October 9th Daily Market Note: Wall Street refocuses its attention on earnings season with Middle East geopolitics tension on-watch
10/9 Premium Strategy Note
Don't trust your own opinion and back your judgment until the action of the market itself confirms your opinion - Jesse Livermore
Daily Market Note & Context (10/9)
No doubt there is quite a lot of geopolitical turmoil in the Middle East at the moment. While I can’t comment on the Israel/Hamas situation because I am no expert in this area, within the stock market, we can observe that the last 5-7 trading sessions is increasingly looking like a bear trap where much fear was manufactured – only to see the S&P 500 see a 120 point jump in the span of 3 days from swing lows.
Our Commentary from last week was quite fruitful for the timeframe in which it was intended and positions us strongly for the upcoming earnings season. October, so far, has not been a bad month for those who were able to take action last week.
I’m going to continue focusing on finding opportunities in the landscape that I believe may have potential.
Over the past several weeks, there is a new narrative that has surfaced which has weighed heavily on a select group of stocks & themes - let’s get into it now.
Consumer Staples (especially Food & Beverage): News flow that a weight-loss drug Ozempic is going to turn the tide against restaurants and food & drink companies as a new trend may emerge on consumers eating less and consuming fewer calories. Companies such as Walmart, Costco, Starbucks, and McDonalds have been affected accordingly.
Dow Jones Stocks: The narrative goes that higher rates have diminished the appeal of dividend paying stocks (which have market risk) as the risk free rate achieves the same outcome without any of the market’s volatility.
I believe several companies within these themes are in regions where a bounce may occur from a 1.5-3% perspective.
McDonalds: MCD today at 249.3 is near a key technical level. Should the Dow stay supported, MCD may see/touch/visit 253-254 within 30-45 days. I did a DCF analysis on MCD over the weekend and my results yield the fact that any region from 228-235 would make it a 12-month capital appreciation return candidate of about 5-8%. Stress tested fair value on the name is around 228-235. Reasonably high probability of success if entries are entered there. Today’s level is imperfect and depends on the Dow being strong.
Home Depot: HD today at 295 should see/touch/visit 300-305 by year-end at the very minimum, in my view. HD has very little exposure to European revenues and within the home improvement theme (adjacent to Real Estate), I view HD to be better than homebuilders – which are much more vulnerable to rates staying at elevated levels. Swing low of last week of 288 is an area to buy this name for a 2-4% run. Today’s level can work, but sizing may want to be smaller to account for the fact that SPY/QQQ/DIA bounced heavily from last week. Today’s entry is a half-size entry.
Starbucks: I view Starbucks as a quasi-China name. If we see positive China macro data on consumers, Starbucks (along with China ADRs) will benefit. Analysts are very downbeat on Starbuck’s China revenues as they believe the consumer’s weakness will cause estimates to be revised lower. However, I believe foot traffic at Starbucks across many different locations in China was not as weak as analyst commentary would suggest. If China can perform, I see Starbucks visiting 100/share by Q1 2024. Or better. Now 92. I’m in this one.
Retail (In General): Top names that I’m in right now are Costco, Walmart, and TJX.
On China, I’m scaling into Trip.com again. Yes, persistent macro worries may pressure the name. But just like PDD and EDU, which have done us well (to say the least), I believe TCOM will come back. The longer the timeframe on this one, the higher the probability of success. Price target of 38+ within 6 months.
On TLT, easy entry has been discussed last week during 84-85. Today’s level is not something I would chase.
We are entering a seasonally stronger part of the year. There will be highly choppy step backs along the way, but the risk in Nov/Dec is missing broad market upside when swing lows present opportunities for entry– not the other way around.
2024 may not be so good. But that’s a story for another day.