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A New E.F. Hutton?

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I’m sure you remember the old E.F. Hutton commercials from the 1970 and 1980’s (okay, I’m sure at least some of you remember them).  They all had the same set-up.  Two people would be talking about finances in a crowded place such as an airplane, Central Park, or the review box of a parade. One person would say, “My broker says blah, blah blah — what does your broker say?”  And the second person would chime in, “Well my broker is E.F. Hutton, and E.F. Hutton says .  .  .”   At this point, the surrounding crowd would immediately hush and the camera would zoom out to show everyone in the scene leaning in to hear the next words.  The voiceover rings in with, “When E.F. Hutton talks, people listen.”

It looks like we have a new E.F. Hutton.  Before the U.S. markets opened Tuesday morning, Appaloosa Management founder David Tepper gave an extremely bullish view of the equities markets in a wide-ranging 14 minute interview on CNBC.  Stock markets around the globe leapt up by the end of the piece. The German market and many major U.S. indexes went from negative territory to positive.  By the time the U.S. markets opened, everyone was on board and the rocket ride commenced in earnest.  By noon, the Dow was up over 100 points from the previous day’s close and everyone was calling this another “Tepper Day”.  That’s right — another one (more on that below).  Looks like these days, when David Tepper talks, people really do listen.

Why did Tepper’s comments matter so much in this market environment? Let’s review a few of the key points he made, dig a little deeper as to why they mattered, and consider whether they have some real staying power.

The Main Thing Is to Keep the Main Thing the Main Thing

In the mid-spring 2013 equities market, there is only one thing that really matters to the psyche of investors. It’s not the fundamental macroeconomic picture.  It’s not corporate earnings. It’s also not the technical picture (though each of those is important in other ways).  The main thing on the collective minds of investors is the action of the central banks.  As long as the Fed and other central banks keep the printing presses printing all that free cash, everyone is happy.

With that thought in mind, let’s turn our attention to the old Wall Street adage, “climbing the wall of worry”.  In short, this saying suggests that the market’s ability (or more specifically, the market participant’s perception of that ability) to overcome key negative factors fuels a bull market. 

In his Tuesday morning interview, David Tepper climbed this wall of worry for listeners.  He addressed key areas of concern and explained why he thought these concerns would be resolved bullishly for stocks.  Before we look at those key areas, let’s take a look at why market participants even care about what Tepper says in the first place.

Success Begets Success (or at least warrants a good listen…)

If you’re wondering why David Tepper’s comments mattered or why the CNBC morning show staff interviewed him practically on bended knee, there are only a few things you need to know.

Most recently, Tepper was listed by Institutional Investor's Alpha at the top of the World's 25 Top-Earning Hedge Fund Managers (also known as the “Rich List”) after having personally made $2.2 billion.  Also notable from recent fund history was a 132% gain for 2009 when Tepper knocked the proverbial ball out the park loading up on bank stocks and AIG debt near the market bottom. Oh yeah, and then there’s the 30% average compounded return since the fund was founded in 1993.

So here you have a guy who’s been at the top of the heap almost 20 years, but now let’s add in another key piece regarding his opinions.  He gives very few interviews, so when he does one, he gets noticed.  As we mentioned above, he has made market moving comments on CNBC before.  Most noteworthy was a September 24, 2010 interview that led to what has been called, “The Tepper Rally”.  In that interview, he built his case that stocks were cheap and that a second round of Fed funding would be bullish for stocks.

So, what did Tepper say Tuesday morning that supposedly pushed the market to new highs?

The Main Worry and Talking His Book

First let’s get back to that “main thing”.  With the world worrying about talk of Fed easing coming to an end, Tepper defused that concern by saying, "There better be a true [Fed] taper or else you might be back into the last half of 1999…"  In short, Tepper allowed investors to climb their main wall of worry by saying that a Fed cutback would be a good thing for smooth market growth.

Tepper went on to explain, "If the Fed doesn't taper back, we're going to get into this hyper-drive market .  .  . It's a backwards argument. To keep the markets going up at a steady pace, the Fed has to taper back."

Wow—so if the #1 worry has been taken off the table by a guy who has been killing it in this market environment, then the bull has been freed to drive on.  And drive on it did that day.

