The Morning Brief: David Tepper Predicts a Bumpy Ride for the Next Few Years

David Tepper says now is a good time to take some money off the table…particularly if you are 100 percent invested and possibly even on margin. In a free-wheeling, one-hour interview on CNBC Thursday morning, the founder of Short Hills, New Jersey-based Appaloosa Management said he is ratcheting down his earnings expectations for the Standard & Poor’s 500 index and the multiple of these earnings that investors should pay for them. He also predicted a higher degree of volatility over the next few years and said he would not be surprised to see a correction somewhere between 10 percent and 20 percent, as was the norm before the current bull market began in March 2009 — which Tepper timed almost perfectly, incidentally.

“I’m probably not as bullish as I could be,” he said, stressing that he is inherently an optimist. “I’m not talking about crashes here. It is a market that should correct.” He thinks the S&P 500 could drop to around 1800 or so, which is around an 8 percent drop from current levels. He says in this environment, investors should learn to sell on the rallies rather than buy on the dips. But he stressed that even if earnings only grow around 5 percent or so per year, in five years investors will make money on stocks.

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Despite the steady drumbeat of reported hedge fund losses in August, Chicago-based data collector HFR says that just over 31 percent of all hedge funds actually posted gains last month. In fact, the top 25 percent of all hedge funds posted an average gain of 2.8 percent. “After falling for several months, macroeconomic volatility and uncertainty increased sharply as a result of slowing growth in China and the first- and second-order impacts this has on global equity, currency, commodity and fixed income markets,” Kenneth Heinz, president of HFR, states in its recent monthly report.

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The average hedge fund lost 2.19 percent in August, according to data tracker eVestment. This brings year-to-date returns to 0.95 percent. This compares with HFR’s HFRI Fund Weighted Composite Index, which fell 1.87 percent in August but was up a paltry 0.2 percent for the first eight months.

Commodities are the worst performing group, down 6 percent for the year. On the other hand, healthcare funds are the top performers, up 9 percent for the year through August, according to eVestment.

Credit strategies lost money for the third straight month and ninth month in the past 12, according to eVestment. Over the trailing one-year period, the funds were down 3.42 percent, although large credit funds declined by nearly one-third less than smaller funds.

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Stifel Nicolaus cut its price target on Alibaba from $97 to $88 but kept its Buy rating. It cites what it calls moderate estimate revisions. However, the investment bank adds in a note to clients: “Despite near-term headwinds driven by Chinese macroeconomic conditions, we remain positive on the company’s long-term ability to build a global eCommerce ecosystem and drive value to a growing customer base.”

Meanwhile, on Thursday, Appaloosa’s Tepper told CNBC he sold his position in Alibaba, which he had recently reported owning at the end of June. “We were involved in China,” he said. “I was reading the situation there wrong. I thought they were easing when they really were not easing. I lost money in the Chinese market.”

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William Ackman’s Pershing Square Holdings is back in the black...albeit slightly. The fund, managed by Ackman’s New York activist firm Pershing Square Capital Management, is up 0.4 percent for the month through September 8, bringing his gain for the year to 0.3 percent.

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