Valeant (VRX): “Hope” Is Not A Valid Investment Strategy.

A reader asked my opinion on the latest commentaries posted on Seeking Alpha about VRX.  Generally they had a bullish slant, permeated with gratuitous rationalization seeded in blind hope. “Hope” is not a valid investment strategy.  VRX is down another 8% today, which says a lot given that its probably the only stock in the Russell 2000 index that is red today.

One “analyst” explained away the reasons why VRX would not default on its debt.  But I laid this out pretty clearly yesterday.   Yes the banks will keep VRX alive. The banks are keeping EVERYTHING alive because they have $2.3 trillion in excess reserves that enable them to plug the cash flow deficits currently occurring from delinquent and defaulted assets.

VRX will not default because the banks will grant as much leeway to VRX as is needed to keep the corpse alive.  At this point in time, VRX’s assets likely are worth enough to cover the bank debt obligations.  Just like a vampire would want to keep a body warm and the pulse ticking while sucking out the blood, the banks will hold up VRX in order to get as much money out as possible.

Of course, the longer this drags out, the uglier it will become for all economically interested parties.  Because there’s accounting and disclosure fraud involved, we can expect the class-action shareholder lawsuits to pile up once the lawyers get a whiff of the blood being sucked out by the banks.Untitled

But keeping VRX alive for creditor purposes won’t help the stock. At this stage in the game,  VRX stock will descend – sometimes quickly, sometimes slowly – below $10.  In other words, VRX’s stock has entered the Irreversible Debt Spiral.

NewSSJ GraphicIn fact, VRX has already dropped another $1 while I have been writing this commentary. Money managers who like to keep their job are unloading this stock as if they were bailing water from the Titanic. 25 million shares have traded already vs the 90-day average daily volume of 13 milllion.  ANY money manager who holds on to this stock is in serious breach of its fiduciary duty.

7 thoughts on “Valeant (VRX): “Hope” Is Not A Valid Investment Strategy.

  1. In this insane market even a deadbeat like VRX could enjoy a nice “short squeeze” run. I am not saying that one should buy VRX for that reason, but just saying that playing it short is also very risky. The vultures of wall st feed on both long and short retail traders.

  2. Thanks. I’m playing the downside on this thing myself and have some really hefty short term gains here. The article had me scratching my head a little and questioning if I should book the profit or hang on for a bit longer, bird in hand and all that. Thanks for the quick response to my question.

  3. so 60 million shares trade at the open…no liquidity..boom,and market goes up? yep makes perfect sense…our computers will be in touch with your computers OK..wink. wink, nudge, nudge….”Markets” roflmao…….but at least gold fell doh.MDB& Kaiser sousa were on fire at the hedge today…

  4. From “Michael,” who was having trouble with the comment moderator:

    It doesn’t get any better than this,
    Underfueled engines like asset bubbles hiss.
    Cash advanced magic carpet rides,
    Too few sheiks for all those brides.
    Kingdoms disintermediate sealed with a kiss.

    Thanks Dave.

  5. Hey Dave,

    Picking your brain again regarding the latest on Seeking Alpha regarding today’s Valeant news. Thoughts?

  6. Dave –
    Correction – “hope” is a strategy in investing – the problem is hope leads to capital destruction and poverty. I apologize for being a cynic.

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