. This can save a busy executive hours of driving from major airports to smaller towns and cities, enabling them to visit multiple sites in a single day and, perhaps, avoid overnight stays away from home. Factor in the savings on overnight lodging and rental cars, and this kind of travel becomes very competitive.

Now factor in the flu. There's no guarantee that a fellow passenger on a VLJ isn't infected (and asymptomatic). But the odds are lower than they'd be on a 300-passenger widebody. And if they're all colleagues you have a little more control over your situation and the behavior of the people on the plane. You could require everybody to wear masks.

Possible winners? DayJet, a Delray Beach, Florida startup which plans to offer service later this year. And Stratford, Connecticut's Pogo, headed by former AMR CEO Bob Crandall.

Business Week has an excellent article on the air taxi business.

I'm not aware of any air taxi investment opportunties here - not yet - unless you have the bucks to be a private backer. But you can invest in Embraer-Empresa Brasileira De Aeronáutica S.A. (ERJ), which manufactures commercial jets up to 110 seats and is an entrant in the VLJ market.

Manufacturers:

Eclipse Aviation – Eclipse 500, Twin engine (Pratt & Whitney), 6 seats, due 2006

Cessna – Cessna Citation Mustang, Twin engine (Pratt & Whitney), 6 seats, due 2006

Adam Aircraft Industries– Adam 700, Twin engine (Williams International FJ33), 6 seats, due 2006

Embraer Phenom 100 - Twin engine (Pratt & Whitney Canada PW617F), seats 6 to 8, due mid-2008.

Excel-Jet Ltd - Sport-Jet, Single engine (Williams International), 4 seats, due 2006

Diamond Aircraft - D-Jet, Single engine (Williams International FJ33-4), 5 seats, due 2007

Aviation Technology Group - Javelin, Twin engine (TBC), 2 seats, due 2007

Avocet - ProJet - TBC, Twin engine (TBC), 6 seats, due TBC

Aerocomp - Comp Air Jet, Single engine (Walter Titan/Ivchenko AI-25TL), 8 seats, due TBC

[avian flu]

Airlines in Peril

2006-03-11T09:02:00.000-08:00

It's a given that airlines will take a beating in a pandemic, but some airlines are more vulnerable than others. A Citigroup analysis targets long-haul international carriers as particularly at risk.

Citi says British Airways, Lufthansa, Air France and Iberia — who operate mostly long-haul international routes - "are particularly exposed to traffic and revenue declines should Avian ‘flu reach pandemic status." Also on the chopping block: Australia's Qantas Airways.

[avian flu]

Uncle Sam's Forecast

2006-03-11T07:27:00.000-08:00

A few months ago the Congressional Budget Office prepared an assessment of the possible macroeconomic effects of an avian flu pandemic. You can read it here.

I've pulled out a few highlights:

The virus would spread widely in a very short time. On the basis of experience with severe acute respiratory syndrome (SARS) in 2003, a pandemic influenza virus would be expected to cross national borders very rapidly.

A rapid surge in the number of cases in each affected area would occur very quickly, within weeks. The number of cases would vary with the severity of the outbreak, but there would be a sharp increase in demand for medical services.

The pandemic would probably spread across geographic areas and vulnerable populations in waves. In any given geographic region, each wave could last for three to five months, and a second wave could appear anywhere from one to three months after the first disappears.

The report predicts the economic effects would be greater than in recent recessions and roughly the same size as the average postwar recession.

"Nonessential activities that required social contact would be sharply cut, which would lead to significant declines in retail trade. People would avoid public places, such as shopping malls, community centers, places of worship, and public transit. Attendance at theaters, sporting events, museums, and restaurants would decline. It seems likely that many schools would close, and even if they did not, attendance would fall dramatically as parents kept their children at home."

"The general slowdown in economic activity would reduce gross domestic product (GDP). Business confidence would be dented, the supply of labor would be restricted (owing to illness, mortality, and absenteeism spurred by fear of contracting the disease), supply chains would be strained as transportation systems were disrupted, and arrears and default rates on consumer and business debt would probably rise somewhat. It seems quite likely that the stock market would fall initially and then rebound later, as it did in Hong Kong during the SARS episode."

Much of the report focuses on the ability to manufacturer and distribute vaccines and anti-viral drugs, and the role government would play in the effort. Sobering and worth reading.

[avian flu]

America's Most Vulnerable City

2006-03-10T20:56:00.000-08:00

In the event of a flu pandemic, America's most vulnerable city isn't New York, Chicago or Los Angeles. I think it's Las Vegas.

