Bogus Headlines, Big Investment Potential

Panic now, think later
The headlines have been screaming at us for weeks that Doom is upon us. Everyone agreed that Financial Armageddon was here and that we, as a nation, as a world, needed to do something NOW to make sure that cascading bank failures didn't cripple every business in the galaxy.

"Lending is the lifeblood of commerce!" the press and pundits shouted. Politicians and sweaty-looking bureaucrats like Hank Paulson and Ben Bernanke brushed aside disagreements by saying, "Sure, it's disagreeable to bail out so many rich financial types, but really, we're doing it for you, not for them!”

Banks, or so the story went, were merely the tip of the iceberg. If we let all the Citigroup (NYSE: C  ) types get hurt, they'd stop lending to the Church & Dwight (NYSE: CHD  ) types, and soon, no one would have access to baking soda, Brillo pads, or condoms!

And it wouldn't be just the big companies, either, they warned us -- they would also quit lending to you, and you wouldn't be able to charge the baking soda, Brillo pads, and condoms, even if you could find them in the stores.

The panic was infectious. The press dutifully ran out and reported every "I can't get a loan" anecdote it could dig up, whether from small businesses or regular Freds, and the fear kept rolling. We even had a call at the top of our home page for Fools everywhere to rally and demand that our Congressional representatives pass a massive bailout package.

Reality's revenge
For the record, I disagreed with that call. I disagree with just about everyone who tries to rush me into judgment without providing much proof for their argument -- especially when they tell me that the entire world will come to an end unless we act now, right this very second.

Heretic investor that I am, I like a little more data before I start panicking, and earlier this month, a few researchers at the Minneapolis Federal Reserve obliged. Their conclusion?

Four widely held beliefs that grounded the argument about bailouts versus the end of the financial world were completely bogus. Really. Here's what they wrote.

The financial press and policymakers have made four claims about the nature of the crisis.

1. Bank lending to non-financial corporations and individuals has declined sharply.

2. Interbank lending is essentially nonexistent.

3. Commercial paper issuance by non-financial corporations has declined sharply and rates have risen to unprecedented levels.

4. Banks play a large role in channeling funds from savers to borrowers.

Here we examine these claims using data from the Federal Reserve Board. At least based on data up until October 8, 2008, we argue that all four claims are false.

As it turns out, the only obvious problem has been concentrated in the banking industry, where commercial paper swapping has dropped and rates have shot up. That tells us bankers have been trying to gouge each other, but it doesn't seem to predict doom for the rest of the economy.

According to this Federal Reserve research (and contrary to just about every headline you've seen for the past few weeks), lending remained robust -- even between banks, even to consumers -- and businesses were finding other credit and at very reasonable terms.

In other words, folks throwing around phrases like "No Banker Left Behind" may be a lot closer to the truth than anyone originally believed. Instead of an economic crisis, what we really face is a financial crisis of confidence -- except to the extent that the rampant fear out there cools spending and consumption.

Let me be clear: I believe we're going to see slowing economic growth, largely based on that fear, but I think those fears are overblown and will pass more quickly than any of the panicked pundits and headline-writers out there realize.

What's in it for me?
Given that the financial world isn't ending, I'm primarily interested in how I can make money even in the market's current panic. And the answer is dead simple: Buy stocks now. Lots of them. I’ve been doing it now for weeks, and so has some guy named Buffett.

Sure, share prices have been hammered, and no one knows when that will end, but given that corporate credit conditions aren't nearly as bad as the headlines are making everyone believe, I suspect that the supposed liquidity concerns at hundreds of companies are vastly overblown. Sure, Ford (NYSE: F  ) and GM (NYSE: GM  ) look as though they may well bleed to death, but I'll eat a half-dozen floor tacos if Yum! Brands (NYSE: YUM  ) finds itself strapped for funding.

Foolish final thought
I expect even better things for bashed-up small caps such as Dynamic Materials (Nasdaq: BOOM  ) , which carries moderate debt (thus spooking the market) but generates strong cash flows and operates in a wide-moat business serving half a dozen industries with extraordinary long-term growth potential. Or take Chipotle Mexican Grill (NYSE: CMG  ) , which is down more than 70% from a recent high yet is a brand powerhouse, net-debt-free, and nearly certain to come out of the current slump stronger than before.

In fact, I don't think there's been a better market for small-cap buyers in a decade, precisely because they've been hammered so hard on the way down -- even those with excellent fundamentals and prospects.

