‘The high for equities is not in,’ says technical strategist who unpacks the stocks to buy now.

Siegel argues that bonds, which have been giving stocks the shove, have proven to be a terrible inflation hedge, but investors have forgotten that given it’s 40 years since the last big price shock. “Stocks are excellent long-term hedges, stocks do beautifully against inflation, bonds do not,” he told CNBC on Tuesday.

Don’t miss: ‘Bond math’ shows traders bold enough to bet on Treasurys could reap dazzling returns with little risk

Other stock cheerleaders out there are counting on a fourth-quarter rally, which, according to LPL Financial, delivers on average a 4.2% gain as portfolio managers snap up stock winners to spiff up performances.

Our call of the day from Evercore ISI’s head of technical strategy, Rich Ross, is in the bull camp as he declares the “high for equities is not in,” and suggests some stocks that will set investors up nicely for that.

Ross notes November is the best month for the S&P 500
SPX,
Russell 2000
RUT
and semiconductors
SOX,
while the November to January period has seen a 6% gain on average for the Nasdaq Composite
COMP.
He says if the S&P can break out above 4,430, the next stop will be 4,630 within 2023, putting him at the bullish end of Wall Street forecasts.

In addition, even with 10-year Treasury yields back at their highs, the S&P 500 is still ahead this week and that’s a “great start” to any rally, he adds.

Evercore/Bloomberg

What else? He says “panic bottoms” seen in bond proxies, such as utilities via the Utilities Select Sector SPD exchange-traded fund ETF
XLU,
real-estate investment trusts and staples, are “consistent with a bottom in bond prices,” which is closer than it appears if those proxies have indeed bottomed.


Evercore/Bloomberg

Among the other green shoots, Ross sees banks bottoming following Bank of America
BAC,
+1.14%

earnings “just as they did in March of ’20 after a similar 52% decline which culminated in a year-end rally which commenced in Q4.”

He sees expanding breadth for stocks — more stocks rising than falling — adding that that’s a buy signal for the Russell 2000, retail via the SPDR S&P Retail ETF
XRT
and regional banks via the SPDR S&P Regional Banking
KRE.

The technical strategist also says it’s time to buy transports
DJT,
with airlines “at bear market lows and deeply oversold,” while railroads are also bottoming and truckers continue to rise.

As for tech, he’s a buyer of semiconductors noting they tend to gain 7% on average in November, and Nvidia
NVDA,
-2.88%

has been under pressure as of late. He also likes software such as Microsoft
MSFT,
+0.82%
,
Zscaler
ZS,
+0.66%
,
MongoDB
MDB,
+0.90%
,
Intuit
INTU,
-1.43%
,
Oracle
ORCL,
-0.05%
,
Adobe
ADBE,
+0.93%
,
CrowdStrike
CRWD,
+0.55%

and Palo Alto Networks
PANW,
+1.38%
.


Evercore/Bloomberg

“The strong tech will stay strong and the weak will get strong,” says Ross.

The markets

Stocks
SPX

COMP
are dropping, with bond yields
BX:TMUBMUSD10Y

BX:TMUBMUSD02Y
mixed. Oil prices
CL.1,
+1.82%

BRN00,
+1.69%

have pared a stronger rally after a deadly hospital explosion in Gaza City, with Iran reportedly calling for an oil embargo against Israel. Gold
GC00,
+1.84%

has shot up $35.

For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor’s Business Daily.

The buzz

Morgan Stanley
MS,
-6.02%

posted a 10% earnings fall, but beat forecasts, with shares down. Abbott Labs
ABT,
+3.12%

is up after upbeat results and aguidance hike and Procter & Gamble
PG,
+2.91%

is up after an earnings beat. Tesla
TSLA,
-0.89%

(preview here) and Netflix
NFLX,
-1.20%

(preview here) will report after the close.

Read: Ford CEO says Tesla, rival automakers loving the strike. He may be wrong

United Airlines shares
UAL,
-7.83%

are down 5% after the airline lowered guidance due to the Israel/Gaza war. Spirit AeroSystems
SPR,
+22.60%

surged 75% after the aircraft components maker announced a production support deal with Boeing
BA,
+0.88%
.

Housing starts came short of expectations, with the Fed’s Beige Book of economic conditions coming at 2 p.m. Also, Fed Gov. Chris Waller will speak at noon, followed by New York Fed Pres. John Williams at 12:30 p.m. and Fed Gov. Lisa Cook at 6:55 p.m.

China’s third-quarter GDP rose 4.9%, slowing from 6.3% in the previous quarter, but beating expectations.

Middle East tensions are ratcheting up with protests spreading across the region after a massive deadly blast at a Gaza City hospital, and airports evacuated across France over terror threats. President Biden told Israeli Prime Minister Benjamin Netanyahu that “it appears as though it was done by the other team.”

