Young Jeezy's 'The Recession': I Think We’ve Bottomed Out

The stock market is simply a perfect expression of all of the buying/selling activity of all of the people in the world. To take a line from the movie Men In Black, "A person is smart. People are dumb, panicky dangerous animals and you know it."

So, while the stock market ..e.g., price per share) may be perfect, it is also, well, dumb, panicky, and dangerous – that is, irrational.

My point is that if the stock market were always a function of perfect balance and rationality, well, then stocks would never be overpriced or underpriced and there would be no reason to think that you can find stocks that are undervalued or vice versa.

Since the market is typically the expression of this irrational reality, to identify the best buying opportunities, you have to look and think somewhat irrationally. For example, we have all heard the quote from the world's most famous investor: "Be greedy when others are fearful and fearful when others are greedy." From an investing standpoint, a smart investing person will abide by such irrational thoughts and look for contrarian plays or frankly investments that just do not seem to make sense when compared to the broader picture that is presented in the media.

So, that leads us to the next question: How can you identify and profit from these swings? Well, if you look to sound logic, such as basic economics and statistics, you will not find that trigger. You have to look for irrational signs and indicators to help guide your investment decisions. Not to toot my own horn, but a couple of months ago in an article, I suggested that this big oil run has had its day and prices would fall. Granted, I didn't time it perfectly, but it was awfully close. I got lit up because of my irrational analysis, but frankly, in world that is an expression of irrationality, you have to think that way. After the fact, the logic and numbers will often support the events that have since unfolded – but that is after the fact, and often too late.

My next irrational observation relates to the so called Recession. Personally, I am not really feeling the impacts of this recession. I feel very fortunate and blessed, but have planned accordingly to not only get through, but thrive in this environment. Yes, I am paying more for gas, food, and other items and people are certainly tighter with their money. Things are certainly not great – there are many people that are hurting financially and that is starting to impact the broader economy.

On September 2, 2008, Young Jeezy, a very successful rap artist (and business person, may I add) is releasing an album called "The Recession." I have sampled some of the lyrics and the message is clear – we are in a recession and things are impossibly tough.

Yes, things are certainly tough, but when a record label is capitalizing on this fear to sell albums (which people will buy regardless of their financial situation), it made me sit back and think if we have bottomed out from a stock market standpoint.

Historically, the best investors in the world will tell you that great opportunities rarely come around, but when they do, they happen when nobody is looking. Take stocks like Bank of America (NYSE: BAC) or Pfizer, Inc. (NYSE: PFE). BAC has had its share of fall-out from the credit crisis and mortgage fall-out and the stock reached down to $18.50 just a few weeks ago. It is up almost 70% from those levels. PFE, which has long been the favorite target of pharmaceutical bashers is up more than 15% from a multi-year low that took place in late June, 2008.

I have been a buyer of PFE since it was at $24. Yes, I have been getting laughed at the past 18 months since I started building a position for the long haul, but I also picked up quite a few shares in the $17.50 range. With the stock now at $19.75, I am not hearing those laughs as much – at least not on the shares I bought at $17.50. I never pulled the trigger on BAC and hindsight is 20/20, but when one of the more sophisticated bankers I have personally met told me he was 'scared' to buy BAC at $19, that should have indicated to me to think irrationally and take a position.

I am not suggesting that PFE and BAC (and many of the other beat-up solid companies that have taken hits) will continue their upward trend during the short-term. The easy money may have already been made, but on the heels of a record label using "The Recession" to sell albums, I am willing to take a stab and say that many of these big names are not going much further. From a long-term standpoint, note some of the opportunities out there.

For instance, take General Electric (NYSE: GE). GE is yielding 4.2% at these levels and is financially healthy on all levels. Over the next 23 years, if you believe GE will stay in business (very likely) and not reduce their dividend (unlikely – if anything, it will be raised), shares you buy today will basically be paid for with dividends from the company. For those looking to have a nice retirement nest-egg and if you can wait a quarter of a century, assuming you never buy another share of GE after today, if you hold for 23 years, your stock will be 100% financed by dividends from the company. For PFE, stock is free in 15 years – for BAC, 12 ½ years (or 8 if you bought at $20).

Granted, this is a simplistic assumption and does not account for many variables, such as dividend policy, price per share appreciation, etc., but I am trying to bring some sound logic to an irrational situation.

Those are some specific examples, but the bigger picture is using irrational actions by others to determine where the market is heading. Young Jeezy will certainly sell a ton of copies of his new album – I myself may even pick up the CD or download the tracks. I am willing to bet he would have sold many copies regardless of what the album was called. For instance, the album would likely be very successful if it was entitled "Put On", one of the big tracks from the album. However, I am willing to go out on a limb and suggest that if the album was called "The Economy is Awesome", it would still sell, but noticeably fewer copies than it being called "The Recession."

