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Argentina Defaults: Now What?

It was a game of chicken, and neither side blinked.  Argentina and its holdout creditors failed to reach an agreement, and as a result Argentina defaulted Wednesday night, the second time it has done so in 13 years.

On Thursday, the Global X FTSE Argentina ETF (ARGT) was sharply lower, down over 4%, but I wouldn’t classify the action as “panic.”   This correction merely took Argentine stock prices back to the levels of late June.

So, what is the story here?  Shouldn’t Argentina be melting down?

We have to keep the default in context.  Remember, Argentina has been largely locked out of global capital markets since its 2001 default, so the impact from the new default will be far less jarring.  At this point, it is not as if there is much Argentina can do to make its reputation worse than it already is.

Furthermore, unlike in 2001, Argentina actually has the funds on hand to pay its debts.  In fact, Argentina deposited the funds needed to make the current interest payment on its restructured bonds at the Bank of New York, claiming that it paid in good faith.  Of course—as Argentina is well aware—the bank cannot actually pay the interest to Argentine bondholders without violating a court order. So…the funds sit there, pending a settlement between Argentina and holdout creditors.

While I don’t have much sympathy for Argentina—the Kirchner regime seems to revel in breaking all laws of economics and of basic common sense—I grudgingly have to respect them for being willing to see this to the end, come what may.  It takes a certain kind of nerve to thumb your nose as the global financial system.

Still, there are consequences.  Argentina’s currency will probably slide, which will make its already horrid inflation worse.

So, what happens now?

My best guess is that the standoff lingers until the first of the year but that Argentine stocks will continue to rally in anticipation.

One good candidate is Argentine oil company YPF (YPF).  If Argentina’s currency slides, YPF could take a beating in the short-term.  But given that its energy is priced in dollars, I would consider the risks here to be tolerable.

Action to take: Buy shares of YPF and plan to hold for 12-18 months.  Use a stop loss at or just below $30.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.

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Twitter Crushes Earnings: What Happens Now?

Twitter (TWTR) released its results for the second quarter and took the Street by surprise, sending shares up 28% after hours.  Excluding the effects of share dilution from stock-based compensation–a major bugbear of mine–Twitter turned a profit of $0.02 per share.

Revenues came in at $312 million, beating the consensus estimate of $283 million by a wide margin.  And the number of monthly active users (“MAUs”) rose to 271 million vs. the consensus estimate of 267 million.

That’s the good news.  Now for the bad news: Twitter is still not growing anywhere near fast enough to justify its current valuation multiples.

Assuming Twitter generates something in the ballpark of $1.2 billion in revenues this year, Twitter’s stock would still be trading at 24 times sales.  Again, that’s sales, not earnings.  That’s even more expensive than Facebook’s (FB) 19 times sales, and remember, Facebook is a vastly more profitable company.  Google (GOOG)–with which FB and TWTR compete for ad revenues and user time–trades for a comparably puny 6 times sales.

I gave my thoughts on Twitter to CNBC’s Ansuya Harjani:

If I may generalize, Facebook has become a real-time high school reunion and a great medium for sharing photos.  Twitter, on the other hand, is a medium for sharing news links and making announcements.  It’s a media company and a fantastic medium for celebrities, politicians and journalists, but it will probably never have the broad, mass appeal of Facebook nor its intimacy.  And we should remember how our expectations have changed: Last quarter, new users were up by a comparable amount, and the street took that as a disappointment.  So, while Twitter beat expectations, expectations were lower.

Twitter CEO Dick Costolo stressed that the bump in monthly active users was NOT due to the World Cup.  He said that the World Cup did boost engagement among users, however, and I would agree with that.  You see a similar effect in the United States during the Superbowl.  Fans use Twitter as a medium to banter back and forth on the games, to give virtual high fives, and to share the grief (or rage) after a loss.

The more time a user spends on Twitter, the more valuable they are to advertisers because the more likely they are to see an ad an (ideally) to click on it.  Furthermore, with Twitter users more engaged during the World Cup, my assumption is that advertisers were willing to pay more.  That’s great for this past quarter, but it isn’t something we should expect to see repeated.

Facebook has been extremely successful in boosting engagement and revenue per user from its North American user base.  Twitter has struggled to keep on on this front, perhaps partially because its user base is more international.  Social media companies have not been particularly good at monetizing users outside of North America.  Twitter’s user base is overwhelmingly outside North America yet only accoutns for 33% of total revenue.

Also, there is one major negative that everyone seems to have glossed over.  On a GAAP basis, which takes into account the effects of share dilution from stock-based compensation, Twitter actually lost money last quarter.  Twitter’s stock based compensation is a major bugbear for me, and a reason I tend to have a negative bias towards the stock.

Last week, I appeared on CNBC to discuss Facebook’s earnings, noting that while Facebook’s user growth is largely in Asia and emerging markets, its revenues come disproportionately–almost exclusively–from North America.  Given that Twitter’s user base is disproportionately from outside North America, it remains to be seen if Twitter will succeed where Zuckerberg and company are not.

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The Hipster Revolt and the Anti-Luxury, Luxury Movement

Kanye West—the hip hop artist whose number-one hit “Gold Digger” epitomized the blingy excesses of the mid-2000s—made news earlier this month by going on an anti-luxury-good tirade:

“It’s like [luxury brands and retailers] want to steal you from you, and sell you back to you after they stole it… They want to make you feel like you less than who you really are.”