Read: Treasury says Hamas leaders ‘live in luxury’ as it unveils new sanctions

Best of the web

Bridgewater says the market has entered the second stage of tightening

Why the FDA needs to halt Cassava Sciences’ Alzheimer’s clinical trials

Hail, heat, rot in Italy push France to top global winemaking spot

Attacks across Europe put Islamist extremism back in spotlight

The tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

Ticker

Security name

TSLA,
-0.89%
Tesla

AMC,
-0.73%
AMC Entertainment

AAPL,
-0.39%
Apple

GME,
-1.20%
GameStop

NIO,
-2.99%
Nio

AMZN,
-1.10%
Amazon

PLTR,
-0.59%
Palantir

MULN,
-0.06%
Mullen Automotive

TPST,
-11.20%
Tempest Therapeutics

TTOO,
-8.20%
T2 Biosystems

Random reads

Loudest purr in the world. Congrats Bella the cat.

Asteroid sample offers window to ancient solar system

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.

Listen to the Best New Ideas in Money podcast with MarketWatch financial columnist James Rogers and economist Stephanie Kelton.

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Here’s where ETF investors could turn to hide as Treasurys sell-off upends U.S. stocks

Hello! This is MarketWatch reporter Isabel Wang bringing you this week’s ETF Wrap. In this week’s edition, we look at how ETF investors can navigate the choppy financial markets which remain on edge after a sell-off in U.S. government bonds drove long-term borrowing costs to the highest level in more than a decade, undercutting stock prices.

Sign up here for our weekly ETF Wrap.

A renewed rout in the U.S. government bond markets that sent the yield on the 10-year Treasury bond to 16-year highs as a new era of higher-for-longer interest rates takes hold, is leaving ETF investors scrambling for the exits on a wide range of exchange-traded funds in the past week, most notably the iShares 20+ Year Treasury Bond ETF
TLT.

TLT, one of the most popular fixed-income ETFs that tracks a market-weighted index of the U.S. Treasury bonds with maturities of 20 years or more, earlier this week suffered its lowest close since the early days of the 2007-2009 financial crisis. The yield on the 10-year Treasury 
BX:TMUBMUSD10Y
slipped 2 basis points to 4.715% on Thursday, after reaching 4.801% on Tuesday, its highest closing level since Aug. 8, 2007, according to Dow Jones Market Data.

See: Bond investors feel the heat as popular fixed-income ETF suffers lowest close since 2007

The bond market, particularly the U.S. Treasury market, has historically been less volatile and and has often performed better than other financial assets during economic slowdowns. However, that doesn’t mean bonds don’t come without their own risks.

Rising yields reflect a diminishing price for the securities when interest rates rise, and hit existing holders of Treasuries.

See: Rising Treasury yields are upsetting financial markets. Here’s why.

The surprising strength of the U.S. economy, as demonstrated by this week’s labor-market data, coupled with hawkish talk from Federal Reserve officials indicating the central bank may need to keep tightening monetary policy, have led to the bond sell-off this week.

Meanwhile, a positive Treasury term premium, or the compensation that investors require for the risk of holding a Treasury to maturity, have also contributed to a steep sell-off as a ballooning U.S. budget deficit and the Treasury’s need to issue more debt have pushed Treasury prices to 16-year lows.

TLT
TLT
has fallen over 50% since its peak in August 2020, according to FactSet data. The losses are “pretty much” what the equity-market loss was from peak to trough during the global financial crisis, said Tim Urbanowicz, head of research and investment strategy at Innovator ETFs.

“It is not insignificant… It really makes you think about how you’re doing risk management because you can’t have the piece of the portfolio that’s supposed to be the risk mitigator falling the worst we’ve ever seen in the equity-market fall. That’s a big issue,” Urbanowicz told MarketWatch.

That’s why ETF investors have very few options when developing or adjusting their asset allocation play in the higher-for-longer rates environment, but there are still some shockproof assets for safety, according to ETF strategists.

Ultra short-term bond funds 

ETF investors that still favor bonds can consider hiding in ultra short-term bond funds to avoid duration risk as the Fed may still need to raise interest rates to curb inflation by the end of 2023, said Neena Mishra, director of ETF research at Zacks Investment Research.

The SPDR Bloomberg 1-3 Month T-Bill ETF
BIL,
which tracks all publicly issued U.S. Treasury Bills that have a remaining maturity of less than 3 months and at least 1 month, offers a yield of 5.43%. The fund attracted over $1 billion of inflows in the week to Wednesday, the largest inflows among over 800 ETFs that MarketWatch tracked in the past week, according to FactSet data.

Meanwhile, Mishra said investors who want active management with “better navigation to the markets” can consider the JPMorgan Ultra-Short Income ETF
JPST,
which is an actively managed fund that invests in a variety of debts including corporate issues, asset-backed securities, and mortgage-related debt as well as U.S. government and agency debt. JPST recorded $15 million of inflows in the past week and has yielded 5.76%, according to FactSet data.

Flows into longer duration bonds, utilities sector

Despite the bond rout hitting the popular TLT fund hard as the 10-year Treasury yield surged, some retail traders have already started to buy the historic dip of the fund devoted to longer-dated Treasuries, said a team of Vanda Research data analysts led by Marco Iachini, senior vice president.

