The One Key Financial Statistic You Must Know
I'm sure it has not escaped your attention that all of the recent crises are debt related: the subprime mortgage meltdown, the near collapse of the global financial sector, the sovereign debt crisis in Greece.
Make no mistake, the next crisis will be debt-related, too.
It's not going to take long for investors to realize that much of the debt issued at the height of the 2005-2007 lending spree is coming due. Soon. And if those companies can't find lenders willing to refinance, renegotiate or forgive a mountain of debt, they will default.
This phenomenon is being called the "Wall of Maturity."
Recall that Greece needed "only" $38 billion in 2010. From 2011-2013, it will need an additional $115 billion. The fallout from Greece's attempt (and failure) to issue $153 billion in sovereign debt over four years caused an EU-wide crisis and may still trigger a worldwide contagion.
Now note that according to the World Bank, global banks -- not exactly known for their financial stability these days -- need to refinance $5 trillion in the next 36 months.
That's $5,000 billion vs. Greece's paltry $153 billion.
Assuming we get over that hurdle in 2010 and 2011, here are the debt obligations coming due from 2011-2014:
- $1 trillion in junk bonds and other high-yield debt, much of which financed the leveraged buy-out craze of 2005-2007;
- $2 trillion in commercial mortgages, most of which were used to buy malls, condos and office buildings that today aren't worth even close to their original purchase price; and
- $1.2 trillion in debt issued by fairly stable, investment-grade companies.
And if finding $4.2 trillion during a shaky global recovery wasn't already hard enough, consider that all these borrowers are going to have to compete against the mightiest borrower of them all, the U.S. Treasury, which is projected to need $4.6 trillion in new debt (not counting the old debt they need to roll over) during the same timeframe.
Even though I didn't mention the debt that will need to be issued by the 2nd and 3rd largest economies, the EU and Japan, respectively, I think you get my point. There is too much debt, and too little money to lend.
So how do you protect yourself from this looming tsunami?
On a macro level, sovereign borrowers like the U.S. and EU have a few options if they can't attract lenders. First, they can cut expenditures on government programs and entitlements, like the austerity measures that Greece is required to impose on its citizens. Second, they can just pay their debts with newly printed money. And we all know that increasing the supply of something decreases its value.
As you probably know by now, long-lived, storable commodities like precious metals should hold their value when currency is debased. Because most experts see currency debasement as the most likely outcome to this debt crisis, gold has continued to test its record high of $1,249 per ounce. The sober and respected economist, David Rosenberg at Gluskin Sheff, expects gold to hit $3,000+ in the medium term for this very reason.
For private companies who don't have the luxury of being able to print their own money, the choices are few: companies that can't refinance their debt will have to liquidate assets to repay lenders, and they'll be selling into an already weak market. Do you know anyone looking to pay full price for an empty shopping center? Probably not.
But you could probably think of someone looking to buy one at a discount.
Before you put a single penny in a stock, you must know its total debt . These are simple to find on the balance sheets and in the notes to financial statements. Companies that have a big chunk of debt coming due between 2012 and 2014 are going to be in the dogfight I outlined above. But those with strong balance sheets and lots of cash will be in a prime position to pick up bargains out of the rubble.
Here are a handful of companies with lots of cash, little debt, and positive earnings:
|Company (Ticker)||Market Cap ($mill)||Return on Equity||Cash ($mill)||Total Assets ($mill)||Cash/Total Assets||Total Debt ($mill)|
|Franklin Resources, Inc. (NYSE: BEN)||21,795.09||19.03%||2,860.99||9,520.58||30.05%||351.97|
|Cognizant Technology Solutions Corporation (NYSE: CTSH)||15,641.7||23.12%||1,080.94||3,509.75||30.80%||0.00|
|Google Inc. (Nasdaq: GOOG)||161,028.55||20.70%||5,622||42,871.00||13.11%||0.00|
|Infosys Technologies Limited (Nasdaq: INFY)||33,568.50||28.72%||0||6,148.00||0.00%||0.00|
The next few years will probably be scary and confusing, but they could be pretty exciting for true value investors. With 9.6% unemployment, shaky consumer sentiment and a financial system still in crisis, companies aren't going to be able to earn their way out of their debt problems like they could in the past. The best of the best will still be able to find lenders, but the weak and overleveraged will most likely be left to rot. You can afford to be picky when you choose which to invest in.
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