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

Published Fri, Dec 2 20164:03 PM ESTUpdated Mon, Dec 5 20168:06 AM EST

Short Hills Capital Partners

Tired, yet still exuberant, they rested in the fourth week of the new dawn, undoubtedly a pause to refresh, the interlude perfectly timed to allow the neighbors across the pond to work out their issues, unsure if any result would continue to be a good result. And while top-line readings of the major domestic stock indices ended slightly lower on the week, trending down in orderly fashion, the list of surprises grew longer. It was a toss-up as to whether OPEC agreeing to a production cut was more of a shock than Vladimir Putin being the one who brokered the deal. Of course, it was no surprise at all that traders got caught short, violently reversing the commodity and the equities as well. Meanwhile, China, Europe — yes even Italy and Spain, less so the U.K. — and of course the U.S., seem to be experiencing an economic revival, albeit in varying degrees, some admittedly requiring a heart rate monitor to assess rapidity of pulse but nonetheless a reversal of economic apathy. This has led to a backup in sovereign yields, a concern of ours for many months, the yield on the 10-year U.S. Treasury breaching 2.5 percent before pulling back below 2.40 percent to end the week, in our estimation a head fake before an extended run to 3 percent over the next six-nine months. Consumer confidence remains high, investor confidence is strong, and the pall of negativism continuing to ebb, so evident in the retail sales figures on Black Friday and Cyber Monday, exceeding expectations leading to the biggest jump in the retail sector since 2011. Are we witness to a transition from the safe haven of a three-decade bull market in bonds into equities? Even before 1,000 jobs at Carrier were saved, before one piece of tax reform was drafted? Could be. Timing is everything and the rally we have seen is part President-elect Trump — how else to explain the instantaneous response the day after the election — and part the synchronized global economic recovery. And that means the week was about industrials, energy, materials and financials – all the sectors that made investors cry out "loser" not that long ago. One of the greatest mysteries in the annals of NYC education is how I gained admission into Stuyvesant High School, an institution perennially ranked as one of the top schools in the country. It's not like I didn't get A's, I clearly remember both of them, but the one I am most proud of was my grade on an art project. Years before my more cultivated self emerged, I painted a large sheet of poster board all white and titled it "You Decide." Quick on my feet even back then, when queried, I told the teacher it was a white elephant in a snowstorm; to others it was something else. That's like the markets today, everyone sees something different depending upon what angle they are coming from. Value investors, despite the indices being only 2 percent higher than they were 18 months ago, and 7.4 percent year to date, are up double digits, while growth investors, the life of the party just a short time ago, are trailing as FANG stocks (Facebook, Amazon, Netflix and Google) have lost their bite and healthcare has yet to heal. It's astounding that financials are up 17 percent this year with all but 2 percent coming in the last month, and that some energy stocks bounced 20 percent in just one day, off an 8 percent pop in the commodity. That copper, driven by speculation in China and algorithmic trading, incorrectly thought by some to be a minor factor in non-equity markets, would have such violent moves. It obviously isn't all a result of a relatively slowly improving economy and a Fed that is further behind the curve than a steroid free Barry Bonds. But be that as it may, it is the back up in rates that may ultimately cause concern. The rate of change is the issue, but it has to keep going at the same rate because each spike that has been sustained at this rate has presaged a recession. Take a look at the chart below, which shows the spread between the 10-year U.S. Treasury and Fed Funds rates. The shaded areas are recessions. We aren't close, but I'd look for at least three hikes next year just to catch up. 10-year U.S. Treasury vs Fed Funds rates For now, though, it is smooth sailing and I like equities; the U.S. remains the default market of choice and that's not likely to change. Sure there are values to be found in other developed markets such as Europe but take it from me, it's not worth it to work that hard. I tried and one election is enough to deal with. After we get through Italy and the threat of Renzi's resignation, we have France, Germany, Austria and so on. Forget emerging markets — not with the dollar likely to further strengthen. At some point reality may hit, but what if the academics are wrong and everything bad about supposed protectionism is actually a strength that puts us in the driver's seat, makes us more profitable and so on? Let's see how it plays out but first...don't worry, be happy. (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.

Daniel Acker | Bloomberg | Getty Images

Meanwhile, China, Europe — yes even Italy and Spain, less so the U.K. — and of course the U.S., seem to be experiencing an economic revival, albeit in varying degrees, some admittedly requiring a heart rate monitor to assess rapidity of pulse but nonetheless a reversal of economic apathy. This has led to a backup in sovereign yields, a concern of ours for many months, the yield on the 10-year U.S. Treasury breaching 2.5 percent before pulling back below 2.40 percent to end the week, in our estimation a head fake before an extended run to 3 percent over the next six-nine months.

Consumer confidence remains high, investor confidence is strong, and the pall of negativism continuing to ebb, so evident in the retail sales figures on Black Friday and Cyber Monday, exceeding expectations leading to the biggest jump in the retail sector since 2011.

Are we witness to a transition from the safe haven of a three-decade bull market in bonds into equities? Even before 1,000 jobs at Carrier were saved, before one piece of tax reform was drafted? Could be. Timing is everything and the rally we have seen is part President-elect Trump — how else to explain the instantaneous response the day after the election — and part the synchronized global economic recovery. And that means the week was about industrials, energy, materials and financials – all the sectors that made investors cry out "loser" not that long ago.