TLT attracted a total of $686 million flows in the week to Wednesday, ranking the 8th out of over 800 ETFs that MarketWatch tracked in the past week, according to FactSet data.

Along with the strong “dip buying” in TLT, retail traders have also poured an “unprecedented amount” of capital into the utilities sector, Iachini and his team said in a Thursday note. The Utilities Select Sector SPDR Fund
XLU
recorded $141 million of inflows last week, according to FactSet data.

“While purchases of utilities stocks are typically of a significantly smaller scale than purchases of tech stocks, the inflow seen over the past week is far larger than any other prior 5-day stretch, easily surpassing inflows into the sector at the onset of the Covid downturn,” the Vanda team said. “The flip side of this dynamic is that institutional investors have likely lightened up their utilities exposure during this bond sell-off episode, making the sector a potentially more appealing equity bet should rates be nearing a local peak.”

See: Utilities stocks ‘decimated’ by rising rates fall into uncommon trading territory, Bespoke chart shows

Small-caps are ‘cheap for a reason,’ so don’t buy them too soon

Many small-cap stocks have traded at a significant discount to their larger-company counterparts, creating an attractive entry point for some investors who think the forward price-earnings ratio for small-caps are low enough to offer potential for outperformance in the longer run.

However, small caps
IWM
are by nature more sensitive to higher interest rates compared with a lot of the larger-cap stocks which have the ability to be “nimble” with strong cash flow, said Urbanowicz.

“It is really important right now not to just rely on a specific sector but really have that built-in risk management at the index level to take a lot of that guesswork out of the equation,” he added.

See: Small-cap ETFs may look attractive as recession concerns fade, but blindly chasing the rally is not without risk

Defined-outcome ETFs

That’s why Urbanowicz and his team at Innovator ETFs think the increasingly popular defined-outcome ETFs, or the “buffer” funds, could limit the downside risk and help investors navigate a stormy rates environment.

See: An ETF that can’t go down? This new ‘buffer’ fund is designed to provide 100% protection against stock-market losses

For example, the Innovator Equity Defined Protection ETF
TJUL,
the “first-of-its-kind” fund, aims to offer investors the upside return of the SPDR S&P 500 ETF Trust
SPY
to a 16.62% cap, as well as a complete buffer against its downside over a two-year outcome period.

Meanwhile, the Innovator Defined Wealth Shield ETF
BALT
offers a 20% downside buffer on the SPY every three months, which is a “very shortened outcome period” and doesn’t require the equity market to actually go up for the strategy to appreciate a value, Urbanowicz said.

“A big reason [to consider this strategy] is it gives investors a place to not only maintain equity exposure, but also to hide out because they [funds] have known levels of risk management that are in place,” he added.

As usual, here’s your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good…

Top performers

%Performance

YieldMax TSLA Option Income Strategy ETF
TSLY
6.2

United States Natural Gas Fund LP
UNG
2.0

Quadratic Interest Rate Volatility & Inflation Hedge ETF
IVOL
1.6

Technology Select Sector SPDR Fund
XLK
0.9

ProShares Bitcoin Strategy ETF
BITO
0.9

Source: FactSet data through Wednesday, October 4. Start date September 28. Excludes ETNs and leveraged products. Includes NYSE, Nasdaq and Cboe traded ETFs of $500 million or greater.

…and the bad

Bottom performers

%Performance

AdvisorShares Pure U.S. Cannabis ETF
MSOS
-11.3

Sprott Uranium Miners ETF
URNM
-10.6

Global X Uranium ETF
URA
-10.2

VanEck Oil Services ETF
OIH
-9.2

SPDR S&P Oil & Gas Exploration & Production ETF
XOP
-9.1

Source: FactSet data

New ETFs

  • J.P. Morgan Asset Management Friday announced the launch of a new actively managed hedged equity ETF, JPMorgan Hedged Equity Laddered Overlay ETF
    HELO.
    The outcome-oriented ETF invests in U.S. large-cap equities with a laddered options overlay designed to provide downside hedging relative to traditional equity strategies.

  • Zacks Investment Management Tuesday announced the launch of the Zacks Small and Mid Cap ETF
    SMIZ,
    which seeks to generate positive risk-adjusted returns by investing in small and mid-cap companies.

  • Calamos Investments LLC Wednesday announced the launch of the Calamos Convertible Equity Alternative ETF
    CVRT,
    the first product of its kind to provide ETF investors with targeted access to equity-sensitive convertibles.

Weekly ETF Reads

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Meta, Alphabet and 10 under-the-radar media stocks expected to soar

The media landscape is going through a difficult transition, and it isn’t only because streaming is such a tricky business.

Companies such as Walt Disney Co.
DIS,
Warner Bros. Discovery Inc.
WBD
and Paramount Global
PARA
have made heavy investments in streaming services as their traditional media businesses wither, only to find that it is harder than it looks to emulate Netflix Inc.’s
NFLX
ability to make money from streaming.

