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.
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.