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Transcript:

Caroline Woods:Joining me now, Kenny Polcari senior market strategist at Slatestone Wealth. Kenny, great to have you back.

Kenny Polcari:Thanks. So it’s always a pleasure to be here with you. I wish I was in New York with you, but I’m in Florida next time.

Caroline Woods:Next time. Kenny. All right. Let’s talk about stocks. They’re on pace for a mixed September. But want to get your view on this market. Have we gotten a little too used to stocks only going up.

Kenny Polcari:You know what. It’s very interesting because I came into September worried about all the issues right. Whether it was the fed, whether it was interest rates, whether it was the ongoing conflict. But the S&P is actually flat. Right? Right. Where it was at on August 31st is about where it is today. Nasdaq is is a couple of points actually higher than where it was in August.

Kenny Polcari:Right. So the nervous is an anxiety that I thought was going to happen in in August. Hasn’t hit the indexes but it has hit individual name right. If you look at I look if I look at my own portfolio, I’m down 6% from September 1st till today. Not my not not our, our corporate portfolio, my own personal portfolio.

Kenny Polcari:So, you know, I kind of expected to see somewhere between like an eight and 10% pullback in the market in September. My portfolio essentially reflects that. Yet the broader market, kind of tells you, if you look at it says, well, it hasn’t been so bad, right. And I think what we’ve seen is on any weakness, we have seen plenty of support.

Kenny Polcari:Right? We haven’t seen the bottom fall out, in the broader market, although individual names once again have gotten beaten up, some of them got beaten up more than others. But that’s just part of the cycle. But one way, the other, we got, you know, the one fed rate hike in the middle of the month, from from award.

Kenny Polcari:The market is now pricing in, a hike in October and a hike in December. And I would say that if oil stays in the mid 90s to the high 90s and diesel stays up where it is up and doesn’t offer any relief, and bond yields continue to take higher. You know, the ten year hit, you know, 5.21 5.22%, that is going to provide a headwind for the broader market, at least told us it’s going to put a cap on it.

Kenny Polcari:Right? So we’re not going to explode higher. And there is a possibility that as we move into October and start getting closer, closer to mid-term, that that anxiety will, rear its ugly head, and then we’ll see maybe a broader pullback in, in the indexes.

Caroline Woods:So that 8 to 10% pullback is now your October forecast.

Kenny Polcari:Well listen it’s happened to me in September I’m done. Like I said 6%. And the month isn’t over yet. Wait till Wednesday. That’ll be over I’m Tiger. But yes I’m still looking for a drawdown right. And like I said, if you look at individual names, then you’ll see it. You’ll see some things are down eight, ten, 12%.

Kenny Polcari:So if you look at individual names, you’ll see it. The broader market though hasn’t hasn’t pulled back. But I still suspect and I’m still in the calm that the broader market, both the Nasdaq and the S&P will see, volatility in the month ahead. So yes, I still suspect I wouldn’t be surprised if we saw a broader pullback.

Kenny Polcari:You know, somewhere in that in that range.

Caroline Woods:Well I was still in the Dow. The Russell in the Dow have been the underperformers in September. What does that tell us is that that does that mean the tracking out of rotation was short lived.

Kenny Polcari:Yeah. Yeah. But and also you look at the Dow transports because they have also been in underperform. The Dow transports have broken down and through their long term trendline support. Right. And that’s something to actually be concerned about because now if you look at the Dow industrials it hasn’t yet. But the Dow industrials are now below its intermediate term.

Kenny Polcari:And so now where it’s in between the 200 day and it’s intermediate term. So that’s going to be a key metric to watch to see if the Dow industrials then mimic what the Dow transports it telling you. Because remember the Dow theory talks about you know the Dow industrials make all these products and the transports transport them all around the country right.

Kenny Polcari:If not around the world. And so when you start to see when you start to see both of them in a negative pattern that suggest to you that the market in the economy is going to run into some is going to it’s telling you that the markets and the economy’s going to run into some problem. And if you look just into transports, it’s already it’s already raising that warning flag.

Kenny Polcari:Right. The industrials haven’t done it yet. But but we’ll see what happens over the next couple of weeks if it breaks in fact. But to today. And if it does then that would confirm Dow theory saying that you know the industrials and the transports are sending up the warning money okay.

Caroline Woods:So given that is now the time to get cautious or should we still be aggressive.

Kenny Polcari:No. So you I would never and I look at that as, as my own portfolio and as a wealth advisor I’m not getting aggressive at all. I always remain I always have kind of one foot in that cautious stance. And I look for opportunities on pullbacks in names that I like right there, a good solid opportunities. We’ll talk about them in a minute because you’ll see what I mean when we talk about not necessarily being aggressive.

Kenny Polcari:If you’re a day trader, you’re somebody trying to do on your own and you want to be aggressive, you know, go for it. But me personally, over the 42 years I’ve been doing this, I tend I tend not to, you know, I don’t ever get so aggressive in the broader market as I do. Kind of I’m much more methodical about it.

Kenny Polcari:And as a wealth manager, that’s kind of the position. You have to think. You can’t really get so excited that you ohmygod, I got to go all in. You know, as a trader. Yes. Or as an individual vessel, you could do that. But certainly somebody has a as a responsibility to find assets. You know, I don’t ever find myself in that position where I’ve thought, oh, God, I gotta jump in.

Kenny Polcari:I gotta put everything to work today. It’s not what I do at all.

Caroline Woods:Okay, so what does the portfolio of someone who has one foot in the cautious camp and that not the all in mentality actually look like where are you position? Where do you want to be? Where don’t you want to be.

Kenny Polcari:Right. So it’s not so much where I don’t want to be because I think there’s opportunities everywhere. It’s kind of where are those, where are those sectors in the cycle. Right. So again, right now I own tech, but I’m not necessarily buying any tech at the moment because again, I think it stretches a little bit. I think that if the market if grades keep going up, high growth things in the tech things are the ones that have outperformed, are going to be the first ones to get hit.

