What Does the World Think

September 22, 2008 by Joe Ponzio

Folks – as you know, I don’t pay lip service to the markets. The Dow dropped and recovered 1,000 points over the past week; and, if you’re looking for that kind of noise, there are plenty of sites out there discussing it.

That said, let me paraphrase many investors I talked to last week: Is the world coming to an end?

No, Chicken Little. It will still be here tomorrow. And you have to invest the same way for one simple reason: If everything does go to hell in a hand basket and the US (or your home) economy – and every business in it – fails, your money is worthless anyways. That’s true whether you hold stocks, bonds, cash, real estate. Even gold.

Just ask the fine folks in Zimbabwe. Eleven million percent inflation and growing. Yep – $100 million Zimbabwean dollars invested in gold last year would be worth less than $1,000 today – and that includes gold’s 50% rise in price.

Don’t get me wrong – we face some very tough times ahead. Let me take a quote out of a post I wrote when I was talking about the recession and the US Dollar back in March:

The credit mess needs to work itself out. (Later this week, I’ll talk about how stupid and irresponsible that Bear Stearns, Merrill Lynch, and crew have been for the last ten years.) Regular Joe American who can’t pay his mortgage today ain’t gonna be able to pay his mortgage at the end of higher-price, higher-inflation 2008.

I won’t try to predict the direction of the markets over the next six months. I’ll simply say this:

  • Expect high inflation for a while;
  • Expect to see some severe market swings – up and down;
  • Expect to see trouble in the overseas markets if we do tighten up our trade policies;
  • Expect to see trouble in US markets if we don’t;
  • Expect to see the US Dollar strengthen if we do tighten up our policies;
  • Expect a weaker dollar if we don’t;

Are our problems “fixable”? Yes. Still, it won’t happen in a quarter or two. We went through a trade problem like this in the mid-1980s and it took three or four years of fixing before we entered the boom of the 1990s. By that logic, our next boom would start around 2011 or 2012 – and that’s only if we can solve these more severe problems in the same timeframe.

Looking Down The Road

Five years from now, things will be better. They have to be, because planning for the alternative (total collapse of everything) will virtually guarantee your financial demise.

Think about this: Two weeks ago, Lehman Brothers, Merrill Lynch, and AIG stood tall. Today, they are all but gone. Do you think Johnson & Johnson or Wal-Mart changed their strategy or outlook over the past two weeks? Do you think that people will stop buying healthcare products…from Wal-Mart (the deep discount store)…because Lehman is gone?

At the Pabrai Funds annual meeting (I’ll post about that later this week), Mohnish said:

If you depend on borrowed money, you have to worry about what world thinks of you everyday.

You need to avoid toxic businesses. I can’t value financial companies, and that has helped us avoid this entire mess in financials. Then again, the “mess” reaches far beyond financials. Companies with toxic levels of debt are in for a real treat.

Spreading Beyond the Financials

Long-time readers know that I’ve discussed Amylin Pharmaceuticals a number of times on this site. I got some anonymous hate-mail on those (presumably from some of the management I ballbusted for taking home $21 million plus in compensation while the company’s value continued to decline last year).

Over the past six years, Amylin has increased its long-term debt by about 55% each year, and the shares outstanding have nearly doubled…without a split. In the first six months of this year, Amylin’s interest expense has nearly quadrupled on a 14% increase in revenues.

Amylin has a tough road ahead of it. It owes money to banks…banks that need to charge as much interest as possible to shore up their weak and withering balance sheets. And now, Amylin is between a rock and a hard place. Amylin has to worry about what the world thinks of it.

It can’t sell stock to raise capital. Additional debt is going to cost more than it had in the past. And Amylin can’t generate enough cash to finance its own operations. Today’s buyers of Amylin are hoping for one of two things:

  • a miracle drug rushes out of the pipeline, increasing revenues so dramatically that the business can begin generating cash; or,
  • a miracle cure to the credit crisis, so Amylin can continue to finance its operations and get their drugs to market.

Otherwise, Amylin will get nickel-and-dimed to financial death, as will many other companies that have to worry about what the world thinks of them.

Maybe there is something to this “buy great businesses” malarkey.

To My Friend Chicken Little

The world isn’t going to end. Sure, we have a long, tough road ahead of us. But, we’ll get through, and great businesses will survive and thrive. Five years from now, we’ll look back and say, “Man – that was crazy. I’m glad that’s over.” Twenty years from now (if not sooner), Wall Street will throw us into another mess, and Chicken Little will poke his head out again.

And if some businesses have to go away, so be it. Just because the stock market falls or stays flat doesn’t mean your investments have to. Invest in businesses that don’t have to worry about what the world thinks about them. As their competitors falter due to massive debt loads, huge interest expenses, and an inability to obtain financing, your businesses will grow more valuable.

Then, you simply have to wait a while. Price follows value, but it doesn’t necessarily happen overnight.

Changes to F Wall Street

Regular visitors will likely notice the redesign here on F Wall Street. I had to make some changes to make it more “user friendly” and get some of those old posts back out here. There is a lot of information on the site, and it gets buried deeper and deeper each time I write an article.

So, here’s what’s new:

  • Amazon Banner Ad: Gone. It was slowing down the site and annoying me. We’re back to the old F Wall Street – articles and comments.
  • Related Posts: Now appear at the end of each post. This randomly draws four articles in the same category so you can find relevant articles to read when you’ve finished the current article.
  • Social Bookmarking: You can now add posts to Digg, Delicious, or Stumble. Admittedly, I have no idea what these are; but, the designer suggested this.
  • Add Your Website: If you run a website or blog, you can now add your website to the comments section and it will appear as a link under your name in the comments.
  • Latest Comments: They have returned and can be found on the left of the page (under “Categories”) as well as on the home page. You can still subscribe to the comments RSS feed; but, you don’t have to.

Those are the major changes. I hope you enjoy and thanks for visiting (and coming back) to F Wall Street!

A Note From Joe Ponzio

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