As author of World Event Trading, I did an entire section on infectious diseases from the 1918 Spanish Flu to Bird Flu. The recent outbreak of Swine Flu is generating headlines and concerns globally. It has spread from Mexico to the US to New Zealand.  Expect the World Health Organization (WHO) to take the lead on dealing with the disease.

Critical point: fear of the disease is the biggest driver of behavior and societal changes due to the outbreak.

Reuters: “The new flu strain, a mixture of various swine, bird and human viruses, poses the biggest risk of a large-scale pandemic since avian flu surfaced in 1997, killing several hundred people. A 1968 “Hong Kong” flu pandemic killed about 1 million people globally.”

Here are a few bullets on the topic:

The country of the origin of the disease will see it’s markets the most severly impacted from currencies to stocks. Bonds generally rally.

Major outbreaks and rapid spread of infectious diseases occur when the populations are under duress or at the weakest points. This would be an ideal time for a large outbreak as the global economy has dramatically weakened the finances of major countries to deal with the situation. The population may also be weakened by lack of funds to provide proper health care due to job losses.

Populations flee and spread the disease. This is already occurring as Mexico has had tourists leave and come to the United States spreading the disease. Russia and some US states are limiting travelers from Mexico and some imports already.

Travel, leisure, and retail will be hit. While I don’t think any attempt at quarantines, I do think travel to the originally infected areas will be severly curtailed. Mexico’s tourism will be severly negatively impacted with hotels hurt. Public places will be shunned and this will impact entertainment like concerts (already canceled in Mexico City), movies, theatres, stores, and restaurants. Schools will be closed and universities. Also, ridership on mass transit could decline significantly.

Pharma could see gains. Like bird flu, the big drugs are Relenza and Tamiflu with Glaxo and Roche. “Roche said Saturday it is in regular communication with the World Health Organization concerning a outbreak of swine flu in Mexico, and could deliver several million doses of its Tamiflu drug should the treatment prove effective. producing them. ”

The big winners could be health care and hospitals as they see a surge in patients. Also, telecommunications entities like cell phone companies could do well with increases in phones used from people staying home. Companies like Blockbuster and Netflix could see surges due to stay at home families….this is somewhat already occuring due to the recession/depression.

I hope this helps and I hope the Swine Flu doesn’t spread like the 1918 Spanish Flu which killed about 7% of the US population at the time.

A Sampling of Advisory Opinion: Looking After Our Best Interests
…The Fed/Treasury/FDIC/White House may decide that it’s in the best interests of the country to not only make the banks keep the money, but also to have these banks scrub their balance sheets by selling “toxic” assets to the new Treasury program….a very good idea, but potential abuses lurk. [Treasury's] legacy security and loan program needs to have buyers and sellers of assets. [But] I see only the FDIC as the one major seller of assets due to acquired loans from failed institutions…getting sold for less than 40 cents on the dollar. – Andrew Busch

– Barron’s  04/04

This is a holiday shortened week with Easter looming and most of Christian Europe on holiday from Thursday on…

However, there are some key things happening.

1. Earnings season starts on Tuesday with Alcoa leading it off. Remember, the analysts are expecting overall earnings to be down 36% in the quarter. The focus should be not on the actual earnings, but the outlook/guidance that companies give for the rest of the year. Also, look to see which managements are backing up positive guidance with share buys. Also, consumer credit comes out as well as hope for consumer spending with stimulus money starting to flow as of April 1st.

Also on the international side, the Reserve Bank of Australia meets to decide on rates. The consensus is that they will cut rates 50 bp from 3.25% to 2.75%. If they don’t, then this will be the 2nd (ECB the other) central bank that is being more conservative in it’s monetary stimulus. This may indicate that they see better times ahead.

The Euro zone GDP is out for Q1 as well and is expected to be -1.5%. If it’s worse, expect lots of questions and pressure to be applied to the ECB for not acting more aggressively and not going to QE.

