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

Published Fri, Dec 9 20164:50 PM EST

Short Hills Capital Partners

Melt up. That's what they call it when the market goes up every day as it did this week, hitting more new highs than a pothead who won Powerball. The rotations between sectors have become less violent not to say that there aren't laggards or choices to be made. Financials, particularly banks and investment banks, continue to lead but on any given day it can be transports or industrials or metals – well, you get the picture. Health care, on the other hand, had a bit of a headwind after President-elect Donald Trump was quoted in Time Magazine reiterating his issues with drug prices. This is a sector that will continue to be under assault, trading opportunities aside, because it has everything that Trump dislikes: The pharma industry spends more on lobbying than any other industry by a wide margin; Medicare, arguably the single largest customer of prescription drugs in the world, is prohibited from negotiating prices under Obamacare; a number of pharma companies had already located offshore prior to the law changing; and the same prescriptions cost more in the U.S. than in other countries, i.e., Gilead's Sovaldi regimen is $10,000 in some regions versus $90,000 here. In other words, you can date Lilly and Pfizer but don't get hitched. From a top down standpoint, although the spread between the more domestically focused Russell and the S & P 500 has yet to shrink, it still appears the former is where you want to be. Yes, the market has traveled far in a short time, but relative to where it was 18 months ago, it has hardly stirred. Choosing to focus on where a market or stock has come from versus where it is going has been the motivation for many portfolio managers to update their LinkedIn profiles and increase their connections. Let's see – what else happened this past week? Give me a second. … Oh yeah, that referendum in Italy. The primary lesson learned is that ultimatums seldom work, particularly for politicians with the shelf life of an Italian Prime Minister, a country that has had six of them in 10 years and 63 governments since the end of World War II. The other takeaway is that European referendums, regardless of result, are buy signals for the U.S. markets. Observations: How high is up? That's the question. The Russell is up 20 percent year to date, as a strong dollar and prospective Trump initiatives clearly favor domestic businesses. I did buy some protection this week, various out of the money puts at levels seen just one-month ago that were astoundingly inexpensive—it seemed prudent. Sure, there are flashbacks to the go-go days of yore such as the usher at Madison Square Garden who quizzed me about whether he should buy more "financials," restraining myself from asking what he owned. Why? So I could add to my holdings if the story sounded right. The déjà vu to another time was complete as I ran into Elliott Spitzer in the men's room, relaying to my wife the nod of recognition he gave me only to have her reply that she was disturbed by the venue. Yup – we are partying like it's 1999 but unlike then, when the Nasdaq had a P/E of 200 based on hopes and dreams without any anchor in reality, this time around our expectations are much more realistic and the base is not comprised of quicksand but rather a combination of pent up demand for change, optimism, and fundamental proposals that make absolute financial and economic sense. They can be realistically accomplished but there is enough skepticism to keep euphoria at bay. Let's return to Europe. According to Lipper, there have only been three weeks of inflows to equities year to date. In other words, if it were the Presidential election, they would have fared about as well as the Green Party. It may still be early, but with the U.S. dollar strength and rates rising, I could see M & A accelerating, although it would be tough to play rifle shots. I would rather nibble at the banks. The European Central Bank announced the expected extension of QE, as needed, to the end of 2017, with a couple of wrinkles, but the one I care most about is reducing the monthly purchase beginning in April from 80 billion euros to 60 billion. That is a taper, although the total amount is potentially greater. Draghi emphatically said it is not a taper. Germany "dissented" and wants to exit QE. Perhaps Draghi, apparently frustrated, won't make it to the end of his term in 2019. It is Europe after all. Merkel has an election coming up and needs some positive press although no one doubts her re-election – just as no one doubted Hillary's coronation or the U.K. staying in the euro zone or… The point is that the German yield curve is steepening and I am on board. How could I not be? If Dave Tepper says that "German bonds are most susceptible to a significant decline" that is where I want to be short. Another way to play it is to own the European banks. I started to position a few, including Deutsche Bank , based upon its steepening yield curve. Sure, it has moved, but it still has a long way to go as money managers aim to replicate the U.S. trade and get in early. Monte dei Paschi should have its issues settled in short order, thanks to the "no" vote on the Italian referendum, and then it is off to the races for the sector. Outlook: Complacency? Not there yet. This is a seasonal move higher, hyper-charged by well-grounded optimism about tangible changes in regulatory governors on growth and a reduction in taxes by a majority in D.C. that can get it done. It is too early to sell on the "news" even from a continuation of the seasonal move into January. A portion of tax selling of winners, typical in November and December, didn't occur this year because who would do so knowing rates will be lower next year? This phenomenon assisted the market's move thus far, although it may take some steam out in January, but that remains to be seen since momentum is so tough to let go. The biggest danger at this point is overthinking this move. (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.")