Tourism and gaming are the major forces behind Las Vegas' economy. $9 billion dollars a year is spent on gaming alone. In turn, that feeds the restaurant and retail industries. Taxable sales in Clark County are over $32 billion a year. A pandemic could quickly wipe all that out overnight.

Most tourists arrive in Las Vegas by airline. I don't think anybody will argue that a lethal pandemic will effectively shut down the airline industry. People won't fly unless they have to.

And when people do venture out, they'll avoid places where there's a high level of human contact. The media reports a majority of Americans will hole up at home. They'll cocoon. Who in their right mind would choose to risk infection sitting shoulder-to-shoulder with strangers at a blackjack table, crowd around a craps pit or play the same slot machines hundred of other potentially ill people have been touching?

How vulnerable are casino stocks? Let's use September 11th as a benchmark. The casinos are going to take a beating, and here's the hit list:

Harrah's Entertainment (HET). Trading around 20 after 911, it's now in the 70s and has a long way to fall.

Boyd Gaming Corp. (BYD), frothy in the mid 40s sank as low as 3.50 after 911.

MGM Mirage (MGM) You can buy it today for 38, up modestly from a high in September 2001 of 29 -- and a low of 16.

Sands Regent (SNDS) trades around $10, up from 2 after 911.

Riviera Holdings Corp. (RIV) traded at 4 after 911 and is now tapping 16.

Trump Entertainment Resorts Inc. (TRMP), listed last summer, is touching support around 16.

Casino holding companies don't only operate in Las Vegas, but the story will be much the same for Atlantic City and the typically jam-packed St. Louis riverboats. As a short play, this one seems obvious, but based on today's prices, investors don't appear worried.

[avian flu]

Chicken Little Investing

2006-03-10T19:47:00.000-08:00

Economics consultant Donald Luskin published his list of 21 companies involved in vaccines, testing, therapies, and nonfowl food production in SmartMoney.com. They've had a nice run since September, 2005, and he thinks there's more upside there.

[avian flu]

Investing in Vaccine Makers

2006-03-08T23:20:00.000-08:00

Personally, I don't believe vaccine makers will be able to stop a pademic, or even make a dent. Viruses mutate too rapidly and, more importantly, we lack the infrastructure to manufacture an adequate number of doses quuickly enough, let alone the delivery system to get them to every citizen in time. But that won't stop the government from trying.

Governments are spending billions to fight this epidemic, and so far the victims are mostly birds. They'll spend billions more when the virus mutates into a form that is transmissable among humans. In the equity markets, perception alone will be enough to drive up the share price of any company that investors believe will benefit from massive government spending programs.

Sanofi Aventis (SNY) should be a big winner. Last September the pharmaceutical giant won a $100 million avian-flu vaccine contract. Development hasn't started yet, and can't be until a human-to-human strain exists. Nonetheless, the stock is in a steady uptrend.

SNY already manufactures flu vaccines, sales of which rose 25% in 2004 and almost 30% in 2005. Disclosure: I'm buying SNY.

[avian flu]

Asleep at the Wheel

2006-03-06T19:01:00.000-08:00

Seattle, Washington is one American city that is taking bold steps to deal with a pandemic now.

I live in Portland, OR, 160 miles to the south. Seattle is not only the closest large city to us, it's the only large city anywhere close to Portland. You have to travel 600 miles to the south before you reach another large metropolis: San Francisco. So Portland is usually pretty aware of what's happening in Seattle.

I decided to write to city officials to find out what Portland was doing to prepare. Apparently, not much at all. For the record, I wrote to councilman Dan Saltzman (Public Affairs), Erik Sten (Public Works), Randy Leonard (Public Safety), Portland Mayor Tom Potter and David Bragdon, preisdent of the regional government we call Metro.

Only Mayor Potter even bothered to answer. An aide wrote back:

We take the threat of avian flu seriously and are prepared to work with our County and regional partners in the event of an epidemic. Should an epidemic emerge, the City's primary role is to maintain order, ensure safety, and distribute resources. The Multnomah County Health Department will be primarily responsible for treatment and prevention.

Prepared to work? Sounds like nothing has been done, but if something happens, they'll think about it then. When the time comes.

I then asked if my company, a large corporation with some 300,000 employees worldwide, was making contigency plans to deal with reduced staff or letting people work from home to avoid catching the bug. I checked the company webiste. It seems we aren't making any plans either, or they aren't telling the rank and file. (Maybe the plan is to fly top management to some mountain retreat where they can deal with the pandemic from a distance.)

