Tuesday, 3 November 2009

Time for Portfolio Vaccine against Swine Flu?

Last year it was the banks the precipitated a market crash. This year will it be swine flu?

All of a sudden, swine flu is in the economic news. Today, GlobeInvestor's H1N1 sick days could hamper Canada's fragile recovery notes the potential for swine flu to make the economy sick. At the same time, CBC's headline article A perennial bull turns negative about the pessimistic outlook of market commentator Josef Schacter includes swine flu as a negative point in his outlook.

Perhaps my view is coloured by what I learned during the brief stint I spent in a former job helping to plan for a flu pandemic, but I am a bit worried too for a couple of reasons. First, there is the reality of a pandemic. By definition a pandemic directly makes sick an awful lot of people, up to a third of the population during the peak of an outbreak. Whether its kids or adults falling sick, a lot of people may take time off work to minister help. Whack! Take that, economy and stock market.

As bad as the real effect is, the panic effect could be worse. If stories of food and fuel shortages start appearing in the press, who knows what panicked people might do. Whack again, economy and stock market.

The key to avoiding all this is control of the outbreak. Thankfully, there is a vaccine, whose effectiveness is unknown but it could still work well if enough people are vaccinated according to Swine Flu Vaccine Predictions from the UK National Health Service. Enough people is a huge number - "... only 70% of the population would need to have the vaccine to reduce the impact of the virus to that of a relatively mild seasonal flu epidemic". 70% means about 0.7 x 33 million = 23 million people in Canada need to be vaccinated but the total so far is only 1 million according to the Montreal Gazette. The reference to striking increases in flu activity is alarming. Official statistics on actual infection rates are hard to get. The national Public Health Agency seems to publish only the number of deaths, which thankfully is low, but that doesn't help too much since the main impact of low-mortality rate swine flu is sickness not death. We are left with Google's Flu Trend indicator, which it claims tracks actual cases quite accurately. Below is a screenshot of today November 3, 2009.

Yikes!, an almost vertical upward trend, except for Quebec, which is different as ever and totally blank for some unexplained reason. I've been watching it for the last month as the country turned bright red, not an indicator that the Liberals have finally won an election, but the sign that things have gone as bad as the scale goes.

For an investor, what happens in the USA matters greatly and the Google trend there is pretty high too. The World Health Organisation provides weekly updates on its H1N1 portal for all parts of the world and swine flu seems to be advancing everywhere to differing levels of intensity though the data's usefulness is suspect since many countries have stopped reporting individual cases. The Pan American Health Organisation publishes a very cool inter-active, but useless (due to stale data), map of swine flu.

A portfolio equivalent of vaccine in this case is to use put options on market ETFs such as XIU in Canada and VTI in the USA to shield against a market downturn. That protection can be secured by buying a 90 day put. A flu pandemic might last a few months, it doesn't last forever and since the death rate is low (barring an unpredictable mutation that changes it) for this swine flu, the bad effects also won't last forever either. Is it still worth buying put options?

Given the relatively high likelihood of a temporary flu-induced market sneeze, it is very tempting to play the speculator and really go "whole-swine" into puts. On the other hand, since I expect to be invested in the market for many years hence, the dip will not harm me in the long term.

What to do, what to do ... just accept the discomfort since the chances are low for a fatal infection to my portfolio, or try to make some money predicting the short-term future.

1 comment:

Pacific said...

Thanks for this insightfull, current report, CanadianInvestor. At present I have a high level of discomfort with the current market uncertainty, and am swaying with pulling out big chunks vs. holding on. The huge market gains in the last 6 months has questionable economic sustainability. Perhaps I should take a holiday and not look for a few months!
Your final comments of your uncertainty made me feel better! Thanks for that!

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