Certainly, complaining and discussing the "Recession" speaks to many people right now. I see it and feel it and it is no fun. But, when the world is talking about how bad things are and how things might get worse before they get better, I am thinking that maybe all of this news is already priced into the stock market. The irrational behavior of people as a whole creates value-drive, contrarian opportunities from panicky, dangerous selling. On the flip side, when things turn and everything is great, well, that same panicky, dangerous thinking will translate into blind buying, which will provide a great time to exit some of the positions.

I do not have the magic answer or exact timing regarding this, but neither do the smartest economists and analysts. But, while everyone is buying up "The Recession" and focusing on how bad things are economically, I'll be building positions in some of the beat-up names that I follow very closely. It's not an exact science, but watching the record companies take advantage of the irrational thinking this recession is causing by releasing an album with the same name, well, there you go. Gordon Gekko said that money is never made or lost – it is simply transferred from one perception to another.

And we all know – or at least heard – that the general investing public buys at the top and sells at the bottom. Can you think of a better way to indicate a bottom than a record album aiming to find buyers using "The Recession" as its theme and catchphrase? It certainly will get people paying attention and sell a ton of albums.

More importantly, to me, this suggests that the people in general are irrationally fearful of a recession and that may indicate that the big selling is over. Maybe the buying does not come back yet or extend much more from the lows, but it is the best cue I have when trying to rationally figure out the irrational world that is the stock market.

Disclosure: Author holds a long position in PFE

Comments

[cynic69:]

Dear Terry – At $116 the price of oil is the highest it’s been in history. Neither the economy nor the market can survive with energy prices this expensive. We have passed peak oil and we are experiencing the first stages of the "peak oil death spiral". Check out this web site: ibisworld.com/indu... It says that as folks curtail their driving due to higher gasoline prices fewer mechanics will be required. The auto business is one of the major components of our economy and as thousands of mechanics are laid off the loss of revenue is going to snake through our economy like a deadly cancer. This same situation exists for the airline industry. The truth is that with oil at these prices stocks are only worth about 25% of their current value. When "investors" finally figure this out its Katy bar the door. If you think the price of energy is going down soon I think you are right. With the world in a severe recession far less energy will be required.

2008 Aug 10 07:33 AM

[t-bird:]

In '08 the market hit lows in mid March, and after a bear market rally, tanked again on July 15. May see another decline by October. May or may not surpass the July lows.

BAC in the upper teens again; it is possible. Wish I knew...

2008 Aug 10 09:23 AM

[sharksm:]

I have been investing for 40 years, have held stocks through bull and bear markets and have found that trying to time the market and trade on a daily, weekly or monthly basis is a fools game. I have owned MO for almost 30 years and my original 1,000 shares is now 20,000 MO, 20,000 PM and 10,000 KFT (I sold about 3,200 shares). I now receive over $70,000 a year in dividends on an original investment of about $35,000! I have held JNJ, PFE, GE and many others from 12 to 20 years and while I no longer reinvest dividends (I am 74) I certainly don't have to depend on social security! About 9 years ago, I went heavily into energy, when oil was $12 a barrel, and while energy portfolio has taken quite a hit, I am still well ahead. I own RIG which is down about 20%, however my cost is about $7.00 a share as I had bought Global Marine, which merged and then was bought by RIG. The point I am trying to make is when stocks like PFE, BAC, GE and other blue chips are out of favor and cheap is when to buy. I am too old to invest any more but for younger investors, this is a time where an opportunity to buy the best of the blue chips at a bargain price. With PFE yielding over 6 1/2%, GE and BAC a lot more than a 10 year bond, the upside over the long term is infinite. I have never heard of anyone complaining that their favorite restaurant has lowered their prices, so why complain when a stock you want gets cheaper?

2008 Aug 10 10:20 AM

[venividivici:]

I can't make head nor tail of your article other than you seem to be just another pumper looking for lemmings to test if the cliff dive is still fatal.
Up until August last year I spent five years just trading the market, but not American stocks, and I was very successful. I don't have to work again. But I was shocked in August to discover just how bad the situation was in the financial market, and it has got infinitely worse since them. There was a lot more dreadful news on Friday and the American market reacted with a euphoric rally! Oil is falling because we are facing a world wide recession. It's all a big joke. This market does not have a nanogram of credibility and should be treated with the maximum caution.

2008 Aug 10 10:43 AM

[truthinvesting:]

Nice article sharksm And MO made me independently wealthy with my investments over the past 15 years. On my freewebsiteI have selected 40 of 43 winning documented long positions in 2008 because of buying stocks like PFE KFT BNI BUD RAI PG KO etc when they are priced appropraitely. Obviously "doom and gloom" have made that possible. Getting your money in right with strong out of favor dividend stocks is paramount

2008 Aug 10 11:00 AM

[ain't no fo...:]

I wonder how many people died of lung cancer, emphesyma and related diseases from smoking MO cigarettes over the past 30 years... a million... a couple million? My mother was one of them... I watched her die a horrible death... congratulations on supporting a company that has killed 10 times as many Americans as the Korean, Vietnam and two Gulf wars combined... while doing everything in its power to make cigarettes as addictive as possible to hook the greatest number of people possible... enjoy the spoils guys.

