Down - But Not By Much So Far

April 27, 2009 · Posted in Weekly Posts · 1 Comment

Markets are down today largely on the thesis that the swine flu issue may derail global growth recovery. That may be true in Mexico which is going to face intense economic pressure due to this against a backdrop of a severe drop in tourism due to the drug feuds. It is however, far too early to start predicting any great global catastrophe.

Let’s review some facts:

1) Mexico has had around 1400 cases of suspected swine flu and a little over 100 deaths believed to have been swine flu. Only 20 of those have been confirmed.l

2) People who have traveled to Mexico from the US, Canada, New Zealand, Australia, Britain, Israel, Brazil, France, and Spain have come down with symptoms but the vast majority have been very mild and not required hospitalization. On a percentage basis this is odd as there are sufficient cases of travelers to Mexico that we would expect someone to have died or be near death outside the country. Perhaps there are other risk factors at work.

3) There is no talk of mass culls or die-offs of swine. The reason is simple - swine flu is a normal occurrence in swine herds. It is seasonal. You do not contract this from eating or handling pork. In fact, it is unclear if you get it form anything less than being sneezed on by a cow. So sell-offs in the Ag sector seem misplaced unless we presume that people will unilaterally stop eating pork because of this.

In all, we think the companies that are selling off today will likely come back very quickly. Let’s take AgFeed (FEED), which we own and like a lot, as an example. For this company to be materially impacted by this there would need to be either a mass cull of pigs in China, or a mass avoidance of pork in China. Any restrictions on pork imports to China should in fact help AgFeed by reducing their competition. We are not buying more as that would unbalance our portfolio’s risk posture but we are sorely tempted.

One notes too that the miners are down today as is oil, copper, and their producers. This is on the expectation that global growth will be cut. We will need to see widespread illness for that to occur.

However, we do understand airlines and tourism being down hard. That makes immediate sense especially with travel to Central America.

All-in-all we are staying put today. Keep monitoring the news and the outbreak reports for details. The market may look very different by week’s end.

Long Brazilian mining and China growth through RIO

Long Australian Iron Ore Supplies to China through Fortescue FSUMF

Long AgFeed Inc FEED

Short gold as a hedge against physical holdings through DZZ

The following posts are relevant:

Brazil

China Part 4 - Playing the Dragon

China Part 3 Global Hard Assets

Commodities

China: Part 2 - Bonds, Dollars, and Inflation”.

“The Fed and The Bond Market - Will Intervention be Effective?”

“The Coming Bond Debacle”

Fundamental Trends

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