Get Your Tactics Ready for the Ebola Market Event

Keith Fitz-Gerald Oct 15, 2014
19 

My sources tell me that Ebola is probably the most serious threat to humanity since the Bubonic Plague of the Middle Ages. Already it has spread to a dozen countries, including the U.S., and more than 4,000 people are dead. According to Dr. Bruce Aylward of the World Health Organization (WHO), mortality rates are rising and now sit at 70%.

This outbreak is more grim proof that Trend No. 6 – War, Terrorism, and Ugliness – is indeed a growth industry.

That’s the next trend we’ll be discussing, though it’s easily my least favorite both personally and professionally. But it’s very, very important. So please stay tuned for that in the weeks ahead.

In the meantime, Ebola has the potential to be a serious market event before it’s brought under control. So we need to talk about it logically – no hype, no conspiracies, and no nonsense. I mention those things because they’re all emotional inputs that can cloud your thinking and have a seriously negative impact on your money.

Here are the tactics you need on hand for the Ebola market event.

Ebola and the Air Traffic Industry

Air traffic is the main component to Ebola’s spread, as the report from the Laboratory for Modeling of Biological and Socio-Technical Systems at Northeastern University makes clear. According to Prof. Alex Vespignani, as reported by Reuters, the risks “change every day the epidemic continues.”

Other experts like Dr. C.J. Peters and virologists of the CDC and the U.S. Army’s Medical Research and Development Command are cautioning that Ebola could mutate and become transmissible through the air.

While there have been some politicians calling for bans on flights coming out of West Africa, these seem unlikely to be enacted. The White House, the WHO, and other groups have made it clear that they view the idea of cutting off the three countries in which Ebola runs rampant as not just politically unfeasible, but also impractical as a tool to fight the spread of Ebola.

Key Takeaways to Protect Your Wealth from Ebola

Here are three key tactics that will help you stay in the game and in pursuit of the longer-term profits we know are out there.

1) Make sure your trailing stops are in place. I recommend using these across the board to ensure that your money is protected against catastrophic loss.

2) Cover your downside with investment choices that will profit in a fall. Shorting UAL is one way to hedge the short-term potential associated with a single company in a single industry. But to hedge your whole portfolio, I like a specialized inverse fund called the Rydex Inverse S&P 500 Strategy – Investor Class (RYURX) that rises as the S&P 500 falls. Studies show that having between 3% and 5% of investable assets not only takes the sting out any short term market drop, but helps reduce overall portfolio volatility so you can remain focused on opportunity rather than fear.

3) Be ready to buy. Every short-term market event ultimately passes. Ebola will, too. When the corner turns, you’ll want to cover your bases and load up. It will be tough if the disease really creates panic, but absolutely the right thing to do for your financial success.

Yet, there’s nothing officials can do about people’s personal inclinations.

I’ve personally cancelled several travel plans in the wake of Ebola’s rise, and many millions of other would-be customers for the airlines are undoubtedly considering doing the same.

This bodes very badly for the airlines in general, but especially for the big global carriers like United Continental Holdings Inc. (NYSE:UAL). The stock has already sagged since the first U.S. infection was announced, and it’s entirely logical to expect that it will decline further against the backdrop of the (sadly) very real possibility of future infections in the U.S. – especially if they involve more airline passengers.

Consider what happened to the industry the last time a contagion threatened the U.S.

UAL’s Delayed Recovery Shows a Highly Sensitive Stock

In February 2009, as the stock market was emerging from the worst haircut in recent memory, UAL was still trading at the $5.00 to $6.00 range. But as other stocks rose from the recession’s abyss, UAL had some room to fall as the H1N1 virus (swine flu) became a cause for national concern.

A disease that caused nothing worse than a fever in the vast majority of its victims would nonetheless kill up to 203,000 people according to researchers writing in PLOS Medicine – a figure 20x higher than WHO lab-confirmed cases by the time it ran its course.

Like all contagions, it wreaked havoc in the airline industry. UAL reached its 2009 low not in March but at the end of June when it sank to $3.17 per share – a 53% drop-off for a stock that had already felt the lash of recession as painfully as any company.

Of course, H1N1 and Ebola aren’t the same thing. Ebola is far more deadly – which makes it a more serious threat to the airline industry, in addition to humanity itself.

Honestly, if there’s ever a time when I hope my analysis is wrong, this is it. I hope with all my heart that this situation is contained quickly and thoroughly.

Source: Yahoo!Finance

But I worry that the damage to the airline industry is already done.

Even in a best-case scenario, the dozens of people potentially exposed to the virus so far will be watched like hawks under quarantine for a few more weeks, show no symptoms, and be free to go – potentially carriers of not only the virus but the law of unintended consequences.

