Tepper: "The Market Looks Almost As Cheap As Coming Into 2017

The Dow Jones Industrial Average broke through 25,000 for the first time on Thursday as Winter Storm Grayson barreled into the Northeast. And as traders joked about buying Dow 30,000 hats, Appaloosa Management’s David Tepper appeared on CNBC for his biannual stock pumpfest.

And true to form, Tepper argued that equity valuations are reasonable, and that he “doesn’t see the overvaluation."

"Explain to me where this market is rich? It's not rich with the tax thing that just changed earnings projections. With earnings forecasts going up and interest rates where they are, how is this market expensive? I don't see the overvaluation. World growth is higher," Tepper said in a phone interview.

"There's no inflation. The market coming into this year doesn't look rich, in fact, it looks almost as cheap as coming into last year."

The Trump tax plan, which Trump signed into law late last year, will lop off 14 percentage points from the corporate tax rate, dropping it to 21% from 35%.

The billionaire investor's comments that the market is nearly as inexpensive as the beginning of 2017 is noteworthy since the S&P 500 rallied 19% last year.

 

Tepper said bond prices are the key indicator of whether the stock market can keep going higher. With the 10-year yield mired below 3%, Tepper says a selloff isn’t likely.

Of course, while the Trump tax cuts will start to boost corporate earnings – over time – forward P/E ratios, which factor in analysts expectations about the company’s performance, are looking notably stretched.

NOT "almost as cheap" as the start of 2017 after all...

1

The S&P 500’s price to sales ratio climbed in 12 months from 1.83 to 2.11, its highest level since just before the dot-com crash...

Forward P/E

 

Forward P/ETWO

Four days into the year, stocks have continued last year’s trend of nearly uninterrupted gains. Though some traders are beginning to get nervous, specifically because valuations are so stretched.

Tepper has often used his CNBC  appearances to talk up the market – even during periods when he was selling off large chunks of some of his biggest positions, as he did in late 2013.

This behavior is notable seeing as he had recently suggested that a 20x P/E multiple on the S&P was perfectly acceptable.

Comments

Moe-Monay The_Juggernaut Jan 4, 2018 4:12 PM Permalink

What do you do?  Try to ride it a bit to keep from being wiped out by inflation?

PMs give some peace of mind but they certainly don't track stocks by any stretch.  For me precious metals will be passed on to grand children long after the crisis main event long into the other side of the hump.

Or just wait for it to crash and hope you can buy in and ride it up next time? But one gets the idea the whole nation will have gotten really out of hand and dollars be worthless.

Fuuuuuuuuuuuuuuck.

In reply to by The_Juggernaut

Traderone Jan 4, 2018 1:54 PM Permalink

Pick any number you like above the current high in the ES and then just buy each and every dip until that number gets taken out, then simply reset the clock with a higher number again. It will work until it doesn't but be safe in knowledge that CB's have your back which is one powerful ally to have. Tepper is spot on.

khakuda Jan 4, 2018 1:55 PM Permalink

Tepper is a short term trader.  Rates are being held far below where they should be by global central banks and taxes just got cut enormously to corporations.  Usually a tax cut like that and the resulting deficit increase would cause rates to rise, but not when central banks have hoovered up 35% of soverign debt via money printing.  That is short term uber bullish.

khakuda halcyon Jan 4, 2018 2:11 PM Permalink

He changes position on a dime.  If rates normalize and real rates cease to be negative, he won't find the market as cheap and will act accordingly.  The market is cheap because interest rates are regulated and not set by the market and because the US government just took a large hit to its balance sheet via an increased deficit as a direct wealth transfer to corporate profits with no normal market adjustment in interest rates higher.

What you have witnessed in the US is a wealth transfer.  First with monetary policy from savers and bond holders to debtors and equity holders.  Second with fiscal policy from future taxpayers to current corporate profits and equity holders.

In reply to by halcyon

Baron von Bud khakuda Jan 4, 2018 2:23 PM Permalink

Except rates were negative from the mid 1960s to 1981 and stocks did poorly. It's the trend of earnings that matters. I agree 100% that the tax bill was a wealth transfer. Higher deficits with managed rates long and short. Good for earnings. Middle class retirees get hit now with chained cpi and after 2020 the middle class gets higher income taxes. It's bad fiscal and monetary policy to make pension funds look solvent and it keeps incumbents in office.