2. Wednesday bring the FOMC minutes and their discussions over QE. Let’s see how unified they were and let’s see if they give us any indication of what they would do if it doesn’t work. Another big item: the SEC discusses changes to the uptick rule. If the SEC agrees to re-install it, the market may have another big move like it did for MtM.

3. Thursday is jobless claims and US trade deficit. JC will be looked at for any inkling of moderation and trade will continue to reflect the dire nature of the global economy. Expect lots of discussion about whether the IMF’s funding of $250 billion for trade assistance will help.

On the international side, Germany, Italy, and Sweden all release industrial productions numbers. The string of data on this globally has been nothing short of disastrous. All better-than-expected numbers will be most welcome.

Hope this helps!

ab

Over the last two weeks, both China and Russia have made headlines with their unhappiness over the current financial world order. The Chinese are worried over the future of their holdings of both the US dollar and US debt. The Russian’s are concerned about the use of the US dollar as a reserve currency and likely worried over the use of the US dollar in the pricing of their chief export oil.

In his speech to the G-20, Chinese President Hu Jintao said that the International Monetary Fund should increase its surveillance of the economic, and particularly the monetary, policies of economies which issue the world’s major reserve currencies. Earlier this week, I wrote that the Bush administration had pushed to make the IMF review the currency policies of member nations and report back to the body. This is a new spin on that concept and flows along the lines of what the G20 statement advocated in using the IMF to review member countries economic policies.

Also addressing the G20, Russian President Dmitry Medvedev said the the question of the global currency system is a topic that needs to be addressed immediately after the summit. Medvedev recommended the creation of strong regional currencies and to use them as the basis for a new reserve currency and that this should be partially backed with gold.

He wants the IMF to study on the following scenarios: Widening the list of currencies used as reserve currencies by taking coordinated measures to stimulate the development of major regional financial centers and the creation of a supranational reserve currency to be issued by international financial institutions. Finally, Medvedev wants an international conference after the London summit to agree on the main characteristics of the global financial architecture and to adopt a convention for a new world financial order.

I think you can see the way forward from both the Chinese and Russian perspective is to have the United States financial policies monitored, the United States economic policies reviewed, and the US dollar role as the world’s reserve currency diminished. While others may argue that neither country will be successful in their goals, I think they miss point. By merely stating they want change, they are indicating to the world their uneasiness over the financial and economic policies of the United States.

Like tremors prior to an earthquake, everyone should be aware that the ground is moving and that something bad may be coming. If the Chinese and Russians sense that the US is weak and unable to maintain our preeminence as a world financial power, they will act to force change that is in their best interests.

On CBS, Geithner says “Of Course” when asked if he would oust CEO’s from TARP banks that are non-performing. This is precisely what I warned about yesterday.

The draft G20 statement apparently has everything for everyone and the euphoria in the markets is palpable with equity markets rallying strongly, bond yields are higher, and the US dollar is lower. There even appears to be an agreement between Medvedev and Obama for a one third cut in strategic arms without having to look into each other’s soul. (Which is probably a good thing for both of them.) Details on the G20 statement is still bit sketchy, but here is what I’m seeing:

The IMF is receive $500 billion to increase its resources and be able to make available $700 billion of funding for assistance. The IMF may be able to raise additional funds via bond issuance. IMF gold sales are under discussion for raising additional capital. A $250 billion trade finance package to support global trade flows should be in the communiqué as well.

Systemically important hedge funds are to be submitted for supervision and regulation via a new regulatory institution and a beefed up IMF. This is akin to the “Super Regulatory” that’s being discussed and debated in the United States to ensure another AIG doesn’t happen. (No word yet from Bridgewater, Paulson & Co., Brevan Howard, or Soros as to whether they will cooperate.) The new financial stability board is to identify economic/financial risk along with the action that will be required to deal with it. The G20 commit to “Candid, Independent IMF surveillance of their economies and financial sectors.”

The G20 are to target tax havens and will publish a list of the offending countries. The Doha trade liberalization talks are to be re-started with the next G8 meeting with Obama to address the group in Italy. This is a big outreach to Brazil, India, and other developing countries.

