David Tepper has gotten off to a good start this year.

His Appaloosa fund is up nearly 10 percent net of fees while his Thoroughbred fund — which has less of an exposure to equities — is up close to 8 percent.

Tepper won’t comment. Those familiar with the results say the early returns are being driven by his exposure to the equity markets and commercial mortgage backed securities.

At year-end, he had established 13 new equity positions, the largest being Micron Technology, Dean Foods and General Motors. In fact, at year-end, Appaloosa was the second largest holder of Dean Foods, with more than 10.7 million shares.

Sure enough, in the first two months of this year, shares of Dean Foods were up more than 19 percent while Micron surged about 39 percent.

Entering the new year, Tepper also still had a big bet on banks, which helped fuel his triple-digit returns in 2009. In fact, his three largest equity holdings were Citigroup, Bank of America and Wells Fargo.

Those familiar with his portfolio say Tepper, whose bullish comments on CNBC back in September touched off what came to be called the “Tepper rally,” still thinks the US economy is in great shape, in large part because he sees fresh new strong economic data being reported on a regular basis these days, whether they are related to new auto sales or jobs, to cite just two examples.

Even so, Tepper has reduced his risk somewhat in response to recent global political developments. He has taken down his P/E estimate from 15 to 14 1/2 times and at the beginning of March removed all leverage.

Rising oil prices so far are not concerning him. He believes the economy can handle $100 a barrel right now and $110 per barrel in six months, for example, say people familiar with the hedge fund firm.

At this point, he is not worried yet about inflation, although he does believe the day of reckoning has moved closer, to one to two years out now, say sources.

However, he is seemingly most concerned about developments in the Middle East. Tepper is said to be especially concerned about Saudi Arabia. Sources say if the oil fields in Saudi Arabia are burning, Tepper would react to that by selling and going heavily into cash. In general, he is said to believe if the Middle East blows up, you can lose half your money.

So what is Tepper doing about these developments now? He still is said to believe investors should be invested, but be cautious and ready to act if things don’t work out.

Now, keep in mind that Tepper does well investing counter-intuitively. For example, he is said to currently like airlines stocks even though oil prices are surging. Indeed, last week many airlines announced yet another round of price increases due to the increase in jet fuel prices. He is said to like USAir, UAL and AMR, which he is said to believe can rise as much as 2½ times from current prices if the Middle East does not blow up.

He also believes that if inflation starts to increase, it will result in a flatter stock market. Another bet would be to short Treasuries, provided, again, the Middle East does not blow up.

Keep in mind, however, that Tepper thrives and shines brightest when all hell breaks loose and while investors are freaking out and hiding under their desk. Like early 2009, when some pundits were predicting a near Depression or that the banks would be nationalized. That year his Appaloosa and Palomino funds finished up around 130 percent or so, net of their fees.

You can bet if the oil fields are burning in Saudi Arabia, Tepper will be one of the only investors who will know what do — and more importantly — have the cojones to act on the crisis.

For the complete II Magazine article, please click here.