Post #7 - Leading Investment Managers' Views on Current Market Environment

Lionscrest, through its relationship with Universa Investments, provides investors with tail-protection strategies that seek to hedge against crashes in asset prices whilst simultaneously participating in upside gains.  Over the long-term, asset prices have tended to increase in value yet there have been periods of extreme, sharp losses that have had catastrophic consequences on investor portfolios.  The possibility to hedge against these extreme losses can provide investors with the ability to compound positive returns over the long-term.  Although extreme events of the Black Swan category are impossible to predict, it is nonetheless possible to measure when risk has increased and the investment environment is less stable.
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Forbes:  David Tepper Dramatically Altered Market Sentiment
May 14, 2013

David Tepper has the magic touch.  The hedge fund billionaire has contributed to a dramatic change in market sentiment, becoming one of the first major proponents of the Federal Reserve tapering its asset purchase program, or QE, to spark a rally.  Tuesday’s Tepper rally is an act of rebelliousness to the sentiment that has prevailed over the past several months, when jittery markets sold off in the face of any indication the Bernanke Fed could be close to reducing its unprecedented monetary stimulus, marking an important paradigm shift.

Yet, Tepper’s bullishness also came with an important warning: markets are close to overheating, and if expectations aren’t themselves tapered, we could be back to the pre-dotcom crisis days of late 1999, when investors set themselves up for one of the largest meltdowns in financial history.

Back in late 2010, Tepper, founder and chief investment officer of Appaloosa Management, went on television and said he was “balls to the wall” bullish equitiess, as either the economy would improve or the Fed would force it to.  On Tuesday, Tepper doubled down: “sure, I’m definitely bullish,” he said.

And when Tepper speaks, markets listen.  The equity rally began to materialize before the opening bell and by the end of the day, the Dow and the S&P 500 had reached new historic highs, while the Nasdaq closed at its highest levels since late 2000 (when the tech-heavy index was imploding).

“There better be a true taper, or else you’re back to the second half of ’99,” Tepper told Andrew Ross-Sorkin at CNBC’s Squawk Box before the market open.  Under the leadership of Ben Bernanke, the Fed has delivered unprecedented monetary support to the economy, keeping interest rates at the zero bound, and pledging to continue to do so, for a long time, while pumping billion after billion into the market through quantitative easing.

The latest iteration of the Fed’s bond buying program, which started last September, is an open-ended $85 billion purchase of Treasuries and residential mortgage-backed securities a month.  It has become commonplace to attribute the incredible strength seen in stock markets to Bernanke’s QE.  And, by the same token, any sign the Fed could be close to scaling back its monetary support was met by fearful selling of risk assets.

Tepper, who’s delivered net annual returns of about 30% since 1993 and was 2012’s highest earning hedge fund manager raking in $2.2 billion, sparked a market rally talking of tapering on Tuesday because he backed his words with numbers.  The Fed’s open-ended asset purchases add up to more than $500 million over six months, yet the deficit over the next six month will be under $100 billion (Tepper pointed to an improved economy, tax income, and Fannie and Freddie returning money to the government).

With net issuance by the Treasury just over $100 billion, a remaining $400 billion has to be “made up,” Appaloosa’s chief said.  That’s $400 billion in investors’ hands, who now face a choice and have few options: put money into the economy, into the short and long-ends of the curve, or into stocks.

Calling the current state of Fed capital injection unprecedented, Tepper issued a dire warning, albeit one that contradicts most of what’s been said over the past few months: “if we don’t taper back, we’re gonna get into this hyper-drive market,” so to keep markets going up at a steady pace, rather than an unsustainable one, the Fed needs to scale back its purchases.

“The guys that are short, they better have a shovel to get themselves out of the grave that they’re in,” he added after Sorkin asked him about the possibility that fear of unwinding could drive down stocks.  Tepper noted the improved economic environment and cited specific sectors.  Housing is better and so is the auto sector, he said.  If stocks reflect the underlying strength of a company, the charts of KB Home, Lennar, General Motors, and Ford Motor all support Tepper’s argument.

Tepper picked up the baton where Jon Hilsenrath, Fed mouthpiece and WSJ reporter left it after the weekend.  Hilsenrath said Fed officials had already drawn out a map as to how they would unwind QE when the timing was right.  According to Tepper, the time is now, or the June FOMC meeting.  Until Tuesday, market participants seemed to still fear a slowdown in Fed asset purchases.  After Tepper Tuesday’s record highs, though, those fears seem long gone.
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David Tepper is a legendary hedge fund manager and the founder ofAppaloosa Management which oversees  $18 billion in assets. His investment specialty is distressed companies. While most hedge funds underperformed the U.S. stock market in 2012, Tepper trounced it. His flagship fund posted net returns of about 30%. Appaloosa has generated average annualized returns of approximately 30% net since inception in 1993. Tepper continues to focus his philanthropic efforts on education-- from the elementary school level to university--and feeding the hungry in his home state of New Jersey.