Kevin Warsh Puts a Hurting on Our Small-Cap Portfolio
The Federal Reserve chair’s address hurt equities, including several of our names.
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On Friday morning, still-new Fed Chair Kevin Warsh made his much-anticipated address from Jackson Hole, Wyoming. He was clear. As I mentioned in my piece after that speech on Friday, I like him as a leader for the central bank. Readers know that I do not agree with where it appears he is going with policy. At least he was clear. There was nothing wishy-washy in what he said.
Warsh sees inflation as an ongoing problem and sees nothing in the data that tells him that underlying inflationary trends are easing. In my opinion, on Friday, Kevin Warsh flat out told us that the FOMC is going to increase short-term interest rates, either on September 16 or, if not then, by the next policy meeting on October 28. What could push out short-term rate hikes? Another disastrous labor market this Friday for August coming after that putrid July report that brought unwelcome downward revisions to May and June with it.
Warsh would like to only have to focus on one side of the Fed’s dual mandate. He sees the economy as quite strong in a broad sense. Another awful jobs report from the Bureau of Labor Statistics could possibly force a reconsideration of that stance. That has been my point. Nobody wants to see demand for labor weaken, so let’s hope Warsh is correct on that opinion, which is undoubtedly more informed than mine. That said, being well informed has not served the last three Fed chairs before Warsh much better than if they had been privy to very little information at all.
This Put a Hurting on Equities
Warsh’s address put some pop in Treasury yields (price down), which also hurt equities. The Fed’s 2% inflation target, after more than half of a decade of rising prices really due as much to legislative failure and the perverse expansion of money supply as much as irresponsible interest rate policy from 2021 through 2024, will remain the target.
On Friday, tech stocks and small- to mid-cap stocks were hit particularly hard. This newly signaled hawkish shift in monetary policy will hurt business heavily reliant upon debt and the use to their balance sheets to maintain operations. That speech took the Philadelphia Semiconductor Index down 3.47%, the Russell 2000 down 1.39%, the S&P Midcap 400 down 1.2% and the S&P Smallcap 600 down 0.84%. That speech also took a jackhammer to this portfolio. I find it likely that the portfolio will have to pare some target prices and even pare down some position sizes as we prepare for increased short-term rates at a time that I am not sure that the economy can handle them.
Upcoming Portfolio Earnings
Rocket Lab (RKLB): After the closing bell on Thursday, September 3. Expected: Adjusted EPS of -$0.02 on revenue of $104.25 million.
Smith & Wesson Brands (SWBI): After the closing bell on Thursday, September 3. Expected: Adjusted EPS of -$0.05 on revenue of $98.7 million.
Portfolio News
Rocket Lab (RKLB)
On Monday morning, analyst Ronald Epstein of Bank of America reiterated his “buy” rating on RKLB while reducing his target price from $115 to $110. Epstein is rated at five stars out of five by TipRanks. Over the past two years, he has compiled a 62% success rate while generating an average return of 38.4%.
The Portfolio
Readers should note below, the reduced target prices for (ALTO), (ONDS), (PL), (RKLB) and (VELO). In addition, my 8% rule has been triggered in RKLB. (The rule does not apply to single-digit stocks.) I tried to put it off, expecting some help from the Warsh trade. I played that speech incorrectly. I will have to halve that position. (PL) is also in that position, but I am going to hold off there as I added to that position more than once last week. I am also going to add to SWBI ahead of earnings.
Friday’s Intention vs Actual Trade
Intention: Purchase 5 shares of (EVLV) at or close to the last sale of $5.36
Actual trade: Bought 5 shares of EVLV at $5.22
Monday’s Intention
Sell 5 shares of RKLB at or close to the last sale of $63.25
Purchase 10 shares of SWBI ar or close to the last sale of $12.95
Current Positions
Long 200 shares of ALTO at $4.7224. Target price: $6.50, down from $8. Last sale: $4.07.
Long 40 shares of (ASPN) at $5.23. Target price: $10. Last sale: $4.99.
Long 100 shares of EVLV at $5.7883. Target price: $8.50. Last sale: $5.35.
Long 100 shares of (OCUL) at $8.3545. Target price: $11. Last sale: $10.40.
Short one OCUL $11 September 18 call at $1.65. Last sale: $0.39.
Long 250 shares of ONDS at $8.3642. Target price: $12, down from $14. Last sale: $7.85.
Long 55 shares of PL at $24.1931. Target price: $33, down from $46. Last sale: $19.96.
Long 10 shares of RKLB at $73.041. Target price: $97, down from $101. Last sale: $63.25.
Long 100 shares of (SOFI) at $15.8511. Target price: $24. Last sale: $17.91.
Short one SOFI $22 November 19 call at $1.20. Last sale: $0.83.
Long 60 shares of SWBI at $14.9645. Target price: $19. Last sale: $12.95.
Long 100 shares of VELO at $12.2986. Target price: $18, down from $21. Last sale: $11.72.
Cash: $232.97.
Portfolio Value: $10,127.35, +1.3% from inception on March 24.
At the time of publication, Guilfoyle was long ALTO, ASPN, EVLV, OCUL, ONDS, PL, RKLB, SOFI, SWBI and VELO.
