Russian Geopolitical Tension Intensifies

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Our View

The early headlines had a significant impact on the ES and NQ price action. Target (TGT) missed both its Q3 earnings and revenue estimates, lowering its full-year guidance and causing a 21% drop in its stock. Meanwhile, Ukraine launched UK-supplied Storm Shadow missiles at Russia for the first time and the Fed’s Collins stated that further rate cuts are needed as current monetary policy remains too restrictive. These are just a few examples of the headlines making waves.

The noise is getting louder, and I believe it’s going to keep escalating through the end of the year and into the period after Trump takes over.

MiM and Daily Recap

The ES traded up to 5957.75 during the Globex session and opened Wednesday’s regular trading session at 5938.75. After the open, the ES reached a session high of 5942.75 before selling off 60 points to 5880.00 by 10:22 AM. It then rebounded 31 points to 5911.00 by 11:03 AM, only to drop another 16.5 points to 5889.50 by 11:33 AM, with volume tracking nearly 750,000 contracts.

Following the drop, the ES rallied 32.75 points to 5922.25 before selling off 26.75 points to 5895.50 by 12:30 PM. It then staged a 22-point rally to 5917.50, dropped 18 points to 5899.50, popped to 5911.75 at 1:33 PM, and fell another 16 points to 5895.75 by 1:48 PM. The market saw an 18-point rally to 5913.75 by 2:48 PM, a slight dip to 5906.25 at 3:06 PM, then surged 31 points to 5936.75.

At 3:50 PM, the imbalance showed $4.5 billion to buy, pushing the ES to 5942.75 by 3:51 PM. It traded 5932.50 at the 4:00 PM cash close. Post-close, the ES climbed to 5944.25, but it dropped sharply after Nvidia reported better-than-expected Q3 earnings and a strong forecast. The ES sold off 33.25 points to 5911.00 at 4:20 PM, rallied 32 points to 5943.00, and settled at 5939.75, up 1 point (+0.02%). The NQ settled at 20,738.75, down 29 points (-0.14%).

Bitcoin reached a new intraday high of $94,963. The yield on the 10-year note closed at 4.406%, up from 4.378% on Tuesday. Spot gold rallied for a third consecutive day, rising 0.6% to $2,647.43 per ounce, marking its highest level since November 11th. The VIX surged 11%, settling up 5%.

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-Dan @ GTC Traders

DIAGEO PLC (DEO:US): Buy, Hold or Sell?

One of the 18 assets we hold as a core position in the GTC Sample Portfolio, is Diageo PLC (DEO). And as of late, Diageo (DEO) stock has not been performing that well …

Our purchase price is $152.06. So we are down just a bit at this point.
It should be noted, that with the other assets in this portion of our GTC Sample Portfolio? We are actually up in this strategy (our “Equity Fixed Income Hybrid Core”) overall …

The accounts yield on cost is 3.37%, and rising, and we are up on the year, and able to beta weight hedge the deltas of our portfolio whenever we wish.
But very obviously, Diageo (DEO) is our problem child.
The question arises … what should we do with it?
Buy? Buy more? Sell? Or simply hold?

Fundamental Statistics

We have reviewed Diageo’s Fundamentals.

The peak stock price of over $240.00 should be viewed as the single most over-valued price that DEO saw in terms of it’s multiples and traditional valuations, in the last 20 years. We can illustrate this later. Regardless, from that moment, DEO began experiencing a small slide in organic sales. At which point, this was the ‘kicker event’ as we call them, for the slide in stock price to begin.

What of it’s operations?

It’s pre-tax income has been growing year after year …

From 0.12 Billion in 2017, to 5.96 Billion presently. As has the Net Income, from 0.38 Billion in 2017 to 3.87 Billion presently …

And Margins have been steadily increasing from 11.99%, to between 19.09% and 21%.

And the Dividend Payout Ratio is currently 59.39%; and is down from 64.34% in 2021, and about the same as it was in 2017. 59.39% is a tad high for us, but still easily manageable; and somewhat normal for DEO. And it’s liquidity ratios have remained steady since 2017. Debt to assets have varied from 0.32, to 0.47 in that time.