I'm not going to say where I work. I'd like to keep my job. But if you have a sizeable investment in a company -- perhaps the one you work for -- you might want to ask Investor Relations what they're doing to prepare.

[avian flu]

Bird Flu Threatens US Poultry Industry

2006-03-05T09:35:00.000-08:00

U.S. Health and Human Services Secretary Michael Leavitt has warned that the avian flu is headed for the United States. That's an immediate threat to the $29 billion US poultry industry.

Avian flu is already spreading throughout France, where authorities are creating protection zones and other nations are banning poultry imports from France. From one small outbreak on a turkey farm, France is now losing 40 million Euros a month.

The danger for the poultry indudstry is that consumers will stop buying chicken and turkey out of fear they would catch the flu by eating the cooked meat. There's no evidence to suggest this is true.

Canada's CNEWS reported recently on reactions among Canadian farmers, and the news is not encouraging. They say public fear and misunderstanding about the H5N1 virus is a bigger economic threat than the virus itself.

The Gulf Times reports signs of panic in Europe:

A French mayor banning chicken from school canteens, Germans abandoning cats by the hundreds, Greeks and Italians virtually axing poultry from their diets are all signs that a worried Europe is inching toward what some have called a bird flu psychosis.
Europe’s poultry industry is counting the multi-million-dollar cost of the spread of bird flu in lost sales.

In Greece, poultry consumption has plummeted by 75% in three weeks. In Italy, poultry meat sales have dropped off by 70% and many butchers have simply stopped selling chicken and duck altogether. In India, consumption has dropped by about 25 percent. Poultry prices in Russia are falling, with industry demanding protectionist import quotas.

Some states are already making plans to destroy flocks if US birds are infected.

The industry has launched a web site to convince American consumers that poultry is safe to eat: http://www.avianinfluenzainfo.com/. Unfortunately rumor and fear can hold sway over fact.

Links

Living on Earth has a good story on steps farmers take to protect consumers and their flocks.

[flu pandemic]
[avian flu]

Cashing in on the Vaccine Promise

2006-03-03T18:04:00.000-08:00

The FDA announed today that it will cut some of the red tape that slows the delivery of a new vaccine to market. In one of the more misleading headlines of the day, CNN says "FDA to speed new flu vaccines to market." What's actually happening is that the FDA has published some guidelines and, reflecting their keen sense of urgency, is giving the public 3 months to comment on them. The avian flu could mutate next week and kill millions long before that happens. Let's hope not.

The article goes on to say "eventually, the guidelines could knock one to two years off the time it takes to develop and license a new flu vaccine." This is like fighting forest fires with a dixie cup.

What's more, there's no strong evidence that flu vaccines are of any benefit. Several years ago, the US ran critically short of vaccine for the seasonal winter bug and we all survived. The reason vaccines are of questionable benefit is because they are based on the previous winter season's strain of influenza. Viruses mutate rapidly, and within a year may have changed enough that the immunization is worthless. The H5N1 virus has already mutated in birds from its form a year ago.

Nonetheless, it seems clear governments will spend billions on vaccinations, and investors who get in on the stocks of vaccine makers such as Glaxosmithkline plc (GSK)could cash in bigtime. The time for this play is before and just after the flu actually hits.

Footnote: Just found a good article advising businesses to plan on huge numbers of sick workers.

[avian flu]

China

2006-03-02T19:48:00.000-08:00

I just read in a recent back issue of the Wall Street Journal that the US gets 85% of its Vitamin C from China, up from virtually none at all ten years ago. We're talking raw materials here, not little bottles if pills. It's probably the last you think of when you think of Chinese exports.

Meanwhile, a company I've done some work for is switching some of it's manufacture of lighting fixtures from Vancouver, Washington to China.

A whopping ten percent of Chinese exports end up on Wal-Mart's shelves.

At the same time, China is the world's leading consumer of concrete, steel, iron-ore, aluminum, copper and coal.

And China exports a key ingredient in the manufacture of Tamiflu.

Suppose a flu epidemic broke out in China and suppose, by some miracle, it was contained? We will all feel China's pain.

[avian flu]

Speculative plays

2006-03-01T19:52:00.000-08:00

Trying to predict the outcome of an unprecedented event is risky business. That's why I would commit most funds to the safest possible investments, such as treasuries and money market funds, even if the interest rates are modest and the chance for capital gain nill. But what about those funds we can afford to lose, funds we can speculate with?