2008 Aug 10 12:08 PM

[Leser:]

Nice article, Terence. The commenters on your article have points worth considering, too.
Sharksm makes a point which harmonizes with Terence, buy and hold quality dividend stocks. Even with DRIP's one can still buy at approximate lows. Let the dividends accru until in retirement. Then have them pay out a living income--or help other retirement payments while the stocks continue growing in value.
Wpdragon's point is valid, too, to avoid the sin stocks. Why profit on someone else's misjudgment? Suzi Ormann's mantra "people first" has much higher moral ground than Cramer's of the "I'm just here to make money" ilk. Lose that opening egotistical mantra to your show, Jim.
By way of a positive suggestion for you Terence, when you've finished writing an article, you should read your it again after a little gestation time and ask yourself what can I weed out, what have I already expressed elsewhere in this article in other words? Your articles will be more readable if shortened.
I think your thoughts are good.
Thanks.

2008 Aug 10 06:44 PM

[NordicImpalers:]

Generally, I agree with the article-- the best statements belong to others: "... money is never made or lost – it is simply transferred from one perception to another" and, "Be greedy when others are fearful and fearful when others are greedy." The latter, is good a rule of thumb, and a mantra of the value investor, who if not careful can mistake a rational sell off for an irrational panic (Bear-Sterns). The market can ruin the experienced and the inexperienced alike, but generally rationality belongs to the experienced, and irrationality belongs to the inexperienced.

We usually remember and apply 'past performance does not guarantee future results' to stocks and funds, but the market itself is becoming less dependable for generating wealth in the long haul. Making judgments based on historical trends in the market has become, for me, as nonsensical as comparing statistical data of any sports franchise to its own past. Market trends are less reliable today because the world is increasingly dominated by western capitalists with a global vision. They move through the world with less and less allegiance to country. Governments are bought and sold (stability of the dollar is less and less concerning to the powerful wealthy). It takes less time to build a company's business and less time to erode it. I don't know that buying and holding works like it did in the past, but it has always been true that attempting to buy at the bottom and sell at the top is rarely possible. If that is what is meant by timing the market, then I agree, it should not be attempted. But buy and hold does not pay appropriate respect to the quotes.

So, remember the quotes, watch the P/E ratio, sector and economic growth, and stay diversified. Move incrementally in and and out of positions according to preset benchmarks, which are not necessarily automatic trades, but second guessed with high caution. As wealth increases, diversify outside the market (be sure to own some productive land).

2008 Aug 10 08:35 PM

[investor88:]

The views of Venivi and Nordic balances out the optimistic view of Terence that the market has bottomed out. A recent article by Prieur in SeekingAlpha using US presidential election cycle analysis says a 'true bottom' of the sp500 would not appear until 2h 2010. Right now we have to observe and proceed with caution.

2008 Aug 11 02:37 AM

[Vinsanity:]

Sharksm and others must realize that if they have been investing for 40 years that their "cycle" encapsulated some of the greatest market gains in history. No World Wars, unprecedented technological innovation and greater access to the markets generated a huge tailwind for you. Those tailwinds do not exist anymore. How much better than the SPX did you do over that time? My guess not much - regardless, bless you for being in their when my parents were buying penny stocks.

Buy and hold aways works if you have the right stocks or the right market - the next twenty years will not give us the same opportunity you had. Read Shillers "Irrational Exuberance" first edition for more on those tailwinds.

2008 Aug 11 10:08 AM

[dlaw:]

If the combination of this young fool thinking he's a contrarian because the market has been negative for five minutes and the old fool, sharksm writing "the upside over the long term is infinite", then nothing will.

The combination of the two is the best sell signal I've ever seen.

There is clearly WAY more optimism (or denial, take your pick) buried in the market than I thought. Until that optimism gets wrung out, we won't find post-bubble pricing.

2008 Aug 11 01:26 PM

[Serapis:]

I agree that the market has turned and will experience a short-run up, but I expect problems to return when we experience probably the worst holiday season in recent memory in terms of spending. Energy seems to be the defining issue of the 21st century; wars will be fought over it, nations will rise or fall based on their ability to harness it. No doubt in my mind that this is where to put the money. Energy stocks may fall in the short-term, but its clear as day their long term trend is up. Those who see this now will be much better off than those who do nothing.

2008 Aug 12 01:27 AM

[Bonanza36:]

How many times is Terrance going to call a bottom. He has been so wrong so many times I have lost count.

Terrance, don't give up your day job.

2008 Oct 29 08:32 AM