Weiss: Here's your hedge fund investment setup for the week ahead

Published Sun, Nov 20 20167:57 PM EST

Short Hills Capital Partners

A record nine consecutive trading-day decline in the S & P 500 pre-election. Then, President-elect Trump, catalyzing an upside breakout of an 18-month trading range in equities, decimating sovereign debt globally, including one of the fastest backup in 10-year yields ever experienced, threatening a multi-decade bull market in bonds, and threatening to stoke the near moribund flames of tepid inflation, a task that trillions in monetary stimulus and millions of words and phrases too carefully uttered by central bankers have been unable to accomplish. And the First Twitter account going virtually silent on November 9th! All surprises – just like a child's first visit to the Fun House, a new surprise has accompanied each day of trading, a continuation of Brexit and its aftermath, the lesson being that George Santayana is definitively out of style and the only condemnation is accorded to those who ignore the money flows rather than those who ignore the past because there is no playbook to refer to, no Yoda to consult, and no three-year period of underperformance to rely upon before your assets go elsewhere. Unquestionably, the market has had a very strong, very bullish tone to it since Trump took the election, but underneath the headlines investors have been making choices. The more dollar=sensitive index, the S & P 500, stands alone in not making a new high and sector performance, away from financials and industrials, has averaged about plust 2 percent except for the yield stocks, including consumer staples with exposure to both the dollar and yield, have been hit hard. The smaller cap, more domestically focused Russell 2000 has been a meteor shot. Then there is tech. In the immediate aftermath of the election, the tech sector was the ATM for healthcare, banks and industrials, but has since recovered and is essentially flat since November 8th. What I find frightening about all this newfound positivity driving markets higher is that it actually makes a lot of sense to me – and not just in retrospect. As Bank of America points out, "During the first post-election week (November 10-16) US Mutual Funds and ETFs reported a big $25.39 billion inflow to stocks and a similarly big $9.06 billion outflow from bonds." Emerging market debt was the hardest hit – no surprise and I remain bearish there as capital flight and repayment of their debt in dollars derails growth – as were munis. This swap from the safe haven of government bonds (not referring to EM) to the wild west of equities speaks to optimism not caution. Maybe, despite the recent rally, not everything is so rosy. As noted above, US Treasuries have been slaughtered. The FT reported that £65 billion in UK investments have been cancelled since the Brexit vote, an issue we have warned about, yet German real estate continues to be bid higher (we still like the long Munich/Frankfurt r/e versus short London r/e trade). Cisco , repeatedly cited as a barometer of economic health because their technology is integrated into virtually every electronic product in every region of the world, disappointed investors with a mediocre earnings report, pointing to a cautious spending outlook from their customers, uncertain about the impact of dollar strength. Actually, my take is that this is bunk. CEO's are not short term currency traders aside from the fact that the dollar ripped AFTER their quarter ended. I've heard this so many times from Cisco and Intel that I know it to be that they are too big to grow and their scapegoat is to blame the economy. Here is what else doesn't make sense. The dollar reached hit a 13-year high after a 10- day rally as China continues to drop the band on the yuan and Japan's Kuroda, who hasn't read the special delivery memo sent to all central bankers about the diminishing returns of monetary policy, vowed to keep buying as many JGBs as possible. Despite this, copper continued its strong rally on Trump's talk of infrastructure spending as had iron ore, steel and coal (Oddly, the market didn't distinguish between met coal and steam coal). It wasn't until China clamped down on speculators that copper corrected, but Freeport McMoran hasn't. It should. Iron ore hasn't, though, despite the CEO of BHP Billiton saying there is a lot of excess supply coming onto the market, China restructuring its steel manufacturing (okay, I'm skeptical too) and virtually all U.S. steel production coming from scrap not iron ore. And then there is coal. On Wednesday, I tried to buy bankrupt met coal producer Peabody Energy, BTUUQ (OTC Pink Sheets), at 9 but gave up at 11 and of course regretted my stinginess at 15. Now it's back at 11. And so it goes. So to me, the recent move higher in commodity- related equities, which began before the elections, is unwarranted. Maybe the financials are ahead of fundamentals, but stocks are discounting mechanisms. Not worth selling the banks here for what may be a slightly overbought condition – not after waiting the better part of a decade for this bit of alpha. But overall the market makes sense. The following may seem political but bear with me, it isn't. And I recognize it may even be controversial but let's keep it interesting. My market thesis is loosely based on the Stockholm Syndrome. The year was 2004 and it was time for a truly fresh regime; the charisma, a candidate with a spring in his step versus stodgy old Washington presented a message of hope and optimism and America enthusiastically embraced it. But as time wore on, the creeping negativity, part self-inflicted, part politically inflicted, part inflicted by external ideology, took over and most didn't even realize that they became captive to it while their admiration for the administration never wavered, perhaps deepened, abetted by the rhetoric of the far right pushing them in that direction. For years now, we have been faced with unrelenting negative rhetoric, periodically lectured that we essentially have to make reparations for being a successful country, for being successful individuals, for having fun. Businesses are too big, Wall Street and banks too evil, drug companies too greedy. Some of it was true but not every institution was rotten to the core nor was everyone who worked there. It wasn't just Democrats versus Republicans, it was industry versus industry, the feeling that you had a scarlet letter on your chest if you worked at a drug company even if you were curing cancer. Each misstep was an opportunity for Congressional grandstanding, effusive with anger and a tidal wave of nonsensical spittle coated words of vilification. Each presidential address had been dour, a lecture on what we have to do better, why we have to do this or do that, why we have to be a better country, why we have to extend ourselves, give them $1.7 billion, give them nuclear power, let them cross the red line, ignore mass genocide, etc., ending in us going the extra mile, the extra 10 miles, 100 miles, giving into Iran, into Cuba, into whoever – eating a lot of crow – with nothing ever in return. Then along comes just as imperfect a candidate but one with a message that America is done taking the short end of the stick, apologizing for what we didn't do, telling the people that success is okay and that we are going to reclaim what made America great. They see their "captor" ending his reign of negativity and the skies brighten just a little at first, maybe just because it is something new, and they buy into it, at least the Electoral College does, choosing to ignore the truly abhorrent aspects of the message about walls and race and other social issues. The skies open further and even some who didn't vote for the new leader get the optimism bug because hope can be contagious; the market is going up and watching others make money looks like fun so why not jump in. Investors snap out of the funk they didn't even know they had been in (again, that Syndrome), optimism ensues and they imagine what can be with tax reform, with regulatory reform, with a pro-business environment and they buy. And they buy. And that's why it makes sense to me. But if that abhorrent rhetoric returns or becomes reality it is back to square one and given that we are entering year 9 of an equity bull market and economic cycle, though muted, the decline will be excruciatingly painful, particularly with the great unwind of passive investing, an "asset class" of enormous proportions that has never been tested in an extended selloff. For now though, the First Twitter account remains mostly on mute, the policy proposals supportive of earnings growth and multiple expansion and the momentum too powerful to ignore. So I am erring on the side of optimism because there is so much pent up demand for it and I will be there until given sufficient reason do otherwise. For all the talk about the market rally, the S & P is only 4 percent higher than where it was in July 2015 yet the economy is stronger and wage growth, a factor that we never thought would arrive back then, is clearly evident. Positioning coming into the election was very muted with cash on the sidelines and net exposure at modest levels. I believe we can continue to rally into year-end. From there the expectation will be that steps will be taken to begin enacting the pro-growth policies Trump has spoken about. Of course, the danger is that they are also pro-inflation policies but we can take a little of that, particularly since the latest CPI was weak. My concern, somewhat tempered by how fiscally responsible Paul Ryan has been, is that the Fed gets trigger happy, particularly since I believe they fast forward their tightening schedule ahead of what they currently forecast due to an accelerating economy. For now though, we remain in the honeymoon period with most of the gains for this year behind us, a likely period of consolidation but a push higher into year-end to make for a Happy New Year. My conviction level is not exceptionally high on a year-end rally, pending further cabinet selections, but it is more than a coin toss. Into next year I still prefer the Russell, particularly with a stronger dollar. (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.")