Briefly put?

Yes, in the last 24 months, there has been a slight decrease in unit sales. But the company is more than sound, with an ample moat when viewing through the lens of a long-term hold.

Fundamental Valuation

Earlier we stated …

“The peak stock price of over $240.00 should be viewed as the single most over-valued price that DEO saw in terms of it’s multiples and traditional valuations, in the last 20 years.”

All well and good. How do we make that determination? What is the lower bound of the stocks price to multiples in the last 20 years?

For this we use the tool … “FASTgraphs”, a tool created by Chuck Carnevale. GTC Traders has no formal affiliation with “FASTgraphs”, but it is a tool we cannot recommend strongly enough for examining stock valuations.

The Dark Green? Is the growth in earnings of Diageo (DEO). The Black line is the stocks price in relation to those earnings via Benjamin Graham’s Intrinsic Value Formula of IV = (EPS * [(8.5+ (2g))/Y. The blue line a look throughout history, of the P/E ratio for the stock, in relation to those earnings.

We see, that the last time that Diageo (DEO) traded this cheaply not in terms of stock price, but in terms of it’s intrinsic valuation to this price multiple?

Was June of 2012. Not in 2017 or 2016 when the stock was actually cheaper in price.
But it has not traded at a great as value in over 12 years.

Position Sizing and Summary

Given our Macro-Economic view, when we purchased each of the assets for the “Equity Fixed Income Hybrid Core” strategy for the last year? We only purchased half of our normal position size. So while are currently down from our cost basis of $152.06? We are down on a half-sized position, and one we can average into more.

Given all of the above?

We will continue to hold Diageo (DEO). It makes no logical sense to us to rotate out into another stock when it is trading at a great value. We can take a little bit of heat.
Yes, we were a little early, when we bought our small half sized position.

We have received dividends, and will continue to receive dividends that are stable, and reduce our cost basis.

We can average down into a full-sized position, should Diageo (DEO) start trading at the multiples we saw in 2008.

And our other assets are keeping the entire portfolio up with positive gains.

We are holding.

What if we had no position in Diageo (DEO) and was interested in establishing a position in our portfolio?

We like a small 5% initial purchase (5% of a full position size) with a daily close above $121.00. We would increase this by adding 45% to the size with a daily close above $123.00; bringing the total size to 50% of a full-sized position.
So Diageo (DEO). It’s been our problem child in our Equity Fixed Income Hybrid Core. But we see no reason to rotate this stock out of the portfolio when it is trading at such a wonderful value, while we are up in the portfolio overall, receiving dividends from DEO, and can average down more at any time. We are holding onto it.

Until next time, stay safe … and trade well.What to Watch for Next

Trading Room News:

Polaris Trading Group Summary: November 20

Market Overview: The day began with overnight trade activity showing a neutral tone, with prices hovering near the 5945 Line in the Sand (LIS). PTGDavid highlighted the significance of monitoring options flows as indicators, specifically referencing the aggressive Call Option flows during a prior breakout. The session started with cautious optimism as traders waited for key setups to materialize.

Key Trades and Lessons:

Notable Insights:

Outcome: The session closed at the highs of the day, with traders positioned to potentially capitalize on NVIDIA’s earnings volatility. Overall, it was a day of solid execution in the morning, disciplined observation in the afternoon, and a focus on preparation for upcoming catalysts.

Key Takeaway: The day’s success hinged on disciplined adherence to proven strategies like Open Range breakouts and the ability to recognize when to step back during choppy conditions.

DTG Room Preview – November 21, 2024

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Disclaimer: Charts and analysis are for discussion and education purposes only. I am not a financial advisor, do not give financial advice and am not recommending the buying or selling of any security.

Remember: Not all setups will trigger. Not all setups will be profitable. Not all setups should be taken. These are simply the setups that I have put together for years on my own and what I watch as part of my own “game plan” coming into each day. Good luck!