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"What Does it Mean When Billionaires Scream Bull?"
By Todd Harrison
Sep 29, 2010 7:40 am


“Welcome to the future. San Dimas, California, 2688. And I'm telling you it's great here. The air is clean, the water's clean, even the dirt, it's clean!”
--Rufus, Bill & Ted’s Excellent Adventure.

One of the first adages I learned on Wall Street was that nobody is bigger than the market. That theory is being put to the test.

When David Tepper and his animal spirits stirred last Friday, the tape took notice. Tepper’s Appaloosa Management Hedge Fund has enjoyed a sweet run, including a $7-billion earn-out in 2009. The New York Times reported that Mr. Tepper, with his $4 billion personal cut, was single-handedly the top earner on Wall Street last year.

Billionaire investor Ken Fisher chimed in this week, calling the concept of “new normal” investment returns “idiotic.” Dismissing notions that developed nations face below-average growth, Mr. Fisher told investors in Sydney, “We are chimpanzees with no memory, the next ten years are going to be just as good as the 1990s. The problems in this current environment we think are so new and so unique. It’s the same stupid old normal we’ve always had; we’ve got a great future.”

While the Street bought stocks on that news -- presumably with an assumption they would have time to ask questions later -- I dialed back to the Spring of 2000. When the tech bubble burst at the turn of the century and the Fed cut rates in an effort to stem the crimson tide, all you heard around the Street and throughout the land was "Don't fight the Fed." I didn't subscribe to that notion then -- it was a painful lesson for many to absorb -- and I’m dubious of it now.

Fast-forward to present day. "Don't fight the Fed" has been taken to an entirely new level. It's no longer about rate cuts -- that bullet blasted long ago -- it's about massive intervention, intricate acronyms, and the full faith and credibility of the United States government. For those who point to the past -- The Depression, the 70's, Y2K -- I would offer, with all due respect to Mr. Fisher, that this time is indeed different. Never before has the world been so interconnected and leveraged. FDR never knew what a derivative was.

I’m hopeful for an economic recovery as I stand to benefit as much as the next guy but hope has never been a viable investment vehicle. Despite what we hear -- the recession is over and the upside is ‘easy’ -- let me tell you something you already know: it's not easy and it ain't over. I consider myself an optimistic realist, meaning I hope for the best but call it as I see it. I foresee another side of the financial storm before the epitaph is written on this Great Recession. (Also read The Eye of the Financial Storm.)

Cumulative Crossroads

Society is a sum of the parts and the stock market is supposed to be our thermometer. When the chasm between perception and reality becomes untenable, a seismic readjustment inevitably occurs, as we saw a few short years ago. The current juncture is complicated by the strong state of corporate credit -- which bodes well for higher stock prices -- but there are so many fragile elements and assumed conclusions that it's difficult to separate what we're feeling vs. what we're being programmed to believe.

I've written about the two paths; there are drugs that mask the symptoms and medicine that cures the disease. The drugs -- giving the drunk another drink with hopes he doesn’t sober up -- will carry us for only so long before social mood sours to the point of deterioration domestically, internationally or both. The medicine -- debt destruction or reorganization -- will be a bitter pill for asset classes but a strong step towards an eventual outside-in globalization. (Also read The Main Event: Inflation vs. Deflation.)

The government bought time -- literally -- by reflating markets last year and allowing corporate America to roll out debt and issue stock. Risk wasn't destroyed, it simply changed shape. It migrated from one perception to another, from one balance sheet to the next. Sometimes I feel like I'm taking crazy pills; the imbalances are cumulative still and the lessons learned from the previous crisis have seemingly been squandered.

Could we rally in the intermediate term? Sure, just as nobody is bigger than the market, nobody is smarter than it either, least of all me. I do believe we'll see a trade lower prior to quarter-end. That could be the "easy" trade, much like the mainstream depression chatter at the beginning of September triggered the upside scramble. (Also read The “Us” Vs. “Them” Depression.)

QE2: Sell the News?

I've been reading financial headlines for twenty years and there was nothing positive in the FOMC language last week save the threat of additional accommodation. The Federal Reserve held steady on their $2 trillion portfolio (pause to let that number marinate) while posturing that the pace of the recovery and job growth "slowed in recent months."

Given how crowded that catalyst was, with the specter of quarter-end performance anxiety mixed in for good measure, this week’s tape has been tricky. For my part, I've kept my bets close to my vest while keeping a close eye on my trading tells which include the financials (Goldman Sachs (GS), Deutsche Bank (DB), JPMorgan (JPM)), high beta (Google (GOOG), Apple (AAPL), and Amazon (AMZN)), the dollar, market internals, and commodities, where volatility often serves as a precursor for movement in the broader tape.

I will simply posit this, as it relates to the specter of QE2: does anyone remember how mainstream the wish for lower crude was when it traded through $140/brl in 2008? Conventional wisdom was that if only crude would trade lower, it would provide an upside catalyst for stocks. It was so widely perceived that it was accepted as fact in most media circles. (Also read The Hump Day Hash Out.)

We took the other side of that trade in Minyanville and not only offered that crude was a short, but opined that a downdraft would be endemic of slowing global growth and by extension would trigger a downdraft in the broader market. (See also Oil of Oy Vey.)

The obsession with QE2 -- the next iteration of quantitative easing -- is a slightly different plot twist but the same train of thought. Everyone and their sister has pinned their hopes for the next leg of this rally on the unveiling of QE2 but few have pondered the unintended consequences. (See Is Quantitative Easing the Last Gasp Bubble?)

I don't profess to know when that will be unleashed although my sense is that policymakers hope the threat alone will keep the bears at bay. If and when it comes to pass however, the resulting price action -- or the reaction from foreign holders of dollar denominated assets -- will hold more than a few surprises in store.

Remain lucid and act wisely, don't bet the ranch or sell yourself short, be good to others and better to yourself, and stay thirsty my friends, without becoming parched. Above all else, as we find our way to better days and easier trades, be careful for what you wish. While the cast of characters is new and different, we've seen this movie before.

R.P."

(in www.minyanville.com)