| David Tepper, Appaloosa Management (Bloomberg) |
Appaloosa Management’s David Tepper has gone into defensive mode.
The Short Hills, New Jersey–based hedge fund manager has moved more of his portfolio into cash than usual as he waits to see how two potential events play out in the markets, according to people familiar with the firm.
Tepper is said to be concerned about a slowdown in China and whether the U.S. Federal Reserve will finally begin to raise rates in September and what effect these events will have. Tepper thinks that if the Fed does tighten next month, the move could be very bad for stocks, according to people familiar with his thinking.
This defensive posture was reflected in part in Appaloosa’s 13F filing this past Friday, which showed the firm had $4 billion in its U.S. long stock portfolio at the end of the second quarter, excluding futures contracts. That’s down nearly 30 percent from $5.7 billion in March. As a result, the firm’s long positions in individual U.S. stocks account for less than 20 percent of assets, which range somewhere between $20 billion and $21 billion.
While many observers got excited about the supposedly big positions Appaloosa reported in Apple and Alibaba Group Holding for the quarter ended June 30, these positions accounted for only 1.5 percent and 0.5 percent of firmwide assets, respectively. So they aren’t exactly big bullish bets.
In any case, Appaloosa Investment I, Tepper’s domestic hedge fund, is up about 13 percent or so for this year even after posting two consecutive small monthly losses in June and July. This makes Appaloosa among the better-performing hedge funds this year, after it gained just 2.2 percent in 2014.
Tepper has been profitably playing the quantitative easing programs in many countries and regions for some time. He has benefited this year from being long the dollar and short the euro, although he is said to have cut back on the euro position as the currency has rallied. He even is said to have profitably caught some of the recent move down in the Chinese renminbi after the government devalued the currency.
On the other hand, Appaloosa has virtually no position in bonds. According to those familiar with the firm, Tepper is wondering whether the recent devaluation of the Chinese currency signals a major slowdown in the economy, and if so, how bad it will get and what the impact on financial markets ultimately will be. So far, he is not willing to get ahead of the developments in China.
Tepper is also watching the Fed. He is concerned that if the central bank proceeds with a rate hike at its meeting September 16 and 17, this could have a bigger, more adverse impact on stocks than some may think.
This is because the stock market in part has been propped up by corporate stock buybacks. However, by the second half of September, the vast majority of companies will have entered their blackout periods before earnings season, which prevents them from buying back stock.
At the beginning of the year, Tepper told people there was a 60 percent chance of a 6 percent to 8 percent rise in the stock market this year. With the Standard & Poor’s 500 index up about 3.5 percent so far for the year, this means it could rise another 2 percent to 5 percent, by Tepper’s earlier estimation. However, his bullishness is said to be tempered by the belief there is a 40 percent possibility the market will decline by 10 percent.
This is the wild card as Tepper waits to see how China and the Fed’s tightening play out. Tepper is said to be concerned that if China slows down significantly, it could affect corporate earnings and make price-to-earnings multiples too high. He is thought to be leaning toward the possibility that the market will rise, however, since he is inherently an optimistic person.
In any case, the next few months will be interesting, and Tepper is not willing to aggressively bet on the outcome.