Today, our small-cap investing service, Motley Fool Hidden Gems, rates a number of companies' ability to withstand the current storms (including Dynamic Materials and Chipotle). We also rank our best buys now, and although I can't give away too much, I've rarely seen so many small caps that I think have the potential to double, triple, or more over the next few years. If you'd like to see a roster of proven performers with hungry, capable management teams that the market has tossed on the trash heap during this ill-informed, nationwide panic, just click here for a 30-day free trial. There's no obligation to subscribe.

Seth Jayson is the co-advisor at Motley Fool Hidden Gems. At the time of publication, he owned shares of Ford, Chipotle, and Dynamic Materials, but he had no position in any other company mentioned. Dynamic Materials and Chipotle B shares are recommendations of Hidden Gems. Chipotle A shares are a recommendation of Motley Fool Rule Breakers. The Motley Fool's disclosure policy never breaks a sweat.


Read/Post Comments (11) | Recommend This Article (47)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 23, 2008, at 5:34 PM, StocksBuyorSell wrote:

    I think jumping back into the market right now may indeed be foolish as some stocks could still come down 40%or more depending on how bad things get. Personally i am going to wait and see what happens before I jump back in. Amazon is a good example of a great company being punished by the market, however it could come down even further making it an even better buying opportunity.

    http://stocksbuyorsell.com/growth-stocks/7-why-amazon-punish...

  • Report this Comment On October 23, 2008, at 9:58 PM, RebelPOW wrote:

    Damn fine comment!

  • Report this Comment On October 23, 2008, at 10:36 PM, EverydayInvestor wrote:

    CMG deserved its fall, like GOOG and ISRG. They were just too expensive. I remember calling CMG overvalued at $60 a few months after its IPO. But yes, buying when the market is falling is a good thing, as long as you avoid the most over-leveraged companies.

  • Report this Comment On October 24, 2008, at 1:10 AM, Inklebee wrote:

    Personally I think this Panic is exactly what America needs. Maybe now we'll put down the credit cards, stop using our houses as ATMs, never lease a car again, and commit to a life within our means in which we can grow real capital. I think the next few generations will look alot like the 30s through the 70s, when people used real money and hard work to build actual wealth. No more money made of clouds. The era of Financiers is over; this century belongs to the Capitalists! Stop consuming, start saving. Frugal is the new black.

  • Report this Comment On October 24, 2008, at 8:02 AM, TMFBent wrote:

    I'm all for frugal. I'm as cheap as they come. It comes in very handy at times like these, when everyone else has suddenly rediscovered livin' within their means, and they bash stocks down to incredible values.

    And I fully agree on CMG's valuation a while back. I sold half my position (with a better than 100% gain, IIRC) near the top. Got back in too early, of course, but I'm there for the long run.

    Sj

  • Report this Comment On October 24, 2008, at 10:58 AM, SolarInvestor wrote:

    I tried to find a reason to give our banks so much money. I listened to what everyone had to say and the only things I ever heard was that companies need to borrow to expand and companies need to borrow to make payroll. What company would be expanding in this economy? What decent company needs to borrow to make payroll? I suspected that this bailout was just a last ditch effort for the Bush administration to give huge amounts of our money to his friends. Did we learn nothing from rushing into Iraq? NEVER trust anyone that says we need to act NOW or else. Not a car salesman, and not our government.

  • Report this Comment On October 24, 2008, at 11:18 AM, chali2na wrote:

    Problem is, one's gotta have money to throw at these bargain stocks. Prices on everything continue to rise (except gas right now, but $2.80/gallon is still just wrong), while compensation remains flat. I agree with Inklebee, time to take a step back and spend on needs as opposed to wants. Either way, thanks for keeping me informed Fool! I have learned a lot over the last few weeks from your site and your readers alone.

  • Report this Comment On October 24, 2008, at 3:43 PM, RaulChapin wrote:

    This is a wonderful site. While the president of it is urging every Fool and their brother to go and support a bailout (albeit with certain conditions) there are other Fools presenting the other side of the coin. IE a) the bailout might not have been necessary, at least not in the super urgent form it was presented and b)the bailout might not have been done for the best interest of “Main” street. (sorry for the cliché)

    Why I say this is a good thing? Because a group of investing advisors that all agree are either

    a) all knowing (pretty unlikely)

    b) unable to see more than one scenario and thus very ill prepared to analyze business opportunities.

    c) paid by a 3rd party (such as many wall street analysts) whose interest might not be in line with that of the street investor.

    So, as any good advice, it is up to us to see what we think is the most likely scenario and act on it.

