From the MGM hack to satellite failures, this fund manager had a rough quarter but is sticking with 'stupid cheap' picks

By Steve Goldstein

Critical news and information for the U.S. trading day

After a presentation dogged by muffled audio and then climate-change protesters, Fed Chair Jerome Powell finally got his message across, which was, basically, that he didn't have one.

It was "historically unusual" that inflation has come down without unemployment rising. Geopolitical tensions are "highly uncertain." In the Q&A, he talked of the idea that the 20 years before the pandemic may have been a perfect storm of disinflation that may now yield to a period of more supply shocks. "Are we going into such a... I don't know." At the margin, while the rise in long-term yields could reduce the need for rate hikes, "that remains to be seen," Powell said.

While Powell's views on the future were muddy, the past shows an aggressive tightening that has left the effective federal funds rate at 5.33%, above the average of 4.6% that it's been dating back to 1954.

"Rising interest rates operate negatively on most assets and the economy at large with a lag. These changes are not temporary, and there will be interesting and painful consequences that naturally befall a world that coasted for over a decade on low rates and free money," said Jeffrey Bronchick, who runs the Cove Street Capital Small Cap Value Fund, in a recent letter to clients.

His fund is coming off a difficult third quarter in which it dropped 7%, though it's had a strong year by small-cap standards, up 7% through Thursday.

The failure of an antenna after a successful satellite launch by Viasat (VSAT) did not go down well. "While most costs are fully insured, the math on the actual cashflow produced by a giant increase in service capacity is pushed out to the right by at least 18 months. That is not a good thing," he says. Then Inmarsat, which Viasat bought in May for $7.3 billion, suffered a likely total failure after launch, the first in 40 years. Still, he calls the stock "stupid, stupid cheap" with immense strategic value. He said it's a very good bet from here, but not the firm's best, highest-conviction one.

Another what he calls an "off spreadsheet" event occurred after the hack at MGM Resorts (MGM), which weighed on media conglomerate IAC (IAC), the 18% owner. Dotdash Meredith, another IAC holding, "remains mired in an ad recession as it continues its work onboarding the Meredith print properties to its digital monetization machine." Still, he says IAC is trading at $125 million above its combined cash, MGM and Angi (ANGI) positions, and he said he's added to the position.

E.W. Scripps (SSP), meanwhile, suffered from the auto strikes as well as general concerns about the economy. "We think legacy TV has much longer life to it than fancy talk suggests, and despite obvious exposure to the cyclicality of the advertising business at large, Scripps is a cash gusher that is rapidly paying down debt from a series of acquisitions that were enabled under the prior administration. Pick your favorite math, but ours suggests that free cashflow to pay down debt is creating 30% annualized increases in equity value at current levels," he says.

The broader view is that the market is not rewarding small caps at the moment. He said that's ultimately a good thing. "That has created real opportunities in real businesses with real values that are less affected by the fads of the day," said Bronchick.

The markets

The S&P 500 SPX has dropped over 2% the last three sessions, and stock futures (ES00) (NQ00)were pointing to more of the same for Friday. The yield on the 10-year Treasury BX:TMUBMUSD10Y has backed away from the very-nearly-almost 5% level. Gold futures (GC00) rose.

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The buzz

Israel carried out air strikes on Gaza as its defense minister told troops that they will soon the region "from the inside," which suggests an imminent ground invasion.

SolarEdge Technologies (SEDG) warned on profits due to a slowdown in solar-power installations in Europe, news that also hurt rivals including Enphase Energy (ENPH) and SunPower (SPWR).

American Express (AXP) is among the companies reporting results on Friday.

Friday will see the expiration of some $2.5 trillion of options contracts.

Best of the web

Apple balked at Jon Stewart tackling topics including China and artificial intelligence, according to the New York Times.

Nvidia (NVDA) CEO Jensen Huang tells a podcast he wouldn't have started the company had he known what he does now.

The average American family can be called millionaires.

Top tickers

Here are the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   TSLA    Tesla 
   NVDA    Nvidia 
   AMC     AMC Entertainment 
   GME     GameStop 
   NIO     Nio 
   AAPL    Apple 
   NFLX    Netflix 
   MULN    Mullen Automotive 
   AMZN    Amazon.com 
   ICU     SeaStar Medical 

The chart

Whether looking at trailing or forward earnings forecasts, stocks are now more overvalued compared to bonds that they have been in 20 years, says Torsten Slok, chief economist at Apollo Global Management. That conclusions is made using the earnings yield -- earnings to price -- subtracted by the yield on the 10-year Treasury.

Random reads

The Van Gogh museum had the bright idea to give out Pokemon cards, in celebration of the artist's ties to Japan. It was too popular.

The latest misfortune to befell Wall Street -- back-to-office mandates precluding the opportunity to use second homes in Florida.

A man posed as a mannequin to steal jewellery after closing time.

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-Steve Goldstein

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10-20-23 0655ET

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