Everybody's Lying to You

Maybe not everyone's lying to you, but it sure does seem that way.

You don't have to go far to catch an earful of big-fish stories and half-baked forecasts coming out of Wall Street, Washington, and the boob tube. Can you really trust that Morgan Stanley (NYSE: MS  ) doesn't need help when it returns TARP money, but continues to sit on $23 billion of FDIC-guaranteed debt (which comes with a lot fewer strings attached)? Or should you trust stress-test results from bank regulators whose “worst-case” scenario of 8.9% unemployment has already been surpassed by a current 26-year-high jobless rate of 9.4%?

Everyone has some vested interest coloring his or her version of the truth. Whether it's padding their pockets, protecting their reputations, or making headlines, everyone has a motive. The trick is to separate motives from facts. While aligning your interests with the truth doesn't guarantee success, it surely beats chasing down a pack of lies.

Here are three economic fibs that you should disregard.

Lie No. 1 -- Consumer spending will solve our problems.
While the National Retail Federation may love articles like Newsweek's "Stop Saving Now," such commentaries are reckless attempts to re-inflate the consumer credit bubble and inflate readership. In this particular essay, the author goes as far as to label savers as "hoarders" and encourage businesses "to roll the dice."

On the contrary, consumers and businesses need to spend prudently, save frequently, and invest intelligently. Thankfully, consumers are earning a penny for their frugal thoughts, as they appear to have deep discounters like 99 Cents Only (NYSE: NDN  ) and Dollar Tree (Nasdaq: DLTR  ) on their minds. In contrast, luxury retailers such as Saks (NYSE: SKS  ) are taking it on the chin. If anything, consumers have put down credit cards and taken up more ways to save money.

Automotive research firm R. L. Polk & Company sees consumers “hunkering down” as they keep their existing cars much longer. It's little wonder that automotive service company Pep Boys (NYSE: PBY  ) reported earnings that blew by analyst estimates. Thrifty is the new green!

Lie No. 2 -- Housing will bounce back.
Real estate doesn't bounce. Not only is appreciation dead for now, it may never have existed. Dennis Cauchon makes that point in a USA TODAY report called "Why home values may take decades to recover." His data show that "the average annual investment return from 1950-2000 was less than one-half of 1% per year, after adjusting for inflation."

Housing has two major purposes: as a place to live and as an investment. When you buy a home to live in, your goal is to acquire a dwelling that brings you pleasure and carries a cost of ownership that is competitive with what you would otherwise pay in rent.

If you buy for investment purposes, you need to perform a discounted cash flow analysis based on the estimated rental cash flows. Either way, appreciation should not be part of the equation.

So, with unemployment on the rise and housing inventories still sky-high, you need to think twice before jumping into any homebuilding stock. (Ironically, with rock-bottom interest rates, one-time tax credits, and falling prices, there's never been a better time to buy your first home.)

Lie No. 3 -- (Insert name here) is too big to fail.
Don't believe the hype; there are no companies too big to fail. Even nations are not too big to fail, as demonstrated by the fall of Rome and the decline of the British Empire. What do exist are institutions so globally intertwined that their failures would cause side effects that would be simply unpalatable to business leaders and elected officials alike. Thus, there's a difference between being too big to fail, and being too important.

Would Americans accept losing their life savings above the FDIC threshold? Could the country stomach endless lines of irate customers demanding their deposits from a national bank like Wachovia – now owned by Wells Fargo (NYSE: WFC  ) ?

There is no doubt we could have survived it, but politicians tend to dislike civil unrest and business owners aren't fond of riots. The "too big to fail" travesty seems like an avoidable consequence of bank centralization. Keep in mind that between 1984 and 2003, the size of our banking system declined by almost 48% as 15,084 entities consolidated into 7,842.

That's why superstar analyst Meredith Whitney's idea to supercharge regional banks, instead of feeding the national lenders, appears to be an intelligent first step. It would be refreshing to see institutions that “bank on innovation,” like SVB Financial Group (Nasdaq: SIVB  ) , allocating more capital instead of watching megabank zombies stumble along.

Believe your lying eyes
Tall tales are common when it comes to matters of money, but don't let the hot air take you off course. The key is not to debate opinions, but to explore facts. No one can predict the economy, so focus on great businesses that execute and management teams that don't lie to you.

Our stock experts, David and Tom Gardner, avoid fish tales. These are two straight shooters who take their big catches in stride and don't lament the ones that got away.

And as the advisors of our Stock Advisor newsletter, they are dedicated to discovering great businesses and exposing the market's dirty little secrets. They aren't afraid to throw the stinkers overboard. These two are the truth, doling out picks that have handily outperformed the S&P 500 since their newsletter service's inception in 2002.

So, can you handle the truth? Click here to see which companies passed the test in Stock Advisor. A trial is free for 30 days and gives you full privileges to the service. Here's more information.

This article was originally published on May 18, 2009. It has been updated.

Fool contributor Andy Louis-Charles doesn't own shares in any company mentioned. Andy is an avid real estate investor and loves running DCFs on income properties. Want to know how? Shoot him an email -- he loves to talk shop. The Motley Fool has a disclosure policy


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