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Looking for hedges against inflation? Try Apple, Nike, Verizon and stocks with this in common, strategists say

By Jack Denton

Critical information for the U.S. trading day

Stocks are set for a poor performance on Thursday, as markets absorb the Federal Reserve's indication (link) that interest rate increases are coming sooner than expected, while the central bank remains alert to inflation risks.

"There is probably no bigger macro issue, both tactically and strategically, than inflation and what this means for portfolios," said strategists led by Inigo Fraser Jenkins at Bernstein Research on Thursday.

Fraser Jenkins and his team have our call of the day: that investors should look to buy shares in companies with a long maturity of debt as an effective hedge against inflation.

Companies issued debt at an astounding rate through the COVID-19 pandemic. Much of it was a necessary move to meet funding needs, but for some groups it was an opportunity to take advantage of the Fed's measures supporting credit markets, which provided an ability to increase the maturity of debt, the strategists said.

According to the team at Bernstein, for companies that have long maturity of debt, have issued fixed-rate debt, and are going concerns -- i.e. can continue operating while meeting financial obligations -- inflation could be a positive thing. "Inflation would erode the real value of the debt relative to earnings (which are tied to the real economy)," the strategists said.

"There is no one solution" to finding suitable hedges for inflation, Fraser Jenkins' group said, noting that a good response may involve more equities, real assets, gold, and even crypto assets like bitcoin . But "another possible string to the inflation-hedging bow" is companies that emerge from the pandemic with a long maturity of debt.

"A basket of U.S. long debt maturity stocks has outperformed a basket of short debt maturity stocks by 7% this year and trades at more attractive valuations than their short debt maturity peers," Fraser Jenkins and his team added.

There are a lot of these stocks: the strategists at Bernstein have a list of more than 80. Some of those picks include Big Tech names Apple (AAPL), Alphabet (GOOGL)(GOOGL), Amazon (AMZN), and Microsoft (MSFT), as well as other technology companies like videogame developer Electronic Arts (EA) and semiconductor groups Nvidia (NVDA), Texas Instruments (TXN), and Qualcomm (QCOM).

Telecom giants AT&T (T) and Verizon (VZ) are also on the list, as are retailers and consumer-products groups such as Home Depot (HD), Target (TGT), McDonalds (MCD), Starbucks (SBUX), Nike (NKE), Kraft Heinz (KHC), Estée Lauder (EL), and Coca-Cola (KO).

Health and biotechnology stocks like Johnson & Johnson (JNJ), Pfizer (PFE), Gilead Sciences (GILD), Regeneron (REGN), and Biogen (BIIB) also make the cut, as do railroad operators Kansas City Southern (KSU) and Union Pacific (UNP). Defense companies Lockheed Martin (LMT), Northrop Grumman (NOC), and Raytheon Technologies (RTX) also qualify.

The buzz

In case you missed it: the Fed is talking-about-talking-about (link) tapering pandemic-era asset purchases of bonds and mortgage-backed securities. While maintaining that the recent burst of inflation would be transitory, the central bank also said it may raise interest rates (link) sooner than expected with two hikes in 2023.

On the U.S. economics front (link), investors can expect initial jobless claims for last week at 8:30 a.m. Eastern. It is estimated that 360,000 Americans filed for unemployment last week. At the same time, continuing jobless claims for the week of June 5 are due, alongside the Philadelphia Fed manufacturing index for June.

A diamond unearthed in Botswana may be the third-largest ever found (link). Weighing in at 1,098 carats, it is only slightly lighter than the second-largest diamond on record -- also found in Botswana -- which sold in 2017 for $53 million.

U.S. President Joe Biden told Russia's Vladimir Putin that critical infrastructure should be off-limits to cyberattacks (link), as the two leaders met in Geneva on Wednesday and agreed to cybersecurity talks. The largest oil pipeline in the U.S. was hit by a ransomware attack in May (link) from a group believed to be operating out of Russia.

Wise, also known as TransferWise, plans to go public in London in a rare direct listing (link) -- the first for a major tech company on the London Stock Exchange. The popular money-transfer service's decision to list in London marks a win for the financial center, amid a government push to attract more tech companies (link).

The markets

U.S. stock-market futures are pointing down, set to open in the red as markets react to the Fed's shifting position on interest rates (link). European equities were broadly lower, while Asian stocks were more mixed.

Gold futures (ABX.T) were down more than 3%, as the price of the yellow metal tumbled after the Fed's policy statement (link).

The chart

Money that investors borrow from brokers to buy securities or take short positions jumped by $14 billion last month to a historic $862 billion, and is up by $202 billion in seven months. Our chart of the day, courtesy of Wolf Richter at the Wolf Street financial blog (link), shows this meteoric rise in stock-market margin debt.

"What is important is the trend -- the steep increase before every stock-market selloff," Richter said. "Margin debt is the only known stock-market leverage measure that we have, and is only an indicator of the trend in overall stock-market leverage. It just shows the tip of the iceberg."

Random reads

Tall tale or whale fail? Professional divers believe the Cape Cod lobster diver (link) who says he was trapped inside of a whale, even if one doctor is doubtful.

Residents of a village in Surrey, England are "under siege" and "living in fear," as police say mystery catapult attacks (link) continue to rain stones on homes.

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-Jack Denton; 415-439-6400;


(END) Dow Jones Newswires

06-17-21 0721ET

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