Bearish Mexico Stock Options Give Traders 200% Returns

Options traders who placed bets last week thatMexico’s outbreak of deadly swine flu would spur a stock-market sell-off earned 200 percent on their investments today.

Contracts giving the right to sell the iShares MSCI Mexico Investable Market Index Fund for $31 by May 16 jumped to $1.80 today from the 60-cent closing price last week, according to data compiled by Bloomberg. June $26 puts, the most-traded options today on the iShares fund, climbed 113 percent to 85 cents, Bloomberg data show.

The fund, which mimics the performance of the MSCI Mexico Index and changes hands on the U.S. exchange like a stock, lost 7.2 percent today to $30.73 after President Felipe Calderon declared emergency powers to fight the virus, which has killed as many as 149 people in Mexico. Mexico’s Health Minister Jose Cordova cancelled school classes on April 24 to prevent the spread of a “new strain of influenza,” according to an e- mailed transcript of a speech in Mexico City.

“You could have done it on Friday because the news was out and that’s when they started to announce the school closings,” Eric Conrads, a Mexico City-based hedge-fund manager at ING Investment Management SA, which oversees $12 billion in developing markets, said in an interview.

The iShares fund had climbed 20 percent in the past month after the government’s decision to seek a $47 billion credit line from the International Monetary Fund to help weather the global financial crisis.

Bolsa, Peso Drop

The benchmark Bolsa index fell 3.3 percent as retailers and airport operators tumbled on concern the flu outbreak will hurt travel and the tourism industry. Mexico’s peso today dropped 4.4 percent against the dollar, the biggest drop in six months.

Grupo Aeroportuario del Pacifico SAB, the country’s largest private sector airport operator, plunged 14 percent, while Wal- Mart de Mexico SAB, Latin America’s largest retailer, slid the most since November.

Mexico’s Finance Minister Agustin Carstens said “there’s no doubt” the outbreak will reduce economic output and that the virus has a “high potential for disruption.” Tourism attracted $13.3 billion into the economy last year, making it Mexico’s third-largest source of foreign currency behind oil exports and remittances from Mexicans living abroad.

Put Volume Climbs

May $25 puts were the best-performing options tied to the iShares fund today, jumping 320 percent from the last closing price on April 20, to 21 cents, according to Bloomberg data. Put trading climbed 26 percent on April 24 from the previous day to 4,964 contracts. Still, trading was below the 6,714 daily average during the previous two weeks.

Put-option volume on the fund climbed to 13,037 contracts today, compared with a weekly average of 7,353 this year, according to Bloomberg data. Those contracts outnumbered trading in bullish bets, or calls, by 2-to-1 today. Put options give the right to sell a security for a certain amount, the strike price, by a given date. Calls convey the right to buy.

Conrads, who’s betting on declines in Mexican shares, said some of the put options may have been bought by investors using the contacts to hedge against existing holdings of Mexican stocks.

To contact the reporters on this story: Michael Patterson in London atmpatterson10@bloomberg.net; Alexander Ragir in Rio de Janeiro ataragir@bloomberg.net.

By Michael Patterson and Alexander Ragir
http://www.bloomberg.com/apps/news?pid=20601086&sid=aDoQtvn4WL9Y&refer=latin_america

Mexico Increases Closures as Flu Toll Rises to 149

Mexican authorities ordered all schools shut and some businesses to close as the number of deaths suspected to be caused by swine flu rose to 149.

Schools and colleges will be closed nationwide until May 6 and authorities are contemplating whether it’s necessary to shut down more activities, Health Minister Jose Cordova said during a news conference in Mexico City. The state of Jalisco ordered bars and nightclubs shut in the beach resort of Puerto Vallarta.

“We’re working with all sectors of Mexican society,” Cordova told reporters today in Mexico City. “This is the only way we’ll be able to control this health problem.”

Government officials are reviewing additional measures, including curtailed business hours and operations in Mexico City, after the number of suspected flu deaths more than doubled from 68 reported on April 24. The spread of the virus had initially appeared to be concentrated in Mexico City and the states of Mexico and San Luis Potosi.

The Health Ministry may request a delay for the start of political campaigns for July mid-term congressional elections to avoid crowds where the disease can spread, Cordova said at a news conference, which was held outdoors under a tent in an effort to avoid transmitting the virus. The event was briefly interrupted when a 5.6-magnitude earthquake shook the city; there were no reports of serious damages or injuries.

Mexico City Government

The capital city’s government will decide tonight or tomorrow morning whether to restrict business operations, which may include mandating that office workers stay home. The decision depends on how fast the disease is spreading, Mexico City officials said.