Kenny Polcari:We’ve seen that so many times, so I own it, so I’m not chasing it. But you talk about basic materials, you talk about healthcare, you talk about financials that are all been under pressure. That’s where I think there’s opportunity. So for me personally as well as, you know, for the firm, we’re going to be looking at those sectors where they’re not running away.

Kenny Polcari:There’s still high quality names that are just going through part of a cycle. The thesis to own them hasn’t changed. They’re just under pressure because the cycle is causing them to be in a pressure. So those right financials like health care, basic materials, even parts of the industrial sector. Look, we’ll talk again. We’ll talk about it today.

Kenny Polcari:But granola is a perfect is a perfect example. Right. It’s in the industrial space. The stock is the stock had gotten, sold. Right. It was down over 22%. It is now finding its base starting to rally back. But that’s the opportunity where I’m saying, right, I love the name. I love the space. The stock is pulled back.

Kenny Polcari:So that’s where I’m buying. I’m not buying at its highs. I’m buying it on a pole.

Caroline Woods:Yeah 20% off the highs for GE for Nova. So what else would you buy today aside from GE for.

Kenny Polcari:No. Well listen there’s another one that’s actually on fire. Is ASML right. ASML is you know we can talk all day long about the chips that ASML is, is the company that manufactures those very very high end machines that that make this very specific chip. That’s another thing that is pulled back. It is a favorite right.

Kenny Polcari:The firm owns it. It is a favorite. But that is also pulled back. And today it’s up on a 1.5%, I think, on, on some, you know, on some good news on some those that came out as, as a, it’s problems as well as just kind of like there’s a market reaction because of that backed off.

Kenny Polcari:And then when good news comes out you get the trade offs, the algo that jump right in and take it higher. But ASML is a name that we all know that we like. And again on weakness we started adding to our cover position. Right. So and then let it ride. But on a day like today when it’s up you know 1.5% or 2%, I’m not chasing it.

Kenny Polcari:We bought it on the way down. Right. You buy it on weakness because the pieces, you own it as a change. The stock is just going through, through part of the cycle.

Caroline Woods:Can you give us some names that aren’t tech names that you would buy today or you wouldn’t wait? So back for.

Kenny Polcari:So that I wouldn’t buy today? That’s just thing.

Caroline Woods:Know that you would buy today, that you don’t need a big.

Kenny Polcari:Push that I would. Yeah that I would buy thing right I wouldn’t that’s like wait for a pullback. So I’ll tell you. JP Morgan Bank of America I would buy because they’re in the financial space. The whole sector has gotten has come under some pressure. So those are the names that I would buy their names that I own, but their names that I would buy, outside of that, I would buy Merck in the healthcare space.

Kenny Polcari:I’d buy Merck, I’d buy Lily. Now, listen, you and I have had this conversation. I’m. I’m biased to Merck just because of, some of the medications in the cancer space that they that they developed that, you know, actually saved my life. And so therefore, I, you know, I’ve looked at it on the chart. If you look at Bach, Merck had pulled back.

Kenny Polcari:It was kind of underperforming for a long time. It’s built the base. But right in here, you know, I’d continue to buy Merck, you know, at its lows now it’s rallied off. So it’s starting to do better. But I would continue to buy Merck. I’d also buy, you know, if you look at the, the emerging market space.

Kenny Polcari:Well, not any specific name, the ETF, the M ETF, which represents kind of the emerging market has done very well. In fact, this year I think it’s up. Let me just look real quick. Emerging markets are up 23% so far this year. But you know, they’ll pull back a little bit and I’d buy I’d buy some of that as an ETF.

Kenny Polcari:Okay.

Caroline Woods:So give us what’s on your shopping list for if and when we do see that 8 to 10% pullback.

Kenny Polcari:So then I would go into the tech right I’m looking for tech to go on sale right. So I’m looking for some of the bigger names. I’m looking for Microsoft once again to go on sale because we’ve already seen that once we saw Microsoft go from 520 or 530 down to 350 and rally back. But on any pullback, if we see a pullback in the broader market and tech gets it, Microsoft is going to be one of the names we could hit on any pullback.

Kenny Polcari:I’d be buying Microsoft I’d be back. Apple ID buying Amazon. I’d be buying meta. But meta is not. That is actually on a run right. We bought some meta. And meta is now actually on a run. So I, I’m not going to be chasing better. But if meta does pullback, if that is part of those names that gets drawn into the draw down.

Kenny Polcari:Certainly meta would be a name that that I would buy, but I’d also buy, you know, other names in the space. I’d buy, some of the cybersecurity names because I think cybersecurity, you know, for it for for Fortinet, CrowdStrike are going to be names that, that I’d like to buy, continue to buy because cybersecurity, the more the more advanced I and this technology becomes, then the more demands is going to be on cybersecurity as a, as a whole in the sector, but on some of those individual names.

Kenny Polcari:So CrowdStrike and Fortinet, it might do for Kenny.

Caroline Woods:What are your three highest conviction AI names right now.

Kenny Polcari:On the field? Would you possibly.

Kenny Polcari:Micron because of memory? Right in the I’m assuming that that fits in the AI space because it’s all about making sure. Hey, of course micron be one Microsoft is going to be another. I think that’s just a core name. I love Microsoft, I’ve owned it for a while. I’ll continue on it. I think they’re doing great things in the space.

Kenny Polcari:And so therefore I’m assuming you’re okay with that name as well. As the third one. Let me think about that for a second. I would say probably something, I’m going to go something in the quantum space. So one of the names there I like is ion Q that’s struggled for a while. It’s kind of doing nothing but ion queue like IBM.

Kenny Polcari:IBM is also got big, big quantum presence. Right. So, IBM could be another name, but if you want specific quantum, I’d pick ion q okay.