Some of the companies are also saddled by debt, in part resulting from mergers that don’t hold the same shine in the current media landscape.

Needless to say, this is the age of cost-cutting for Netflix’s streaming competitors and many others in the broader media landscape.

Below is a screen of U.S. media stocks, showing the ones that analysts favor the most over the next 12 months. But before that, we list the ones with the highest and lowest debt levels.

All the above-mentioned media companies are in the communications sector of the S&P 500
,
which also includes Alphabet Inc.
GOOGL

GOOG
and Meta Platforms Inc.
META,
as well as broadcasters, videogame developers and news providers.

But there are only 20 companies in the S&P 500 communications sector, which is tracked by the Communications Services Select Sector SPDR ETF
.

High debt

Before looking at the stock screen, you might be interested to see which of the 53 media companies are saddled with the highest levels of total debt relative to consensus estimates for earnings before interest and taxes (EBIT) for the next 12 months, among analysts polled by FactSet. This may be especially important at a time when long-term interest rates have been rising quickly. Dollar amounts are in millions.

Company

Ticker

Debt/ est. EBIT

Total debt

Est. EBIT

Debt service ratio

Total return – 2023

Market cap. ($mil)

Dish Network Corp. Class A

DISH 1,245%

$24,556

$1,973

15%

-57%

$1,773

Madison Square Garden Sports Corp. Class A

MSGS 1,125%

$1,121

$100

-14%

-4%

$3,400

Paramount Global Class B

PARA 656%

$17,401

$2,654

-29%

-13%

$9,529

Consolidated Communications Holdings Inc.

CNSL 651%

$2,152

$331

-26%

6%

$441

TechTarget Inc.

TTGT 629%

$479

$76

16%

-36%

$788

Cinemark Holdings Inc.

CNK 616%

$3,630

$589

61%

81%

$1,908

Cogent Communications Holdings Inc.

CCOI 548%

$1,858

$339

-19%

27%

$3,388

E.W. Scripps Co. Class A

SSP 529%

$3,084

$583

80%

-42%

$552

AMC Networks Inc. Class A

AMCX 492%

$2,945

$599

26%

-29%

$357

Live Nation Entertainment Inc.

LYV 466%

$8,413

$1,805

135%

22%

$19,515

Source: FactSet

Click on the tickers for more about each company, including business profiles, financials and estimates.

Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

The debt figures are as of the end of the companies’ most recently reported fiscal quarters. The debt service ratios are EBIT divided by total interest paid (excluding capitalized interest) for the most recently reported quarters, as calculated by FactSet. It is best to see this number above 100%. Then again, these service ratios cover only one quarter.

Looking at the most indebted company by quarter-end debt to its 12-month EBIT estimate, it would take more than 10 years of Dish Network Corp.’s
DISH
operating income to pay off its total debt, excluding interest.

Shares of Dish have lost more than half their value during 2023, and the stock got booted from the S&P 500 earlier this year. The company has seen its satellite-TV business erode while it pursues a costly wireless build-out that won’t necessarily drive success in that competitive market. Dish plans to merge with satellite-communications company EchoStar Corp.
SATS
in a move seen as an attempt to improve balance sheet flexibility.

It is fascinating to see that for six of these companies, including Paramount, debt even exceeds the market capitalizations for their stocks. Paramount lowered its dividend by nearly 80% earlier this year as it continued its push toward streaming profitability, and Chief Executive Bob Bakish recently called the company’s planned sale of Simon & Schuster “an important step in our delevering plan.”

You are probably curious about debt levels for the largest U.S. media companies. Here they are for the biggest 10 by market cap:

Company

Ticker

Debt/ est. EBIT

Total debt

Est. EBIT

Debt service ratio

Total return – 2023

Market cap. ($mil)

Alphabet Inc. Class A

GOOGL 22%

$29,432

$133,096

711%

47%

$1,528,711

Meta Platforms Inc. Class A

META 47%

$36,965

$78,129

717%

137%

$634,547

Comcast Corp. Class A

CMCSA 266%

$102,669

$38,539

77%

33%

$187,140

Netflix Inc.

NFLX 197%

$16,994

$8,641

192%

41%

$184,362

T-Mobile US Inc.

TMUS 378%

$116,548

$30,838

32%

-5%

$156,881

Walt Disney Co.

DIS 263%

$47,189

$17,975

88%

-4%

$152,324

Verizon Communications Inc.

VZ 370%

$177,654

$48,031

36%

-11%

$140,205

AT&T Inc.

T 378%

$165,106

$43,681

31%

-20%

$100,872

Activision Blizzard Inc.

ATVI 93%

$3,612

$3,891

2159%

21%

$72,118

Charter Communications Inc. Class A

CHTR 434%

$98,263

$22,651

89%

23%

$62,380

Source: FactSet

Among the largest 10 companies in the S&P Composite 1500 communications sector by market cap, Charter Communications Inc.
CHTR
has the highest ratio of debt to estimated EBIT, while its debt service ratio of 89% shows it was close to covering its interest payments with operating income during its most recent reported quarter. Disney also came close, with a debt service ratio of 88%.

