Steve Weiss's hedge fund outlook for next week

Published Fri, Sep 30 20165:01 PM EDTUpdated Sat, Oct 1 201610:44 AM 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 ..." Nope, not deja vu all over again and not Groundhog Day either; I wrote that line in the Sept. 16 note and sure enough, heading into last weekend, the VIX traded with an 11 handle — to be fair 12 is usually just as good an entry point — and BANG! the cash register was rung. Nonetheless, we almost made it through the last week of the quarter with scant volatility but the minefield that is the market was too laden with potential trigger points to escape unscathed. Twelve Fed speakers, including Janet Yellen 's semiannual testimony to the House Finance Committee; a batch of economic releases; the House's shot at John Stumpf of Wells Fargo and the potential knock on Wall Street, big banks and whatever grandstanding they think might help get them re-elected; and a stop-gap funding vote to keep the government running. And did I mention the great debate, the ultimate reality show that may have had the Kardashians either cringing (unlikely) or jealous (more likely) or unaware that it was scheduled to occur (most likely). But in the end it was what wasn't scheduled or anticipated that took the market up on Wednesday and then plummeting on Thursday; paradoxically the unexpected that, no surprise to us, always surprises markets: an OPEC agreement (the ultimate oxymoron) and concerns about Deutsche Bank 's balance sheet. On Friday, the last trading day of the third quarter, more realistic views of DB's financial fitness drove their common equity and bonds higher and took markets with it, providing an opportunity to mark up portfolio positions closing out the month on a flattish note and the quarter with a very nice gain. Owing to four knee scopes and one back surgery, my cardio workouts are limited to machines, resulting in a significant resemblance to the market in September and of the last 18 months: lots of effort, lots of sweat, lots of liquids (different kinds) to keep me going and when it's over, I'm in the same damn place! Away from all the noise, we unearthed a couple of important lessons from this past week. The first is that investors have clearly told you who they prefer as the next president. As Clinton became the clear winner in the second half of Monday's debate (the available options still rankle me), Mexico, via a strengthening in the peso, breathed a sigh of relief, and S & P equity futures rallied with follow-through on Tuesday. Thus, it is important to keep an eye on the polls because they will dictate the direction of the market through Election Day but be wary because we know their reliability. Speaking of Brexit, for all those who thought that any impact to the U.K. economy would be slight or off in the distance, you better recalibrate your thinking. Capita, a U.K.-based technology outsourcing company, took a hatchet to their earnings outlook based upon a slowdown in corporate spending. In our view, this is just the beginning and the contagion factor into Europe is sure to occur. And then there is OPEC. After eight years, they have finally agreed to an output cut — or at least that's what they have told us. But it's an agreement to agree to an output cut at their November meeting. Based upon that announcement, crude rallied 6 percent and continued higher over the next couple of days. If OPEC does follow through, analysts believe crude can rise to $60. The problem being, of course, is that OPEC members have rarely abided by their commitments and the reorganized U.S. shale industry has shown scant signs of slowing down. So until further notice, trade at your own peril as the tankers remain full and the CEO of BP has yet to retract his months-old statement that every bathtub in America will be used to hold oil since the storage tanks are full. The best news of the past week has been that Congress has shown that they can work together by passing a stop-gap spending bill and at long last Zika funding but should be ashamed of the comedic way they handled the questioning of John Stumpf. I am not defending Wells — what they did was absolutely egregious. My favorite moment was when one of the representatives kept asking questions but as Stumpf got a word out she would say: "Hold on, I only have a few more seconds" and then lob another question. She did this multiple times, clearly never interested in a response. The questions were inane, but hopefully her local stations aired them at 6 p.m. The week will begin on a slow note with the Jewish New Year keeping a number of market participants at home on Monday and Tuesday but otherwise it is more of the same. The vice presidential debate airs Tuesday night. It is sure to be a raucous affair and will undoubtedly be a ratings winner against QVC's flash sale of Emeril Lagasse's latest cookware line but otherwise not particularly newsworthy. Oct. 9 is the next presidential debate and that will test my theory, above. The U.S. market remains the most attractive despite limited upside owing to tight headroom on valuations. The next few weeks will be very instructive as we pass through pre-announcement season into the heart of corporate earnings and guidance. I believe this will be, as usual, better than we have been looking for but the tone has not been as dour, nor the bar set as low, as the prior five quarters. Biotech remains my top sector followed by areas of technology. I'm still not biting on commodities. The consumer is healthy but bifurcated and still predisposed to spending more on experiences than on accumulation of goods. Dry powder is the one commodity I am willing to hold. (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

Twelve Fed speakers, including Janet Yellen's semiannual testimony to the House Finance Committee; a batch of economic releases; the House's shot at John Stumpf of Wells Fargo and the potential knock on Wall Street, big banks and whatever grandstanding they think might help get them re-elected; and a stop-gap funding vote to keep the government running. And did I mention the great debate, the ultimate reality show that may have had the Kardashians either cringing (unlikely) or jealous (more likely) or unaware that it was scheduled to occur (most likely). But in the end it was what wasn't scheduled or anticipated that took the market up on Wednesday and then plummeting on Thursday; paradoxically the unexpected that, no surprise to us, always surprises markets: an OPEC agreement (the ultimate oxymoron) and concerns about Deutsche Bank's balance sheet. On Friday, the last trading day of the third quarter, more realistic views of DB's financial fitness drove their common equity and bonds higher and took markets with it, providing an opportunity to mark up portfolio positions closing out the month on a flattish note and the quarter with a very nice gain.