Traders work on the floor of the New York Stock Exchange.

Michael Nagle | Bloomberg | Getty Images

A record nine consecutive trading-day decline in the pre-election. Then, President-elect Trump, catalyzing an upside breakout of an 18-month trading range in equities, decimating sovereign debt globally, including one of the fastest backup in 10-year yields ever experienced, threatening a multi-decade bull market in bonds, and threatening to stoke the near moribund flames of tepid inflation, a task that trillions in monetary stimulus and millions of words and phrases too carefully uttered by central bankers have been unable to accomplish. And the First Twitter account going virtually silent on November 9th!

All surprises – just like a child's first visit to the Fun House, a new surprise has accompanied each day of trading, a continuation of Brexit and its aftermath, the lesson being that George Santayana is definitively out of style and the only condemnation is accorded to those who ignore the money flows rather than those who ignore the past because there is no playbook to refer to, no Yoda to consult, and no three-year period of underperformance to rely upon before your assets go elsewhere.

Unquestionably, the market has had a very strong, very bullish tone to it since Trump took the election, but underneath the headlines investors have been making choices. The more dollar=sensitive index, the S&P 500, stands alone in not making a new high and sector performance, away from financials and industrials, has averaged about plust 2 percent except for the yield stocks, including consumer staples with exposure to both the dollar and yield, have been hit hard. The smaller cap, more domestically focused Russell 2000 has been a meteor shot.

Then there is tech. In the immediate aftermath of the election, the tech sector was the ATM for healthcare, banks and industrials, but has since recovered and is essentially flat since November 8th.

What I find frightening about all this newfound positivity driving markets higher is that it actually makes a lot of sense to me – and not just in retrospect.