Tags: Tepper | upside | stocks | 6%

Appaloosa’s Tepper: ‘A Lot’ of Upside Room for Stocks

Monday, 17 Dec 2012 12:33 PM

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Stocks have “a lot” of room to rise provided Washington steers the country away from the fiscal cliff, said David Tepper, founder of the Appaloosa Management hedge fund.

Uncertainty surrounding the U.S. fiscal cliff, a combination of tax hikes and spending cuts due to take effect at the end of this year, has sent investors chasing safe-haven bond positions.

The European debt crisis and cooling growth rates in Asia have also iced demand for equities somewhat, though Tepper says the asset class is poised for gains.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

“This market is a very good market. And once we can get over this hump, we could have Prince,” he said, making reference to the Prince song “Party Like It’s 1999.”

The hump, or fiscal uncertainty in the United States, continues to darken horizons for investors in U.S. equities.

The White House and congressional Republicans are negotiating ways to avoid the fiscal cliff, though both sides have disagreed over the role tax hikes on top U.S. earners must play to restore fiscal health.

Democrats want to let tax breaks expire for those earning $250,000 a year or more, while Republicans have reportedly warmed up to the idea of tax hikes but want that threshold hiked up to $1 million in annual earnings.

Failure to avoid the cliff could send stock prices falling.

“If it does blow up, the market will probably go down 2 percent or 3 percent,” Tepper said, though politicians will likely avoid disaster.

Turning to the Federal Reserve’s recent announcement to keep interest rates low until unemployment rates reach 6.5 percent level, compared with the 7.7 percent rate today, Tepper said the U.S. central bank has the room to keep policies loose to spur recovery.

Inflationary pressures, he noted, won’t kick in unless policy remains loose and jobless rates dip to around 6 percent considering the levels of liquidity in the market due to present and past stimulus measures.

“There is no reason at this point in time to think that the Fed doing something with so much liquidity in the markets is going to have any kind of long-term negative effect,” Tepper said.

“The Fed is taking a chance that 6 percent is where you start triggering inflation, that’s the real trigger here,” he added.

“They’re going to go to 6.5 percent but I think the bet is that they’re not going to trigger until you get to 6 percent. I think that’s the bet I get out of this.”

The Fed is currently purchasing $85 billion in mortgage debt and Treasury holdings from banks a month, a monetary policy tool known as quantitative easing designed to push borrowing costs down by pumping the economy full of liquidity to encourage investing and hiring.

Past easing measures have pumped over $2 trillion into the economy, swelling the Fed’s balance sheet in the process though the U.S. central bank can safely divest those assets once the economy gains steam without stoking inflation rates.

“I think the balance sheet can hold and can slowly whittle down over time,” Tepper said.

Other market participants expressed similar views, hoping loose policies in the United States and elsewhere along with a resolution to the fiscal cliff would open the door to blue skies for U.S. stock markets.

“It’s a historic tug of war: pulling on one side is the fiscal cliff, pulling the other side is continued global monetary easing,” David Sowerby, a portfolio manager at Boston-based Loomis Sayles & Co., told Bloomberg.

“The most positive thing for the market is valuation and an accommodative Fed policy.”

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

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