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Economics: Bird Flu Blues ?
New York: October 17, 2005
By John R. Stephenson

The last few weeks have shown a dramatic shift in the news coverage. No longer are we worried about the slow government response to hurricane Katrina, the sagging stock market and weak consumer confidence numbers, the front-page news today is of a different sort — an avian flu pandemic (an epidemic that is geographically widespread). Perhaps it's just his poll numbers talking, but even George W. Bush, has taken up the cause, warning of the serious consequences of a world pandemic from bird flu. While only sixty people worldwide have died from avian flu, recent cases in Romania and Turkey have shown that this illness which has to date been pretty much confined to birds in Asian countries, has at least the possibility of spreading across borders and across species. Just what would be the implications to investors if this bird flu somehow became widespread and was transmitted from human to human?

Who knows? But if history is any guide, then this could be serious. Since 2003, there have been 100 million reported deaths — of chickens, ducks and turkeys in East Asian countries as a result of Avian flu. While some sixty human deaths have been reported in Thailand, Vietnam and Cambodia as well as Romania and Turkey, all these deaths have been the result of coming into contact with infected birds. The real worry? What happens if this virus spreads from human to human as opposed to bird to human. While this is so far a crisis for poultry, not people, the fear is that with the explosion in air travel over the last few decades the disease could mutate into a human to human variant spreading quickly.

Pandemics are nothing new and while the likelihood of this flu mutating to a human variant is remote, it is nonetheless worrisome. Scientists who research human pandemics refer to the Spanish flu of 1918 and 1919, which killed 500,000 Americans and between 50 and 100 million people worldwide. Most died within days of being infected and were often the youngest (most were between 20 and 40 years of age) and healthiest members of society. This pandemic occurred when the world population base was less than one third of what it is today. The problem today? The world is much larger and more interconnected and the United States has no domestic production of vaccine to ward off such a pandemic were it to occur. This has health officials running scared as they try to assess the likelihood of this flu mutating to a form that can be spread easily among people — possibly killing millions before adequate stockpiles of vaccine can be assembled.

Asia already has a full-blown bird epidemic on its hands and the fear is if a mutation to a human strain were to occur, this could quickly change to a human epidemic and then a global pandemic. That a global pandemic of some kind is in the future is beyond doubt. The World Health Organization ("WHO") and other public health agencies are unanimous in this view — the only question is when. The World Health Organization has already certified this bird flu, known officially as Influenza A type H5N1, as an epidemic amongst birds and animals in Asia. What we do know so far is that this particular strain can be deadly for humans and there is little or no pre-existing immunity amongst humans. If this mutates to a strain that can be transmitted person to person, there is little doubt that it could become a full-fledged human pandemic. According to the World Health Organization, pandemics can be expected to occur three or four times a century as new virus subtypes emerge and are passed rapidly from person to person.

But what about a vaccine? As Toronto's experience with SARS (severe acute respiratory syndrome) and the lines of elderly patients in the U.S. waiting for flu shots in the fall of 2004 demonstrated, the world remains extremely vulnerable to the rapid spread of infectious diseases. SARS, for example, originated in rural China and became a global problem when infected birds were eaten by people. It crossed the species barrier and spread to five countries within a mere 24 hours. So far, the only vaccine shown effective against this strain of influenza is Tamiflu, which is produced by Roche, a Swiss-based pharmaceutical giant. But with only nine nations worldwide having the ability to produce flu vaccine on a commercial scale, the world seems woefully unprepared should a pandemic break out.

So what's an investor to do? Well, for starters, diversify. If a pandemic of this type were to occur, governments would react as they have in the past by quarantining affected individuals and banning travel and flights from affected regions. Financial markets will react, but probably with a lag until investors realize that the problems are real and here to stay. As the pandemic grows, so too would fear and panic — turning many people into recluses overnight. As a result, public events would all but cease to exist. This would deal a sharp blow to companies engaged in retail sales as well as the travel, tourism and transportation industries. The insurance industry would likely be wiped out and the financial system would come under severe strain as it would be expected to provide increased liquidity in the face of individuals and businesses defaulting on their loans as a result of increased absenteeism.

Credit spreads in developing countries would widen dramatically, as they would be the regions hardest hit by a pandemic of this type because they lack a well-developed health care delivery system. Currencies in regions of the world deemed most at risk would likely plummet and swing widely as news reports surfaced. Technology would be another area that would be hard hit because of the high price/earnings ratios (P/E's) and because a significant portion of sales growth and component supplies originate in Asia. Stocks of commodity producers, particularly the metals producers, that are very dependent on growth from Asia, would also take a pounding as the pandemic spreads and the economies of Asia begin to slow.

Gold, the U.S. dollar and U.S. Treasuries would likely be beneficiaries if a pandemic were to occur, as investors flock to safe, quality investments. Credit worthy bonds, high-quality dividend paying stocks and put options on the broad market or high-flying stocks are other smart, defensive moves that investors should consider if they are concerned about the spread of bird flu around the globe.

While the risks of a disaster of this type are slight, investors often lose sight of the risks inherent in investing. As time goes on, we all become more and more comfortable that our view is right and that little can change. But savvy investors understand that risk looms large in investing. The only free lunch in investing? Diversification. Spreading your eggs amongst many baskets can help prevent the devastation that can be hard to recover from even when the pandemic, currency crisis or whatever else blows over.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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