Steve Weiss: Here's your investing setup for the week ahead

Published Fri, Oct 21 20165:37 PM EDT

Short Hills Capital Partners

It was an interesting week. Before you inquire of yourself "what did I miss?" or, of me, "what the heck was he trading?" let me set the record straight – I wasn't necessarily referring to the markets. Sure, we had a number of esteemed members of the FOMC attempting to confuse the markets in their all too frequent public speeches but their efforts at transparency have become commoditized dribble. There was a vacuum of news on the economic front except for industrial production and CPI, both a little weaker than expected but not enough for anyone to change their view on when the Fed will hike. And then there was the third and final presidential debate where the only revelation was that if Alec Baldwin were to run as Donald Trump , he would be the most likable candidate. As to markets, both here and abroad, they decided to move marginally higher this week in the absence of much news except for generally positive earnings results. Financials continued to perform exceptionally well in the aftermath of last Friday's earnings report from Citi , with BofA , Goldman and Morgan Stanley putting up substantial beats, despite the 10-year gaining some footing with the yield dropping ever so slightly, as fixed income trading and banking revenues improved. Just imagine if the yield curve ever did steepen. Industrials were the weak participants, GE 's earning report finishing the week on a disappointing earnings note. So what was so interesting? We celebrated the 5th Anniversary of Halftime Report on CNBC. As my wife will tell you, while I am sometimes guilty of having anniversaries sneak up on me (as I tell her it's because I don't believe I should limit celebrating my marriage to once a year but I sense her skepticism at this heartfelt response), this was one I made sure not to miss because of the quality of the guests and the non-stop reminders from the producers. Among others we were visited by Tepper, Rosenstein, Chanos, Pzena, Gundlach, Lasry – all people I am fortunate enough to know and, befitting of their rock star status, can be identified by a mononym. While their range of concern about the level of risk varies, the consensus seems to be that a meaningful correction in equities is unlikely. I would sum it up in this way: sovereigns are significantly overvalued, equities fairly valued, the outcome of the election won't mean much except perhaps a knee jerk reaction, unless it is a Democratic rout, and a 25 basis point rate hike is meaningless. While this could lead to a conclusion of complacency, that would be misleading since going into detail on their positioning reveals a more guarded outlook. The wisdom of the crowds is often right. In the investment industry we term it group think and it is interesting to observe; momentum swoops in, often overcoming fundamentals, overshadowing rational thought, the contagion of greed-fueled emotion taking over. The manifestation of this type of behavior is ultimately most evident in two areas, the first being in an asset that evolves from an analytically derived value proposition to a thesis dependent upon imagination supported by execution of its stated plan and an ascending valuation (think Amazon) and the second being in readily accessible assets with negligible transaction costs and the only risk easily avoidable as long as the investor doesn't ever sell (think any S & P 500 ETF). At least that's been the case since March 2009. There are other names for the phenomenon described above and they are passive investing or indexing, the hot topic of the week on the Halftime show. It is a crowded strategy, a momentum play. Just as everyone had to own gold as analysts raced one another to raise their price targets to $2,000 an ounce; or energy analysts raised their crude targets to $150 barrel; or to forecast a 30,000 target for the Dow; passive investing has become the latest momentum trade. But the reason indexing has worked so well has nothing to do with low transaction costs and brilliant algorithmic stock selection. Rather, it is the result of monetary policy removing risk. Now that the end of the great experiment is upon us, dispersion among assets and stocks is returning, allowing skill based stock pickers to ply their trade. Think about it – the markets have become so incredibly efficient that they haven't moved in 18 months with everyone on the same side as massive flows moved from active to passive. The large cap, heavily weighted index participants were tired and bloated. The inefficiencies lurked below and the managers that trafficked in those areas outperformed. Now, with dispersion creeping back into the market – correlations breaking down as fundamentals begin to get recognized, both good and bad – long/short equity and long only value performance has handily beat the indices (read: passive investing) over the last quarter or so and continues into October. Group think equals crowded trade equals passive investing. That's the equation and the time tested result is always the same: overshoot and then a reversion to the mean. Europe was also strong last week as currencies weakened and Italy started to deal with their troubled banks. Earnings reports were stronger than expected exhibiting some reasonable growth. The elections are front of mind but perhaps not the center of concern. First things first and that is another week of earnings reports that will reinforce this week's mostly positive narrative, albeit one of Goldilocks growth – not too hot, not too cold – just right; good for companies well positioned, poor for managements that can't execute and – guess what – placing stock selection at a premium. A stagnant top line market with all the action to be had underneath, away from those plying their trade pushing buttons toward those pushing pencils. The elections are front of mind but perhaps not the center of concern. First things first and that is another week of earnings reports that will reinforce this week's mostly positive narrative albeit one of Goldilocks growth – not too hot, not too cold – just right; good for companies well positioned, poor for managements that can't execute and – guess what – placing stock selection at a premium. A stagnant top line market with all the action to be had underneath, away from those plying their trade pushing buttons toward those pushing pencils. Apple is up first. I continue to marvel at how they have lost their competitive edge. We have been waiting for Apple TV for so many years but in the interim, so many others have come out with offerings - Google announcing a deal to stream CBS this week – that they are left to compete for a low cost consumer hardware device with Roku. Apple radio – never in a conversation with Pandora or Spotify. And, by the way, don't download the new IOS; my iPhone 6 has been frozen for a week. So until further notice, Apple is dependent upon one product with excessive margins, helped along by divine intervention (Samsung). I suggest they buy Netflix and get in the service game. (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.")

Spencer Platt | Getty Images

Sure, we had a number of esteemed members of the FOMC attempting to confuse the markets in their all too frequent public speeches but their efforts at transparency have become commoditized dribble. There was a vacuum of news on the economic front except for industrial production and CPI, both a little weaker than expected but not enough for anyone to change their view on when the Fed will hike. And then there was the third and final presidential debate where the only revelation was that if Alec Baldwin were to run as Donald Trump, he would be the most likable candidate.

As to markets, both here and abroad, they decided to move marginally higher this week in the absence of much news except for generally positive earnings results.