Charter Chief Financial Officer Jessica Fischer said at an investor day late last year that “delevering would only make sense if the market valuation of our shares fully reflected the intrinsic value of the cash-flow opportunity, if debt capacity in the market were limited or if our expectations of cash-flow growth, excluding the impact of our expansion were significantly impaired.”

Meanwhile, Kevin Lansberry, Disney’s interim CFO, said during the company’s latest earnings call that it had “made significant progress deleveraging coming out of the pandemic” and that it would “approach capital allocation in a disciplined and balanced manner.”

Disney’s debt increased when it bought 21st Century Fox assets in 2019, and the company suspended its dividend in 2020 in a bid to preserve cash during the pandemic.

When Disney announced its quarterly results on Aug. 9, it unveiled a plan to raise streaming prices in October. Several analysts reacted positively to the price increase and other operational moves.

Read: The long-simmering rumor of Apple buying Disney is resurfacing as Bob Iger looks to sell assets

The largest companies in the sector, Alphabet and Meta, have relatively low debt-to-estimated EBIT and very high debt-service ratios. Netflix has debt of nearly twice the estimated EBIT, but a high debt-service ratio. For all three companies, debt levels are low relative to market cap.

Low debt

Among the 52 companies in the S&P Composite 1500 communications sector, these 10 companies had the lowest total debt, relative to estimated EBIT, as of their most recent reported fiscal quarter-ends:

Company

Ticker

Debt/ est. EBIT

Total debt

Est. EBIT

Debt service ratio

Total return – 2023

Market cap. ($mil)

New York Times Co. Class A

NYT 0%

$0

$414

N/A

32%

$6,968

QuinStreet Inc.

QNST 18%

$5

$26

-153%

-35%

$513

Alphabet Inc. Class A

GOOGL 22%

$29,432

$133,096

711%

47%

$1,528,711

Shutterstock Inc.

SSTK 26%

$63

$241

39%

-20%

$1,502

Yelp Inc.

YELP 31%

$106

$344

78%

55%

$2,909

Meta Platforms Inc. Class A

META 47%

$36,965

$78,129

717%

137%

$634,547

Scholastic Corp.

SCHL 54%

$108

$201

319%

12%

$1,314

Electronic Arts Inc.

EA 73%

$1,951

$2,678

605%

-2%

$32,425

World Wrestling Entertainment Inc. Class A

WWE 93%

$415

$448

479%

66%

$9,455

Activision Blizzard Inc.

ATVI 93%

$3,612

$3,891

2159%

21%

$72,118

Source: FactSet

New York Times Co.
NYT
takes the prize, with no debt.

Wall Street’s favorite media companies

Starting again with the 52 companies in the sector, 46 are covered by at least five analysts polled by FactSet. Among these companies, 12 are rated “buy” or the equivalent by at least 70% of the analysts:

Company

Ticker

Share “buy” ratings

Aug. 25 price

Consensus price target

Implied 12-month upside potential

Thryv Holdings Inc.

THRY 100%

$21.11

$35.50

68%

T-Mobile US Inc.

TMUS 90%

$133.35

$174.96

31%

Nexstar Media Group Inc.

NXST 90%

$157.08

$212.56

35%

Meta Platforms Inc. Class A

META 88%

$285.50

$375.27

31%

Cars.com Inc.

CARS 86%

$18.85

$23.79

26%

Alphabet Inc. Class A

GOOGL 82%

$129.88

$150.04

16%

Iridium Communications Inc.

IRDM 80%

$47.80

$66.00

38%

News Corp. Class A

NWSA 78%

$20.74

$26.42

27%

Take-Two Interactive Software Inc.

TTWO 74%

$141.42

$155.96

10%

Live Nation Entertainment Inc.

LYV 74%

$84.79

$109.94

30%

Frontier Communications Parent Inc.

FYBR 73%

$15.24

$31.36

106%

Match Group Inc.

MTCH 70%

$43.79

$56.90

30%

Source: FactSet

News Corp.
NWSA
is the parent company of MarketWatch.

Finally, here are the debt figures for these 12 media companies favored by the analysts:

Company

Ticker

Debt/ est. EBIT

Total debt

Est. EBIT

Debt service ratio

Total return – 2023

Market cap. ($mil)

Thryv Holdings Inc.

THRY 227%

$433

$191

53%

11%

$730

T-Mobile US Inc.

TMUS 378%

$116,548

$30,838

32%

-5%

$156,881

Nexstar Media Group Inc.

NXST 358%

$7,183

$2,009

63%

-8%

$5,511

Meta Platforms Inc. Class A

META 47%

$36,965

$78,129

717%

137%

$634,547

Cars.com Inc.

CARS 223%

$451

$202

41%

37%

$1,253

Alphabet Inc. Class A

GOOGL 22%

$29,432

$133,096

711%

47%

$1,528,711

Iridium Communications Inc.

