Don't Fight The Tepper Tape?

Mark DeCambre of MarketWatch reports the man who made a killing during financial crisis says that, at some point, the stock market will slow down — but, till then, ‘I love riding a horse that’s running’:
Perhaps, cribbing from the lyrics to the viral song “Old Town Road,” David Tepper is going to take his horse and ride till he can’t no more.

That is essentially the sentiment conveyed by the founder of hedge fund Appaloosa Management to CNBC on Friday.

Tepper told the network’s anchor Joe Kernen that he “has been long and will continue that way.”

The U.S. stock market has enjoyed a nearly uninterrupted assault on records, highlighted by the Dow Jones Industrial Average closing at a milestone above 29,000 for the first time and the S&P 500 achieving its own landmark close above the psychological round-number at 3,300, while investors in the Nasdaq Composite Index may have their sights trained on 10,000.

The ascent for stocks has made investors uneasy, primarily, because markets are already coming off a stellar 2019 and further gains, while possible, were expected to be more subdued than the current start for major indexes in the third week of 2020.

On top of that, U.S. economic expansion its in its record-setting 11th year, with experts and statisticians making the case that the expansion and bull run for markets can’t last forever.

The Dow ended 2019 up 22.3%, its best year since 2017, while the S&P 500 saw its best year since 2013, gaining 28.9%. The Nasdaq produced its loftiest annual performance in six years after rallying 35.2% last year.

So far this year, the Dow and S&P 500 are both up by about 2.9% in January and the Nasdaq Composite is up more than 4.5% in the first three weeks of the year.

The gains have even made well-known professor of finance at the University of Pennsylvania’s Wharton School of Business fear that investors may be “throwing risk to the wind.”

Tepper’s bull thesis appears to be the equivalent of the oft-used Wall Street investing mantra: Don’t fight the tape.

He tells CNBC that “at some point, the market will get to a level that I will slow down that horse and eventually get off.”

When is that point? No one really knows.

Optimist have pointed to a partial resolution of China-U.S. trade tensions but even many bullish investors are getting nervousness about huge gains in an election year that could deliver surprises, including the possibility that business-friendly President Trump lose to a progressive Democratic candidate.

Making Wall Street prognostications isn’t the norm for Tepper, who has tended to cut a low-key figure as an investment manager.

Tepper may be best known for the concentrated bets he made on the financial system during the 2007-09 financial crisis, when he cited the backstop provided by the Federal Reserve as a reason to own beaten-down bank shares.

Tepper’s net worth was estimated at $12 billion by Forbes, ranking him as the world’s fifth-wealthiest hedge-fund manager. Tepper has also been an outspoken critic of President Donald Trump.

Since buying the National Football League’s Carolina Panthers, Tepper has retreated further from Wall Street. Back in May, he started converting his hedge-fund firm to a family office, according to reports.

Appaloosa Management LP has earned an average annual return of 25% since its inception in 1993. The fund regularly features among the ranks of all-time top performers.
Alright, it's Friday, time to cover the stock market again. First, the good news. The Dow, S&P 500 and Nasdaq opened at intraday records as the stock market aims to cap a solid week of gains:
U.S. stock rose at the start of trade Friday, with the major benchmarks reaching new highs in just the third week of the year, after data on new U.S. home construction showed it surging to 13-year highs in December. The Dow Jones Industrial Average gained 0.1% at 29,334, the S&P 500 index rose 0.2% at 3,322, while the Nasdaq Composite Index advanced 0.3% to reach 9,381 at Friday's start. Gains on the day have been bolstered by strong economic data. December housing starts showed home constructing rising 16.9%, to annual rate of 1.608 million units, to the fastest pace since 2006, well above the consensus forecast of 1.375 million, according to a MarketWatch poll of economists. Investors optimism wasn't dented by China reporting its worst annual growth in three decades of 6.1%.
Fantastic, as long as stocks keep making record highs, follow Tepper's advice and keep riding that running horse.