First, I don't see any shame in trying to seek gains during a tragic event. Investing has always been about avoiding what will cause us loss and acquiring that which will gain. Nobody blames the investor who buys an income property in a neighborhood where growth is expected, or who sells one in a declining district. In good conscience we should shun investments that are likely to suffer, such as transportation, hospitality and non-essential retail. And speculators who short the market or purchase put options will benefit from a declining market, but they are not the cause of the decline. It is, in fact, the shorts covering their bets, who are the first to begin buying at a market bottom.

While the impact of a pandemic will be almost entirely negative and widespread, certain sectors will suffer greater declines than others. Even in the SARS epidemic of 2003, which was largely contained and killed about 1,000 people, the travel and hospitality sectors were slammed. Tourism plunged. Attendance at theatres and other public attractions declined sharply.

The same will happen when the next epidemic or global pandemic strikes. I also believe that any non-essential business that requires close and prolonged human contact will be decimated. (If you could short the lap dance business you'd make a killing.)

Regis Corp (RGS), which owns and franchises beauty schools, hair restoration centers and hair cutting shops (Supercuts, Jean Louis David, Vidal Sassoon, Regis Salons, MasterCuts, Trade Secret, SmartStyle, and Cost Cutters) will probably suffer sharp declines. I predict the same for crowded little coffee shops like Starbucks (SBUX).

Analysts also believe that consumers will shun eggs and poultry products. Purdue Farms is well aware of this and has devoted a full page on its web site to the subject. Perdue is privately held, but publicly traded Yum Brands (YUM), owners of Kentucky Fried Chicken and Pizza Hut, could get walloped. The stock is currently trading at a healthy PE of 19.11 and is at an all-time high.

I expect gyms will be shunned as well. The prospect of sharing sweaty equipment with people who may be infected should scare off all traffic. Bally Total Fitness (BTF) is publicly traded. Gold's Gym and 24-Hour Fitness are privately held.

On the upside, Del Monte (FPD) could benefit as the company focuses on canned fruits and vegetables. Consumers are expected to switch to a more vegetarian diet and stockpile canned and dried goods.

And then there's coffin maker Hillenbrand (HB). The company also provides products and services for the health care and funeral services industries worldwide. Even pays a 2.2% dividend.

Bare Shelves and Empty Stomachs

2006-02-28T19:52:00.000-08:00

I've been reading a study prepared for the grocery and food service industry analyzing the impact of an avian flu pandemic. The industry expects restaurant sales to "evaporate", significant disruptions to the supply chain with resultant product shortages, travel and transport restrictions and a surge in employee absences. It's a well-written, thoughtfully prepared document and I encourage everyone to read it.

The study expects the initial outbreak of the pandemic to be characterized by widespread panic, rumor, irrational behavior and a surplus of media hype. And that's just for starters. The industry anticipates the potentional for warehouse raids and food truck hijackings and warns that drivers may refuse to work or drive to areas where outbreaks are severe.

The food industry is not alone. Even given the best-case scenarios, I think prudent preparation includes expecting bank closures, stock market shutdowns and ATMs that run out of cash. Even if you protect your investments by purchasing T-Bills, T-Bill money market funds like FDLXX, gold bars or shares in GLD or bear market funds, that protection does little good if you can't translate your assets into money you can spend. And if your family, neighborhood or city is quarantined, even your personal mobility may be restricted.

A prudent financial survival plan should include:

Plenty of cash on hand, enough for several weeks at the very least, and ideally enough for several months worth of essentials such as food, fuel and medical supplies.

A stock of non-perishable canned and packaged food, and some bottled water. Power supplies and other utilities could fail, so frozen food is not a good option.

A stock of N95 particulate respirator masks. These will be in short supply.

Items for black market trade. I'm not suggesting profiteering. Shortages created by panic buying and supply chain disruptions always create a black market. Always. Goods for trade will be more valuable than cash in anything other than a best-case scenario. Food, 9N5 masks and medicines (of all kinds) will make excellent barter items. Unfortunately, alcohol and cigarettes will probably also be in high demand. And since transportation might be limited by government to only the essentials, non-essential consumables such as cosmetics and beauty aids could be in even shorter supply.

Finally, keep a paper record of all bank account and brokerage statements. In the event that temporary system meltdowns erase your data, you'll be happy to have them.

Loss Even in the Face of Demand

2006-02-27T18:01:00.000-08:00

In John Barry's excellent history of the 1918 influenza pandemic, he recounts how rapildy some people died from the killer flu that swept the globe. In one anecdote, a commuter tells how the conductor on the streetcar he was riding on dropped dead right before the passengers. A short while later, the operator also died. It's a shocking anecdote, but now extrapolate such a tale to modern times.