    I personally don't have the necessary resources to invest in individual stocks at this time, but I have been putting my monthly contribution to an ING DIRECT* index tracking passive fund, and any spare cash that I have, I have also thrown in. I know the S&P will be slow to rebound comparing to the amazing opportunities out there... but I am sure in the long run it will at least beat the CDs and saving account interest rates. When my net worth gets a little higher… the Fool is for sure going to be in my list of top picks for paid investing advice.

    (*I am not promoting ING Direct here, I actually chose it after seeing it advertised at the Fool many times, TD is great in the USA, but not so much in Canada.. so you do with what you have!!)

  • Report this Comment On October 24, 2008, at 6:29 PM, bejeweledfool wrote:

    OMG! This article was so funny and so RIGHT!! The sky is falling, the sky is falling!!!!

    I have never in my life bought stocks. I started buying two weeks ago and I am buying like crazy. Even I, a history major in college, realize a deal of a lifetime when I see it. There are stocks in the clearance bin from companies that have been here FOREVER with strong balance sheets, that are profiting and paying dividends. I feel like I am stealing! (Which does add to the thrill I must admit.) I honestly cannot understand WHY people sell in a market where the only rule seems to be buy low, sell high. I sure am glad they are though.

  • Report this Comment On October 24, 2008, at 6:45 PM, IBJAMMIN wrote:

    Solarinvestor got it right!

    This was the Bush Gang's last (I hope) big effort to transfer ordinary citizen taxpayer's wealth to the super rich. Who do any of you think is going to end up owning the bulk of the foreclosed homes going for 30 to 40 cents on the dollar? Notice the really big corporations and banks buying up the small and medium sized companies and regional banks. Did anyone not see the FED's gift of Bear Stearns to JP Morgan for pennies on the dollar. Segue now to WAMU, Wachovia, and NCC (the latter purchased with money from the Treasury Dept).

    Now picture a split screen on your TV.

    On one side Paulson, Bush, and Benanke railing on about how we are all threatened with financial disaster if the TARP isn't passed ASAP!... On the other side of your screen, a time warp, with Bush, Rumsfeld, and Colin Powell railing about the weapons of mass destruction, Al Queda connections, and terrorists, 9/11, and on and on, with the Fox News crew acting as cheer leaders, echoing the mantra of fear!

    How did that turn out! They suckered most of us into supporting an unprovoked attack on a second moslem country, an act guaranteed to infuriate any moslems that didn't already hate, fear or at least distrust us.

    So now after spending over $600 billion, and an untold number of lives on all sides, on an unneccessary war in Iraq instead of finishing the pursuit of Al Queda in Afghanistan, it appears we have been suckered again. This time into spending over $700 billion on this bailout of Wall Street bankers instead of using the Congress's time and money on stopping the hemmoraghing in housing markets. Until the foreclosures abate, there will be no recovery of the whole economy.

    By the way, for those of you in markets not devastated like FL,CA, NV and others, it's gone way past the fools who never should have been given a mortgage. Now it's dragging under hundreds of thousands of families that had good credit but now realize that there is little point in continuing to make payments on a $300,000 loan on a house now only worth $180,000. Once again, a massive transfer of middle class assets to the wealthy buyers scooping up the bargains left behind.

    Here in Cape Coral FL, poster child for the housing bubble, every other home owner is in or is in danger of going into foreclosure. It's so bad that if you stop making payments, it may be over a year till the bank and the courts can get to your case heard. In a city of 130,000+ people there have been tens of thousands of foreclosures and short sales with tens of thousands left to go. This in an area with a wonderful climate. Where you can now buy a Gulf of Mexico access waterfront house with a pool for $160k and up, or have your trailered boat in the water in 15 minutes from your new $60k to $90k house. Swim, golf, play tennis, fish or go boating year 'round! We've been driven down to "third world" prices! Few locals can take advantage of the bargains though.

    So, if you haven't been wiped out out yet, this is a great investment opportunity about to unfold. Remember the huge wave of Baby Boomers are going to be looking for retirement homes. If you come to invest, leave your parka and snow shovel behind!

    P.S. No I''m not a real estate agent.

  • Report this Comment On October 27, 2008, at 6:59 PM, knighttof3 wrote:

    B-b-b-but the Fed paper is http://www.minneapolisfed.org/research/WP/WP666.pdf

    666, people! Obviously these Fed represent the anti-Christ! They even put it out in the month of Halloween!

    No no, I will place my faith in the Christians like Bush and Paulsen and the ummmmm- "Pre-Christian" Bernanke ;-)

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