Hope can be contagious; it can be immediate; and it can be powerful, engulfing even the most dour into its optimistic embrace. It was an inescapable observation as I viewed the images on CNBC of market strategists, of economists, even the occasional Fed member. The rollback of Dodd-Frank easing margin pressure on investments banks, preserving their jobs and speaking fees was a distant second to something much more important. "It is a new dawn," I imagined they each were likely thinking, the vaguest hint of a smile betraying the glee they were endeavoring so hard to mask, "thank heaven for the pollsters. They make my calls look like prophecies!" Now, if only active managers could translate how President-elect Trump was able to beat big data into how they could conquer algos, no Wall Streeter would be left behind. Alas, perhaps it is not the pollsters that should be the most castigated but rather the bookmakers in London. As one of our European fund managers pointed out, a £5 million trifecta wager on Leicester City to win the Premier League, Brexit and Trump would have returned £15 million. The reasons for the market rally were clear: relief that the election was over, eradicating the uncertainty that investors loathe; the lifting of the curtain of vitriol, allowing some to be optimistic; and the massive wave of short covering and repositioning. The recent gains may slightly recede but the underlying economy had already strengthened and my cautiousness, pre-election, in expectation of a continuation of D.C. gridlock, margins peaking and valuations being full has faded given that there is now a potential catalyst to lift indices higher. Everyone likes a good story and with Trump's proposals, we have it. However, it is ridiculous to believe that he will be the first President to follow through on his campaign rhetoric, both good and bad, so he's been accorded enough of a goodwill gesture in advance of naming his team and starting on the long road to drawing and enacting legislation. Equity markets opined on Trump's policies by driving commodity and material stocks higher; saying hush to Elizabeth Warren in buying financials; ta-ta to Hillary and Obama by bidding up healthcare; fretting over trade wars and selling tech, a sector most found comfort in over the last year as healthcare became less attractive. Some moves, such as United States Steel with a 30 percent short interest, were beneficiaries of covering and accumulation, others were a beneficiary of massive ETF buying which accounted for 60 percent of net buying on Wednesday, the quickest way to get market exposure. The advance-decline line was surprisingly balanced despite the major move in the indices. The pendulum swung fast and wide this week, its counterintuitive movement immediately victimizing those who reacted with emotion, eviscerating their profits and losses (P & L) and the S & P futures as a Trump victory became clear. That's why managing money is such a tough job and why so many participants leave the field early. There is no time for rest, for reflection on the social impact of events, no time for an emotional release on tasting the joys of victory or wallowing in defeat by protesting on Fifth Avenue. A number of managers took advantage of the weak kneed and stunned sellers by removing their hedges—they had learned from the Brexit aftermath not to be married to a pre-event view—but reversing field by going long in the middle of the night was a leap too far. I came into the election with more cash than I would have liked while maintaining my long term holdings. I had already taken off my long volume position, not because of a view on the election, but because it had worked out and at then current levels became a directional bet and not a hedge. My participation this week lagged like most others who can have variable exposure. Undoubtedly, were the new administration able to enact a number of their domestic economic policies such as a rollback of onerous regulations, Dodd-Frank, Affordable Care Act and cut taxes, it would be great for business and the economy. However, fiscal stimulus would be welcome by both parties. This is not only what is needed by the U.S. economy but the global economy as well. I suggest that Fed monetary policy, to the overreaching extent that we have seen, was largely influenced by the inability of Congress to agree on any type of fiscal stimulus, a factor that the FOMC, being nonpolitical, could only address in the most guarded tones. With Republicans controlling the government, the handoff from monetary to fiscal stimulus will occur. This same issue afflicts Europe; their banks, pensions and consumers harmed by low rates and high unemployment. Not so fast on commodities and commodity based cyclicals. China has not only been the marginal buyer of the asset class but the majority buyer through the last cycle and their appetite has been waning, a function of transitioning to a consumer driven economy from infrastructure and slowing growth. Massive monetary stimulus has revived growth temporarily but issues loom large in the shadows, especially in the form of intolerable levels of bad debt at both banks and non-banks. And while we are on China, should a trade war break out, a not unreasonable nor undeserved outcome, they hold the Trump card in being the largest creditor of the U.S. While it would be foolish to take a final mark on a sale of money good Treasuries, I'm not sure the Chinese maintain a P & L. A massive and immediate rise in rates after a rout in bonds, on top of a Fed reversal in monetary policy, could cause the next recession rather quickly. But that won't happen because China needs us more than we need them. Besides they are already onto the next big thing and it is called self-sufficiency, barely willing to steal U.S. technology, more interested at this point in developing their own products to compete with Apple , with self-driving cars, etc. The assembly line jobs they took years ago with low wages have left for Mexico and Vietnam as they, like America, have experienced their own wage inflation. The message is be careful on the shares of commodity companies or you could see those equities get ahead of the fundamentals as energy equities did, discounting $75 crude when it only winked above $50. We recently looked at a strategy that funds small professional businesses, essentially a factoring model, lending at interest rates of 18-24 percent in addition to a 1.5 percent closing fee. Their loss ratio is so small it is basically incalculable. This business model, as is the proliferation of BDC's, sub-prime auto, mortgages, direct lending, and so much more, a beneficiary of tighter regulations not just on money centers but also on community banks. Imagine what this has done to economic growth and imagine what it has done to limit the number of new business startups or to force others out of business. You may recall that I had a very definitive, out of consensus view on how quickly the U.S. 10-year treasury yield would rise above 2 percent. The inflationary proposals of the new administration could hasten a rise to 3 percent. Short sovereigns with impunity although there should be a bounce at some point. I also believe that the U.S. remains the preferred equity market of choice. Succinctly put, if two major themes play out—the long awaited generational move from bonds to equities and the handoff from monetary to fiscal policy within the backdrop of still low rates—we have an extremely constructive environment for domestic equities. Change doesn't happen over night and especially not before an inauguration so until we know who will be doing what and an idea of whether the measured Trump or the locker room Trump will be running the country, I'm going to err on the side of optimism. I continue to like healthcare, financials, certain industrial's—all on pullbacks, and tech that has come back to reasonable valuations. Going forward, as details emerge, and time to enactment becomes a factor, some will ascend while others will fall back to earth. For now, both the bond market and the equity market moves are too powerful to take a contraposition. (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.")