How to Turn UAL’s Woes into Profits

We already talked about how buying put options can produce gains when prices for the underlying stocks or indexes fall. There are also a wide variety of exchange-traded funds (ETFs) designed to go up in value when the market or specific sectors drop – in some cases, by two or three times as much.

However, the purest means of profiting from a downward move in the market or an individual stock is by selling short. It’s aggressive and it’s not for everybody because it can take nerves of steel to bet on failure when the nature human instinct is to bet on success.

In simplest terms, when you sell a stock short, you borrow the shares from your broker, sell them at the current market price, and then hope to score a profit by buying them back at a lower price once the stock drops. At that point, you return the shares to the broker, keeping the difference as profit (minus a small margin fee).

This is a powerful short-term strategy, especially in uncertain times.

Of course, you can’t short just any old stock and expect to profit. The key is to find overvalued issues and sell them when the market turns down. That way you’ll have momentum on your side yet still have the ability to remain fully invested, getting the maximum bang for your buck.

However, you don’t ever want to bet against a stock solely because it’s expensive, or even overvalued.

Instead, you always want to find some other compelling reason for potential failure or a lower valuation – like Ebola’s potential impact on the airline industry and its major carriers like United.

You also have to be careful and spread your risk – much as you would with long positions. I suggest putting no more than 2.5% of your assets in any single short position. Long or short, you never want to bet the proverbial farm on any trade – ever.

So, if you believe like I do that Ebola has the potential to ground earnings, consider shorting United Continental Holdings Inc. (NYSE:UAL) at market, with plans to cover the trade if UAL rises by more than 10% from your entry point. More sophisticated investors may wish to consider buying put options as an alternative.

If you find it unthinkable to profit from Ebola, I understand. But recognize that from chaos comes opportunity, an investment maxim I’ve learned to live by in the pursuit of wealth protection and profits.

Best regards for great trading,

Keith

19 Responses to Get Your Tactics Ready for the Ebola Market Event

  1. Tom Malloy says:

    Hi Keith-

    What about the companies developing an vaccine for Ebola? I heard there was three of them in play, none of which have been approved by the FDA….

    Thanks

    Tom

    • Scott Nelms says:

      Do any of the MoneyMap various portfolio’s contain any companies involved in the vaccine or the testing kits for Ebola? I know one of your biotech companies had an ingredient used in some of the successful Canadian testing that turned out to be 100% successful in mice and primates. It is unclear whether any of the trial vaccines are using that ingredient that is in very short supply.

      • Keith says:

        Hi guys and thanks for being part of the family and, of course, for taking the time to comment.

        I am tracking roughly a dozen Ebola related vaccine companies. So far there have been a whole lot more misses than hits which is consistent with early stage biotech development. In the meantime, though, I’ve recommended other companies engaged in single source medical supply and data wrangling in the Money Map Report. To be fair to those subscribers, I can’t name them here.

        However, if you’re interested in similar investments, I suggest hunting around for a) industry leaders; b) with a blend of domestic and international revenue who c) are closely tracking emergency medical testing and equipment provision. The key is to think like the guys who sold the picks and shovels to the gold miners of 1849…not like a miner.

        Best regards,

        Keith

  2. Liam O'Reilly says:

    As soon as the first person who works on the airplane, or a TSA or customs agent at a major air terminal gets ebola, all bets are off. The panic will spread instantly and these employees will refuse to come to work. The US Hospitals are not prepared for the flood of ebola patients and their employees will refuse to come to work and risk infecting themselves and families.

  3. Robert Freeman says:

    I understand looking at the potential for shorts and puts because they have high rewards, but there could be companies who have upsides as well. Has anyone looked into the companies that produce the protective masks, hand sanitizers, and medical grade anti-bacterial soaps that will probably see increased sales once word spreads that Ebola can be contracted from the air? I would imagine that companies like Lysol will also see a big bump.

    • Robert Freeman says:

      I apologize. I realized shortly after posting that Lysol is a private company. Clorox is a similar company that would see the same benefits though.

    • Keith says:

      You are spot on and there are lots of great choices that I’m tracking in a variety of sectors. The trick, of course, is that you never want to try to catch falling knives. Market sentiment is overwhelmingly negative for the minute and while that makes for a great buying opportunity, you can still get cut until traders take their finger off the sell button.

      Thanks for being part of the family and for taking the time to ask. Constantly looking for the upside is exactly what needs to happen to build Total Wealth.

      Best regards,

      Keith

  4. Kenny says:

    Tom: There are more than 3 vaccines in the works but all are very risky bets. I’d rather short or buy puts on UAL with a higher probability of success.