In reply to by khakuda

khakuda Baron von Bud Jan 4, 2018 2:44 PM Permalink

Yes, but stocks did poorly because inflation was huge - nearly 20%.  The inflation that built in the 1970s was the problem suppressing PEs and caused stocks to do poorly.  Volcker moved short rates up to the 20% range, too.  High rates and inflation equals PE compression.  Low rates and inflation equals PE expansion - what we are seeing now.  The guy I work with was buying stocks at 3 times earnings in 1981.  It wasn't the lack of earnings growth that killed you, it was the PE compression.

In reply to by Baron von Bud

adr Jan 4, 2018 1:56 PM Permalink

Just buy Ripple and make the CEO the richest man on Earth even though XRP might never be used for anything and hasn't actually been used for anything other than a test.

If that doesn't perfect explain the insanity of the current environment, nothing will.

halcyon Jan 4, 2018 1:56 PM Permalink

I usually don't listen to these talking heads, but Tepper. He's a smart cookie. Gotta read his thesis. Although many macrotraders are seeing inflation (esp. commodity and PPI driven) rising.

Let's see. It'll be an interesting year for stocks, for junk bonds, for gov bonds and for crypto for sure.

 

Full Court Lug… The Real Tony Jan 4, 2018 3:06 PM Permalink

No kidding. I can almost respect someone who says "yeah this is almost the biggest bubble ever, but it's gonna keep going up for now anyway so keep buying". That at least has a shred of cynical honesty to it.

But hearing Tepper (or Buffett, or Yellen, or whoever) blinking owlishly and saying "what overvaluation? I don't see any overvaluation anywhere! also there's no inflation, because lol financial assets don't count" makes me want to bring back the guillotine.

In reply to by The Real Tony

Simplifiedfrisbee Jan 4, 2018 1:59 PM Permalink

Ahhh... Zerohedge now likes licking the putrid scum from the assholes of Wall Streeters. What a joke website. Why not state that y’all were against democrats and our constitutional republic from the start? Oh yeah, because Americans need to be deceived to believe in this type of shit. 

wisehiney Jan 4, 2018 2:11 PM Permalink

Big pussy finally shut up about rates.

In August when asked if he was shorting treasury bonds said:

"You bet your hiney!"

Well, he lost that bet.

And hiney -  the wise one - won.

 

itstippy Jan 4, 2018 2:12 PM Permalink

I grew up watching Wall Street Week With Louis Rukeyser.  The format was simple.  Every week he introduced three celebrated economists, and they'd give their take on what's up with Wall Street.

The first guy would say that it's a good time to buy - stocks are undervalued and the economy looks strong.  Bullish!

The second guy would counter that it's a good time to sell - stocks are overvalued and the economy looks weak.  Bearish!

The third guy would say that it's a good time to hold - stocks are priced correctly, but the economy could go one way or the other.  Wait for further clarity . . . Splunge!

Tune in next week for another exciting episode.

wmbz Jan 4, 2018 2:13 PM Permalink

" No Overvaluation"

Right, there is no overvaluation... Because there is no valuation. It's what you want it to be or say that it is. This is that brave new world we now live in.

It must be true, why? Because I said so.

The Real Tony Jan 4, 2018 2:17 PM Permalink

I thought Tepper would offer an explanation like "numbers have no memory". The numbers don't remember what happened in 1929 or 1987 or the dot-com era. Maybe he can use this line in his next speech of utter bullshit.

Roger Ramjet Jan 4, 2018 2:23 PM Permalink

No inflation???  Really?

I suppose if your just looking at the governments useless measure.  But what about rents, home prices, medical costs, education, art work, financial assets?

I kinda thought the bond king would be a bit more astute.

affirmed_78 Jan 4, 2018 2:37 PM Permalink

Inflation is limited because all the Fed money printing has accrued to rich dunces like Tepper, who just add it to their wealth.  The thing that might add a little inflation is actually the tax cuts, as lower income people are more prone to spend what they have.

ludwigvmises Jan 4, 2018 2:37 PM Permalink

He's right. The Trump rally can easily take this market to 33k/35k in the Dow over the next 24 months. We're just in the first innings of this economic expansion made by Trump.