🗞 Argentina's Free Market

WHILE YOU POUR THE JOE… ☕️
Premature Cuts?

We had discussed the possibility that the Federal Reserve might have acted prematurely when cutting interest rates at the latest FOMC meeting, running the risk of sparking higher inflation once again. 📈 

After that, we broke down the manufacturing and services PMI indexes for you, quoting the issue with higher reported prices for both. Given this trend, it would be foolish to expect anything but hotter inflation moving forward.

So, we sent out this tweet yesterday morning ahead of the CPI data:

And guess what? We did come in at 2.4%, which led us to a down day for the $SPY ETF; we’re also going home with a net short position here since we expect the index to have another down day to end the week.

Speaking of a shifting view, let’s get on with today’s email 📧…

A NEW CALL
George Soros’ Whisperer Just Did This

Stanley Druckenmiller, who has a fascinating story I would absolutely recommend getting familiar with, just expressed a few of his new thoughts. Where these go, his money goes, and so does the market.

In a nutshell, this is what he’s doing:

• He’s going short on bonds, quoting that we’re about to enter a long-term period of high inflation. I have to agree with this one. One thing to keep in mind, though, is that he said this could pay off in the next six months or six years.

• Loves Japan, and despite the recent interest rate hikes, I also have to agree here. The strengthening of their currency could hurt some of their exports, like automobiles and steel, but also help service businesses in this high-tech economy.

• Lastly, one of my favorites is going long with Argentina under Milei’s new leadership, which is already doing miracles in this former socialist state.

In these choices, we are, of course, threatened in our long $TLT position 📉 being bullish on bonds since the Fed will probably keep cutting rates, though the possibility of higher for longer inflation will put tremendous bearish pressure on bonds overall.

When it comes to Japan, we have to start looking into the services sector, or at least companies in other countries that provide components and infrastructure to allow for Japan’s digital and tech-driven economy to take off in the coming quarters.

Once we find those, we’ll make a proper post about them, but that will take a bit, so bear with us in the meantime.

As far as Argentina, I do think we are a bit late to the party. Still, if the U.S. stock market ends up going on a downturn from these renewed inflation pressures, we could see some decent discounts in Argentina-exposed stocks.

There is one that is my absolute favorite, so we’ll talk about that next. 👀 

TRADE OF THE WEEK
Can’t Deny It

Even though this stock now trades at 96% of its 52-week high today, I still think there could be enough of a potential upside in the coming quarters, as long as we get the right entry opportunity here.

There is a strong fundamental factor working in favor of Mercado Libre stock to being it to new highs, and it’s got a lot to do with Argentina’s new growth. Before we dig into that fundamental analysis (simple one, we’ll dig deeper when we decide to buy), here’s what the entry points look like:

It looks like the first area that we should watch out for is the $1,950 🎯 a share price for this stock, considering that, as judged by the volume profile, this is where volume starts to cut off.

We could get there before the next quarter, considering (as drawn below) volume has started to dry up around the new high, meaning new buyers are not coming in just yet to keep the momentum going.

Taking a look at the market profile, I have to agree with this level being a first worthy test for a reaction on new buying, as it is where both time and volume do cut off significantly:

Now, for the fundamental side, I want to give you a quick rundown of the business’ key performance indicators lately, which seem to be working well.

• Gross Merchandise Volume up 20% on the year to $12.6 billion

• Total Payment Volume up 36% on the year to $46.3 billion

• Monthly active users from 38 million to 52 million within 12 months

Here’s what’s been driving the latest results, though.

Argentina’s economy has shifted to more consumer discretionary items like electronics, when not too long ago, it was mostly focused on buying food and other necessities. This is a major tailwind that (just getting started) could push Mercado Libre’s growth above peers.

More than that, the company’s credit portfolio is also on the rise, showing increased confidence to take on debt from Argentinians, a psychology made available by optimistic expectations in personal finance.

Mercado Libre is also highly exposed to Brazil’s consumer economy, but let’s just focus on Argentina for the moment.

I had the experience of dealing with Mercado Libre when I traveled to South America earlier this year, and I have to say I was very surprised to how similar it was to peers like Amazon and Alibaba.

Here are other metrics I liked about the business, which make up for an outstanding value stock at the right price:

• Gross margins of over 54%

• Net income margins over 8.2%

• Return on Invested Capital (ROIC) over 20% 🔥 

• Reasonable debt and good free cash flow

That’s it for now; we will take the time to do more research on the business while the stock potentially gives us that $1,950 entry or better to consider. 🫰 

NOW GO AND MAKE IT HAPPEN
Digging Deeper

Being able to spot these value plays is one thing, but knowing how to term a business as a potential compounder is another field completely.

That’s why, in today’s book recommendation 📖, you will learn a few of the main points used by Warren Buffett and other famous value investors so that you can get a crash course on all the important things to look at and consider.

To your success,

G. 🥃