IRDM 306%

$1,481

$483

54%

-7%

$5,977

News Corp. Class A

NWSA 261%

$4,207

$1,611

109%

15%

$11,940

Take-Two Interactive Software Inc.

TTWO 272%

$3,492

$1,283

-40%

36%

$24,017

Live Nation Entertainment Inc.

LYV 466%

$8,413

$1,805

135%

22%

$19,515

Frontier Communications Parent Inc.

FYBR 453%

$9,844

$2,173

85%

-40%

$3,745

Match Group Inc.

MTCH 287%

$3,839

$1,337

540%

6%

$12,177

Source: FactSet

In case you are wondering about how the analysts feel about debt-free New York Times, it appears the analysts believe the shares are fairly priced at $42.60. Among eight analysts polled by FactSet, three rated NYT a buy, while the rest had neutral ratings. The consensus price target was $43.93. The stock trades at a forward price-to-earnings ratio of 27.7, which is high when compared with the forward P/E of 21.7 for the S&P 500
.

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‘Own what the Mother of All Bubbles crowd doesn’t.’ This market strategist expects stagflation and is investing for it now.

There’s always a bull market somewhere — if you can find it.

Keith McCullough encourages investors to join him in the hunt. You’ll need to be agnostic and open-minded, the CEO of investment service Hedgeye Risk Management says. If you’re wedded just to U.S. stocks, or the market’s latest darlings, you’re setting yourself up for disappointment — particularly in the hostile environment McCullough sees coming.

This coming challenge for U.S. stock investors, in a word, is stagflation, McCullough says. Stagflation — higher inflation plus slow- or no economic growth — is hardly a bullish outlook for stocks, but McCullough’s investment process looks for opportunties wherever they may be. Right now that’s led him to put money into health care, gold, Japan, India, Brazil and energy stocks, among others.

In this recent interview, which has been edited for length and clarity, McCullough takes the Federal Reserve and Chair Jerome Powell to the woodshed, offers a warning about the potential fallout from Powell’s upcoming speech at Jackson Hole, Wyo., and implores investors to discount happy talk and always watch what they do, not what they say.

MarketWatch: When we spoke in late May, you criticized the Federal Reserve for being obtuse and myopic in its response to inflation and, later, to the threat of recession. Has the Fed done anything since to give you more confidence?

McCullough: The Fed forecast of the probability of recession should be trusted as much as their “transitory” inflation forecast or a parlor game. People should not have confidence in the Fed’s forecast. The “no-landing” or “soft-landing” thesis is looking backwards. The Fed is grossly underestimating the future, doing what they always do, in looking at the recent past.

Their policy is wed to what they say. They claim they’re not going to cut interest rates until they get to their target. But any hint of the Fed arresting the tightening gives you more inflation. So there’s this perverse relationship where the Fed is the catalyst to bring back the inflation they’ve spent so much time fighting.

Read: ‘The Fed is way late and they’ve already screwed it up.’ This stock strategist is banking on gold, silver and Treasurys to weather a recession.

MarketWatch: U.S. Inflation has come down quite signficantly over the past year. Doesn’t that show the Fed is well on the way to achieving its 2% target?

McCullough: A lot of people are peacocking and declaring victory over inflation when we’re about to have reflation that sticks. We have inflation heading back towards 3.5% and staying there.

Our inflation forecast is that it’s set to reaccelerate in the next two inflation reports, which will lead to another rate hike in September. The Fed’s view is that until they get to the 2% target they’re not done. A lot of people are really confident because inflation went from 9% to 3% that it’s getting closer to 2%, therefore the Fed is done. Given what Fed Chair Jerome Powell said, the next two inflation reports are critical in determining whether we hike rates in September. I think maybe even one in November. This is a major catalyst for the next leg down in the equity market.

The Fed is going to see inflation go higher, and they’ve already articulated to Wall Street that no matter what happens, that should constitute a rate hike. That’s a policy mistake. They’re going to continue to tighten into a slowdown. When the Fed tightens into a slowdown, things blow up.

MarketWatch: By “things blow up,” you mean the stock market.

McCullough: I don’t think the Fed cuts interest rates until the stock market crashes. The Fed is going to be tightening when the U.S. economy and corporate profits are at a low point, going into the fourth quarter. It’s not dissimilar from 1987 where all of a sudden a market that looked fine got annihilated in very short order. There are a lot of similarities to 1987 now; the market’s quick start in January, people in love with stocks. That’s a catalyst for the stock market to crash.

When the Fed has an inconvenient rule, particularly for the U.S. stock market, they just move the goal posts or change the rule. If they actually started to cut interest rates, inflation would go up faster. This is exactly what happened in the 1970s and what Powell explains is the risk of going dovish too soon – that he becomes [much-criticized former Fed chair] Arthur Burns. That’s why you had rolling recessions in the 1970s; the Fed would go dovish, devalue the U.S. dollar
DX00,
-0.21%
,
and the cost of living for Americans would reflate to levels that are prohibitive.