Now, the bad news. Whenever CNBC brings David Tepper on to talk stocks, you know we are near a top, might be an interim top but start hunkering down next week before the next ISM and US payroll reports come out.

Always beware when big hedge fund legends come out to warn you one way or another. Almost exactly two years ago, the world's most powerful hedge fund manager, Ray Dalio, turned heads with one of the worst short-term market calls in recent memory:
The Bridgewater Associates founder, in an interview at the World Economic Forum back in January 2018, told investors that they were going to “feel pretty stupid” if they were holding cash as stocks climbed toward record highs.

So, how stupid did they feel? Not very, at least initially. Just look at this chart from Kevin Muir, veteran trader and author of the Macro Tourist blog:

Of course, Dalio was eventually right, as the market found its footing and has since exploded to highs. And anybody who invested in him that year certainly wasn’t complaining about his impressive performance numbers.

But he was comically wrong at the time as the bottom almost immediately fell out of the S&P in the following weeks.

Now, with the market “running like it stole something,” Muir suggests that we could have a repeat of the swift downturn that proved Dalio so wrong.

“Could we go higher? For sure!” he wrote. “The momentum is electrifying and the stock market’s rise has begun to capture the public’s attention with stocks like Tesla (TSLA) and Apple (AAPL) gapping higher every night.”

But all the optimism out there has Muir feeling rather short-term bearish, considering overconfidence often leads to shocks, as was the case with Dalio.

“Be careful up here,” he wrote. “As the speed of the move increases, the risks for a painful correction increase. The possibility of another quick correction like 2018 are high. I just don’t know if it will be from this level, or another 5% higher.”
Prior to writing this comment, I was talking to an S&P options trader here in Montreal who told me he thinks a market correction of at least 5% is around the corner as people start paying attention to economic data again and that the next 25% move is down, not up in these markets.

I told him what I wrote above, pay attention to how the market reacts to the next ISM and US payroll reports for a short-term correction. As far as his longer term call, I said this: "If Trump gets reelected in November, which is a strong possibility, the market might continue making new secular high."

I also told him to read my Outlook 2020 as well as my more recent comments on what's really spooking markets and the Fed's exit strategy.

Right now, it's all about the Fed pumping massive liquidity into these markets. The trade deal hoopla was just icing on the cake. These are liquidity-driven markets running amok.

In a nutshell, here is what has been driving markets to record territory:
  • Following the bad Santa selloff of 2018, the Fed did a complete 180 degree U-tun and went from restrictive to accommodative mode by cutting rates. That alone was enough to make stocks great again as everyone rebalanced their portfolio to take more risk.
  • Importantly, the Fed's rate cuts work their way into the system with a lag so we are still feeling the effects of these rate cuts.
  • Then came Quant Quake 2.0 and QE Infinity in mid-September of last year at the same time the "repo crisis" hit banks. The Fed scrambled to pump massive liquidity into big banks and there's nothing more big US banks love than money for nothing and risk for free to speculate on risk assets. And this week, we learned the Fed is considering lending to hedge funds directly when the next repo crisis strikes. More money for nothing and risk for free.
  • Commodity Trading Advisors (CTAs) which control large pools of capital have also added to this powerful rally as their models remain super long the S&P 500.
On that last point, Quantifiable Edges posted a comment on the remarkable persistence of the "non QE" rally:
The persistence of the rally over the last 3 months has been amazing. The chart below is of SPX. I have marked where the Fed announced the “not QE” program back in October. The blue line is the 10-day moving average of SPX.

I have noted a few times lately that the market has gone an extended period without any closes below the 10ma. But what is more remarkable is how few days it has closed below the 10ma since “not QE” was announced on October 11th. In the last 67 trading days, there have only been 5 closes below the 10ma for SPX. There has not been a 67-day period with only 5 closes below the 10ma since 1972. And looking back to 1928 (when the S&P 500 was the S&P 90), there have only been 6 other instances: September 1929, July 1933, March 1943, June 1957, November 1965, and late February / early March of 1972. In other words, the persistence of this rally is extremely rare, and over the last 48 years, it is unheard of.
A rally of this nature might be "extremely rare" but so is the Fed pumping billions into the market on a monthly basis fueling all this speculation and feeding frenzy.