Caroline Woods:So ion QS almost 50% off the highs. Microsoft’s down about 70% off the highs and microns off what, more than 10% off the highs. Right. And for any of those you you would wait still for a pullback. You wouldn’t put money to work to that.

Kenny Polcari:Well Mike look they’re down right. What do you just say that down 10%. What do you say. Micron is down 10%.

Caroline Woods:Right 13% from the highs.

Kenny Polcari:30%. So micron that falls into the position where if you want to buy something today that does understanding that if we get a broader pullback micron like to a lot of the names are going to get hit again. So I wouldn’t put it. You know if you allocate a certain amount of dollars to it I’d buy a little bit and then keep someone you know keep some dry powder on the side.

Kenny Polcari:Take advantage. If we get that pullback, which I do think we’re going to get. Look the buckets and the pressure again treasuries at trading at 5.21% today. There are a couple of basis points. And so I think that’s what you have to be concerned about.

Caroline Woods:Yeah. In your note, your latest note, you said this 5.2% ten year Treasury is going to cost some investors, especially the ones who are more risk averse to say, why am I taking equity risk when I can get paid more than 5% to own a risk free treasury and sleep at night? So why should I take equity risk?

Kenny Polcari:Well, because here you go. It depends on where you are in the life cycle. If you’re somebody in their 60s or 70s, then that’s going to be that’s going to that’s going to feed right into the way you think, because you can’t afford to think that much risk if you’re somebody who’s in their 40s or 50s and you’ve still got 25 or 30 years to go, then you shouldn’t be so concerned about, you know, the ten year Treasury.

Kenny Polcari:I mean, unless you’re completely risk averse. But if you’re if you’re somebody in your 40s or 50s, you should still be, you know, at least market weight risk, if not a little bit more. Right. But certainly someone in their 60s or 70s at 5.2% that you can guarantee riskless sleep at night sure doesn’t mean you take it 100% of your money putting it there, but you may take a sizable chunk of it and say, you know what?

Kenny Polcari:I’m going to take this risk off the table. I’m still going to have some risk to the market, but I’m going to take this risk, and I’m going to put it this in this treasury and look at maybe someone who says, I’m going to take three years worth of my living expenses and put it in this 5.2% treasury, and I have to worry about it.

Kenny Polcari:And then the rest of it, I you know, I don’t I don’t need it because I’ve taken my three years worth of living expenses and I’ve guaranteed it. Now the other one kid can run with it.

Caroline Woods:What level on the ten year would make you change your overall market outlook? Or what sort of pullback could happen that would make you realize it’s not a buying opportunity, it’s something more concerning.

Kenny Polcari:Well, so if we see look, I thought 4.75% was the danger zone for ten year Treasury. In fact that’s run right. We’re already at 5.2%. And the market is still essentially closer to my eyes than not. So what I’m what I’m assessing based on how strong the economy is. If you look at some of the economic data, you saw that consumer sentiment was, well, our finest bit of a sentiment was was, better than expected.

Kenny Polcari:I’m guessing that the ten year Treasury could probably push a tiny bit higher before it gets really anxious. So where’s that? Is that 5.3 5.5% in there? I think that’s really now the danger zone because we’re at 5.21 and the market is not panicking at all. And so you have to assume, you know, bonds take a little bit more of a hit and treasuries could go a little bit higher.

Kenny Polcari:But if I think we get the 5.3, 5.4, that’s I think when the market’s going to start, people are going to start and they’re going to start to, you know, question themselves and say, okay, what about am I willing really to pay? What do these companies have to earn with the ten year Treasury risk free rate at 5.3 of 5.4%, that’s going to change that.

Kenny Polcari:That’s going to change the math. And so now while I thought it was maybe 4.7 or 5, that’s been proved wrong. So now I got to move my target up. So it’s got to be somewhere above 5.2 because we’re already there and the market’s holding in. So it’s got to be somewhere you know 5.35.45.5 somewhere in there.

Caroline Woods:But does that mean if we see that level you you wouldn’t take part in a pullback. You would say now is the time to be very cautious and maybe.

Kenny Polcari:I will.

Caroline Woods:Take money.

Kenny Polcari:And if we get there I would be more cautious. I would be I would said I wouldn’t panic and sell everything I own because the names I own are all high quality in the sectors they’re in. But I would take back, I’d sit back for a minute and I’d let the I’d let the market turn to see where it’s going to go.

Kenny Polcari:I wouldn’t necessarily jump in on the first down date, because I think that I think there’d be a bigger story there, right? If that if treasuries tick up there, then I think there’s, you know, we’re in for we’re in for some low volatility. So I’d be happy owning what I own. But the cash that I have to invest, I’d leave sitting in a government money market fund earning 5.4% while I wait.

Caroline Woods:So if you kind of expect an 8 to 2, I know you don’t have a crystal ball, but if you kind of expect an 8 to 10% pullback correction, that would be healthy. If we do see the ten year at 5.5%, what sort of pull size.

Kenny Polcari:Pullback is then I think because then.

Caroline Woods:Not fair.

Kenny Polcari:Market I think the both yeah I think the pullback yet or really like the I think the pullback is at more than 8 to 10%. If we see the ten year Treasury tick higher then I think you know you’re you’re into you could be into a 15 or 20% pullback. And so that would make me more cautious in terms of okay what am I going to do with this cash I have to invest?

Kenny Polcari:I’m going to do nothing with it. I’m going to let it sit and earn 5.4%, because doing nothing and leaving your money in a government bucket fund is an investment decision. You are making a decision, right? It’s all it’s just sitting here earning nothing. It’s earning 5.5%. When the market could actually suffer a 10 or 15% drawdown. That’s going to offer stability for the balance of the portfolio.

Kenny Polcari:So that’s what I would do if it got to there. Then I’d be more cautious, say, okay, I’m willing to sit this one back, sit this one out. I’m going to keep what I have. Unless of course, the thesis has changed on why I own Apple or Amazon or JPMorgan. And I don’t think the thesis is going to change that much.