If Kanye West is really turning his back on conspicuous consumption, it is a sign of one (or all) of three things:

  1. The end of days is drawing nigh.
  2. Kanye West is crazy—as in truly schizophrenic and/or suffering from multiple personality disorder.
  3. The luxury goods business is in deep trouble and facing a real consumer backlash.

While the first two explanations are definitely plausible, I’m going to focus on the third.   It’s been rough for luxury retailers of late.  Coach (COH) has seen its U.S. domestic sales virtually collapse as upstart Michael Kors (KORS) has crowded its turf.  But even Kors has hit something of a brick wall of late, and its share price has heading lower since late May on valuation concerns and lower margins.

Going higher upmarket, you see a slightly different dynamic. Luxury leather goods and drinks conglomerate LVMH Moet Hennessy Louis Vuitton (LVMUY), high-end watchmaker Swatch (SWGAY) and Remy Cointreau (REMYF) has also seen uneven growth over the past two years, though the primary driver here was a crackdown by the Chinese government on bribery and excessive gift giving.

Returning stateside, the simplest explanation for Big Luxury’s woes are simple supply and demand.  There are more luxury brands than ever competing for a customer pool that has been forced to scale back its buying due to years of high unemployment and sluggish economic growth.

But might the winds of fashion be changing as well?  And could demographic trends be at play?

Let’s break down America by its major demographic groups.  Though U.S. stocks have long since blown past their pre-crisis highs, and home prices have recovered substantially in most markets, the 2008 meltdown and Great Recession that followed were devastating to the retirement plans of many Baby Boomers.  The Boomers are more focused than at any point in their lives on securing their nest eggs for retirement.  Bling spending is simply not a priority for all but the highest-income Boomers.

And my generation—Generation X?  Gen Xers are now in the primes of their careers, earning more than they ever have.  Unemployment among Gen Xers is the lowest of all major demographic groups.  But Gen Xers also got hit the hardest during the housing bust, as they were the most likely to be recent buyers with large mortgages, and Gen Xers are at the stage of life in which most disposable income gets spent on their kids.  And let’s not forget, the Gen Xers are a significantly smaller generation than the Boomers they followed.

That leaves the Millennials.  Millennials are, as a general rule, known for being a little flashier and more brand conscious than Gen X, but this is also the generation that has most embraced the bearded hipster movement.

Hipsters are an odd lot.  They eschew branded goods yet will pay a large premium for hybrid automobiles,  organic groceries and even organic cotton clothes. (Seriously guys, last I checked you weren’t supposed to eat your t-shirts.  Not sure I understand the appeal here.)

Somehow, hipsters have turned antibranding into a brand that they are willing to pay a premium to own.  And their tastes are gradually going mainstream.

What is means is that “luxury goods” are not dying, but the notion of what constitutes a luxury good is.  Americans are still willing to pay a premium for things that they value.  It just happens that they are increasingly valuing different things.

Earlier this year, I wrote about the business of organic groceries, though I stopped short of recommending the stocks of Whole Foods (WFM) due to valuation concerns and the reality that groceries are a rotten business.  But I do believe that “upscale” fast food restaurants like Chipotle Mexican Grill (CMG) are attractive stocks to buy on dips.  Chipotle has seen mild margin compression due to rising food costs but remains wildly profitable and continues to add new locations.

Where does this leave the traditional luxury goods makers? Clearly, not all young Americans with higher-than-average incomes are bearded, brand-eschewing hipsters.  I expect to see the industry return to more consistent growth as the economy continues to heal and as unemployment drops.

But China remains the real wildcard.  As goes China, as goes the luxury industry.  If China can avoid a true hard landing—and if the bling crackdown proves to be a short-term blip, like previous crackdowns—then the luxury goods makers should enjoy a solid finish to 2014 and a strong 2015.  I don’t consider LVMUY, SWGAY or REMYF to be screaming buys at current prices, but I would consider all three to be good stocks to consider on any substantial pullbacks.

This article first appeared on InvestorPlace.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

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Is Amazon Chief Jeff Bezos A Madman Or Crazy Like A Fox?

Following up on Amazon’s (AMZN) disappointing earnings report, I gave my thoughts to Tech News World’s Erika Morphy:

Jeff Bezos is probably the greatest innovator in American capitalism alive today.  I would put him ahead of the late Steve Jobs and roughly equal to the late Sam Walton as a “game changing” CEO.  For all intents and purposes, Bezos invented e-commerce as we know it today.

But investors are getting tired of the lack of profitability.  Amazon is no longer a young start-up.  Amazon has had a “free pass” from investors who were willing to sacrifice current profitability for future growth.  But now, it’s time for Amazon to focus.  Bezos tends to pursue multiple strategies at the same time, many of which don’t pan out.  The new Amazon phone, for example, represents a major allocation of management time and energies, and it will probably be a bust.  Investors–myself included–would love to see him focus.

As for the stock… I love Amazon as a company, but I hate the stock. It’s priced at 2 times sales vs. 0.5 times sales for Walmart (WMT), its biggest competitor.  Amazon SHOULD trade at a premium to Walmart because it is a much faster-growing company.  But to be four times more expensive is excessive.  If Amazon fell by another 20-30%, I would still consider it expensive but probably worth worth buying if you have a long-term horizon.

You can read Erika’s full article here.

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StockTwits Banter: Amazon Earnings Part II

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