Weiss: Your investment setup for the week ahead

Published Fri, Oct 7 20164:49 PM EDT

Short Hills Capital Partners

What is more emblematic of the divisiveness of the presidential election than the market's fascination with the auction process of one mid-cap, poorly functioning company, Twitter , that can perhaps even be taken to task for its showcasing of vitriolic behavior? The acrimony has even spilled over into the currency markets with the body shaming of an algo trader as the media refers to the instantaneous 13 percent collapse in the pound as the result of a "fat-finger" mistake. Sovereigns were the story this week and with the backup in yields, surprising to some but not to those who read last week's weekly, was the continued slaughter in yield-bearing equities. The mini taper tantrum in Europe, which began as rumors circulated about a reduction in the ECB's bond buying program (later clarified in the dated minutes of their last meeting), pressured prices. The yield on German bunds crossed into unfamiliar positive territory while the U.S. 10-year consolidated at 1.73 percent. Equity markets tried awfully hard to trade lower all week but always seemed to rally back, although, as Marines they would have failed, leaving behind the wounded, those yield plays whose valuations had been too far extended as investors sought to replace what central bankers had callously removed in the name of QE. Ultimately, on Friday, the sellers, abetted by a just strong enough jobs number and perhaps unsure about the impact of Sunday night's presidential debate, won the battle and equity markets closed ever so marginally lower on the week. With all the negative news, it was a win. The Philadelphia Utility Sector Index, a proxy for dividend seekers, traded down 10 straight days before bouncing into the weekend, likely as short sellers uncharacteristically for this cycle booked profits. The yang was the monstrous rally in financials with Citi hitting a 52-week high and taking with it Wells Fargo in a soft rebuke to Senator Elizabeth Warren and Congresswoman Maxine Waters, the market casting doubt on the supposition that all their 250,000 employees are part of a criminal enterprise. Financial markets have mirrored a poker game of high-low. Sovereign yields have declared: high; sterling has declared: low; the dollar: high and equities: both. The problem is that there is always another hand to be dealt in the form of a Fed that is much too reliant on short-term data reports and addicted to the media spotlight as if auditioning for a future as paid public speakers where one appearance fee is greater than their current annual income. As such, the long list of initiatives that have caused unintended consequences — QE, the Volker Rule, Dodd-Frank, Affordable Care Act — can now include Fed transparency as it has had the adverse effect of boosting short-termism and eroding the base of the high pedestal of reverence upon which it once sat. The good news in this is that the much maligned hedge fund industry, specifically long/short equities, has made a stealth comeback. From our lens, the performance trend over the last few months has been very strong as the Fed's unabated call to pile into risk assets has met with some resistance with investors taking the position that the Fed is behind the curve of a tightening cycle thereby breaking down correlations between and within asset classes. Investors remain somewhat complacent, and let's face it, equity valuations are not high enough to unnerve anyone but the most miserly of value players; any dips have been bought, the economic data has been trending positively and there is nowhere else to go. Oh, how I loathe that last justification as an investment case, but money does have to find a home. Sunday's debate starts the week rolling and it will be interesting to see if Trump is more prepared and Clinton less rehearsed. As you recall, equity futures were instantly responsive to the candidates' performance at the first cage match, clearly enamored with Clinton's victory, or perhaps Trump's defeat (nuance intended). Earnings season starts in earnest next Friday with Wells Fargo, Citi and JPMorgan all reporting. FactSet notes that the bar is set unusually high for this quarter with the smallest downward adjustment prior to earnings reporting versus the one, five and 10-year average. Guidance, particularly with a strengthening dollar and uncertainty about the next administration, will be more important. However, with elections merely a month away, earnings will share the spotlight with politics and any thought of a November rate hike is pure folly. Perhaps it doesn't matter because history shows that it is the first rate hike that momentarily derails equities, not the ensuing, measured tightening until monetary policy becomes restrictive. (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 industry's most successful hedge fund 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

The acrimony has even spilled over into the currency markets with the body shaming of an algo trader as the media refers to the instantaneous 13 percent collapse in the pound as the result of a "fat-finger" mistake.

Sovereigns were the story this week and with the backup in yields, surprising to some but not to those who read last week's weekly, was the continued slaughter in yield-bearing equities. The mini taper tantrum in Europe, which began as rumors circulated about a reduction in the ECB's bond buying program (later clarified in the dated minutes of their last meeting), pressured prices. The yield on German bunds crossed into unfamiliar positive territory while the U.S. 10-year consolidated at 1.73 percent. Equity markets tried awfully hard to trade lower all week but always seemed to rally back, although, as Marines they would have failed, leaving behind the wounded, those yield plays whose valuations had been too far extended as investors sought to replace what central bankers had callously removed in the name of QE. Ultimately, on Friday, the sellers, abetted by a just strong enough jobs number and perhaps unsure about the impact of Sunday night's presidential debate, won the battle and equity markets closed ever so marginally lower on the week. With all the negative news, it was a win.

The Philadelphia Utility Sector Index, a proxy for dividend seekers, traded down 10 straight days before bouncing into the weekend, likely as short sellers uncharacteristically for this cycle booked profits. The yang was the monstrous rally in financials with Citi hitting a 52-week high and taking with it Wells Fargo in a soft rebuke to Senator Elizabeth Warren and Congresswoman Maxine Waters, the market casting doubt on the supposition that all their 250,000 employees are part of a criminal enterprise.