Listening To The Smart Guys

Hedge Fund manager David Tepper shook up the markets this week when he announced at the SALT Conference in Las Vegas that he was nervous about the market. He told attendees, in a shot heard round the world thanks to the internet, that this was a pretty good time to hold some cash. In his words: “I'm not saying go short, just don't be too friggin' long.” He subsequently told CNBC that he had cut his equity exposure from 100 percent to just 60 percent in the past six months. Tepper had been a raging bull advising investors not to fight the Fed, so his pullback scared some folks and there was pretty strong selling on Thursday.

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Investors need to take a look at the tone of the entire conference as well as remarks made by other very smart investors recently. Tepper's call has made the most impact, but some other intelligent managers with solid track records have expressed concerns about the current valuation and price level of the stock market. Everyone from short term day traders to long term private equity leaders said that the market looks overly rich to them and suggested caution may be in order.

David Rubenstein has been in the investment game for a long time. He was one of the co-founders of the private equity giant Carlisle CG back in 1987 and has racked up an impressive track record over the past 27 years. He has a pretty good track record when it comes to calling the economy and markets as well. Back in Early 2006 he commented in a Reuters article “Right now we're operating as if the music's not going to stop playing and the music is going to stop. I am more concerned about this than any other issue.” A year later he proved to be spectacularly right when the credit crisis hit in its full fury.
He is urging caution again as the stock market flirts with all-time highs. According the CBC, he told the conference attendees that “The markets are not cheap. In the buyout world right now it's actually difficult to find deals. Companies that are publicly traded are at their highs, and they have a lot of cash.” He thinks that Europe and China both have more attractive opportunities than the US right now. He also pointed out that deal multiples are right back up at 2007 levels and there is actually more leverage being used by private equity and buyout funds. High prices and debt levels have not historically been a recipe for success, so investors should take note of Rubenstein's call for caution.

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Leon Cooperman of Omega Partners was a bit more positive than the other speakers, but even his views are tepid at best. He seems to feel that stocks are the best asset class in comparison to other alternatives like bonds. He compared buying Treasuries to picking up dimes in front of a bulldozer and said that being invested in stocks made more sense. He later clarified his remarks on CNBC saying “I don't believe it will go below 1,700 and I don't think we get above 2,000. At the end of the day, as I said around the turn of the year, I think we could have a high single digit return for the year. “He referred to his stance on the markets as positive but with a lowercase p. That is hardly a ringing endorsement for the market.

There a lot of very smart people suggesting that asset prices are too high relative to the level of economic activity. Being aggressive in the market right now means ignoring the advice of people like David Tepper, Leon Black, Seth Klarman, Carl Icahn, David Rubenstein and other smart investors who have suggested a more cautious approach might be in order.
History suggests that individual investors have not done very well following their own thoughts and instincts about the markets. It might be wise to follow the advice of those who have made billions in the stock market.