Stephen Weiss: Your hedge fund setup for the week ahead

Published Fri, Sep 9 201612:00 AM EDT

Short Hills Capital Partners

It was a short week; short on days, short on volume but not short on fodder for the ongoing rate debate. Credit markets clocked a round trip, with the 10-year starting and ending the week above a 1.6 percent yield, ending at a multimonth high of 1.65 percent, having made a pit stop at 1.52 percent along the way. Equities were fairly stagnant until Friday, uncertain after seven years of monetary-infused expansion as to whether bad news is good news or good news is bad news, or if it is even worthwhile to figure it out since the machines account for 70 percent of trading volume. The most notable economic news event was the weak ISM Non-Mfg report on Tuesday, which followed the weak ISM Mfg release on September 1. These overshadowed the otherwise arguably positive economic releases, including one of Janet Yellen's allegedly favorite indicators, the JOLTS report. In what one would have expected to be particularly market-moving negative news but was only of slight impact, there was Mario Draghi 's message that further ECB stimulus is on hold. And to show that everything old is, well, just old, Apple 's new iPhone launch underperformed low expectations, likely only exciting the same crowd who will be lining up for Sulu's autograph at the next "Star Trek" convention. But just when the week was drawing to a close, Boston Fed President Eric Rosengren's hawkish comments were laid out like bread crumbs, leading markets down the path to a September rate hike. In response, equities dropped in excess of 2 percent, yields spiked globally (10-year bunds briefly traded out of negative territory) and complacency took an early holiday. As I stated with conviction in last week's note , the Fed will hike the Fed Funds' rate by 25 basis points at the September 21-22 FOMC meeting. Sure, the ISM reports were disappointing, but the Fed, justifiably, takes a longer-term view, usually looking at such data on a rolling basis. The prior two months data has been strong. The Fed is ready and wants to tighten; that has been made abundantly clear by each Fed member that has spoken over the last few weeks — remarkably, with no one dissenting. It is time. Central bankers recognize what we mere mortals have known for some time — that negative or near zero rates have reached a point of diminishing returns and are now in fact harmful to economies because they weaken banks and take their toll on individuals who are dependent upon yield. As much as developed economies require healthy financial institutions, they also need household spending. Furthermore, too many pensions, historically so dependent on yield-bearing instruments to achieve their actuarial assumptions, are lagging their obligations, a problem that is sure to surface and that will increase the longer rates stay low. And of course, this being a global economy, our tightening measures are the rest of the world's de facto stimulus measures. Then there is this: Perhaps the Fed is actually looking ahead at the elections, worried about whoever gets in and further Congressional gridlock. Or maybe they are concerned about our long-in-the-tooth economic recovery, albeit shallow, and the lack of traditional measures to deal with a recession. While that alone is not a good enough reason to raise rates, it is definitely a factor that could tip the scales in favor of a hike. Worth repeating from last week's note is this line from a research paper prepared by Fed staffers that was footnoted in Janet Yellen's Jackson Hole speech, given its importance in light of today's apparently greater awareness of a September rate hike: "By historical standards, this amount of running room would seem rather modest, compared to an average reduction in the federal funds rate of about 5½ percentage points during the past nine recessions ." Is the market too complacent? Could be. We will find out if I am correct about the Fed. Complacency is definitely on holiday thus far today but algos have found a way to revert to the mean, although it is difficult to know what they have modeled in relating to this move in rates. Am I being too fixated on this, jealous of the attention? I don't think so. I attended a hedge fund conference this week, and the panel of quant traders attracted the biggest crowd at the event; similar to what activists attracted two or so years ago and long/short managers in 2009-2013. In fact, those quants were downright giddy, yucking it up on stage while the distressed and long/short equity managers were, shall we say, a bit more reserved. Will buyers right the ship should it take on too much water as they have done for the last two years under the thesis where else is money to go? Historically, volatility is an opportunity. I am a buyer of equities should there be a sell-off, but I also want to know who is in the Oval Office before I do anything but trade dislocations. This may have been a shortened week, but next week will trade just like it and the week after, right up until the FOMC — and then we will do it all over again. The opportunity is underneath the surface, in the stocks not prominently featured in ETFs. That's the place to hunt, as is the financials. (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.")

It was a short week; short on days, short on volume but not short on fodder for the ongoing rate debate.

Credit markets clocked a round trip, with the 10-year starting and ending the week above a 1.6 percent yield, ending at a multimonth high of 1.65 percent, having made a pit stop at 1.52 percent along the way. Equities were fairly stagnant until Friday, uncertain after seven years of monetary-infused expansion as to whether bad news is good news or good news is bad news, or if it is even worthwhile to figure it out since the machines account for 70 percent of trading volume.

The most notable economic news event was the weak ISM Non-Mfg report on Tuesday, which followed the weak ISM Mfg release on September 1. These overshadowed the otherwise arguably positive economic releases, including one of Janet Yellen's allegedly favorite indicators, the JOLTS report. In what one would have expected to be particularly market-moving negative news but was only of slight impact, there was Mario Draghi's message that further ECB stimulus is on hold. And to show that everything old is, well, just old, Apple's new iPhone launch underperformed low expectations, likely only exciting the same crowd who will be lining up for Sulu's autograph at the next "Star Trek" convention.

But just when the week was drawing to a close, Boston Fed President Eric Rosengren's hawkish comments were laid out like bread crumbs, leading markets down the path to a September rate hike. In response, equities dropped in excess of 2 percent, yields spiked globally (10-year bunds briefly traded out of negative territory) and complacency took an early holiday.