Health officials haven’t established any common patterns among the flu victims, Ignacio Villasenor, Mexico City’s deputy health minister, said in an interview. Many of the dead are between the ages of 25 and 50 who only sought medical attention in the late stages of the disease, he said.

Health workers at two laboratories will increase the number of tests for swine flu to 100 per day by tomorrow after reaching 15 yesterday, Cordova said.

“We’re doing the case studies, but evidently not at the speed we would like,” he said.

Cordova said an early case of swine flu appeared in a 4- year-old child in the state of Veracruz on April 2, though authorities only confirmed the case as swine flu after others appeared. The outbreak in Veracruz was controlled and the child has recovered, he said.

Central Bank

The central bank is operating normally and taking preventative measures recommended by the government, the bank’s press office said. The bank is advising employees not to congregate in large groups and is allowing parents to stay home to take care of small children, it said.

The lower house of Congress plans to hold its session scheduled for tomorrow in Mexico City without any changes, Cesar Duarte, president of the Congress, said in a statement.

The slowdown of commerce in Mexico City as people remain at home has cost businesses such as restaurants and hotels 3 billion pesos ($225 million), Reforma newspaper reported, citing Laura Velazquez, head of the city’s Economic Development Ministry.

Mexico City’s subway system, which usually handles 5 million passengers a day, is seeing significantly less traffic, the system’s press office said. Workers are handing out face masks in stations and cleaning trains and stations more thoroughly to avoid spreading the flu. There are no plans to close subway stations or routes because of the outbreak.

Hospital Scene

Mexico City hospitals have enough staff and medicine to confront the epidemic, Villasenor said.

Gabriela Galan, nursing supervisor at Dalinde Centro Medico in Mexico City, said that while the hospital has received patients seeking consultations, none have been diagnosed with swine flu. The hospital isn’t experiencing long waits and has the medicine and capacity it needs, she said. Doctors and hospital personnel are washing their hands before seeing patients and using masks, she said.

Many organizations are heeding the government’s call to avoid events that generate crowds. A conference today in Mexico City to provide results of a national survey on philanthropy was called off because of the warnings the government has made, according to a statement from the organization.

Business Operations

Businesses, such as The Home Depot Inc., are operating normally in Mexico City and surrounding areas. The company said in a statement it has issued breathing masks to all its employees and is handing them out free of charge to customers.

Alfa SAB, a Monterrey-based maker of engine parts and petrochemicals that employs more than 50,000, said it’s recommending workers avoid flying to Mexico City. The company is providing flu shots, hand sanitizers and masks to employees, especially in Mexico City and the states of Mexico and San Luis Potosi, Enrique Flores, an Alfa spokesman, said in an e-mail.

Grupo Aeromexico, the Mexico City-based airline, said it won’t charge customers to change or cancel flights between April 24 and May 31 to help people adjust travel plans because of the flu outbreak.

Mexico’s currency and stock market plummeted on investor concern the epidemic will undercut an already weak economy.

The benchmark Bolsa stock index fell 3.3 percent to 21827.11 at 4:05 p.m. New York time. The peso sank 4.5 percent to 13.9635 per dollar.

To contact the reporter on this story: Thomas Black in Monterrey attblack@bloomberg.net; Jens Erik Gould in Mexico City atjgould9@bloomberg.net

By Thomas Black and Jens Erik Gould
http://www.bloomberg.com/apps/news?pid=20601086&sid=aH8DeSCFHnJY&refer=latin_america

Mexican Peso, Stocks, Bonds Tumble as Swine Flu Outbreak Grows

Mexico’s peso tumbled the most in six months and stocks and bonds dropped as an outbreak of the deadly swine flu threatened to curb tourism and consumer spending, deepening the country’s recession.

The peso sank 5.1 percent to 14.0505 per dollar at 5 p.m. in New York, the biggest decline among all currencies tracked by Bloomberg. The benchmark Bolsa index dropped 3.3 percent, the most among Latin American stock markets.

The swine flu “has an immediate economic impact,” said Gerardo Margolis, a vice president for emerging markets at TD Securities Inc. in Toronto. “Investors will be cautious.”

The flu outbreak may scuttle a rebound in investor confidence in Mexico that was fueled by the government’s decision to seek a $47 billion credit line from the International Monetary Fund and tap a $30 billion swap line with the Federal Reserve. The peso has gained 10.8 percent after dropping to a record low of 15.5892 per dollar on March 9.

The currency had plunged 32 percent in the previous six months, the worst performer among the 16 most-traded currencies against the dollar, as the global recession eroded demand for the country’s exports and slowed migrant remittances from Mexicans working abroad.