Kenny Polcari:That would cause me to say, okay, I’m not a get out because the things I owned are not like that. Right? I think I think the only name I own that would be like that would be Iron Cube because it’s so volatile. But I’m not even sure that that would be true, but it would cause me to just sit back and say, okay, I’m going to wait.

Caroline Woods:Okay, so we have a lot of retail investors who tune in as they think about the Q4 playbook, knowing that we could have this pullback in store. A lot of them probably are sitting in S&P 500 funds. What’s their strategy, which they do.

Kenny Polcari:So listen.

Caroline Woods:You got to kind of prepare.

Kenny Polcari:Your point. Yeah okay. So here’s the point. You’re sitting in an S&P 500 fund. You realize how much of that is exposed to tech. It’s close to almost 40% right. Though the tech weighting in the S&P is I think close to 40%. So all these people that say, oh look I’m in the S&P fund. I’m okay. Be careful because you’ve got a lot you’re out weighted in technology.

Caroline Woods:So so what do they do okay.

Kenny Polcari:So what you have to do is you have to diversify the way you might want to think about going into an S&P equal way fund. You have to be equal way fund. You realize the has to be equal. Weight is up almost 10.5% this year. And when the S&P is up 12% right now okay this is up 12% because it’s got a big tech weighting.

Kenny Polcari:But if tech gets whacked then the S&P the market weighted S&P is going to get whacked. But the S&P equal weight won’t react as much. So you may want if you want the exposure because you want broad market exposure. Then they put more money into the equal weight S&P versus the the regular way S&P because because you’re you’ll be overweight in technology.

Kenny Polcari:And then if you own the S&P and then you say oh I’m going to own the X okay. Or I’m going to own, you know, the the IVs that, you know the tech ETF, you’re going to be even more overweight in technology. So you have to understand if you’re going to play the game in ETFs, you have to understand what those ETFs own, what the exposure is and then ultimately what your exposure.

Kenny Polcari:If you’re going to play with individual names, then you have to spread it out. Make sure that you’ve got you’ve got, representation across the sector, right, to make sure that you’re balanced.

Caroline Woods:So, Kenny, if I gave you all my extra cash today, not my retirement, but just my extra cash, and I said, start a portfolio from scratch for me today at these levels, what would you do?

Kenny Polcari:

Caroline Woods:So I would.

Kenny Polcari:Start. Yeah. Yeah. No, it’s great advice. No, it’s great that, so first of all, what have do is I have to sit down and talk to you, just assess kind of what your own risk profile is, right? Because because I don’t know what your risk profile is. So you can give me all the cash you want.

Kenny Polcari:But if you say to me, look, I’m, I’m, I’m I’m more risk.

Caroline Woods:I want to be risky. It’s my extra cash. I want to be risky. I’m a long way from.

Kenny Polcari:Okay. So you want to be risky, right? You’re young. You’ve got 25 years to go. You want to be risky. So I would start. I wouldn’t take it all today and just plop it in. But I would start to feed it in, and I would start to build a portfolio of the broad, equal weight S&P 500, not the market weight.

Kenny Polcari:Be equal weight. I’d put you in, health care. I’d put you in, industrials right separately. Either we can play. Yes. If you want to eat that type portfolio. But if you if you want an individual name portfolio, I’d pick things like JP Morgan, IBM and Bank of America, Johnson and Johnson, Amazon, Apple, Microsoft. Those are all the names that I would I would, you know, I put you in the SPV which is he has a B value trade right.

Kenny Polcari:Which are value names. Right. So they’re not as sexy as the growth names, but they’ll offer stability especially, you know, on a drawdown.

Caroline Woods:Okay. And what do you need to see for me to get even more risky and just go into, you know, bigger tech again?

Kenny Polcari:Wow. Listen, you should everyone should have tech exposure again. It’s going to depend where you are, right? You’re younger than I am. I have tech exposure, but I’m 65. My tech exposure is going to be a whole lot less than somebody who 40 or 45. Or at least it should be right just because of my age and where I’m at in the life cycle.

Kenny Polcari:So again, that’s all part of this conversation of which I’m happy to have with you if you want to have a conversation. But, you know, that’s all very that’s all very individual. You can’t just it’s not like a one size fits all question. Just because I don’t know anything about you. I don’t know about your family.

Kenny Polcari:I don’t know what what what what you’re trying to provide for. All that stuff plays a role in how I might help design a portfolio.

Caroline Woods:That’s when your fee starts kicking in. All right, I guess it’s with them. All right, Kenny.

Kenny Polcari:But I listen, I’m kind of nice to you.

Caroline Woods:All right? Kenny, I think this is a great time to pivot to our rapid fire round of this or that. You know how to play. Quick questions. Quick answer is no. Hedging is you can help it. Yeah. Are you ready?

Kenny Polcari:All right.

Caroline Woods:There we go. Yep. Bull market intact or cracks forming. Cracks forming Q4 take some risk off or stay fully invested.

Kenny Polcari:Stay fully invested.

Caroline Woods:Stocks by year end higher or lower from here.

Kenny Polcari:I think they’re going to end right here. So I don’t think they’re going to be higher or lower. I think this is where we are.

Caroline Woods:But a bumpy road to get there.

Kenny Polcari:But bumpy road out the.

Caroline Woods:Dow or Nasdaq from here.

Kenny Polcari:I think. So that’s that.

Caroline Woods:S&P or Russell.

Kenny Polcari:Staying the low I have to say S&P because the grades go up Russell the spins are going to get lack.

Caroline Woods:Mag seven or everything else.

Kenny Polcari:Everything else.

Caroline Woods:Buy the dip or raise cash.

Kenny Polcari:You’re tying my hands on that one.

