The Mexican Flu of 2009: Potential Economic Shocks Ahead

Monday afternoon on CNBC's Fast Money, Guy Adami said "the flu trade is over." Guy was referring to bidding up a basket of pharma and biotech stocks that could benefit from a flu pandemic (drug and vaccine stocks), and, shorting stocks that would be hurt by same. Guy is a terrific trader and for the time being I wouldn't doubt him.

That being said, there's a potential reality that the market hasn't priced in yet: a severe, economically crippling flu pandemic. In my previous article yesterday, I described some of the basic virology of the Mexican Flu, and left it at that. I stayed home today, ironically, with a cold, and had a chance to watch a segment on "The Situation Room with Wolf Blitzer" featuring Dr. Ira Longini.

Dr. Longini didn't have much "personality" on TV, in fact, he was the sterotypical dead-pan professor. A couple years ago the CDC asked Dr. Longini to do some mathematical and computer modeling of the spread of a hypothetical virus. Even starting with just a handful of cases across the country, much like we see now, the virus speads exponentially within a few months to a very high level of infection.

Surprising to me, travel restrictions and isolation techniques did not meaningfully alter the rate or the intensity of the epidemic. Treatment with anti-viral medications decreased the infection rate, but did not alter the overall spread of the disease. Medications like Tamiflu should not be taken prophylatically "just to make sure" you don't get sick; they need to be taken within the first 48 hours of the onset of symptoms.

I was shocked by the potential spread of the hypothetical virus in his simulations. However, according to the report, even new flu outbreaks tend to follow seasonal patterns, so the U.S. could be spared until the Fall. However, this is the beginning of the flu season in the Southern Hemisphere, and countries like Australia, New Zealand, etc. could be impacted.

The World Heath Organization has upgraded the current Mexican Flu outbreak to "stage 4" (sustained human to human transmission). Given this categorization, and Dr. Longini's modeling, the Mexican Flu may become a significant public health and economic event. Much as the credit crisis caused many economies to come to a grinding halt, an epidemic/pandemic would likely have an even more severe short-term impact. The stock market has a way of seeing though the short term, and a Mexican Flu pandemic may not be anything more than "a trade."

But I wouldn't be surprised to see some serious downside jolts economically and in the stock market as the Mexican Flu makes its way around the world.

Disclosure: No Positions (porfolio 100% cash)

Comments

[YoYoMama:]

Overblown media frenzy. We're in Texas, and even with Mexico as our backdoor neighbor we aren't worried.

Apr 29 09:40 AM

[ETFdesk.com:]

YoYo, I think you are being a little short sided here. Yes, the chance of imminent death, or frankly, infection is very small. However, that does not mean it will not have severe consequences to some people and countries around the world. Mexico will certainly feel some economic pain from this, as will other countries, the longer this is still an issue. Public health, or other disasters for that matter, should not be categorized by the number of deaths it causes.

Schools closing for extending periods of time, paying overtime for police, health officials, overbooked hospitals, canceled flights, vacations, etc. etc. all have an economic cost.

Apr 29 12:05 PM

[raytayzmd:]

...empty speculation...the most pertinent line from a federal reserve report written two years ago:

"Despite the severity of the 1918 influenza, however, there has been relatively little research done on the economic effects of the pandemic."

...ultimately, the economy will adapt and survive just as it did in New Orleans after Katrina...and no crystal ball is sufficently clear enough to predict the effects on the stock market...the fed report can be read here:

stls.frb.org/community...

Apr 29 02:39 PM

[Dr. O:]

The WHO raised the "phase" of the pandemic alert today to "Phase 5" (Pandemic). Since everyone seems to "know" that the Mexican Flu (H1N1 subtype) will be a "non-event."

The authorities are trying to rename this flu "H1N1" instead of swine flu, due to protestations from the pork industry. I like my name of the Mexican Flu of 2009.

Somewhat ominously, the most deadly pandemic in recorded human history, the Spanish Flu of 1918, was also a virus type H1N1. Not very comforting for me.

Long GSK and GILD.

Apr 29 06:13 PM

[TLassen:]

Stolen straight from Dan's predictability / Irrational Blog.
Food for thought, comments?

"Three of our predictable irrationalities give the swine flu story much more impact than it should have — and in this case, it would be better if we were more rational.