People can’t afford reflation at the gas pump, or in their health care. It’ll be fascinating to see how Powell pivots from fighting for the people to bailing out Wall Street from another stock market crash, which will therein create the next reflation.

‘The Federal Reserve has set the table for a major event in the U.S. stock market and the credit market.’

MarketWatch: Speaking of a Powell pivot, the Fed chair speaks at Jackson Hole this week. Last year he put markets on notice for rate hikes. What do you think he’ll say this time?

Powell’s going to see inflation accelerating. I think Jackson Hole is going to be a hawkish meeting. That might be the trigger for the stock market.

Take the bond market’s word for it.  The bond market is saying the Fed is going to remain tight and seriously consider another rate hike in September. The reasons why markets crash in October during recession is that the fourth quarter is when companies realize that there’s no soft landing and they need to guide down.

The Federal Reserve has set the table for a major event in the U.S. stock market and the credit market. We’re short high-yield and junk bonds through two ETFs: iShares iBoxx $ High Yield Corporate Bond
HYG
and SPDR Bloomberg High Yield Bond
JNK.
On the equity side the best thing is to short the cyclicals; I would short the Russell 2000
RUT.

MarketWatch: What’s your advice to stock investors right now about how to reposition their portfolios?

McCullough: Own what the “Mother of All Bubbles” crowd doesn’t. The things we’re most bullish on include gold
GC00,
+0.21%
.
The Fed is going to keep short term rates high and both the 10 year and 30 year go lower. Gold trades with real interest rates. I think gold can go a lot higher, towards 2,150. Our ETF for gold is SPDR Gold Shares
GLD.

Also, you can be long equities and not take on the heart-attack risk that is the U.S. stock market. I’m long Japanese equities — ETFs for this include iShares MSCI Japan
EWJ
and iShares MSCI Japan Small-Cap
SCJ.

We’re long India with iShares MSCI India
INDA
and iShares MSCI India Small-Cap
SMIN.
Both Japan and India are accelerating economically. Were also long Brazil iShares MSCI Brazil
EWZ,
which is weighted to energy. We are bullish on energy.

MarketWatch: Clearly accelerating inflation and slowing economic growth is an unhealthy combination for both investors and consumers.

McCullough: What I’m looking for, with inflation reaccelerating, is stagflation.

Stagflation pays the rich and punishes the poor. You want to be the landlord. The prices of things people own are going to go up, and the prices of things you need to live are also going to go up. So for example, we are long energy, uranium and timber as stagflation plays. ETFs we’re using for that include Energy Select Sector SPDR
XLE,
Global X Uranium
URA,
and iShares Global Timber & Forestry
WOOD.

One positive thing that happens from stagflation is that because it’s so hard to find real consumption growth, there’s a premium on the growth you can find.

If there is something that actually accelerates, then those stocks will work, which puts a nice premium on stock picking. You can be long anything that is accelerating because so many things are decelerating. So avoid U.S. consumer, retailers, industrials and financials, which are all decelerating. Health care is our favorite sector, which we own through the ETFs Simplify Health Care
PINK
and SPDR S&P Health Care Equipment
XHE.

Instead, people are betting we’re going to go back to some crazy AI-led growth environment. Now everyone thinks everything is AI and rainbows and puppy dogs. I’m old enough to remember we were in a banking crisis in March. From an intermediate- to longer-term perspective, I don’t know why you wouldn’t want to protect yourself until this inflation cycle plays out.

Also read: Jackson Hole: Fed’s Powell could join rather than fight bond vigilantes as yields surge

More: Will August’s stock-market stumble turn into a rout? Here’s what to watch, says Fundstrat’s Tom Lee.

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Bank of America execs blew $93.6 billion. Here’s how they did it.

In several notes to clients this month, Odeon Capital Group analyst Dick Bove has pointed out that Bank of America’s big spending on stock buybacks over the past five years has been a waste for its shareholders, with the bank’s stock price declining slightly during that period.

The idea behind repurchasing shares on the open market is that they reduce a company’s share count and therefore boost earnings per share and support higher share prices over time. This doesn’t seem to be a bad idea, especially for a company such as Apple Inc.
AAPL,
+1.01%
,
which has generated excess capital and has appeared to be firing on all cylinders for a long time. For a company that is continuing to expand its product and service offerings while maintaining high profitability, buybacks can be a blessing to shareholders.

But for banks, for which capital is the main ingredient of earnings power, a more careful approach might be in order. The data below show how buybacks haven’t helped the largest banks outperform the broad stock market over the past five years. And now, banks face the prospect of regulators raising their capital requirements by 20%, according to a Wall Street Journal report.

Before showing data for the 20 companies among the S&P 500 that have spent the most money on buybacks over the past five years, let’s take a look at how share repurchases are described in a misleading way by corporate executives — and by many analysts, for that matter. During Bank of America’s
BAC,
-0.79%

first-quarter earnings call on April 18, Chief Financial Officer Alastair Borthwick said the bank had “returned $12 billion in capital to shareholders” over the previous 12 months, according to a transcript provided by FactSet.

