Wednesday, February 27, 2013

Keynesian economics doesn't work? Or does it?

Sequestration Is “Terrible Policy” But Better Than No Spending Cuts At All: Ayn Rand’s Brook

Not surprisingly, the Ayn Rand Institute claims that Keynesian Economics "doesn't work."  Look around and we see high unemployment despite trillions in stimulus spending.  Look at Japan.  The problem is that we can't see what would have happened without all that spending.  Look at what happened in the Great Depression.  I think most people would agree that our economy appears to be better off than it was back then.  It's probably better off right now than it would have been without stimulus spending.

That said, government does need to come up with some way to reduce spending in a meaningful way.  This idea that the economy will grow enough to eventually pay our debts doesn't work, and isn't going to work this time either.  We do need cuts; I just don't think we need cuts now, and I think it's wrong to say that any cuts are better than no cuts.

One of the comments made in the video was that there was no way that World War II did anything to help our economy.  Yes, it raised GDP, but standards of living fell.  Another, toward the end, was that you can't raise standards of living by breaking stuff, or something to that effect.  Only, the way I see it, that's exactly what eventually did raise standards of living immediately after the war.  Standards of living were low because people weren't allowed to buy a lot of things.  Those things were rationed.  The government forced the diversion of resources toward supporting the war effort.  And demand for some things was, well, "pent-up."  So, when the war ended, U.S. industry had developed into an extremely efficient manufacturing machine, and people spent.  It turns out, you can increase standards of living by breaking stuff, just not immediately.

Tuesday, February 26, 2013

Amazon (AMZN) Part V

I’ve finally gotten around to looking at the cash flows for AMZN. I didn’t include all of the cash flow information from previous 10-ks but thankfully, AMZN did include cash from operations and free cash flow from 5 years.

Frankly, I’m surprised. AMZNs cash flows aren’t as good as I thought they might be, given the stock price. In fact, cash from operations, while growing, isn’t keeping pace with sales, indicating that cash operating expenses are growing faster than sales. Worse, free cash flow has actually been declining. Of course, that’s due to the large capex which is expected given the rapid growth in revenue. Most of the increase in AMZNs cash in 2012 appears to have come from the issuance of $3.3B in debt.

To tell the truth, I’m having a hard time finding anything compelling about this stock, and I don’t care for some of the accounting practices (like adding shipping fees collected to revenue and classifying depreciation expenses as part of other departmental expenses) which seem designed to try to hide something. So, for now, I doubt I’ll pursue this project any further.

Trend in public companies

The Triumph of the Virtual Corporation

This article takes an interesting perspective on what's happening to public companies here in the U.S.  I was thinking about this around about the time of the Facebook IPO, from which I definitely got the impression that IPOs were no longer being used to actually raise capital for companies, but instead were being used by the founders as a way to cash out.  Unfortunately, I think it says a lot about U.S. business, and none of it is good (not to me), although this article seems to try to put a positive spin on the whole thing.  We don't make much here in America anymore, and now, we don't even really care about the businesses we build.   I can't help but wonder where we'll be in another decade if the trend continues, and at this point, I don't see any catalyst to change the trend either.  Perhaps by then we'll all be working at McDonalds or Walmart, depending on government aid, while the few that are lucky enough to be successful complain about taxes they pay to send welfare checks to the rest of us.  I'm feeling a little gloomy tonight.

Monday, February 25, 2013

Housing bubble? Define bubble...

Is Rebound in Housing Creating Another Bubble?

I have to admit, I've been thinking there's a bit of a bubble in housing.  After watching this video, I guess it really boils down to your definition of a bubble.  Home prices are up, which is good, but they never really got back down to the long-term trend.  And I've actually seen people complaining that 6% or 8% rise in home prices in a year isn't good enough. The truth is that the real estate market is being manipulated.  It is artificially high.  But, it could be okay this time because there's not the same air of speculation going on that there was a few years ago.  Still, home prices have been propped up by the Fed, as well as the federal government, and given that the federal government is trying to find places to cut spending, I might be a bit leery of their continued support of the housing market.  And what would happen if there were no deduction for mortgage interest?  With that deduction, the rent vs. buy decision may favor buying, but take that deduction away and does it still?  I don't know.  I don't expect anything bad in housing soon, but it wouldn't really surprise me to see a substantial drop in a couple of years, and maybe sooner depending on how the spending debate goes in Washington.

Market news today

Wall Street trips and falls on cloudy Italian election

Well, I'm not so sure this drop was all about Italy, although it may have been the catalyst.  Instead, I think it's more about what's happening right here in the U.S.  Only a few days left before we start seeing spending cuts.  And, of course, the market is still up quite a bit this year, so it needs a rest.

At any rate, based on what I've read about the upcoming cuts, I think we're heading for a recession.  And given that nobody really seems to expect it, or at least they don't seem to think it will be that bad, I think it may very well be really bad.  I don't think the government will be able to do much, and the Fed has already pretty much exhausted its bag of tricks.  The only thing that seems to be holding our economy together right now is people's apparent confidence in the economy.  But that confidence seems to be misplaced, at least in my opinion.

