Good Evening: The major U.S. stock market averages declined on light volume today, and an outbreak of a new strain of swine flu was deemed the primary culprit. Upon closer inspection, however, it seems as if the sloppy — even hoggish — bank lending practices of the previous up cycle are as much to blame for today’s pullback as any potential pandemic.

While I was away late last week, stocks tried to best the recent highs they had set in anticipation of Friday’s release of the “stress test” parameters. The less than stressful reality of these tests for large banks proved anticlimactic, and equities were unable to muster the energy to reach fresh, post-March 6 highs. As such, the averages may have been looking for an excuse to retreat when the news from Mexico made the rounds over the weekend. A strain of swine flu known as H1N1 was reported to be responsible for more than 100 deaths in Mexico. Though no deaths have been reported in other countries, tests have confirmed that this flu has spread to parts of the U.S. and as far away as New Zealand.

In reaction to these reports, the World Health Organization raised its alert level and investors accordingly raised their level of concern during today’s trading. Fears surfaced that global travel would be disrupted and that overly cautious trade sanctions (e.g. pork imports) would be put in place. The playbook from the 2003 SARS outbreak was dusted off and put to use, with hotels, airlines, cruise lines, and casinos among the day’s biggest losers. Since H1N1 appears to be treatable with Tamiflu and other anti-viral drugs, it came is no surprise that biotech and assorted health care names were among Monday’s winners. Eyebrows were raised, though, when GM managed to gain 20% in the wake of an equity-for-debt swap offer that will likely gain little traction (see below). Short-covering and capital structure arbitrage strategies aside, GM common and the company itself will need enormous measures of both luck and skill to survive in anything resembling current form.

Stock index futures were indicating losses of up to 2% prior to this morning’s open, but the actual damage was approximately half that amount when the opening bell rang in New York. Market participants were soon of a mind that the media was over-hyping the flu story, and they managed to push equities back above unchanged before lunchtime. The averages then resumed sinking during a relatively quiet afternoon before closing just above their worst levels of the day. Helped by GM, the Dow (–.65%) suffered least, while the Dow Transports (-4.7%) understandably brought up the rear. Just as they did during the SARS outbreak in 2003, Treasurys performed well. A large 2 year note auction was quite well received, and yields fell between 4 and 8 basis points. The dollar was somehow deemed a beneficiary of the swine flu, and it rose 1.4% today. Commodities were much less fortunate, as fears of protectionism hiding behind a fig leaf of health concerns hurt almost every major sector. The CRB index declined more than 2%.

While it’s still early by flu outbreak standards, most health experts seem to believe that the H1N1 strain of swine flu is unlikely to reach pandemic proportions. If so, and I’m particularly unqualified to doubt medical professionals, to what can we better attribute to today’s decline in the stock market? I have two candidates and the first is a piggish rise in bullishness among large institutional investors. The latest “Barron’s Big Money Poll” came out this weekend, and the results display anything but doubt for the future of either U.S. stocks or the U.S. economy. Fully 59% of portfolio managers in the survey counted themselves as bullish on equities, while only 13% said they were negative. Readings of 4-1 bulls over bears are usually reserved for the frothier portions of bull markets — or, perhaps, at the peak of a vigorous bear market rally. As BAC-MER economist, David Rosenberg, points out in his piece below, the figures are even more striking (in the opposite direction) for Treasurys. 84% are bearish on securities issued by our government while a mere 3% are constructive. I may not be bullish on U.S. debt, but maybe the overwhelmingly bearish sentiment means it’s a bit too early to short them.

Given today’s 5% drop in the KBW bank stock index, my other candidate for an old affliction that might be responsible for weighing down stock prices today is the epidemic of shoddy bank lending practices during the previous boom. Infecting far more than just subprime residential real estate, this contagion spread to commercial real estate, leveraged loans, junk bonds, CDS, and even plain old corporate bonds. This strain of poor lending was evident in the narrow spreads seen for all types of credit in the run up to mid 2007, and despite repeated assurances from so many government officials and bank CEOs to the contrary, this problem is still not contained. The contagious desire among banks to extend credit to so many parties with hardly more upside than the generation of upfront fees is the real swine flu of our generation. And, just like its pandemic namesake, this strain of sick lending can be found all over the world.

Let’s look at Wells Fargo, a bank that has been in the news quite a bit of late.. The Bank of Buffett, according to the Oracle himself, stayed mostly out of trouble during the last cycle by avoiding doing the “dumb things” that so many of its competitors felt an irresistible urge to do on the lending side. “But they’ve never felt compelled to do anything because other banks were doing it, and that’s how banks get in trouble, when they say, ‘Everybody else is doing it, why shouldn’t I?’” (source: Fortune article below). As a Wells Fargo mortgagee myself, I agree with Mr. Buffett that Wells maintained a unique sense of discipline during the last cycle. But now WFC is lugging around the old Wachovia, which was a poster child of “me too” credit practices prior to its merger with Wells. Strictly because it now owns Wachovia, I’m a lot less sanguine about the future of Wells Fargo, a sentiment apparently shared by Dick Bove (see below).

