H1N1: Prudence vs Hysteria

spanishflu

 

In the last several days there has been increasing news coverage of how the media is blowing the H1N1 Virus (aka Swine Flu) out of proportion. Some have blamed the media for creating hysteria. While I am not ready to make-like-Joe-Biden (no confined spaces) just yet, I do think most businesses and other organizations would be smart to take the H1N1 seriously and make prudent decisions to help keep their employees/members healthy.
Thursday, I attended the GIC’s Monetary and Trade Conference and host David Kotok drew laughter from the crowd when he took the podium wearing a medical face mask. David wasn’t going for the cheap laugh. He actually takes pandemics seriously and with the right dose of charm and information tried to persuade his audience to do the same. He brought in masks for all attendees to take home, explaining how the N95 mask was different from a dust mask (dust masks can’t stop germs and will do nothing to stop the spread of the H1N1). Then he moved on to the business of the conference.
Serendipitously, that same evening I happened to be flipping through the channels on television and stumbled upon the movie Philadelphia (Tom Hanks character fights discrimination against AIDS patients and wins). The movie did such a great job capturing the fear and bigotry surrounding AIDS and those suffering from it. It struck me that David Kotok’s approach to H1N1 was prudent. The lawyers who fired Tom Hank’s Andrew Beckett, on the other hand, were caught up in the hysterics.
There is a third option, when it comes to reacting to the threats to your well being; that is to be smug or cynical and do nothing. We see it all the time during hurricane season. The folks who think only lemmings and losers evacuate to escape the storm.
Just how serious H1N1 will become in the days and weeks ahead is unknowable at this time. But if history has taught us anything, acting prudently, while it has its costs, is often the best course if you want to avoid becoming a victim. This holds true in investing, as well as pandemics.
If you want to know more about David’s message– take a look at his note below.-Mary

Swine Flu Strategy Update
May 3, 2009

Type A, H1N1 “swine flu” responses range from complete complacency to proactive prevention. We see both in the United States and elsewhere in the world. Some of the leading epidemiologists at the Milken Institute Global Conference give this version of flu a 50-50 chance to be a large-scale killer, according to Barron’s journalist, and my good friend, Jim McTague (see Barron’s, page 34, May 4, 2009).

Cumberland is in the “take this seriously and hope we’re wrong” camp. In our market actions we raised a cash reserve last week. This was easier to do after an eight-week, 30% stock market rally. So I guess it’s fair to say that the swine flu timing was opportunistic. Selling and raising cash at 850 on the S&P 500 index at the end of April is a lot easier than selling and raising cash when the S&P 500 is 666 and the date is March 9.

So far, AH1N1 “swine flu” is looking like the SARS outbreak when it comes to economics and market impact. Swine flu (so far), SARS, and avian flu (H5N1) were and are limited to a few thousand worldwide cases that have been documented and confirmed by lab tests. So far, they have triggered deaths counted in the hundreds.

SARS in 2002-3 had a death rate of about 9.5%. Swine flu (so far) has a death rate of about 6.5%. Avian flu has not jumped to an easily transmissible form. It is still a bird disease. It is also a killer. The cumulative 421 cases in the 2003-9 period have a death rate of 61%, according to the confirmed lab tests. Remember, when it comes to flu, the statistics only count those cases in which a certified lab was able to confirm the virus as the cause of death. Epidemiologists believe that there are many unreported cases in third-world countries and emerging economies.

There are three references for big flu shocks.

The first and the most infamous is the 1918-20 period involving the “Spanish flu.” That was also a variety of the H1N1 strain. Global deaths in 1918-20 attributable to that flu are estimated at between 40 and 100 million, or somewhere between 2% and 5% of the total world population. In the US about 25% of the population was infected with “Spanish flu” and about 500-700 thousand died. In 1918 the first outbreak came in the spring and was as small as the current flare-up of H1N1. The real killer phase occurred in the subsequent flu seasons of late 1918-1920.

In the Asian flu episode of 1957-58, the virus form was H2N2. Estimated global deaths were 1 to 1.5 million.

The third reference is the Hong Kong flu of 1968-9. It was the H3N2 strain and had a low death rate but a high infection rate. Globally it killed about 1 million people.

We have no idea how the current H1N1 “swine flu” risk will play out. We do know that media coverage and information flow is heightened, and that is good thing. Sensitizing large segments of the global population induces many to act preventively rather than remain complacent. We hope that it only takes a few deaths for folks to take this seriously. Preventive actions like closing schools, frequent hand washing, and wearing masks all combine to reduce spread of the virus. A race for a “swine flu” vaccine is underway; scientists now compete with the clock which ticks toward autumn flu season.

At Cumberland, we have distributed masks and hand sanitizers to all our staff; we have a flu pandemic contingency plan and have activated it. I wear an N-95 mask in public places like airports and on flights. We practice risk management in the portfolios we manage and in the business life we conduct. And we hope that the outcome will be inconvenience and not something more severe. It will be another year or two before we know the full outcome of this “swine flu.”

Many thanks to our medical friends who must remain anonymous but who confirm the seriousness of the risk. And also thanks to Barclays Capital, Credit Suisse, Wachovia, and Barron’s for data and concept assistance.

David R. Kotok, Chairman and Chief Investment Officer, email: david.kotok@cumber.com

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