Imagine if the pilot and co-pilot of a wide-body jet on a trans-Pacific flight were to both die in mid flight? Horrifying as this may be for the passengers on board, the impact on air travel and world commerce - for those still brave enough to fly - is incalculable.

In 1918, flu swept through ships infecting crew and passengers alike. Today, virutally everything we eat, wear or build depends in some way on the smooth operation of international ports and global shipping. Influenza could kill or incapacitate crew members, leaving them too weak to work for days or even weeks. Without officers or navigators, what would happen to ships trying to dock in ports or navigate the Panama or Suez canals?

This is why I have doubts that any market sector, other than funeral homes and crematoriums, will profit from a pandemic. Admittedly some sectors could benefit, but there are ample reasons for caution. While a pandemic will create an immediate and urgent demand for health care, from physicians and nurses to masks and respirators, it's doubtful that the delivery systems will be able to meet that need.

Just-in-time inventory management and tight supply chains give Western nations very little wiggle room. Even in its current state, the supply chain would be incapable of meeting the demand. Now assuming the supply chain is disrupted (which is likely), it will be unable to meet the need. Simply put, you can't make money if you haven't got the product to sell. Attempts to dramatically inflate the cost of medical supplies will result in charges of price gouging and government controls. To be sure, there will be price gouging, but this is not a scenario for healthy gains.

In 1918, the prices of commodities from butter to petroleum did increase, but this doesn't neccessarily translate into increased profitability. Price increases hurt everybody; when gas goes it it costs more to bring butter to market.

I believe a bearish, protective strategy is safer than attempting to predict who the winners will be. I recommend putting a significant chunk of your savings into short-term US Treasury Bills, ideally via a T-Bill only money market fund such as Fidelity's FDLXX.

Who Loses When We Stay Home?

2006-02-26T08:23:00.000-08:00

I'm still thinking about the recent survey showing that most people will hunker down, stay at home and avoid contact with other people in the event of an outbreak of avian flu. It makes sense. It's probably the strategy I'd follow.

I spent some time at a busy downtown mall yesterday chatting with a friend. The mall was packed with shoppers but, as my friend surmised, most of it is impulse shopping. In a pandemic, I thought, this place will look like a ghost town. What will the impact be on chains like Eddie Bauer? If you really need clothing, Eddie Bauer sells by mail order.

We stopped at Starbucks for coffee. Starbucks is much more than a coffee vendor though, It's become the modern day general store. People hold business meetings at Starbucks, friends rendevouz, it's a safe place to meet that boy you've been chatting with on MySpace. You can't buy a latte on the internet. In a pandemic, people will avoid contact with people. Starbucks will take a nosedive and we'll use Ma Bell and the internet to stay in touch.

Any product or service that requires a lot of human contact, or is non-essential, is in peril. In a recession, people stop buying furniture before they stop buying food.

The last time people stayed close to hearth and home in significant numbers was 911. Travel and tourism took a huge hit. And comfort food and feel-good products got a boost. If your portfolio is heavy in any industry that depends heavily on human interaction, I believe it's at significant risk.

If you aren't comfortable with selling, consider bear funds and Put LEAPS as a hedge.

Rydex Funds RYAIX is a fund designed to rise in value when the NASDAQ 100 falls. If the NAZ falls 5%, RYAIX climbs 5%. I also like RYURX, which does the same for the S&P 500. For a more aggrssive strategy, URPIX has daily return characteristics that are twice the inverse of the S&P 500 Index. A 5% drop in the S&P means a 10% gain in URPIX. Of course a 5% gain in S&P means a 10% drop in URPIX.

Put LEAPS are long term options that let you sell a stock at a given price. Like any option, they're wasting assests. They have expiration dates and they lose value as they approach those dates. But you never risk more than the price of the option, and the leverage is amazing.

Let's take Starbucks as an example. Starbucks coffee is a non-essential commodity that will take a huge sales hit if people stay home. It has international exposure and is highly dependent on the shipping and trucking infrastructure to deliver coffee beans from foreign countries. Quarantines, border closings and port slowdowns (sick workers) all spell trouble for Starbucks.

