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Tepper: THIS could be 'magic formula' for stocks

If there's a "magic formula" for the U.S. stock market, it would be China heavily easing its "much too tight" monetary policy, hedge fund billionaire David Tepper said Friday.

"If there was going to be a paradigm, it would be China really easing; not one quarter, but they could lower a couple hundred basis points," said Tepper, founder and president of Appaloosa Management, which has more than $20 billion in assets under management.

Last week, China's central bank cut interest rates for the sixth time since November, and the European Central Bank signaled it would consider extending its massive bond-buying program well into 2016 and even beyond.

"People might underestimate if [China] straightens itself out ... how fast the Fed might have to raise rates. It might be another paradigm," Tepper told CNBC's "Squawk Box" in an interview from Carnegie Mellon University, where a groundbreaking on the Tepper Quadrangle was set for Friday.

The Federal Reserve this week took no action on interest rates at its latest meeting. However, central bankers put the markets on notice that the first rate hike in nine years could indeed happen in December. While signaling rates could go up, Tepper said the message from Fed policymakers could be viewed as having "more faith in the economy."

Looking at the overall stock market, Tepper said the conditions that led him to be cautious about stocks last month have not changed much since. "We're in old-fashioned investing here. You have to keep cash on the sidelines; have a diversified portfolio."

He said he doesn't "love" the bond market right now, though he acknowledged individual investors should probably own some fixed-income assets.

When he was last on the program in September, Tepper said it was a good time to take money off the table. At the time, Tepper said he's "not as bullish" as he could be — taking a more cautious view of the stock market almost five years after his comments on CNBC sparked the "Tepper Rally" in the stock market.

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Since Tepper's previous interview on Sept. 10, the S&P 500 moved higher for a few days and then tested the Aug. 25 lows of the year, before increasing about 8 percent as of Thursday's close.

In some other past calls, Tepper told "Squawk Box" In May 2013 that the Fed had to taper its bond-buying to keep the stock market advance on an even keel. The term "taper" become common parlance on Wall Street, and gave rise to the phrase "taper tantrum."

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