“They’ve been doing all the right things,” said Cathy Elmore, who manages $450 million in emerging-market assets at Blackfriars Asset Management in London. “The swine flu is really bad luck. There has been a knee-jerk reaction to sell Mexico.”

Schools, Bars Closed

The flu outbreak, which has claimed more than 100 lives in Mexico and spread to countries including the U.S., Spain and Canada, prompted authorities across the Latin American nation to order mandatory closures of public places, including schools and bars. The spread of the disease will reduce dollar inflows from tourists and curb consumer spending at restaurants, theaters and other venues where crowds gather, Margolis said.

“There will be a drop in consumption and tourism and that affects the currency,” Margolis said.

Tourism attracted $13.3 billion into the economy last year, making it Mexico’s third-largest source of foreign currency behind oil exports and remittances from Mexicans living abroad. Private consumption accounts for about 50 percent of total demand for goods and services in Latin America’s second-biggest economy.

Retailers, Airport Operators

The Bolsa fell the most in almost a month, led by declines in retailers and airport operators.

Grupo Aeroportuario del Pacifico SAB, the country’s largest private sector airport operator, plunged 14 percent, while Wal- Mart de Mexico SAB, Latin America’s largest retailer, slid the most since November. The yield on the government’s benchmark peso-denominated bonds due in 2024 rose 18 basis points, or 0.18 percentage point, to a one-month high of 8.16 percent.

The peso earlier weakened to as much as 14.0610, the lowest since April 1. It depreciated 1.6 percent last week after the government first disclosed deaths tied to the virus and as faster inflation fueled speculation the central bank will slow the pace of interest-rate cuts.

The central bank bought $400 million worth of pesos at three separate auctions today to stem the currency’s slide. It has spent $23.1 billion from its foreign reserves since October.

“It’s a very significant risk factor,” said Alberto Ramos, an economist at Goldman Sachs Group Inc. in New York. “If the outbreak spreads and causes damage to the economy, then that could do damage to financial assets.”

Spain, Canada, New Zealand

Spain reported its first case today, while six people in Canada contracted the virus and more cases are likely, government officials said. New Zealand said as many as 13 students who recently visited Mexico may have swine flu.

The extra yield investors demand to own Mexican bonds instead of U.S. Treasuries widened 20 basis points to 3.39 percentage points today, according to JPMorgan Chase & Co.’s EMBI+ Index.

Mexico’s Finance Minister Agustin Carstens said “there’s no doubt” the outbreak will reduce economic output and that the virus has a “high potential for disruption.” The government doesn’t yet know the extent of the impact, he said at the IMF’s spring meetings in Washington.

The government earlier this month forecast the economy will shrink 2.8 percent this year, the first contraction since 2001, as the U.S. recession curbs demand for Mexican exports and slows dollar flows from remittances, foreign direct investment and tourism.

‘Very Bad Time’

The outbreak “comes at a very bad time,” said Benito Berber, an economist at RBS Greenwich Capital Markets in Greenwich, Connecticut. He predicted the peso will drop to 14 per dollar over the next two weeks.

UBS AG downgraded Mexican stocks to “underweight” from “top pick” on concern the country’s economic outlook may worsen because of the swine flu.

Sony Corp., Samsung Electronics Co. and Nokia Oyj are among companies that have told workers not to travel to Mexico, officials at the companies said. Japan, Malaysia, Australia, South Korea and Singapore are screening passengers at checkpoints for fever. The European Union advised travelers to avoid going to Mexico.

Mexico’s President Felipe Calderon declared a swine-flu emergency on April 25, giving him powers to order quarantines and suspend public events in the nation, where more than 1,600 patients have been hospitalized with flu-like symptoms.

‘Lot of Jitters’

The number of deaths from Mexico’s flu outbreak has risen to 149, Health Minister Cordova said. Not all deaths have been confirmed to be caused by swine flu, he said.

In the U.S., 40 people have confirmed cases of swine flu linked to the Mexican virus, the World Health Organization said today. It has called the outbreak a “public health emergency of international concern.”

“We don’t know what the magnitude of the flu outbreak will be,” said Mario Copca, a currency strategist at Metanalisis SA in Mexico City. “This is going to fuel a lot of jitters.”

Russia suspended imports of all meat from Mexico, the Philippines ordered a ban on imports of pork and hogs from the Latin American country, South Korea is boosting quarantines on pig and pork imported from Mexico and China has banned some imports of pork.

“We may start seeing an impact on exports,” said Margolis at TD Securities. “That could also hurt the currency.”

To contact the reporter on this story: Valerie Rota in Mexico City atvrota1@bloomberg.net.

By Valerie Rota
http://www.bloomberg.com/apps/news?pid=20601086&sid=aEQyIL11CsrI&refer=latin_america