Kenny Polcari:You got to buy the dip. Unless of course you see those other things, right? I’m not trying to hedge, but if suddenly we see treasuries go to 5.4%, then I’d say, you know, not necessarily raise cash, but don’t put any more to work. Don’t buy the debt. Right.

Caroline Woods:Better my next pullback. No I get it. We appreciate the context. It’s okay that buy on the next pullback tech or something outside of tech. Yeah.

Kenny Polcari:I say tech.

Caroline Woods:The number one stock. You’re definitely buying on a pullback.

Kenny Polcari:

Kenny Polcari:IBM.

Caroline Woods:You’re seeing the pullback for IBM right. You buy it buy here. Yeah one sector you want to own in Q4.

Kenny Polcari:One sector healthcare.

Caroline Woods:One sector you don’t want to own in Q4.

Kenny Polcari:Consumer many discretionary.

Caroline Woods:Micron ahead of earnings buy now or wait.

Kenny Polcari:Buy it.

Caroline Woods:Nvidia or AMD.

Kenny Polcari:Us.

Kenny Polcari:I can say Nvidia because I own it. I don’t own AMD because that’s the way I played it. So I’d have to I have to be loyal.

Caroline Woods:Okay. Switching gears, is Nike ahead of earnings bargain or steer clear.

Kenny Polcari:Steer clear I.

Caroline Woods:Nike or Carnival which is also reporting.

Kenny Polcari:You’re killing me. And neither I, I don’t like either one of them. They’re not names that I own. So you know, I’d be I’d be okay with the. I’d be poking, carnival.

Caroline Woods:Consumer stocks pick selectively or just avoid here.

Kenny Polcari:Consumer staples.

Caroline Woods:No. Consumer discretionary.

Kenny Polcari:No. I would stay away from I don’t like consumer discretionary okay.

Caroline Woods:The one stock in your portfolio you’d never sell even in a crash is.

Kenny Polcari:

Kenny Polcari:Bike racer.

Caroline Woods:And finish this sentence.

Kenny Polcari:I wouldn’t sell the market. I wouldn’t have Amazon. I wouldn’t sell my game. People it either.

Caroline Woods:Okay, we’ll take all of us. Finish this sentence. If the market pulls back 10%, the first thing I’m doing is it’s up.

Kenny Polcari:In London right now. First thing I’m doing, I would, I would, I would, I would rebalance the portfolio.

Caroline Woods:Kenny Polcari senior market strategist of Slatestone wealth I always appreciate you joining us. Thanks for flying along. Thanks for all your picks and your insights.

Kenny Polcari:Thank you for letting me play along. I always enjoy that. Next time I’ll be with you at the New York Stock Action.

Caroline Woods:Can’t wait. Kenny, if you enjoyed this street talk, check out our full interview with Brent Schutti. He’s also in the S&P 500 is to concentrated camp and says where to move your money now.

Jim Cramer has a warning for investors hunting dependable income: Generous dividend might be hiding a costly problem.

On the Sept. 28 episode of “Mad Money,” he argued that some high-yield stocks have become increasingly dangerous as rising bond yields and weakening businesses undermine their appeal. 

Those quarterly checks offer little comfort when share prices keep falling. For investors accustomed to treating dividend payers as a financial cushion, that challenges a familiar playbook.

Buy an established company, collect the income, and wait out the turbulence. But what happens when the turbulence hits both the stock and the payout?

Cramer examined multiple recognizable companies whose sizable yields have failed to protect shareholders.

His concern goes beyond disappointing stock performance. With Treasury bonds offering increasingly competitive income, investors have greater reason to question the risks they are accepting. And the biggest yields deserve the toughest scrutiny of all.

Cramer says big dividends can hide bigger problems

Cramer’s warning is that a big dividend just can’t rescue a weakening business, especially as government bonds offer investors a compelling alternative.

“But lately, high-yielders no longer represent safety,” he said on Sept. 28. “If anything, they represent complacency, even danger.”

He cited a 10-year Treasury yield of 5.24%. Separately, the Associated Press reported the benchmark at 5.23% Monday, after it touched its highest level since 2007.

That competition matters. Investors need a reason to accept uncertain dividends and volatile share prices when Treasury income becomes increasingly attractive.

Cramer pointed to VICI Properties (VICI), yielding 7.93% but down nearly 18% for the year, and General Mills (GIS), yielding roughly 7.3% while down 28%, according to his figures.

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His concern was the businesses underneath those payouts. This includes sluggish growth at VICI and declining sales, earnings pressure, and higher input costs at General Mills.

UPS (UPS) faces another combination of threats, including lost Amazon business, competition, and fuel costs. Edison International (EIX) carries wildfire liability risk.

“Who cares about a high dividend yield if the earnings estimates are coming down?” Cramer asked.

The danger can eventually reach the payout itself.

He cited Campbell’s dividend reduction and the company’s projection of annual sales declines of 2% to 4% as reported by Reuters.

Still, Cramer remained optimistic about Kraft Heinz’s (KHC) turnaround, showing his argument is selective. A high yield needs operating support. 

Otherwise, investors risk collecting income from a business that is losing the financial strength needed to sustain it, while a falling share price erodes their invested capital.

The S&P 500’s 10 highest dividend yields demand a closer look

Dividend yield is a measure of a stock’s annual dividend per share divided by its share price, expressed as a percentage. 

For example, a stock yielding 7% would provide $70 in annual dividends on a $1,000 investment, assuming the payout remains unchanged.

But a bigger yield doesn’t necessarily mean a better investment. Falling share prices can push yields higher, even as a company’s outlook weakens.

That said, these are the S&P 500’s 10 highest-yielding stocks, according to Quant500’s September 28 closing data:

VICI Properties (VICI): 7.93%

General Mills (GIS): 7.26%

United Parcel Service (UPS): 6.96%

Edison International (EIX): 6.82%

Kraft Heinz (KHC): 6.79%

Altria Group (MO): 6.42%

Crown Castle (CCI): 6.33%

Clorox (CLX): 6.14%

Amcor (AMCR): 6.08%

Healthpeak Properties (DOC): 6.07%Source: Quant500’s S&P 500 dividend rankings, as of Sept. 28, 2026. Yields fluctuate with share prices and dividend changes.