Tepper did have another interesting justification for his bullish take on the stock markets.  He showed a chart from the New York Fed’s blog that displayed and all time high “risk premium” for stocks.  Here’s the chart he referenced:


Here’s a short explanation for that chart — analysts look at 29 models for expected stock growth and compare those returns vs. the risk-free rate of return.  If the models expect high stock returns, then the higher reading reflects that.  For me, the most interesting part of this chart is the other high periods that all came at the end of big down markets (for example: late 1974 and early 2009).  Tepper noted that higher markets have typically followed high readings in this quite academic research.

Like almost any fund manager who comes on CNBC, Tepper not only shared his big picture opinions but also “talked his own book”.  This means he made the case justifying his holdings and even persuading investors to side with him.  Tepper is no different from other fund managers in this regard and while he talked up his broad “book” (equities), he also talked up specific companies to great effect.

He waxed rhapsodic about U.S. banks and especially about his top holding, Citigroup.  Citigroup (Symbol: C) responded by outperforming the S&P by more than double on Tuesday.

The hedge fund maven also took on Apple, damning the company with faint praise.  He sold his position in Apple a while back and bought it under 400 recently, but “just a little bit”.  In essence, he questioned the company’s ability to continue its revolutionary product development in the absence of Steve Jobs.  If not revolutionary, he said evolutionary would be fine but finished by saying, “if they don’t do either, we’ve got a problem”.  Apple responded by dropping 2.4% in the face a very strong up market.  Once again, when Tepper talks…

Tepper also covered other wide ranging topics including auto sales, home construction, Fannie Mae repayments and a $400 billion surplus in Fed money that’s out there still waiting to find its way into the stock market.  All of those topics will be fodder for another day.  For now, David Tepper spoke again and the market listened. 

Follow Through?

A respected figure alleviating worries can stimulate the market.  Will there be follow through like we saw after Tepper’s 2010 interview?   Will Tepper continue in his role as the new E.F. Hutton?  For now, it looks like the answer to both questions will be “yes”.

If you’ve found this article useful or thought provoking (or both), I’d love to hear your thoughts and feedback — just send an email to drbarton “at” 

Great Trading,
D. R.

About the Author: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on and Financial Advisor magazine. You may contact D.R. at "drbarton" at "".


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Trading TipKen

The Joy and Tao of Trading Properly

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Editor's Note: The following is an informal conversation that recently occurred in Ken Long’s trading chatroom. We have chosen to publish it in it's original form. Ken uses the lowercase "i" intentionally.

"SS" asked me:

Ken: you mentioned having to reset your emotions earlier. Just what does that entail for you or what does that look like? — or for anyone else? reset my emotions is to trigger a learned behavior of rapid mental/emotional state change to achieve what i call, "The Zero State", where i am balanced and centered in time and outlook...

...i am in the moment with a balanced awareness of the past (history/framework for interpretation) and the future: reasonable potentials and possible future states going forward within certain time frames...

...centered on this Moment where Action may occur...

... i listen carefully for the language of price in that moment, listening for meaning and a change in tune, and let my internal thoughts/ beliefs/ assumptions/ expectations go where ever they will, like butterflies...

...the zero state features regulated tidal breathing, a calm "no-mind",  a state of mindfulness,  a release of anything that is not the pure trading moment where i intend to be excellent as a reflection of Excellence...

...and when the trade is traded, it goes thru me without thought, only being, and recognition in my conscious mind that "that went well" in the same way when i play the proper pass in soccer or hockey, just so, i hear, see and feel it in the moment, and recognize it with specific detail after the fact, as i carve it into little meaning-chunks...

…and thus leave the moment of being, sadly, until i can achieve the next similar state after properly being centered, prepared, available to the moment, without preconception...

...that's how it is for me, anyway...

...the joy and the tao of trading properly for me...

the end.

About the Author: Ken Long retired from the Army as a Lieutenant Colonel and now teaches at the U.S. Army Staff College. He recently earned a D.M. in Organizational Behavior. He is a proud father of three, a husband, teacher, student, martial artist and active trader. Ken also instructs dynamic trading workshops for the Van Tharp Institute.

Flash Report

Our client Francesco Maggioni has an interesting technical view on the EURUSD relationship.

Here's a link to his special report.

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May 15, 2013 #629


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