In today’s Daily Rundown video, Chris Versace gives more color on the Portfolio’s decision to exit the shares of Builders FirstSource (BLDR) and why we’re looking to add to its position in American Express (AXP) at the right price.
He also explains why the December Employment Report and the findings in the preliminary reading of the January University of Michigan Consumer Sentiment Index keep us bullish on Amazon (AMZN) and Costco (COST) shares.
He closes out this video by explaining why the week of January 20 could be a big one for the markets and share how he'll be kicking off next week.
Transcript
CHRIS VERSACE: Hey, everyone, Chris Versace here, Friday, December 10. And as we can see, the market is not reacting well to the stronger than expected December employment report. In fact, pretty much good news is bad news. And the why behind that is, well, along with recent inflation data, the hotter than expected number of jobs being created during December, and the tick lower in the unemployment rate, it's simply going to extend the runway for the Fed to deliver further rate cuts, especially following 100 basis points in cuts that the Fed delivered over the last four months of 2024. Odds are higher for longer will be the mantra. And it means that, once again, we are going to see some recalibration going on in the market.
As you probably saw by now, all of this led us to pull the plug on 4 rated shares of Builders FirstSource. On the one hand, as we talked about when we downgraded it to a 4 earlier this week, we saw the risk that the shares could be dead money. But, at the same time, given what we saw in the December employment report and the risk that inflation data continues to essentially move what we've seen of late, i.e. more sticky inflation or potentially even ticking higher, well, what we wanted to do is get ahead of that potential risk and limit any further losses on the portfolio with the shares of Builders FirstSource, hence our move to close out that position today.
Now, while bad for interest-related stocks, we have to say that the other side of the coin, when we look at the December employment report, is that it's rather positive for consumer spending prospects and for the overall economy. Why?
Well, we have more people working, benefiting from real wage growth. But here's the thing. As of yesterday, the Atlanta Fed's GDPNow model was updated to around 2.7% GDP for the December quarter. Good. But today's data, well, that's going to fuel an upward revision when we get the next reading for the GDPNow model next week.
As we mentioned, we will continue to watch the shares of American Express closely. Why? Well, one, we do like the membership business model that the company has in place. It's a big differentiator, just like the one that we see at Costco. But we also had very favorable comments earlier today from Delta Airlines regarding international travel, corporate travel in particular. So that is going to lead us to want to pick up more shares of American Express at the right price. In our comments to you this morning, we shared we're going to be closely watching the $294 level, which is just above the 50-day moving average.
Those comments also go for Amazon and Costco. Again, more people working, more folks earning real wages. But remember the comment we got from Albertsons, that consumers remain price-sensitive, price-cautious because they continue to feel the pinch of higher prices. And, yes, Costco did deliver stellar December comp sales earlier this week. But there are reasons to think that our shares of Amazon and Costco will continue to be beneficiaries of this ongoing pinch of higher prices. We saw some data pointing to that this morning.
The preliminary University of Michigan index of consumer sentiment for January slipped to 73.2 from 74 in December. And that's also down from 79 a year ago. Peering into the report, key takeaway for us is that consumers continue to worry about inflation increasing, both for the year ahead and longer run inflation.
Now, that's not something the Fed is going to want to hear. And given what we've seen in recent data, well, as we get ready for the Trump White House and potential tariffs, the Fed is likely to take a wait and see approach about potential rate cuts, even without some of the data that we saw this week. So put it all together, it means that rates are going to be higher for longer. That explains the pushout that we've seen in the CME FedWatch Tool to not anticipating a rate cut in 2025 until late 2025, against that recalibration that I referred to earlier.
Now, when we think about the potential for tariffs, we have to remember that inauguration day is January 20. But we are going to mark our calendar not only for that date but also for the World Economic Forum in Davos that runs January 20 through the 24. Giving the timing of that World Economic Forum, it's bound to have some comments, potentially some insight that we want to pay attention to following President Trump's inaugural address on January 20. Our thinking is that inaugural address could very well set the tone for his administration.
Now, let's get back to the portfolio as we get ready to close out the week. The exit of Builders FirstSource shares brings our cash levels back above 11% and it leaves us candidly with a more manageable 26 positions in the portfolio. Now, after you read your next batch, excuse me, of signals on Saturday and digest the next serving of Sunday soup-- when we kick next week off, we will be updating our portfolio table, sharing the latest consensus EPS figures for the holdings as well as a fresh look at potential pickup points for those holdings as well.
Now, let's remember, too, that we're only just a handful of days into 2025, which means that we will continue to look for new bullpen candidates that benefit from multiyear structural tailwinds that are poised to deliver favorable EPS prospects. And we're going to do that recognizing that the December quarter earnings season is going to heat up. And as the market recalibration continues, especially, remember, we have the December inflation data next week-- both CPI, PPI. As that recalibration continues, we will look for opportunities in both existing positions and potentially new ones for the portfolio as well.
So, with that in mind, please be sure to check your emails, check your alerts. We want to make sure you're getting our latest thoughts. And if we happen to make any moves with the portfolio, we want to make sure that you are right there with us. Have a wonderful weekend and we will see you back on Monday.
At the time of publication, TheStreet Pro Portfolio was long AXP, AMZN and COST.