    Liam: I couldn’t agree with you more. I’m really hoping this won’t happen but there’s far too many people and possibilities for transmission on this planet. With flu season here, and enterovirus affecting young kids by the thousands, anyone who sneezes is going to get a dirty look.

  5. Robert in Vancouver says:

    Too bad that Ebola is being treated as a political issue by most US politicians and media outlets.

    Democrats and the media (except for Fox) are opposed to banning flights or visitors from Ebola source countries.

    Republicans and Fox Media are in favour of such a ban until the epidemic is contained in the source countries.

    This is scary.

    • Ste says:

      Robert, you hit the head of the nail. Our politicians here in the United States are more concerned about being politically correct and not offending anyone than they are about governing and making the tough choices which will help protect the populace they were elected to represent.

  6. blake says:

    Keith,

    Have you really cancelled airplane trips in the near future? Where is the report that states Ebola could mutate and be transmitted by air?

    Thanks.

    Blake

    • Keith says:

      Good morning Blake.

      Yes, I have – a trip to China and a trip to the east coast both. But that’s just me being cautious. I want to stay out of the air until I have a better sense of what we are dealing with here and can personally come to terms with the implications.

      As for the report, there are several leading disease specialists including Dr. Michael Osterholm, director for the Center for Infection Disease Research and Policy at the University of Minnesota and Dr. James Le Duc, director of the Galveston National Laboratory at the University of Texas who are worried that a respiratory transmissible Ebola virus would be devastating. He even goes so far as to call the possibility “genetic roulette.”

      Officially, the chances of that happening are still small. However, as Dr. L Duc pointed out on CNN, nobody is tracking how the virus is mutating which is perhaps the ultimate wildcard. Every time the virus finds a new host, it gets the chance to mutate. One group in Sierra Leone, for example, has already documented more than 300 genetic changes in the Ebola virus during this outbreak alone.

      But the most pointed comments I’ve encountered yet have come from Dr. David Sanders, a virologist at Purdue University and an Ebola expert. He pointed on on Fox that “we actually have the data that show that Ebola enters into lung tissue from the airway side. And it enters by exactly the same side of the cell as influenza enters cells. So it clearly has the inherent capacity to get into the lungs from the airway.”

      Even the United Nations is now warning of the possibility. Anthony Banbury, who is the UN’s Ebola mission chief, says you cannot rule out this nightmare scenario.

      Critics charge that noted experts like this are being alarmist. But I don’t believe that’s the case. I share Mr. Banbury’s opinion that behind closed doors they are saying “they have never seen anything this bad.”

      Thanks for being part of the family and for taking the time to write.

      Best regards,

      Keith

  7. Harry says:

    Hi Keith, Plz. explain the use of a trailing stop and how it can be best used to protect “downside risk”. Is a stop order used or a stop limit order used to best accomplish the task? Thanks, Harry

  8. diana says:

    I am nervous about flying too. My usual airport is Houston….a straight shot from Africa. I don’t want to be involved in extra security, the mental energy of so many people concentrating on this one thing. And the possibility of quarantine or being searched out after the flight. I think it would be MUCH better to quarantine people for however many days BEFORE they fly out of the hot zone. And now they are flying the poor exposed girl all over the country!! Duh. I don’t like it.

  9. DOUGLAS CARR says:

    Hello,
    HOW/WHERE CAN I ACCESS YOUR ANSWER TO HARRY’s
    QUESTION ABOUT TRAILING STOPS? THANK YOU.

  10. Shailesh says:

    Keith,

    Re shorting UAL, the stock is trading higher today as is the general market with the DOW up 300 pts at one stage. Would you say that this only provides more
    opportunity to buy puts with the premise being that this uptick is short lived and more a function of the market bounce today? Or is there risk in shorting with
    the possibility that UAL keeps going up. It would important to note that Delta is painting a rosy picture Ebola notwithstanding and stock is up. Thoughts?

  11. Bill says:

    Can you identify and maybe rank the companies as to impact on bottom line that are supplying the masks, hazmat suits, Ebola test kits, etc. that could have a windfall in sales and profits and are still good investments?

  12. F. Mervar says:

    So, what about his LAKE company, stick has been 18-30 in the past few days.. Doesn’t sound like this govt is telling us everything.. Typical.

    Havent heard any good news about vaccines, has anyone???

    Thx,

    Butch

  13. Sam Glover says:

    You are right on! Considering also: entertainment, restaurants, shopping, social meetings, all travel modes, sports & other events. Fear to be a motivator.
    Government to take in billions on this. Watching with interest.
    Sam

Leave a Reply

Your email address will not be published. Required fields are marked *