SBUX is doing nicely right now, trading at almost 36 up from 26 a year ago. For $3.60 a share, you can buy the right to sell SBUX at 35 at anytime until January 2008. The symbol for this LEAP is WSPMG. A little closer in, you can buy a PUT at 35 for about $2.50 a share with a January 2007 expiration (VPRMG). The value of that in-the-money option will increase with any drop in the price of Starbucks. And as long as SBUX trades below 32.50, it will be a proftiable position regardless of how close the expiration date is. These options are just slightly in the money now, and the premiums are very reasonable, nothing like the premiums on the wildly gyrating energy stocks. I like SBUX Puts as an avian flu hedge.

Housing Bust and Opportunity

2006-02-25T19:19:00.000-08:00

Among the economic impacts of a lethal flu pandemic, experts list a housing bust as a strong likelihood. As businesses fail or cut back to survive and unemployment soars, millions will be unable to meet their rent or mortgage payments. Others will suffer loss of income from forced quarantine. Most grim of all, homes and apartments will go on the market because their occupants have died.

The impact will be most severe in large cities, where density will contribute to higher morbidity and mortality rates. This was the case in 1918.

But the pandemic will pass, and those who have kept their debts low and placed liquid assets in safe havens will be able to purchase homes, commercial property and farms at bargain prices. The prudent course (for American investors) would be to keep a bulk of our savings in US treasury bills, in cash or T-Bill money market funds. I stress the T-Bill because most government money market fund or government bond funds are heavily weighted in mortgage-backed securities. Notes issued by Fannie Mae are not backed by the full faith a credit of the United States government.

Gold bullion, coins or the gold tracking stock GLD should fare well. Gold is likely to spike in the initial panic at the beginning of a pandemic, and remain high until fear is gone. That could take some time. The psychological blow of losing loved ones, coworkers and neighbors and the likely failure (real or perceived) of government to deal effectively with the emergency will impact public psychology for some time to come. (Seven hundred years later, we still remember the black plague.)

For more speculative investors, the hosuing bust could be played by investing in SRPIX, a mutual fund designed to gain in a falling real estate market. The fund is based on commercial as well as residential indices and ha sfared poorly so far this year. Other plays would be to short or buy PUT options on large homebuilders such as Toll Brothers (TOL), Lennar (LEN), D.R. Horton (DHI) and Pulte Homes (PHM).

There are too many uncertainties to engage in speculation with more than a small portion of our assets. In a deflationary scenario, cash will be king and safety the best strategy.

The Recluse Strategy

2006-02-25T00:43:00.000-08:00

A report this week reveals that 6 in 10 Americans are worried about an avian flu pandemic. That means some 120 million people are living in denial. But even mong those who profess concern, most see the odds of a pandemic the year as low. I hope they're right.

Read the story here in the Washington Post.

The story contains some big clues for investors. About 46 percent of respondents who eat chicken said they would stop eating it if bird flu hits the U.S. poultry industry.

If human outbreaks occurred, 75 percent said they would reduce or avoid travel, 71 percent said they would skip public events and 68 percent said they would stay home and keep their children at home while the outbreak lasted.

Losers? This spells disaster for restaurants, clubs, poultry producers, sporting events, theatres, airlines, hotels, tourist attractions or large mall-based retailers. Great opportunities for traders who want to go short but I wouldn't want to hold stock in any of these industries. Consider the ripple effect too. Industries that supply these sectors will take an equally big hit.

Aljazeera reports on the devastation of the poultry industry in Egypt.

Possible winners? Online retailers and the techies who keep them up and running. Online or cable entertainment. UPS.

Expect anybody who can work from home to exercise that option. Gas sales will suffer, but if oil and gas industry workers are sick, supplies may also fall.

Share your thoughts on winners and losers. Please comment.

Preparing for Pandemic

2006-02-24T00:42:00.000-08:00

Avian flu is now spreading rapidily among the world's bird populations. Of greater concern: the flu is infecting birds in Nigeria and Egypt, poor countries whose weak health infrastructure increases the liklihood that human will catch the disease from birds. The odds of the virus mutating into a form that can infect humans increases with every human infection.

The consequences are spelled out graphically in The Great Influenza, John Barry's chilling history of the 1918 influenza pandemic. If you haven't read it, you probably don't know what you need to know.

What surprises me is that attention is given in the financial press to the consequences for the average investor. Conservative estimates of the impact of an avian flu pandemic are a 5% drop in world GDP -- a moderate recession. I believe the consequences will be more severe and that investors who believe it will be business as usual are misinformed or in denial.

The purpose of this blog is to provide a forum for reviewing what we know today, for gathering new information as it becomes available, and exploring investment strategies toprotect our assets when an avian flu pandemic becomes reality.