David Tepper Unfazed by Looming Budget Cuts

February 14, 2013  

The Appaloosa Management founder sticks by his predictions of 20-plus percent gains in U.S. stocks this year

   Appaloosa Management founder David Tepper
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.

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 markets.

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 paper gains.

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 airlines.

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" go up.

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.

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