VIDEO: How We’re Positioning the Portfolio for the Fed, AI and Rising Yields
Plus, more on our decision to further increase our cash position.
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The market is facing a pivotal week, with the Fed decision, higher oil prices, Treasury yields and renewed AI concerns all weighing on sentiment.
Chris Versace explains why the Pro Portfolio has been raising cash, the decision to exit NeoStellar (NSLR), and preparing a shopping list.
Transcript
Hey folks, Chris Versace here on Monday, September 14th.
As you’ve probably observed, it’s been a little bit of a challenging day for the market as we start what is going to be a pretty big week. Remember, on Wednesday, we’ll get the Fed’s latest monetary policy decision.
As we talked about in this morning’s opening comments, we’ve seen a sea change in thinking, especially among economists, compared with where they were on Friday. The market was already looking for a rate hike, but now these economists are on board, and there’s a lot more expectation for the Fed to deliver not only a 25-basis-point rate hike, but for its language to skew a little more hawkish.
Remember, on Wednesday, we’re also going to get the updated SEP, which should be pretty revealing as well. So there’s a lot building up to that. We also have the Dreamforce event this week, which will showcase a lot of what’s happening with AI.
But today, the market is reacting to a confluence of events that includes, in no specific order, oil prices continuing to move higher, other signs of renewed inflation pressure, renewed geopolitical tension, primarily between the U.S. and Iran, the AI warning that came out over the weekend, and a few other factors.
I would argue a few things. One, given where the market has been, this is really a knee-jerk reaction to what we’re seeing today. But some rational thought has to come through as well regarding what all of this means for consensus EPS expectations for the S&P 500 in the back half of this year and for 2027.
Remember, we’ve been saying that those expectations have been rather—to borrow that word from Alan Greenspan—a little exuberant. Our growing thought over the last few weeks has been that there could be some downside risk to those numbers.
I think the combination of what’s driving the market today, plus the prospect of higher interest rates and Treasury yields—they did touch 5% earlier today—is going to lead to a little bit of a rethink on those earnings expectations for the back half of the year and for 2027.
At the same time, as the risk-free rate moves higher, as I touched on in our opening comments this morning, we could see some capital pulled from the market as folks start to question valuations, especially if we see those S&P 500 EPS numbers come down.
When we think about all of this, you’ll also notice that we’ve increased the portfolio’s cash levels. We started with the exit earlier this month from Builders FirstSource. Last week, we cleared out the portfolio’s position in United Rentals in two tranches.
Then today, for very specific reasons that we outlined in the trade alert, we opted—though painful as it was, and I expect people aren’t going to be thrilled with the move—to remove shares of NeoStellar from the portfolio, putting them back in the bullpen.
I would argue that this is more of a company-specific view and list of reasons rather than a concern about the AI scare. I say that because, in our opening comments this morning, we said that the AI scare is more about future model development and the need to slow that down. That’s very different from AI adoption.
AI adoption is happening with consumers, in the enterprise, and across other organizations and entities, with usage widening.
Now, is it possible that we see that lift rate slow a little bit in the near term? Possible. Just given some of these concerns, it could happen. But by and large, we continue to see rising AI adoption and widening usage driving demand for capacity at data centers.
Remember, too, cybersecurity is another driver. And as we’ve been talking about recently, medium- to longer-term autonomous driving will create and consume a tremendous amount of data.
So there are a lot of reasons to think that this is likely to be a little bit of a stumbling block here for companies in the AI and data-center ecosystem.
When you look at shares of Arista Networks, Eaton, and some others that are down—Marvell, Broadcom—they are lower.
Now, we’ve raised our cash levels, as I said. So we’re going to be looking for opportunities to shore up not only those positions, but some others in the portfolio.
Remember, we are entering historically one of the most challenging times of the year for the market—the last two weeks of September. And again, given the thought that S&P 500 consensus EPS numbers might have to come down, as we have more conferences, this could be a challenging time.
Better to have more cash on hand than not.
When we’ve seen times like this in the past, getting our shopping list ready and being prepared to move when we take a look at the technical setup in the S&P 500 and the Nasdaq and it looks like the market is bottoming has been a very solid strategy for the portfolio. It’s helped us outperform at different periods of time.
That’s what we will be looking for.
So, in the next day or so, particularly ahead of the Fed’s next policy meeting, we want to have that shopping list ready. That means that, somewhere in the next 24 hours, we’ll be sharing with you not only an updated shopping list, but also an area of key pickup points.
I know folks are looking for it, and we will make sure that you’re ready so that, depending on what the Fed does, what it says, and where the market goes, we might be ready to take advantage of some of those opportunities.
Notice I said “might.”
I strongly suspect that, day to day, that’s how the market is going to move over the next few days. So don’t be surprised if we take our time, look for things to settle out, keep an eye on the technicals for the market, and make the move when the time is right.
By that, I mean when the risk-reward is extremely compelling to the reward side and the risk appears to be low.
As a result, I would not expect us to make any moves today, tomorrow, or even Wednesday morning. Most likely, it would be later in the week, at the soonest. But again, that doesn’t mean it’s going to happen, because the back half of the month tends to be the most challenging.
Let’s walk the cautious path, focus on the long-term opportunities, and build our shopping list as we go forward.
A couple of other things that I do want to talk about.
One of the things that we were watching for Boeing was the settlement with the union that we expected to happen. That did happen over the weekend. That gives us a relief, if you will, from any potential union strike and disruption to Boeing production and deliveries.
So Boeing will be one of those names that we are eyeing to build our position in.
Also, shares of the XLV ETF—we’re a little light on healthcare. I know we have Welltower, and we’re looking for places to not only add to the XLV ETF, but also the ROBO ETF as well.
We’ll be talking more about that when we share our updated set of stocks on our shopping list and those potential pickup points.
As far as folks who may not have acted as quickly as we did with NeoStellar, that was an extreme reaction in the stock, falling below $8. Candidly, I didn’t see that coming.
But given the volume that we’re seeing, which tells us it’s not just us who are exiting the shares of NeoStellar, there are others out there likely with the same or similar concerns to what we laid out in our trade note.
What I would say to folks is that I do think the odds of the NeoStellar shares being dead money in the near term are pretty high.
Having said that, wait for a little bit of a rebound and then move forward with your exit.
I know some folks are wondering, “Why did we exit the entire position today?”
I’ll just say this: When we take a look at the confirmation that the OpenAI IPO has been pushed out, where Treasury yields are and what that could mean—not only for money coming out of the market, but also concern about the IPO market in the near term—and even, candidly, the AI scare and how it might disrupt, at least in the near term, private capital fundraising for some of the companies or competitors that might be in NeoStellar’s investment portfolio, things have changed.
And as a result, we have to change our thinking.
That is really what we did today with NeoStellar.
Do we think it’s a bad company? No.
No, I actually continue to like the holdings that are in the portfolio. I just think it’s going to be a lot longer until they’re able to monetize some of them and get back to paying dividends, hence putting them into the portfolio’s bullpen.
So that’s our position on NeoStellar.
Stay tuned. We do have a lot more coming your way today and tomorrow, obviously with the Fed decision, and a lot more this week.
Continue to check your emails. We want to make sure you’re getting our latest thoughts. And if we make any additional moves with the portfolio, potentially later in the week, maybe a little later, we want you right there with us.
Thanks for watching.