One: Unlike the agents in economic models, we have limited memory and limited thinking capacity; to manage it we shift our attention depending on outside information. Or, in non-academese, we pay attention to what’s happening now: things that are recent and things that are repeated often get more attention, even if they are not that important. Because the news focus on the negative (it’s their business model) we keep hearing about the cases discovered, and not about the millions of people who were exposed and didn’t get sick. Which gets us to point two:

Two: We overweigh new risks relative to comparable risks we are accustomed to. Around 100 people per day died in US roads in 2008, an enormous improvement over previous years but still. People obsessing about spending 5 minutes in elevators with others (an infinitesimal chance of contagion) will blithely cross the street against the light to have a artery-clogging triple cheeseburger with fries and then smoke a pack of cigarettes. These things have much higher risks, but because we have grown accustomed to them, we don’t think of the risks. They are not, in the technical term, salient; but they are much more dangerous. Still, their dangers are dry statistics and people are not good with statistics, which gets us to point three:

Three: Brains are wired to work well with stories. And there are many stories one can make from the news reports: pandemics amplified by airport air recycling and global travel; mass extinction followed by anarchy and mayhem; terrorism taking advantage of the burden on the health system; the flu as prelude to alien invasion from Alpha Centauri. Ok, the last one only works around the MIT Media Lab. But we love stories, and forget that the plural of anecdote is not data. Statistics, dry as they may be, give a lot more information than stories.

It is not that this problem is not real and important, I just don’t think that relative to our other problems, it is as big as we are making it to be."

Apr 29 07:26 PM

[Dr. O:]

I noticed Sanofi-Aventis (SNY) was up 5% today. Only then did I learn that they are one of the world's largest vaccine makers and are awaiting viral samples to mass produce vaccine for this strain of flu.

You can add SNY to my other two picks of GSK and GILD as companies that will benefit short term from the Mexican Flu Pandemic. All have horrible charts and will probably be shorted into oblivion after the initial pop.

I am wondering whether, even after the initial boom in business for these three companies, a sustained restocking, and increased stockpiling of Tamifu and Relenza might be a follow on effect of this Pandemic, regardless of the severity.

As I mentioned, there's 6 billion people in the world, and only a couple of hundred million doses of these medications. In fact, in the US, there's only 50 million doses for 300 million people.

I would be concerned that in an emergency the patent holders would have to give out the manufacturing rights to other companies, which is the logical and right thing to do.

Apr 30 05:16 AM

[YoYoMama:]

I'm not saying there isn't potential concern. Schools and churches here are in preparation mode for the worst.

I'm just saying at a grassroots level, neighbor to neighbor, at the water cooler, etc...we aren't as frenzied as the media would have us be. The worst has not happened yet. And until it does, it's all speculation.

After the effects of panic on Wall Street and in the halls of Congress and from the President's chair, aren't we all just a little bit sick of being manipulated by the media on what COULD happen rather than on what IS happening?

On Apr 29 12:05 PM Tom Schumacher wrote:

> YoYo, I think you are being a little short sided here. Yes, the
> chance of imminent death, or frankly, infection is very small. However,
> that does not mean it will not have severe consequences to some people
> and countries around the world. Mexico will certainly feel some
> economic pain from this, as will other countries, the longer this
> is still an issue. Public health, or other disasters for that matter,
> should not be categorized by the number of deaths it causes. <br/>
>
> Schools closing for extending periods of time, paying overtime for
> police, health officials, overbooked hospitals, canceled flights,
> vacations, etc. etc. all have an economic cost.

Apr 30 12:06 PM

[Dr. O:]

By Caleb Hellerman
CNN Senior Medical Producer
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(CNN) -- If there's a blessing in the current swine flu epidemic, it's how benign the illness seems to be outside the central disease cluster in Mexico. But history offers a dark warning to anyone ready to write off the 2009 H1N1 virus.
The Spanish flu epidemic of 1918 sickened an estimated third of the world's population.

The Spanish flu epidemic of 1918 sickened an estimated third of the world's population.

In each of the four major pandemics since 1889, a spring wave of relatively mild illness was followed by a second wave, a few months later, of a much more virulent disease. This was true in 1889, 1957, 1968 and in the catastrophic flu outbreak of 1918, which sickened an estimated third of the world's population and killed, conservatively, 50 million people.

Lone Simonsen, an epidemiologist at George Washington University, who has studied the course of prior pandemics in both the United States and her native Denmark, says, "The good news from past pandemics, in several experiences, is that the majority of deaths have happened not in the first wave, but later." Based on this, Simonsen suggests there may be time to develop an effective vaccine before a second, more virulent strain, begins to circulate.