This Rochdale Securities analyst has been favorably disposed toward banks for quite some time (read: bullish at much higher prices than these institutions fetch today). For Mr. Bove to cut Wells Fargo from a buy to a hold and question WFC’s cash levels and ability to digest the Wachovia transaction may thus actually be news. Mr. Bove agrees with Mr. Buffett that Wells is very well run, but he also agrees with me that Wells will be hampered by Wachovia going forward. Trying to keep up with the Joneses in New York, the Charlotte-based bank caught the “everybody else is doing it” syndrome so abhorred by the management of Wells and its famous shareholder. Let me repeat: I’m not saying Mr. Buffett is wrong and I’m not advocating anyone be short of Wells Fargo. What I am saying is that bullish market sentiment is already running a fever just as a flu scare strikes a global economic sentiment that is already bedridden. H1N1 may or may not have much of an impact on the world, but the real swine flu is still wreaking havoc.

– Jack McHugh

U.S. Stocks Fall as Swine Flu Drags Down Travel, Hotel Shares

GM Bondholder Group Says Offer Isn’t ‘Reasonable’

Warren Buffett on Wells Fargo

Ahead of the Bell: Bove cuts Wells Fargo rating

Big Money Poll meets Bob Farre.pdf

Category: BP Cafe, Markets, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

9 Responses to “The Real Swine Flu”

  1. TomOfTheNorth says:


    No doubt the abundance of pork getting slung around by our politicians in D.C. and the further gorging at the trough by the hogs of Wall Street give rise to all sorts of amusing comparisons to the recent outbreak of swine flu. However, with respect to your comment, ” most health experts seem to believe that the H1N1 strain of swine flu is unlikely to reach pandemic proportions.”, even a lay person such as myself recognizes that it’s far too early to draw any conclusions as to the end result of this outbreak. Therefore, the more expert & Government reassurances that are issued, the more nervous I get. Mexico’s request that bars, theaters & churches stay closed for the duration of the outbreak is anything but reassuring. I read today of a Mexican death toll of 150 out of 2000 infections – a staggering (for flu) 7.5% mortality rate. Then this evening, our County health official was on the local news with the comforting announcement that the county has 200k doses of antivirals on hand, enough for the entire population of our northeastern MN county. Yet Mark Thoma informs that nationwide the available doses of Tamiflu & Relenza total 5 million (with 25% earmarked for all of CA). Since I doubt Thoma is misinformed on that number, County guy is either confusing antivirals with aspirin or he’s lying. I can appreciate not wanting to start a panic however, if this situation is not quickly resolved, there will be increasing pressure on our public health officials to frost the glass further. It’s the nature of these events that they don’t resolve quickly regardless of it all goes well and we deserve accurate & complete information in order to assess our risk. But as you suggest, that has proven to be in short supply on all manner of issues. The Thoma link:

  2. leftback says:


    I am inclined to agree that this outbreak is not likely to be a dangerous pandemic, but that is based on what we have seen in the NYC area cases. However, as Tom points out information is quite sparse at this stage. My gut feeling is that if/when we see a real killer flu it will be on us with tremendous speed and the hospitals would start filling up very rapidly. What we should be concerned about is that this virus is going to be sitting in the human population and the probability that mutation results in the later generations emerging as a substantial threat.

  3. [...] Excerpt from:  The Real Swine Flu | The Big Picture [...]

  4. Thatguy says:

    Quote from LB:
    “What we should be concerned about is that this virus is going to be sitting in the human population and the probability that mutation results in the later generations emerging as a substantial threat.”

    This kind of statement belies a misunderstanding about viral mutation. Viruses usually mutate in order to become less fatal. Part of the success with treating HIV can be traced to the slow mutation of the disease into less deadly forms. Viruses don’t actually want to kill their host because they are dependent upon it and cannot spread when the host dies. So the virus will steadily become less deadly as it mutates within the human population. The most deadly viruses are those that have just jumped from a different species and therefore have not mutated sufficiently to prevent death in their host (what doesn’t kill a pig MAY kill a human).

  5. [...] Continued here:  The Real Swine Flu | The Big Picture [...]

  6. dunnage says:

    Well, give back Wachovia, TARP and Government Guarantees and let us see how well Wells Fargo was run.

  7. gunterik says:

    I have been checking on this swine flu tracking website on and off for the last couple of days now and its kinda scary seeing how it this strain of flu is spreading.

  8. BG says:

    You have just got to love how the hogs pulled back from the trough when they learned Obama is giving Chrysler $8B more to support them thru their bankrupcy filing. Wall Street did not like that shit.

    They don’t give a damn about a deteriorating economy, people losing jobs or a major corporation going down the tubes just as long as it isn’t them.