 Jim Cramer warns that generous dividends may conceal growing risks for investors.Slaven Vlasic / Getty Images

Make the dividend prove it deserves your money

Investors have to treat Cramer’s warning as a reason to review their income holdings, starting with how each company funds its dividend.

Compare annual dividend payments with free cash flow after capital spending. 

If payouts consistently exceed that cash, investigate if borrowing or asset sales are filling the gap. For property REITs, examine adjusted funds from operations and its calculation.

Next, check debt maturities and earnings forecasts. Refinancing at higher rates can squeeze cash available for shareholders, particularly when sales are weakening.

Then ask whether the yield adequately compensates for those risks.

Against a 5.23% Treasury benchmark, a stock yielding 7% offers 1.77 percentage points more headline income. That comparison excludes dividend growth, price changes and taxes but exposes how small the apparent cushion can be.

Focus on total return. A hypothetical $10,000 investment paying $700 in dividends still loses $800 overall if its share price falls by 15% before taxes.

Avoid building an income portfolio around one troubled sector simply because its yields look generous. Consider spreading essential spending reserves across cash and treasuries, with maturities that match upcoming needs.

Longer Treasury bonds can also lose market value before maturity. For stocks, prioritize sustainable payouts and cash-generation improvements over yield rankings.

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For much of the inflation cycle, McDonald’s (MCD) had a straightforward way to protect its restaurant economics.

Customers spent more.

That approach is becoming increasingly difficult to sustain, and McDonald’s own second-quarter filing reveals the tension.

U.S. comparable sales increased just 0.8%, primarily because of higher average checks and favorable product mix. But those gains were partially negated by negative comparable guest counts.

Thus, the customers who visited helped to support sales, but traffic went the opposite way.

That difference matters because inflation elsewhere is still making its way through American households. Restaurant prices were up 3.4% in August from a year earlier, gasoline prices rose 27.4%.

McDonald’s is now under attack from both sides of the counter. Its restaurants face ongoing labor, food, and operating expenses, yet customers want more discounts.

The company’s response is starting to look less like another pricing play and more like a productivity play.

McDonald’s customers are reaching their inflation limit

Restaurant inflation isn’t out of the woods. The Bureau of Labor Statistics (BLS) reported 3.4% higher consumer prices in August 2026 than a year earlier. Food-away-from-home prices rose 3.4%, while limited-service restaurants, including fast-food chains, rose 3.2%.

Gasoline prices, meanwhile, rose 27.4% from a year ago.

That number may seem unrelated, but it’s important to McDonald’s.

Consumers don’t budget for a Big Mac separate from gasoline, rent, groceries, or electricity. As necessities take up a bigger slice of household income, even cheap restaurant visits become easier to put off.

And the restaurant inflation problem doesn’t seem as though it will disappear anytime soon. Food-away-from-home prices are projected to increase 3.5% in 2026, according to the U.S. Department of Agriculture (USDA) September 25 Food Price Outlook.

The USDA’s current forecast calls for a further 2.6% increase in 2027, but with a wide forecast interval. It means that even if inflation cools from recent highs, restaurant customers could see menu prices remain high.

Consumers are already responding. Half reported it was harder to cover expenses than a year ago, versus 20% who said it was easier, according to the National Restaurant Association’s (NRA) third-quarter survey.

Another 34% said they regularly spend more each month than they earn, with 27% saying they do so occasionally.

But consumers want their eateries. And 50% of those surveyed ordered takeout or delivery, while 53% said they ate at a restaurant during the survey’s reference week.

At the same time, they’re becoming more selective about value. Some 40% said they are using discounts or value promotions more than usual, up from 35% in the second quarter, NRA noted.

That’s a very uncomfortable development for McDonald’s. The chain’s business has historically done well when consumers trade down from more expensive restaurants. But McDonald’s itself now has to persuade customers that the trade-down saves enough money to be worthwhile.

You can see the problem in its own financial numbers. McDonald’s had second-quarter revenue of $7.10 billion, an increase of 4% from $6.84 billion a year ago. Revenue for the six months increased 6% to $13.62 billion. Diluted earnings per share rose 6 percent to $3.32 quarterly.

However, U.S. comparable sales increased only 0.8%, down from 2.5% in the year-ago quarter, with the gain primarily due to positive check growth, even as guest counts decreased.

There’s a much more important question for McDonald’s than whether it can hike menu prices again: How does it ramp up the cash it earns from its restaurants without making customers pay significantly more?

McDonald’s wants restaurants to absorb more of the inflation

McDonald’s appears to be increasingly relying on the restaurant itself to solve the problem.

The program, McDonald’s > NEXT, is meant to modernize restaurants, accelerate operations, and roll out its generative-AI-enabled ArchIQ system at scale, a company press release shared. It expects the full package to generate roughly 250 basis points of gross restaurant-level efficiency gains in the U.S. and its international-operated markets.

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The company estimates that a 250-basis-point improvement would be worth about $100,000 of additional annual cash-flow benefit for the average U.S. restaurant, with much of that eventually flowing to the restaurant’s bottom line. Participating franchisees are expected to repay the company support in about four years, McDonald’s said.

That’s a different way of looking at the McDonald’s AI push.

ArchIQ is not just a technology upgrade. It’s part of an effort to lower the cost of producing each dollar of restaurant sales.

The system includes an AI assistant called Archy that can take orders in English and Spanish, potentially saving about 50 labor hours per restaurant each week, CNBC reported. ArchIQ is also designed to help manage inventory and employee schedules, while other technology can check order accuracy.

