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David Tepper Asks “Why Are Stocks And Bonds Acting So Differently”

Monday, February 27, 2017 14:40
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With bond and stock markets having recently bifurcated, signalling two distinctly different outlooks on the future of the reflation trade, the confusion among the “smartest money” persists.

Close up this looks even more divergent.

Friday was the 6th day in a row that The Dow and the Long Bond have
risen in price together… equal record longest streak (1989 and 1994)

As we noted last night, in his latest statement to Reuters, DoubleLine’s Jeffrey Gundlach sided with bonds, pointing out that “stocks are out of sync with the stealth flight to safety. Lots of hope built in” and adding that “the 10-year Treasury will go below 2.25 percent … not below 2 percent.” 

On the other hand, speaking to CNBC on Monday, another investing titan, Appalooosa’s David Tepper disagreed with Gundlach and said that he remains bullish on the stock rally.

“Still long stocks. Still short bonds,” Tepper told CNBC’s Scott Wapner. Just like Gundlach, Tepper mused rhetorically “why are stocks and bonds acting differently? It’s as if they’re reacting to two different economies.”

As noted over the past few weeks, as of mid-February, bond prices and stock prices have been moving higher together again, breaking from the so-called “Trumflation” trade that marked the period from the election through the end of January. One explanation for this bifurcation is that as retail investors, inspired by record gains, have been flooding the market using ETFs, even as other institutional clients have been selling, something JPM noted over the weekend.

For Tepper the answer may hide elsewhere, namely in residual central bank liquidity: “Could be there’s too much monetary policy still around the globe? Reaction in markets suggests it’s affecting the bond market more.” This echoes an observation made last week by Citi: the bank’s analysts noted that yields on German bunds have been tumbling as a result of the ECB potentially running out of monetizable bonds as soon as the end of the year, prompting traders to frontrun the ECB’s purchases, and dragging the 2Y Schatz just shy of -1.00% on Friday.

Tepper was not the only one who remains bullish on stocks: also on Monday Warren Buffett, talked up stocks and bashed bonds. U.S. stock prices are “on the cheap side” with interest rates at current levels, Buffett told CNBC’s “Squawk Box” on Monday morning, adding there is no sign of a bubble, although he warned that there is always a risk the market “could go down by 20% tomorrow.” For now, however, that does not appear to be a concern for the market which remains blanketed by a record sense of complacency about the near-term future, and certainly does not anticipate a bear market any time soon.


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