For currencies, the G20 says that everyone pledges to refrain from competitive devaluation of our currencies. The G20 also pledges to support “General SDR Allocation To Ease Liquidity Restraint” with the UK saying the IMF SDR allocation to be significant and more than double. As I warned, the comments by the Russians and Chinese on a new reserve currency were significant as this increases the importance of the SDR.

All of these wrap up to show that the G20 made serious efforts to bring about agreement on important issues and attempt to address the problems in the world economies. Clearly, the conduit the G20 has picked for changes to world’s oversight of financial institutions and economies will be the IMF. This is building on something the Bush administration pushed for in regards to the IMF monitoring how countries use their currencies for increasing their competitive positions.

There are many good proposals and policies being put forward that make this G20 much more productive than the markets were expecting. The sovereignty problem remains as one has to question whether countries will follow through on these commitments to being open to scrutiny and open to the change that the IMF recommends.

How likely is it that either the US or UK will submit to any prescription which includes cutting back on fiscal stimulus? How will the Chinese react if the IMF says that they need to stop intervening to support the US dollar?

Overall, I think the G20’s actions to make available loans will be the biggest positive as it helps shift the deleveraging from the individual, emerging countries balance sheets to the IMF. Next, the competitive currency devaluations should mean that the UK and Switzerland won’t be allowed to force their currencies lower going forward and this should be a negative for the US dollar. The IMF issuing bonds would add to the massive supply of debt that is hitting the fixed income markets and will be a bond negative.

With the exception of the IMF loans, these moves on the markets will likely be very short term and may not last beyond today.

Did anyone notice how grumpy all the financial CEOs looked after meeting with President Obama last Friday? The meeting must have been quite unpleasant as the Obama administration is informing these private sector giants that they need to change the way they are running their business. The government wants more lending and less executive pay. Also, several banks indicated that they want to return the original TARP money and the Obama administration is telling them no.

While it may not have been explicit, the implicit threat was large. The FDIC is in the middle of stress testing the 15 largest financial institutions in the country. This testing is being undertaken to understand how these entities balance sheets react under the duress of 10.7% unemployment, -3.3% GDP, and peak-to-trough drop in housing prices of 47%. How do you think they will do? How would you do under those metrics?

The structure of the test appears to be designed to ensure that no bank can pass it and therefore no bank will be allowed to return TARP money. The Fed/Treasury/FDIC/White House may decide that it’s in the best interests of the country to not only make the banks keep the money, but also to have these banks scrub their balance sheets by selling “toxic” assets to the new Treasury program. This would be done under the motive that once the banks shed these assets, they can then start lending.

This appears to be a very good idea, but potential abuses lurk. The legacy security and loan program by the US Treasury needs to have both buyers and sellers of assets. Under the loan program, I only see the FDIC as the one major seller of assets due to acquired loans from failed institutions. Currently, these loans are getting sold for less than 40 cents on the dollar.

However, other owners of these type of distressed loans are not necessarily going to sell them. If a bank has written down the loan to 30 cents on the dollar, the return on equity of this asset is very good and the hit to earnings has already occurred. If the bank hasn’t written down the asset, then they would have to take the hit to earnings. Either way, there is very little incentive to act……unless they are forced to.

This is where trouble can happen. Remember, the US government has a dual role with the Treasury plan. They are both a regulator and investor. Hmm, does that sound like a recipe for disaster?

If this is the case, then why haven’t all the major banks come out and said they are worried about what is happening? Again, I would speculate that the quid pro quo may be to have been implicitly promised to receive a glowing stress test result and therefore to remain solvent. This means that common shareholder equity won’t be wiped out and they will be allowed to live another day.

With the ouster of the head of GM, these bank CEOs know what’s at stake. The results of the stress test are expected to be released by the end of the month. Until then, the uncertainty surrounding the outcomes will continue to weigh upon the financial sector stocks. April Fools Day appears to have been put off until then.