McDonald’s hasn’t said those hours will equal job losses. Franchisees could cut staffing, hiring, scheduling, or customer-facing tasks to save money. But the financial goal is clear: Get more out of each restaurant, allocating fewer resources to repetitive tasks.

Why? Labor economics offers an explanation.

In the latest BLS detailed earnings release, average hourly earnings of all employees in limited-service restaurants were $19.20 in July 2026, up from $18.76 in the same series in August 2025. The detailed August figure for that industry category was still not available.

Automation therefore attacks one major restaurant expense. Better inventory controls attack another. And greater order accuracy can reduce waste and costly remakes.

That combination gives McDonald’s something that’s only getting more valuable: a way to defend restaurant economics without putting the whole inflation bill on the menu board.

McDonald’s has an uncomfortable new problem with its customers.BRENDAN SMIALOWSKI / Getty Images

McDonald’s food-cost story is more complicated than it looks

There’s another reason to look more closely at the McDonald’s inflation story.

Some restaurant costs are no longer rising. NRA’s analysis of Bureau of Labor Statistics producer-price data shows August wholesale food prices fell 1.9% year over year. Annual declines continued for the second month.

That’s welcome news for restaurants, although it doesn’t mean the problem of inflation has gone away. Wholesale food prices were still up more than 33% from February 2020, with large variations across individual food items.

Producer prices for beef and veal in August were 3.1% higher than a year earlier, NRA noted. Fresh fruit rose 7.6%, soft drinks were up 4.1%, and fats and oils rose 21.2%. Other categories, such as eggs, butter, and pork, fell sharply.

That nuance is especially pertinent to McDonald’s.

Beef prices have almost doubled in five years across McDonald’s biggest markets, CEO Chris Kempczinski said in an interview with CNBC on Sept. 23. He also cited rising labor and construction costs and said inflation is a persistent global problem.

This means McDonald’s doesn’t face the same rate of inflation as the hypothetical “average restaurant.” The company’s large beef operation gives it specific exposure to the price of cattle and beef.

Additionally, at the end of 2025, about 95% of McDonald’s 45,356 restaurants will be franchised, meaning much of the cost pressure at the restaurant level will first be felt by franchise operators.

That heavily franchised structure helps to explain the tension around discounts.

A promotion may make a meal more affordable to customers and increase restaurant traffic, but franchisees still have to pay the labor bill, food bill, and other operating expenses.

That’s why those promotions remain tempting, according to the National Restaurant Association’s broader traffic data.

Restaurant operators were split, with 49% reporting lower customer traffic year over year in July and 40% reporting higher traffic. In fact, July was the 17th month in the previous 18 in which the industry recorded a net decline in customer traffic, NRA confirmed.

McDonald’s is not tackling its traffic problem alone. The entire restaurant industry is fighting for customers who are becoming more discerning about how often they eat out and how much they are willing to spend.

That makes productivity especially important. Discounting can help address some of the challenges consumers face, but efficiency has to solve the franchisee problem.

McDonald’s stock needs a different kind of growth

The inflation problem eventually reaches Wall Street.

McDonald’s shares were down nearly 31% from their February high, and down about 23% for the year as of Sept. 28, according to Bloomberg. The stock appears to be headed for its worst year since 2002.

The concern is not just that bigger Macs will cost more. Investors are asking whether McDonald’s can keep its longstanding attractive economics when traffic is under pressure, and the chain can’t lean on price increases forever.

The company is, however, approaching that transition from a position of considerable financial strength. McDonald’s generated $139.4 billion of systemwide sales in 2025, up 7%. Operating income rose 6% to $12.39 billion, while its operating margin expanded from 45.2% to 46.1%.

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Cash from operations reached $10.6 billion, and free cash flow totaled $7.2 billion. McDonald’s returned $7.1 billion to shareholders through dividends and share repurchases during the year.

Those numbers help explain why the current strategy is so critical. McDonald’s isn’t just trying to protect its current level of profitability; it wants to increase it.

Management is targeting operating margin in the low-to-mid 50% range by 2030, up from 46.1% in 2025. It also anticipates G&A to drop to approximately 1.9% of systemwide sales and free-cash-flow conversion to be in the mid-to-high 80% range.

That is a meaningful ambition while McDonald’s U.S. traffic is already negative.

To reach it, the chain needs multiple pieces to work simultaneously. Customers must perceive better value. Franchisees must become more productive. Technology must reduce restaurant expenses. Menu innovation must encourage additional visits, and the company needs enough pricing power so that lower costs don’t just mean lower revenues.

Wall Street fears that it will be some time before the benefits show up.

McDonald’s traded around 17 times forward earnings recently, below its five-year average, said the Financial Post, while the average analyst target among firms tracked by Bloomberg implied substantial upside. But near-term sales softness and increased investment needs are already testing investor patience.

McDonald’s needs to make inflation less visible

It’s a simple way to understand the transformation McDonald’s is attempting to make.

Inflation could be blown through the window for years.

Prices went up. The menu prices went up. Average check went up. That approach still works financially, but less so with customers, McDonald’s most recent quarterly filing shows.

U.S. comparable sales were still positive as check growth offset some of the damage from declining traffic.

It’s not a model McDonald’s necessarily wants to keep pushing forever.

Consumer data makes the danger clear. Consumers say it’s harder to pay their bills, and they are using discounts more aggressively. Restaurant prices still are rising faster than grocery prices, and a gasoline shock is biting into household budgets again.

Meanwhile, McDonald’s own costs haven’t disappeared.

The company’s challenge is therefore no longer simply to pass inflation along. It is to remove inflation from places customers don’t see.

Fewer labor hours devoted to taking orders. More efficient schedules. Less inventory waste. Fewer order mistakes. Lower corporate overhead. And up to $100,000 more in annual cash flow per average U.S. restaurant if the company’s efficiency goals are met.

