VIDEO: Fake News Pressures Our Shares, Presenting Opportunity

In today’s Daily Rundown video, Chris Versace explains why the market is reversing course following Wednesday's move higher, tying it to the warmer-than-expected November Producer Price Index report. 

Piecing together that report and Wednesday's better-than-feared November CPI data, Chris explains why the market still sees a Fed rate cut next week but shares why the focus will now be on the Fed’s next set of economic projections. 

Chris also touches on the Portfolio’s recent downgrade of PepsiCo PEP shares, Ciena’s CIEN multi-year outlook and the renewed pressure on Lockheed Martin LMT shares following our recent buy.

Transcript

CHRIS VERSACE: Hey, folks. Chris Versace here, Thursday, December 12. And stocks are trading off following yesterday's gains that put the NASDAQ composite not only above a significant level but firmly back in overbought territory given its relative strength index reading that was north of 70.

Remember, too, yesterday's pop really followed what is viewed by the market as an OK or better-than-feared November consumer price index. So what's the catalyst for today's market action that sees the market giving back some of those gains? Well, it was the November Producer Price Index report, which showed that both year-over-year headline and core PPI data for the month of November was simply hotter than expected.

Now, despite that, we did see the sequential core PPI figures come in as expected, down a tick compared to what they were in October. And when we look at the CME FedWatch tool after that-- remember, this is the tool that tracks the market's expectations and timing for Fed rate cuts-- we see that, despite the mixed bag in the November PPI report, the probabilities expected by the market for a December rate cut actually ticked even higher.

So this sets us up for an interesting situation next week, where the market's expecting the Fed to deliver a rate cut. And I think, based on what we saw yesterday in the CPI data and with that sequential PPI core reading ticking lower, we are likely to see the Fed deliver that 25-basis-point rate cut.

But when we take a look at a lot of the data that we've gotten of late, it tells us that the economy [INAUDIBLE] on stronger footing, the employment market, again, not rolling out of bed, and inflation is sticky. So as I'm thinking about this, the real focus for next week is going to be on the Fed's updated set of economic projections. This is where they're going to give us their latest take on what they expect in terms of the economy, inflation, rate cuts for 2025, 2026.

Now, here's the thing. The market currently only expects two more rate cuts in 2025, one at their March meeting by the Fed and then at the July meeting, with nothing happening in the back half of the year. And I think that likely reflects the fact that, when we look at the Fed's calendar of meeting next year, they're really stacked more so in the first half of the year than the second half of the year.

So we're going to have to really parse those numbers. I do think that the Fed is more inclined to find a more neutral level of policy over time. That kind of suggests that they want to be dovish. But they might have some comments in next week's policy statement or even in Fed Chair Powell's press conference that say the Fed is likely to take a more measured approach.

But the good thing is that would likely match what the market is expecting. More likely than not, if we get what the market expects, that probably means that we will see the typical second half of December seasonal strength in the market unfold. And that's something that we'll be enjoying given the setup that we have in the market.

But again, we'll have a lot more about that. And as we watch today's move lower in the market, we are going to continue to keep an eye on our shopping list. And with that in mind, I want to talk about the move that we made yesterday with PepsiCo, where we downgraded to a 4 rating. And, yes, while we discussed the rationale behind that in the alert, the cut to the quick is that it really stems from our concern over two competing forces that could weigh on PepsiCo's margins and its expected earnings.

One in the note that we talked about was the sequential pickup in key input prices for PepsiCo compared to the third quarter, with some also higher on a year-over-year basis. And that is happening just as PepsiCo is using promotional activity, pricing, to help stimulate demand, as it called out, on its September quarter earnings call.

And, yes, we have seen that. We've seen some very competitive pricing in the beverage aisles at the supermarkets, even one for Coke that was buy two, get three free, which is pretty phenomenal when you think about it. But as we laid out in our note, because we downgraded PepsiCo to a 4 rating, we are planning on unwinding the position over the coming weeks.

Now, I just mentioned that we're entering a seasonally strong time of year for the market. So that likely means that we'll be using some of that seasonal strength to unwind the position. So don't be surprised in the coming weeks if you see us slowly pilfering out PepsiCo shares. And what we'll be doing is rebuilding our cash position but also potentially using some of it as we look to rearm the portfolio for what's ahead in 2025.

Now let's take a look at some other news. Last night, ServiceTitan priced its IPO above the expected range. ServiceTitan, if you haven't heard about it, it's a company that provides cloud and CRM software primarily to tradespeople-- plumbers, electricians, landscapers-- really with the aim of helping them manage their business. Now, the transaction is one of the first in recent IPOs in the tech sector. So we'll want to see how this performs.

And the transaction was underwritten with lead underwriters from Goldman Sachs and our own Morgan Stanley. So from our perspective, this kind of helps support the recent price increase that we gave to Morgan Stanley shares. Remember, we lifted our price target earlier this week, along with Bank of America.

We are going to watch the ServiceTitan after-market reaction to the IPO. Why? Well, because if it performs well, this could help open the door to a more robust IPO market in 2025, not just in general but also in the tech space, as well. We'll be watching not only that activity, obviously, but also for the M&A activity. We talked about that when we boosted our price targets for those two holdings earlier this week.

This morning, we had some interesting developments from Sienna, which actually raised its long-term guidance. Why did Sienna do this? Well, it says it sees plans for strong CapEx investments by cloud-provider customers as they continue to invest in networks to support AI training and, increasingly, the adoption of AI.

Now, we see that as just another round of positive comments for NVIDIA, but also for Marvell. Remember, that's been a key cornerstone of our thesis for Marvell. And it really comes on the heels of very similar comments about network investing from Oracle.

So we continue to like Marvell here. We are watching the shares closely. Remember, we recently downgraded them to a 2 rating. And we had said that, depending on if they hit certain support levels, we might be inclined to revisit that 2 rating. So that's what we're watching with regard to Marvell.

And finally, I'm sure we're going to get some questions on this, but we are seeing Lockheed Martin shares under renewed pressure this morning. This really spins out of an article that said that President Trump apor-- allegedly, excuse me, informed Lockheed Martin management of his intent to terminate the F-35 contract that's around a trillion dollars.

Now, Lockheed Martin immediately responded to this report that said-- calling it false reporting and fake news. Now, I know there's been a lot of controversy over the F-35, a lot of innuendo. Thank you, Elon Musk. But we have to remember that this is a key cornerstone of the US Defense program, but also for other key allies, as well.

There are a number of reasons why the F-35 is a wonderful part of the US Defense system, given an array of capabilities. We do expect Lockheed to unveil an updated multi-year delivery schedule in January. We think that's the next catalyst. But we did take advantage of the recent pullback in Lockheed Martin shares to add some earlier this week.

And in our opinion, when we see confusion like this, especially when it's a lot of innuendo that's driving it, it tends to be a nice opportunity for folks to pick up shares. So I would say that if you missed our picking up Lockheed Martin shares earlier this week, this is a great, arguably even more compelling, opportunity to do so. So I would suggest that you revisit Lockheed Martin shares if you haven't.

And with that, members, I would say we've got a lot going on this week still, even though it's Thursday. We got more comments coming your way. So please be sure to check your emails, your alerts. And remember, if we make any moves with the portfolio, we want to make sure that you are right there with us. Thanks for watching. 

At the time of publication, TheStreet Pro Portfolio was long PEP and LMT.