Borthwick was referring to buybacks and dividends combined. Neither item was a return of capital. In fact, Bove summed up the buybacks elegantly in a client note on June 9: “The money that the company uses to buy back the stock is simply given away to people who do not want to own the bank’s stock.”

It is also worth pointing out that the term “return of capital” actually means the return of investors’ own capital to them, which is commonly done by closed-end mutual funds, business-development companies and some real-estate investment trusts, for various reasons. Those distributions aren’t taxed and they lower an investor’s cost basis.

Dividends aren’t a return of capital, either, if they are sourced from a company’s earnings, as they have been for Bank of America.

One more thing for investors to think about is that large companies typically award newly issued shares to executives as part of their compensation. This dilutes the ownership stakes of nonexecutive shareholders. So some of the buybacks merely mitigate this dilution. An investor hopes to see the buybacks lower the share count, but there are some instances in which the count still increases.

How buybacks can hurt banks

Banks’ management teams and boards of directors have engaged in buybacks because they wish to boost earnings per share and returns on equity by shedding excess capital. But Bove made another industry-specific point in his June 9 note: “If the bank buys back stock it must sell assets that offer a return to do so; it lowers current earnings.” Buybacks can also hurt future earnings. Less capital can slow expansion, loan growth and profits.

According to Bove, Bank of America CEO Brian Moynihan, who took the top slot in 2010 and saw the bank through the difficult aftermath of its acquisition of Countrywide and Merrill Lynch in 2008, “is one of the brightest, most capable executives for operating a banking enterprise.”

But he questions Moynihan’s ability to manage the bank’s balance sheet. Bove expects that Bank of America will need to issue new common shares, in part because rising interest rates have reduced the value of its bond investments.

In a June 5 note, Bove wrote: “Mr. Moynihan indicated twice [during a recent presentation] that the bank has excess cash that apparently could not be invested profitably. Possibly he is unaware that the cost of deposits at the bank in [the first quarter of] 2023 was 1.38% while the yield in the Fed Funds market can be as high as 5.25%.” In other words, the bank could earn a high spread at little risk with overnight deposits with the Federal Reserve.

That is a very simple example, but if Bank of America had grown its loan book more quickly over recent years while focusing less on buybacks, it might not face the prospect of a near-term capital raise, which would dilute current shareholders’ stakes in the company and reduce earnings per share.

Top 20 companies by dollars spent on buybacks

To look beyond banking, we sorted companies in the S&P 500
SPX,
+0.51%

by total dollars spent on buybacks over the past five years (the past 40 reported fiscal quarters) through June 9, using data suppled by FactSet. It turns out 11 have seen prices increase more quickly than the index. With reinvested dividends, 12 have outperformed the index.

Company

Ticker

Dollars spent on buybacks over the past 5 years ($Bil)

5-year price change

5-year total return with dividends reinvested

Apple Inc.

AAPL,
+1.01%
$393.6

279%

297%

Alphabet Inc. Class A

GOOGL,
+0.84%
$180.6

116%

116%

Microsoft Corporation

MSFT,
+0.87%
$121.5

221%

239%

Meta Platforms Inc.

META,
+1.58%
$103.4

42%

42%

Oracle Corp.

ORCL,
+6.11%
$102.6

140%

161%

Bank of America Corp.

BAC,
-0.79%
$93.6

-2%

10%

JPMorgan Chase & Co.

JPM,
-0.18%
$87.3

27%

47%

Wells Fargo & Co.

WFC,
-1.01%
$84.0

-24%

-13%

Berkshire Hathaway Inc. Class B

BRK.B,
-0.80%
$70.3

70%

70%

Citigroup Inc.

C,
+0.09%
$51.4

-29%

-16%

Charter Communications Inc. Class A

CHTR,
+1.09%
$48.5

20%

20%

Cisco Systems Inc.

CSCO,
+1.00%
$46.5

15%

34%

Visa Inc. Class A

V,
+0.75%
$45.6

66%

72%

Procter & Gamble Co.

PG,
-1.26%
$42.1

89%

116%

Home Depot Inc.

HD,
+1.01%
$41.0

51%

71%

Lowe’s Cos. Inc.

LOW,
+1.92%
$40.8

111%

131%

Intel Corp.

INTC,
+4.67%
$39.0

-40%

-31%

Morgan Stanley

MS,
+1.04%
$36.7

67%

93%

Walmart Inc.

WMT,
+0.33%
$35.6

82%

99%

Qualcomm Inc.

QCOM,
+2.12%
$35.1

101%

130%

S&P 500

SPX,
+0.51%
55%

69%

Source: FactSet

Click on the tickers for more about each company or index.

Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

The four listed companies with negative five-year returns are three banks — Citigroup Inc.
C,
+0.09%
,
Wells Fargo & Co.
WFC,
-1.01%

and Bank of America — and Intel Inc.
INTC,
+4.67%
.

Don’t miss: As tech companies take over the market again, don’t forget these bargain dividend stocks

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