That makes McDonald’s NEXT strategy more than a run-of-the-mill restaurant-remodeling program. It’s an effort to alter who gets the next dollar of inflation.

For much of the post-pandemic period, that answer was the consumer. Now mroe than ever, McDonald’s needs it to be the restaurant.

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Industries eventually have to decide where learning ends and stealing begins.

Musicians sample old records. Drugmakers wait for a patent to expire, then sell the generic. Automakers buy a rival’s newest model on launch day and take it apart in a garage, one bolt at a time.

Nobody loses sleep over most of that, because the rules are old and everyone knows them.

Artificial intelligence doesn’t have old rules yet. The top American labs spend fortunes training their models, and a rival with enough accounts can ask those models millions of questions, then use the answers to teach a cheaper model of its own.

That sounds like a fight for engineers until you notice who ends up paying. The AI tools at your job, the chatbot on your phone and the chip stocks sitting inside your 401(k) all ride on how it gets settled.

Washington has already chosen its word for the practice: theft. On Monday morning, the most powerful executive in the chip business went on live television and chose a different one.

Nvidia (NVDA) CEO Jensen Huang was asked on Squawk Box whether AI model distillation amounts to robbery. “That’s called competition,” Huang said, according to CNBC.

Jensen Huang calls AI distillation fair competition as Nvidia unveils $150B buyback.JONATHAN BRADY / Getty Images

Jensen Huang rejects Treasury’s AI theft label

Huang’s case is simple. Companies are allowed to test a rival’s products as much as they want, he said, and Nvidia’s own hardware gets stripped down by competitors trying to learn how it works, CNBC reported.

He admitted he would rather rivals didn’t do it. But he argued competition makes everything better, and that a company unhappy with how its product is used can vet its customers and cut off the service, CNBC reported.

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That puts him squarely at odds with Treasury Secretary Scott Bessent. Bessent said in July that officials had found traces of U.S. models inside Chinese ones and warned that “we have the ability to sanction them because of this theft,” he told Fox Business, as reported by CNBC.

Huang didn’t blink then, either. A day later, he said U.S. companies should “absolutely” be allowed to run Chinese AI models, according to Axios.

The White House did not immediately respond to CNBC’s request for comment on Monday, Sept. 28.

Why the distillation fight escalated in September

The dispute stopped being a war of words on Sept. 8. Three agencies accused six China-based developers, including Alibaba (BABA) and DeepSeek, of running “industrial-scale knowledge distillation campaigns” against American models, according to CISA.

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The advisory came from the National Security Agency (NSA), the Federal Bureau of Investigation (FBI) and the Cybersecurity and Infrastructure Security Agency (CISA). It said the firms pulled billions of tokens from U.S. frontier models since at least late 2024, in violation of those companies’ terms of service.

The agencies also described distillation as a valid training method that becomes a problem when it’s used to shortcut a competitor’s work. As TheStreet reported, U.S. intelligence agencies now say someone is quietly copying America’s AI.

Here’s how the fight has built since summer:

July 21: Bessent says the U.S. could sanction overseas models built on stolen capability, per CNBC.

July 22: Huang says U.S. firms should be free to use Chinese models, per Axios.

Sept. 8: The NSA, FBI and CISA name six Chinese AI developers in a joint advisory, per CISA.

Sept. 9: China’s Commerce Ministry says the allegations lack evidentiary and legal basis, per China IP Law Update.

Sept. 20: Bessent proposes a U.S.-China channel for flagging AI incidents after talks in New York, per CNN.

Sept. 28: Huang calls distillation competition on live television, per CNBC.

Nvidia’s China sales tell a different story

Here’s the part that surprised me. Huang isn’t defending a China revenue stream, because Nvidia barely has one left in data centers.

Nvidia has been guiding with zero China data center compute revenue baked in, as TheStreet reported after Nvidia’s first-quarter beat. Huang has also said export curbs wiped out Nvidia’s share of China’s AI chip market, TheStreet reported in its look at Nvidia’s uncomfortable new reality.

So when I lined up his July comments against Monday’s, the “talking his book” read fell apart. In my analysis, he’s defending the loop his whole business runs on: models get built, studied, shrunk and rebuilt, and every pass runs on someone’s chips.

There’s a defensive angle, too. China’s antitrust regulators found in September 2025 that Nvidia’s compliance with U.S. export rules violated the terms of its Mellanox deal approval, according to Nvidia’s latest quarterly filing.

Beijing has also warned it would answer new restrictions tied to distillation with “resolute countermeasures,” Tech Insider reported. My read is that Nvidia, with its China antitrust exposure already on record, is the most obvious American company within reach.

What a record $150 billion buyback says about the risk

Huang spoke the same morning Nvidia added a record $150 billion to its buyback, lifting its remaining capacity to $235 billion, Reuters reported.

The stock traded at about 16.5 times forward earnings, its lowest multiple since January 2015 and well under its 15-year average of 30, according to LSEG data cited by Reuters. That’s a market pricing in slower growth for the world’s most important AI supplier.

If you own an S&P 500 index fund, you own a slice of Nvidia whether you chose it or not. A sanctions fight that spills into chip retaliation is exactly the kind of risk that can keep that multiple compressed.

Huang is betting the other way. A buyback this size says management thinks the shares are cheap, and his comments on Monday, Sept. 28, say he thinks Washington’s theft framing is the bigger threat to the AI boom than Chinese copying.

Shenzhen talks set up the next sanctions test

Washington and Beijing are also still talking. Bessent said the two sides agreed to meet again in about two months in Shenzhen, China, to work on protocols for serious AI incidents, Benzinga reported.

That meeting is the one to watch. If Treasury names a specific Chinese lab before then, Huang’s stance turns from a policy opinion into a bet against his own government.

If it doesn’t, Huang may have just shaped the rules of AI’s copying era before Washington finished writing them. And the cheaper AI tools that follow would run on Nvidia chips either way.

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