Weiss: Your hedge fund setup for the week ahead

Published Fri, Sep 16 20163:17 PM EDT

Short Hills Capital Partners

"Psst. Hey, Bud. Want a sure thing? Anytime the VIX has an 11 handle, back up the truck and go long volatility because you will never lose money. Doesn't happen often, but when it does." That's the thing about markets, the only predictability about them is the unpredictability which for some odd reason is manifested in periods of complacency which only occur when market denizens believe they have it figured out, as evidenced by record low volatility readings. Newly hawkish Fed head Eric Rosengren's comments last Friday led to a one-day 50 percent spike in the CBOE Volatility Index , which then only beat a slight retreat after Fed Governor Lael Brainard, in an apparently unscheduled speech on Monday that was much anticipated as to whether or not she too would make the turn to the dark side, instead reiterated her case for standing pat on rates. Friday's equity losses were partially recovered and the week, which experienced continued volatility, ended on a mostly positive note despite some steep intraday losses midday due to triple-witch Friday. Europe remained ... well, let's just be polite and say "out of favor" as did oil, traders justifiably coming to their senses, assigning a higher weight to inventory data than to talk of a potential production freeze from Putin. Treasurys and other sovereign debt were the most interesting storylines as yields either held steady or continued to climb. The backup in U.S. 10-Year Treasury yields the prior week was understandable as each Fed member alluded to near-term Fed action. But as the data weakened, particularly both ISM releases and payrolls, a September move appeared less likely, yet sovereign debt only slightly recovered. In fact, the 10-year yield moved appreciably higher, blowing through the Yellen high the day after Brainard spoke by 10 bps to 1.74 percent. The sell-off in sovereign debt has been a global movement and has been more significant in Europe, and at one point, Japan, surprising because those regions allegedly remain poised to provide further stimulus. So what gives? Two factors are likely at play. The first, and I am newly subscribed to this view although it is difficult to point to empirical evidence in support of my position because that will only be available in a historical context, is that the effectiveness has been neutralized and only fiscal stimulus will be able to impact GDP growth from here. The second notion is more practical: the ECB has run out of sovereign bonds to purchase and Japan's inventory is thinning which is why the former is buying corporates and the latter may also be looking elsewhere such as to equities. For all the volatility that has been visited upon the markets over the last week, and for all the talk of the markets reaching periodic new highs over the last few months, here we sit with the S & P 500 exactly where it was in May 2015. Underneath the headline index, there has been movement in various sectors but it has often been acute, leading to the utterance of the familiar phrase of "how come I'm not making any money?" by those who are invested with active managers. This week is illustrative of why most have underperformed; the S & P 500 is about half a percent higher yet the average and median stock is negative, the index led higher by the weight of Apple and its tech brethren such as Intel . The last 19 months have featured an endless loop of the same questions: Will the Fed raise or not? Do public debt and equity valuations present opportunity? Is the health of the economy supportive of better corporate earnings, inflation, stronger GDP? And, more recently, which of the collectively least-trusted and most-disliked candidates ever to run for the presidency will lead this great country? Of course, but for the election, the other questions remain interdependent pieces of a puzzle that can be categorized by one word: markets. We may get some clarity on the Fed near term as the FOMC convenes for their meeting on Sept. 20-21. I have to admit, I assigned much higher odds of a 25 bps hike a week ago than I do today, but I still believe it happens. The good news is that now, with Fed fund futures indicating only a 20 percent probability, the setup for the trade should be compellingly cheap. The bad news is that I still believe that equity markets are somewhat complacent, bonds less so, and the knee-jerk reaction will be a trade lower, but the message from Yellen accompanying the move will dull the impact. Additionally, history shows that the first hike, which already occurred, has the most impact on equities. Owing to excessive debt and fair equity valuations, the tone was generally dour at the CNBC Delivering Alpha Conference this week. In full disclosure however, those that offered their views are generally constrained to narrow, more efficiently valued segments of the markets owing to their significant assets under management. Nonetheless, I tend to agree with that outlook, but am focused more on the outcome of the election than the Fed — 25 bps doesn't worry me, nor does 50 or 75 in a measured way — nor do market valuations since there are always values underneath the headline indices. (Mr. Weiss is the managing partner of Short Hills Capital Partners, a hedge fund advisory firm and asset manager primarily established to invest on behalf of one of the some of the industry's most successful managers. He has held senior management positions at SAC Capital, Salomon Brothers, Lehman Brothers and MSW Asset Management. He is the author of two investment books and a novel, is a visiting teaching fellow at UNC's graduate business school, Kenan-Flagler, and a CNBC contributor appearing regularly on "The Halftime Report.")

Week in Review

"Psst. Hey, Bud. Want a sure thing? Anytime the VIX has an 11 handle, back up the truck and go long volatility because you will never lose money. Doesn't happen often, but when it does."

That's the thing about markets, the only predictability about them is the unpredictability which for some odd reason is manifested in periods of complacency which only occur when market denizens believe they have it figured out, as evidenced by record low volatility readings.

Newly hawkish Fed head Eric Rosengren's comments last Friday led to a one-day 50 percent spike in the CBOE Volatility Index, which then only beat a slight retreat after Fed Governor Lael Brainard, in an apparently unscheduled speech on Monday that was much anticipated as to whether or not she too would make the turn to the dark side, instead reiterated her case for standing pat on rates. Friday's equity losses were partially recovered and the week, which experienced continued volatility, ended on a mostly positive note despite some steep intraday losses midday due to triple-witch Friday.

Europe remained ... well, let's just be polite and say "out of favor" as did oil, traders justifiably coming to their senses, assigning a higher weight to inventory data than to talk of a potential production freeze from Putin. Treasurys and other sovereign debt were the most interesting storylines as yields either held steady or continued to climb.