Friday, September 24, 2010

Tepper Speaks and the Market Listens

Stocks rallied fiercly today after the durable goods number came in better than expected:

"*U.S. AUGUST DURABLES ORDERS FALL 1.3%; EX-TRANSPORT RISE 2%"

Another trigger today weas famed hedge fund manager David Tepper's comments on CNBC today:



My Take:

David has a lot of "street cred" after averaging 40% returns annually over the course of 17 years including a whopping 130% return in 2009.  Tepper earned over $4 billion alone in 2009.

He also does very few interviews so needless to say when he does come out of hiding people listen.

Here is his basic thesis as heard above:

""Either the economy is going to get better by itself in the next three months...What assets are going to do well? Stocks are going to do well, bonds won't do so well, gold won't do as well," he said. "Or the economy is not going to pick up in the next three months and the Fed is going to come in with QE.


"Then what's going to do well? Everything, in the near term (though) not bonds...So let's see what I got—I got two different situations: One, the economy gets better by itself, stocks are better, bonds are worse, gold is probably worse. The other situation is the fed comes in with money."

Take Continued:

Tepper's case is a very compelling one for the short term in my eyes.  I had one problem with his comments and it appears many traders voiced similiar concerns on the street:
 
Bob Pisani explained it nicely in his blog:
 
"Tepper bullish...but what does it say about moral hazard?
Hedge fund manager David Tepper, on CNBC, has sparked an interesting debate among traders.

Tepper is bullish on stocks and feel the risk reward is on the upside. Why? Because the Fed is your friend. Quantitative easing (QE) is going to trigger a move out of bonds and into stocks.

But a number of traders say this is exactly the problem:

"If Tepper on CNBC didnt just wake up the Fed to the moral hazard of QE I dont know what will," what trader said. "Is this the creation of expected inflation or are they generating stagflation through their communique?"

The Bottom Line:

I share the same concerns. 

Here is another concern that I thought about today:

By threatening another QE, the Fed has forced the market to chase risk because they believe the Fed has their back via QE2.

This "perception of safety" is forcing money to get out of bonds and chase stocks.  We saw this today as the 10 year dropped and yields rose:


The question I have is how do we continue funding ourselves via selling treasuries if the Fed and their QE2 talk is causing investors to bail on bonds and pile into stocks?

The way I see it:  The Fed's QE2 jawboning may have very well backfired on them.  We cannot afford a large rise in interest rates due to the massive amount of treasury issuance that this country has done over the past several years.

The Fed knows this and if a stock pile on continues,  it may be forced to back off of their QE2 idea EVEN if the economy continues to drag.

For the short term I expect the Ponzifest to continue.  Longer term I think the Fed may have well just painted themselves into a corner.

Dosclosure:  Now new positions taken at the time of publication.








10 comments:

getyourselfconnected said...

Sorry to be crude but Tepper can kiss my ass!

theArt said...

I am not a stock trader, but Tepper logic was so clear and compeling, that guy is great.

Jeff said...

Get...

LOL

I understand but he is a smart guy nonetheless.

BTW

Another Pittsburgh boy. Who woulda thunk him and Druckemiller would have come from the same town.

GO STEELERS!

Jeff said...

the Art

Agreed.

I guess the mantra should be trade the Fed.

I love when you hear from guys that hate to talk.

That being said I think longer term fundementally he will be wrong. I am sure by then he will be short and make even more billions.

Anonymous said...

Jeff - nice well reasoned post. No ranting, no anger at the possibility of short term bullishness (versus your first comment here). Overall, nicely done.

Most of the time I come here to give you a hard time (we agree completely on the final destination - just differ vastly on the timing). However its nuggets like this that make me appreciate your work.

Good job.

Jeff said...

thanks anon

Can't help the ranting at times. WAtching the bankers run wild drives me nuts:)

getyourselfconnected said...

Steelers may be the best team in the nFL right now, never mind when Big ben returns! Unreal that D!

Belichick should take notes.

FRF.Assoc said...

Great article. Tepper has chosen a time to go public when he's coming off a big year (2009 130%).

He's also had some bad years when he lost money.

Since 2009 his returns have been trending down, so he could be wrong, or he could be right.

Worth listening to, though, because of his performance, and stature. I'm sure his opinion will influence other fund managers, so it could encourage them to jump on board & move the market higher.

One remark was funny, and naive, though, that the government has to obey the law. LOL They remake the laws all the time and never obey them if it's not in their own best interests! What a dreamer! |B^)

Jeff said...

Get

Yup

In Steeler "heaven" today. I am getting greedy now. I want to take down the Ravens and be 4-0 when Ben Gets back.

Jeff said...

FRF

Yeah.

Tepper sounds like just another pumper at times but you take notice because of his track record.

Gonna throw up a video in a second that takes the opposite stance that I picked up on ZH because it's outstanding.