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)