VIDEO: Why We Raised Our Cash Levels This Week

In today’s Daily Rundown video, Chris Versace explains this week’s portfolio moves and why we wanted to have more cash on hand ahead of Fed Chair Powell’s Jackson Hole comments tomorrow and as we enter September.

"I do think there's room for the market to be disappointed," he said. "We are going to tread carefully in the very near term. We will, however, further refresh the bullpen."

Versace also explained why we’ll be focused on margin expectations for 2H 2024 when companies make the investor conference rounds in September.

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Transcript

CHRIS VERSACE: Hey, folks. Chris Versace here, Thursday, August 22. And I wanted to catch you up on a few things as we wait for Fed Chair Powell's comments tomorrow morning at Jackson Hole. The big economic data point of today-- and we shared this in an alert with you-- was the flash PMI report for August. It was supportive for the Fed entering a rate-cutting cycle, especially given what it showed on the jobs creation front during the month of August, which was far slower than what we've seen over the last few months.

As we know, the Fed has kind of been moving towards a tight rope of sorts between inflation continuing to make progress on one side, but the jobs market, if you will, starting to roll over and point to far slower rate of job growth. So I think Powell's comments are going to reflect this tomorrow. But again, we continue to think that he's going to keep his cards very close to the vest. It's what the Fed Chair usually does.

Even when we saw him testify in Congress several weeks ago, didn't really tip his hand whatsoever. The reason being, he was in between meetings, and there was more data to come. I think that he's going to play that same tune this time around, even though, as I said, today's August flash PMI report was supportive for the Fed entering a rate-cutting cycle.

The other concern that we have is that the market is potentially a little bit of ahead of itself. We've seen this time and time again, and it looks like it is one more time. I say that because when we look at the CME Fedwatch Tool, and we look at the number of rate cuts it shows between now and the end of the year and the number of meetings that we have, if Powell is not as dovish as the market expects tomorrow, that could raise some questions about the number of rate cuts. And remember, as we talked about yesterday, the market in the near-term is overbought.

So any type of pushback could be reasons for the market to start to sell off a little bit. We've kind of prepared for that earlier this week. Yesterday, for example, we took some chips, very profitable chips, off the table regarding Axon, as well as Lockheed Martin. We did pick up some additional shares at Dutch Bros, but the net effect boosted the portfolio's overall cash position to around 9.4% of its assets.

Now, again, the market's overbought. We're going to wait and see what Powell has to say. I think the risk is I just indicated is probably more that he disappoints, either in his actual words, or the fact that he doesn't say anything about potential rate cuts in September. That is certainly a possibility.

Remember, Jackson Hole is not a policy meeting, per se. It's more a symposium where they do, from time to time, talk about the economy and monetary policy. But it doesn't guarantee Powell is going to say anything. So I do think there is room for the market to be disappointed.

And we also have to remember trading volumes are low. This is one of the seasonally slowest times of year. And we're getting ready to enter into September, which has a reputation of being a very challenging month for the market. So we opted, given all of that and the run-up in Exxon and Lockheed Martin shares, to take some of those chips off the table, build up our cash. We are going to tread carefully in the very near-term.

We will, however, look to further refresh the bullpen. We did some of that earlier this week when we pulled up Netflix into the bullpen. But we're going to want to do a little bit more of that and flesh out some potential opportunities, especially if September and its reputation rings true one more time.

With that, the only other thing I would call out-- another focal point of ours for September is going to be during the upcoming wave of investor conferences-- what are management teams saying about margin pressure? And if you read the note this morning about the August flash PMI, you get what I'm referring to. Inside that report, there is a growing mismatch between the rate of input costs and output prices. In other words, input costs are continuing to rise. Output costs are not. That's a flag for potential margin squeeze.

And if we do get that, it could be another reason to question EPS expectations for the second half of the year and into 2025 for the S&P 500. So we'll continue to monitor that. And of course, we'll be updating our thinking with you as we do so, which means, of course, please be sure to check your emails. Check your alerts. We want to make sure you're getting our latest thoughts. And if we make any moves with the portfolio, we f you right there with us. Thanks for watching.