As swine flu -- also known as the 2009 version of the H1N1 flu strain -- spreads, Simonsen and other health experts are diving into the history books for clues about how the outbreak might unfold -- and, more importantly, how it might be contained. In fact, the official Pandemic Influenza Operation Plan, or O-Plan, of the U.S. Centers for Disease Control and Prevention, is based in large part on a history lesson -- research organized by pediatrician and medical historian Dr. Howard Markel of the University of Michigan.
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Markel was tapped by the CDC to study what worked and what didn't during the 1918 flu disaster. Markel and colleagues examined 43 cities and found that so-called nonpharmaceutical interventions -- steps such as isolating patients and school closings -- were remarkably successful in tamping down the outbreak. "They don't make the population immune, but they buy you time, either by preventing influenza from getting into the community or slowing down the spread," Markel said. Explainer: Flu facts »

Markel describes a dramatic example in the mining town of Gunnison, Colorado. In 1918, town leaders built a veritable barricade, closing down the railroad station and blocking all roads into town. Four thousand townspeople lived on stockpiled supplies and food from hunting or fishing. For 3½, while influenza raged in nearly every city in America, Gunnison saw not a single case of flu -- not until the spring, when roads were reopened and a handful of residents fell sick. Visit LIFE.com for photographs of the lethal flu pandemic of 1918

Nonpharmaceutical interventions, or NPIs, also proved effective in big cities such as New York, according to Markel. In fact, the sooner cities moved to limit public gatherings or isolate patients, the less severe their experience tended to be -- as much as an eight- or ninefold difference in case and death rates, he says. Based on this guidance, the CDC preparedness plan devotes dozens of pages to potential NPIs, from voluntary isolation to reorganizing company work schedules to reduce the density of people sitting next to each other in the office or while riding trains and buses.

If it seems odd to base medical strategy on 90-year-old newspapers, the approach is increasingly popular. "There's a big case for looking at history," says Simonsen. "We call it archaeo-epidemiology. You go to libraries and places like that, dig around, collaborate with people like John Barry and try to quantify what really worked." Map: where the flu is today »

Barry is the author of "The Great Influenza," perhaps the signature history of the devastating 1918 pandemic. He says the historical record shows that isolating patients worked to slow the spread of flu in 1918, but that attempted quarantines -- preventing movement in and out of cities -- was "worthless."

While Barry supports the CDC's general containment strategy, in the past he has publicly criticized Markel's work. After Markel's findings were published in the Journal of the American Medical Association, Barry wrote a letter in response, saying it wasn't swift action but rather an earlier wave of mild flu, acting like a vaccination, that was probably responsible for New York's relatively low caseload. In the letter, he noted, "New York City Health Commissioner Royal Copeland did tell reporters ... that he would isolate and quarantine cases," but based on his own articles in the New York Medical Journal, he "apparently never imposed those measures." In response, Markel and CDC officials pointed to a decision by the New York Board of Health making influenza a reportable disease, and a 1918 JAMA article describing strict quarantine efforts in New York. Barry says both those sources rely on Copeland's assertions, which he considers unreliable.

It looks superficially like an academic feud, but in this field, different conclusions can suggest radically different approaches to quashing a pandemic. Nowhere is this more true than in research that builds computer models to predict the spread of outbreaks, based on previous ones. Markel, along with most analysts, says that in prior pandemics, the so-called R-naught number -- the number of new infections caused by each infected person -- has been approximately 2.0. The current U.S. pandemic control strategy is based on computer simulations that assume a flu virus with an R-naught between 1.6 and 2.4.

Last year, however, Simonsen and Viggo Andreasen concluded that the true R-naught of the 1918 flu virus was probably somewhere between 3 and 4. Since an epidemic grows exponentially -- each person sickens three others, each of whom infects three more, and so on -- this is a tremendous difference. "It says it's going to be harder than we thought" to control a pandemic, Simonsen says.

Barry agrees. "I do think that some of these things, like isolating [sick people], will take off some of the edge. We hope they'll do more than that. But to think they'll stop a pandemic, that is just not going to happen."

Simonsen says control measures such as the steps taken by Mexico in recent days -- closing schools and restaurants, for example -- are still worth the effort. "It doesn't mean we should give up, because we don't know the R-naught [for swine flu]. We don't know how easily this spreads." But she adds, NPIs are at best a way to buy time. "We just badly need a vaccine. That's the most important thing."

To date, the CDC has emphasized personal protective steps such as washing hands and using hand gels, as opposed to tightening border controls or issuing formal directives to close schools or limit public gatherings. Such steps have been left to state and local officials, who have responded in a variety of ways.
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One reason for the delay in stronger guidelines is that swine flu caught planners off guard; they had anticipated being able to recognize a pandemic overseas, weeks or at least days before it hit the United States. At the same time, CDC acting director Dr. Richard Besser said Thursday that it's important to let officials tailor their response to local conditions. "They can take the recommendations we're providing and apply them locally. [By doing that] we hope to learn and see what are the most effective control strategies."

Markel agrees that the best response depends on the particular situation. "History is not predictive science. And the powers of public health officials [in 1918] were much greater. Another difference is that people's trust of doctors and government in 1918 was probably remarkably different.... But what I have found, studying epidemics, is that good planning and good relationships between local state and federal authorities, goes a long way.

Apr 30 08:30 PM