Citigroup Inc (C) And The ‘Tepper Rally’

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Citigroup Inc (NYSE:C)Appaloosa Management has been one of the most profitable hedge funds of the last few years. Its founder, David Tepper, appeared on CNBC Tuesday to give his latest market prognosis: stocks will continue to head higher!

The ‘Tepper Rally’

In recent years, Tepper is mostly known for the so-called “Tepper Rally” that took place from the fall of 2010 to the summer of 2011. In September 2010, Tepper made a simple observation: either the economy would recover, in which case stocks would rally, or the Federal Reserve would inject more stimulus, in which case stocks would rally.

He received a fair amount of criticism for the call (mostly from Fed skeptics), yet it proved to be stunningly accurate. From the beginning of September 2010 to the end of the May 2011, the S&P 500 rallied from about 1100 to over 1300.

Case dismissed

Despite the fact that the S&P 500 has rallied nearly 50% from Tepper’s original bull call in 2010, he continues to love the market. In his CNBC appearance, he remarked that the evidence for the rally continuing was “overwhelming.” Specifically, Tepper cited:

  1. Easing by other central banks: Australia, ECB, Korea and Japan
  2. The US economy is rebounding
  3. The US deficit is set to shrink dramatically in the next six months

On the last point, Tepper noted that given current projections, the Fed would be injecting more money into the economy than the federal government was looking to borrow. Consequently, these additional funds have to go somewhere — possibly into stocks, or the real economy.

Could the Fed quit easing?

Of course, a popular notion among market bears continues to be a belief that the Fed will cut back on its easing. Given that the market has moved higher mostly on Fed policy (not economic fundamentals), any tapering of Fed bond purchases would, in the minds of bears, lead to a drop in the markets.

But Tepper doesn’t buy that. In fact, Tepper hopes that Fed does begin tapering, as he believes the healthiest markets rally gradually. According to Tepper, if the Fed doesn’t start tapering its asset purchases, we could see a repeat of the end of 1999.

If that happens, Tepper warns that bears will have to find themselves a shovel to dig out of their “graves.”

How to play the Tepper rally

So, if investors buy into Tepper’s logic, how can they play the rally?

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