With the markets off to a fast start this year, pundits in some
quarters believe there could be a pullback in the coming weeks
ahead of the March 1 deadline for the so-called sequester, the
next set of automatic budget cuts, as investors wait to see
what Congress decides.
|| Appaloosa Management founder David
There are some hedge fund managers who are convinced that if
the automatic spending cuts amounting to $85 billion go into
effect in defense and domestic programs these will have a
detrimental effect on the economy and will therefore spook
Then there is David Tepper, who remains as bullish as ever.
The Appaloosa Management founder, who racked up a 30 percent
net return in 2012, is said to be sticking to his late December
prediction for a 20 percent or so gain in the U.S. equity
market this year. That the market has moved up about 6 percent
in as many weeks has not diminished his convictions.
The blunt-speaking Tepper ranks among the elite hedge fund
managers whose views are not to be taken lightly, judging by
his track record. The Short Hills, New Jersey–based
hedge fund manager has enjoyed annualized returns north of 30
percent since the onetime Goldman Sachs chief junk bond trader
launched his firm in 1993.
From Tepper’s perspective, the strong stock
market gains could blunt the potential effects of the sequester
to some degree.
The reason? Tepper feels the stock market rally so far this
year and in the four-year period following the financial
crisis, as well as the turnaround in housing prices, have
created a wealth effect for investors. In other words,
investors feel they have more money today, thanks to recent
As anyone who watches the financial television networks well
knows, as we entered 2013, Tepper was clearly bullish on the
U.S. stock market. He even increased his overall equity
exposure before year-end 2012, according to sources.
In an appearance on CNBC mid-December, Tepper elaborated on
the reasons behind his upbeat outlook. He said the bond market
had risen too much and that stocks looked particularly
attractive, with the price-to-earnings ratio in general trading
at 12 times estimates for 2013 amid low interest rates.
"With this Fed, of course it’s cheap," Tepper
asserted, commenting on the central bank’s easing
policy, which has resulting in historically low interest rates.
So, even on a relative basis, stocks appeared cheap relative to
bonds, he observed.
Those familiar with Tepper’s thinking and
positioning say that, even though the stock market to date has
already made a third of the gains he’s predicted,
Tepper isn’t any less sanguine or less
constructive on the market.
In a recent interview with Bloomberg News, Tepper was asked
about his expectations. His advice to long-short managers:
"Good luck, because you can’t get long enough."
Among his favorite stocks, he singled out Citigroup and
In recent years, Tepper, a minority owner of his hometown
Pittsburgh Steelers football team, has made a conscious effort
to raise his public profile. In late September 2010, he almost
single-handedly moved the markets when he correctly predicted
that Federal Reserve policy at the time would make "everything"
And unlike many other successful hedge funds firms that
seemed determined to build fee-generating assets, Appaloosa has
on several occasions returned money to investors. In each of
the past two years, for instance, Appaloosa returned billions
of dollars to investors, indicating Tepper’s
desire to keep the fund from becoming too large, where he
can’t maximize returns.
Given Tepper’s long-term performance —
and remarkable prescience for market-moving events —
he appears to know where those optimal thresholds lie.