VIDEO: Here's Our Plan While We Wait for the Fed

In today’s Pro Portfolio Daily Rundown Video, Chris Versace recaps Costco’s COST stellar August sales report and discusses why the portfolio will remain on a cautious path as we wait for the Fed to conclude its next policy meeting. 

But being cautious doesn’t mean we’ll be sitting on our hands. 

Using Costo's August report, earnings from Broadcom AVGO, and other examples Chris explains why our approach will have us ready for opportunities.

Transcript

CHRIS VERSACE: Hey, folks. Chris Versace here Friday, September 6. And following what we can only call the not horrendous August Employment Report, the market has sold off and is tracking to finish, unfortunately, lower week-over-week, potentially putting it in as the worst week of the last year in trading. It's fair to say that as we close out the first week of September, the month is living up to its reputation, and candidly with the risk that the market is once again out over its Fed rate cut skis, something we detailed in one of our Alerts to you this morning. So, I hope you read it.

We are going to continue to walk the cautious path with the portfolio between now and when the Fed concludes its next policy meeting on September 18. That's the day that the Fed is not only going to announce a potential policy action, but we continue to think that should be around 25-basis points. You know, the market is kind of dithering back and forth between 25 and 50. We have some more data we'll get next week and I think we'll have a better sense as to what that is likely.

Again, ahead of that, we continue to think 25-basis points is likely. But also on September 18, the Fed is going to release its updated set of economic projections. And that is going to show how many rate cuts the Fed thinks it could deliver across its November and December policy meetings. Now, we talked about this quite a bit.

You know, the market is expecting something of at least 100-basis points, maybe even 125. Again, way out over its skis. We could take a look at some of the data that we got this week about the services economy perking up and likely to remain there. The August Employment Report, again, a little bit of a disappointment, but we knew that going in.

Wage data inside the August Employment Report per tire, the Fed's not going to miss that because of what we're kind of seeing inside the various PMI reports about input costs, output charges. So I think the Fed is not going to risk a 50-basis point cut here. You know, we'll see what happens with data later in the year. I think the Fed is going to keep the window open to be flexible, continue to focus on the incoming data. So we will as well.

But again, the market seeing that it's 100-basis points, it's out over its skis. And I can say that in part not only because we think it, but our poll that we ran this week asking folks, how many rate cuts do you think the Fed will deliver between now and the end of the year also turned up 50-basis points. That would be two 25-basis point rate cuts.

And again, the way to think about this here is if the market is out over its skis, if we're right, the risk is that on September 18 the Fed is going to kind of walk those expectations back, just like they did earlier this year. What did we see? The market sold off in response. So knowing this, knowing this concern about the month of September, we purposely built up our cash levels over the last few weeks. And what are we going to do?

Well, we're going to patiently look for opportunities. Let stock prices, if you will, come to us, because despite the pain of the weak, the market is not oversold. All we have to do is look at the RSI levels for the S&P 500 and for the Nasdaq composite. They're below the neutral line at 50, but are they bumping up against an oversold reading of 30 or less? Not yet.

So, again, we're going to continue to let stock prices come to us. The market may be volatile, but volatility, as we talked about earlier this week, can be our friend if we are prepared. And that's what we're going to continue to do, looking for potential opportunities in the portfolio, in the bullpen and potentially in some other places as well. But we're not just going to sit on our laurels waiting for stock prices to come to us.

Obviously, we'll be doing that work. But we'll also be taking a look at some of the incoming data that we're getting, not just economic data, but also comments that we're getting from companies as they make certain announcements. It could be revenue reports like we got with Hon Hai earlier this week, like we should get with Taiwan Semiconductor soon, or like we got with Costco last night.

And let me tell you, that was an unbelievable August Comp Sales Report for Costco. Comp sales-- I just want to make sure I get it right here-- excluding gas prices and foreign exchange for August, 7.1% higher year-over-year. In the US, that figure was 6.7%. So we might be reading about dollar stores having a tough time and other retailers, not Costco.

They are continuing to take consumer wallet share. And remember, that was for August. Starting September 1, that's right, the long anticipated membership price hike goes into effect. That means we'll see a positive bump for that high margin, all important membership fee revenue stream. But there's other reports out there.

Case in point, Broadcom, even though the stock is down 9%, yes, we added it to the bullpen as a result, if only to keep tabs on it because it touches a number of different end markets. But when we reviewed that report in a note to you this morning, what did we see? Really good confirmation for our positions in Qualcomm, in Apple, Universal Display, Nvidia, Marvell. And again, even in that not horrendous August Employment Report, one positive nugget that really jumped out to us was the jump in construction employment.

It tells us that if more people are going to work on construction sites, there's more activity. It also says that some of that very unseasonable weather for construction activity in July is in the rear view mirror. Those are positive data points not only for Vulcan Materials, but also United Rentals. And we're also not going to just collect data, right?

Because if we just collect data, what does it mean? We need to do something with it. We will be revisiting price targets. We will be revisiting our ratings because as stocks come in, the risk reward trade-off might become more favorable. We saw that with Morgan Stanley, which we upgraded to a one-rating yesterday. So I hope you saw that note.

And again, we'll be looking at incoming data, reviewing price targets and ratings. In other words, it's going to be business as usual for us here at the portfolio because we are active investors. And with that in mind, we will have a fresh batch of portfolio signals for you out tomorrow and we will continue to collect them. We will continue to have our noses to the grindstone and we will be sharing our thoughts with you in Alerts.

So please, folks, even though it's Friday, remember to continue to look at your email, look at your Alerts. We want to make sure you are getting our latest thoughts and insights. And as I like to say, if we make any moves with the portfolio, we want to make sure you are right there with us. Thanks for watching today's video. Have a fun weekend and we'll see you back here on Monday.

At the time of publication, TheStreet Pro Portfolio was long COST.