April 27, 2009

1) A few bad tacos in Mexico, and all of a sudden the world has gone apoplectic about another Spanish flu epidemic, when 5% of the global population died, or 50 million. The State Department banned non essential travel to Mexico, cratering that economy, while the EC recommended against travel to the US. With visions of SARS in their minds, which sent markets in Asia tumbling a few years ago, traders sold off the Mexican Bolsa by 4% and the Hang Seng by 2.7%, American Airlines (AA) 10%, Carnival (CCL) 10%, and Royal Caribbean (RCL) 15%. The Mexican peso got slammed in the FX markets, and commodities tanked across the board. Tamiflu makers Gilead Sciences (GILD) and GlaxoSmithKline (GSK), as well as drugstores like Rite Aid (RAD) got a nice bump. Epidemiologists say the world is long overdue for a reoccurrence of a severe pandemic, with the explosion of international trade and an exponential growth in populations. But it is highly unlikely this is the Big One. Mexico's public health infrastructure is primitive at best, and there is no biological evidence that this is anything remotely like the H5 N1 virus that caused the 1918 epidemic. With 25 million living in Mexico City in close quarters on a former swamp and a dubious water supply, this could be anything, even just the tail end of last year's flu season. Almost all of these viruses originate in China, where they make the leap from pigs to humans, and then globally. But, still, try and buy a face mask at Longs Drug Store today.

2) Over the weekend, the Financial Times published an editorial by the outspoken London School of Economics professor and former Bank of England policy board member, William Buiter, arguing that the green shoots we are seeing in the world economy are really weeds. He argued that the slowdown in the rate of decline is anything but a recovery. A real recovery won't come until late 2010 at the earliest. First, we must destroy the zombie banks by wiping out both the current equity and debt holders. Once the giant holes in the balance sheets in these institutions become obvious, there will be a second leg down in the financial crisis, and taxpayers aren't going to brook another bail out. The government's incrementalist approach to rescuing the banks and ignoring the borrowers is only prolonging the crisis. For those who believe the financials are now the new one way trade, this is all sobering food for thought.

3) A giant collective sigh of relief could be heard across California as the embattled state managed to sell $6.85 billion in general obligation tax exempt bonds. The deal is the second successful fund raising effort since a similar $6.5 billion issue was floated three weeks ago. The spigot has been turned back on for over 5,000 construction projects that were halted last December as the Golden State's coffers were about to run dry. Now construction crews are mobilizing to add new wings to hospitals, repair decrepit school buildings, add car pool lanes to freeways, and start the reconstruction of key bridges. California and its 55 electoral votes will also be the beneficiary of big government spending in alternative energy and stem cell research. The icing on the cake will be a further $97 million the federal government has committed to spend on 22 national park projects at Yosemite, Kings Canyon, and elsewhere. Economists expect the money will make a dent in a state unemployment rate that has exploded to depression levels of 11.2%, and is probably over 16% when discouraged job seekers and expired benefit recipients are added in. California is not out of the woods yet. It still has the opportunity to commit financial suicide if voters fail to approve any one of the six crucial measures in a May 19 statewide election.

4) General Motors (GM) CEO Fritz Henderson made known his final, final, last ditch offer to avoid bankruptcy. Owners of $27 billion of bonds will get 10% of the company. The unions will get 39% of the company. Pontiac will be axed. Six more plants will be closed, laying off 21,000 workers. What will happen to 3,900 dealers is still up in the air. With the stock now at $2, Fritz has very little to bargain with. Whatever car business survives this won't look anything like the GM we know. Why do I think we are headed towards a Ford (F) only nation?

QUOTE OF THE DAY

'The green shoots are weeds growing through the rubble of the ruins of the global economy,' said William Buiter, professor at the London School of Economics, and former policy board member at the Bank of England.