The quants are cute with all their models but I remember a time in the late 90s when genius failed and a bunch of super smart Nobel-prize winners got decimated because they forgot what John Maynard Keynes once said: "Markets can stay irrational longer than you stay solvent."

And that's where we are now, the silliness in markets can go on for a lot longer than anyone thinks and it typically always does.

Still, I was listening to CNBC this morning and someone mentioned a few interesting things:
  • Alphabet (GOOG) just surpassed the trillion-dollar market cap.
  • Collectively, five mega cap tech companies -- Apple, Microsoft, Amazon, Alphabet (Google) and Facebook -- now make up 5 trillion of market cap and account for 17% of the stock market. 
  • Over the last year, tech stocks have outperformed the overall market by 26%.
You get the picture, there's a lot of concentration risk in these markets as five tech stocks are driving the market to record highs:

That's why I don't foresee the Fed pulling the plug any time soon, it prefers dealing with the effects of an asset bubble boom rather than try to deal with the effects of a deflationary bust.

The irony, however, is by fueling more risk-taking behavior, the Fed risks creating a bigger deflationary bust down the road.

Nothing goes up forever, in these are liquidity-driven markets, smart traders and investors know enough to take some profits along the way.

"Don't fight the Fed and the tape" are fine adages for billionaires like Tepper but the regular retail investor needs to be made aware that as stocks keep hitting record territory, the risks of a severe correction keep rising too.

Also, keep in mind the S&P is up 3% so far this year, it's already experienced one sharp correction (Iran) and will experience a few more before the year is done.

Now, for all you stock market junkies like me, have fun looking at the top-performing Nasdaq-100 stocks below (full list is available here):

Tesla is number one, gaining 22% year-to-date, and this is music to Elon Musk's ears:

In all seriousness, I was telling my readers last year when Tesla’s share price dropped below its 400-week moving average and held the $180 level that it could bounce back and it did, shocking even me with a vicious surge up recently:

I wouldn't buy it here but don't be surprised if Tesla shares make a new high and cross above $600 even though I'm sure shorts are piling on here.

That's what happens when the Fed stuffs big banks with money for nothing and risk for free, you start seeing very strange things in markets, so be careful out there, what goes up fast, can come down even faster.

Below, David Tepper, billionaire founder of Appaloosa Management, said Friday he still likes this bull market, which is the longest on record. “I love riding a horse that’s running,” Tepper told CNBC’s Joe Kernen in an exclusive email. “We have been long and continue that way.

Tepper also told Kernen that “at some point, the market will get to a level that I will slow down that horse and eventually get off.” He did not, however, specify when that would be.

Kernen also noted that hedge fund legend Stan Druckenmiller is an intermediate bull here, agreeing with Tepper (you can track Tepper and Druckenmiller's portfolios here with a lag along with that of other hedge fund gurus).

Next, the 'Fast Money Halftime Report' team discusses the news that Appaloosa Management founder David Tepper got more invested in December.

Third, CNBC's "Power Lunch" team discusses markets with CNBC senior analyst Ron Insana and Michael Kantrowitz of Cornerstone Macro.

Fourth, CNBC's "Squawk Alley" team discusses technology stock strategy with JJ Kinahan of TD Ameritrade and Barry Bannister of Stifel.

Last but not least,  Howard Marks, co-founder and co-chairman at Oaktree Capital, explains why now is not a good time to “probabilistically” be investing in markets and discusses the contents of his latest memo titled, “You Bet!.” He speaks with Bloomberg’s Erik Schatzker on "Bloomberg Daybreak: Americas."

Marks is probably right but just remember markets can stay irrational longer than you can stay solvent. The billionaires meeting at Davos next week know this all too well.