So, not surprisingly, stocks are down, bond yields are down, and gold is up.  Looks pretty much like a flight to safety, of sorts.  I wouldn't really call bonds safe, though.

Sunday, February 24, 2013


Just Explain It: How Will The Sequester Impact The Economy?

So, this sounds exactly like what we don't want to do.  Oh yeah, that's exactly what it was supposed to sound like so that no rational government would allow it to happen.  Guess what?  We don't have a rational government.

Wednesday, February 20, 2013

Yeah, I think so

Critics Be Damned, Bernanke Is Getting it Right: Munson

I think I may have said this before, and if I didn't I meant to.  I actually think that what the Fed is doing is the right thing.  I just don't know that when it comes time to change they'll necessarily get that right.  And I also think that today showed that the market may overreact to the end of QE.  There's still a lot that can happen, but I think without QE we would be experiencing some pretty bad deflation.  Still, I think the market is a bit overvalued and the end of QE will hurt stocks, but it may not be a total disaster.  Gold, on the other hand, I think will be (a total disaster).

But whether the Fed is right right now doesn't much matter.  Their actions are definitely manipulating the markets, and I don't much like that, although in some ways it does make things predictable.  Then again, about the time everyone thinks that, something unpredictable breaks, which is why I think investors should be taking some off the table at this point.  I certainly don't think this is a good time to be adding to positions, at least in stocks.  Instead, use that money to stock the wine cellar.

The other thing that I think people aren't really talking about is that it's a real possibility we could dive back in to a recession, which would be bad all the way around.  I don't think the Fed could really help, and the government... well, the federal debt is already so high that the interest in 2012 was $359,796,008,919.49.  And that's with some ridiculously low interest.  It's going to be interesting to see what the government does if recession does come our way.

Tuesday, February 19, 2013

More value to whom?

M&A deals lift shares, suggest more value in market

The question should be, more value to whom?  Just because one company finds value in merging with a competitor doesn't mean investors should find the same value in either company.  Of course, in most cases it would be nice to see the value in the target to the acquirer before the acquirer does since that would definitely benefit the investor, but then, you could wait for years for the acquirer to recognize the value.  No, I think M&A action really is more of an indication that companies are less competitive and see this a some sort of solution, which it is in the short run.  In the long run, though, new competitors will enter the market, and these companies will still be unable to compete.

Monday, February 18, 2013

What's the difference again?

Did the G-20 Just Signal Further Global Easing?
And according to Goldman Sachs analysts, there's another key difference between the two.

"Whereas competitive devaluation remains a zero-sum game, "competitive monetary easing" is net positive for global growth and effectively helps narrow the world's output gap. At a time of low inflation and high unemployment in many countries, competitive monetary easing is therefore a welcome policy," Goldman analysts wrote in a note to clients on Friday.
Okay, I can get behind that.  But, what exactly is the difference again?  I mean, besides the name.  Because as far as I can tell, they're both just turning on the printing presses.

Sunday, February 17, 2013

Amazon (AMZN) Part IV

I know.  It has taken a while to get back to AMZN.  I began to lose interest after looking at the Income Statement in my last post on the subject.  I really shouldn’t have though, because it raises the question of how is AMZN being valued so highly when they aren’t actually making any money.  Of course, the answer is the expectation of future earnings, but I wonder just how far in the future those earnings are going to be, and how much to justify the current stock price.

At any rate, today I’m looking at the balance sheet, which I’ve included a picture of at the end of this post.  I didn’t do any adjusting other than to include the breakdown between gross and net plant and equipment, and accumulated depreciation, which AMZN shows in a separate part of the 10-k from the balance sheet.  This kind of thing is annoying to me, but at least it was there.

So, to be honest here (why would I want to do that, right?), nothing really stands out in the balance sheet, except, perhaps, that things are a little TOO regular (nothing like a little paranoia).  Since 2008, the balance sheet appears to have gotten bigger at about the same rate as sales have increased, and most of the balance sheet accounts have remained at about the same proportion to the size of the balance sheet.

One thing that could be a bit troubling is the trend between long-term debt and stockholders’ equity.  Debt is becoming a more significant part of the balance sheet, while the portion of the balance sheet represented by equity is decreasing.  It’s probably not a big deal though.  They recently purchased their corporate offices so the increase in debt isn’t inexplicable, and being that AMZN is reporting losses, the decline in equity is also not surprising.

Inventories are gradually edging up as a percent of sales, which I would not really expect given that AMZN is selling more downloadable stuff, which doesn’t require much in the way of inventory.  Accounts receivable are also edging up compared to sales, which could signal some difficulty collecting, although I doubt AMZN has trouble with collections, and the amount isn’t that great anyway.  Still, the trend isn’t really something an investor wants to see.

The fact that deferred tax assets keep staying relatively constant indicates the possibility that there is some earnings management going on in order to avoid taxes.  In fact, in one of the 10-ks there was a statement that the Deferred tax assets were nearly used up and that the company would likely have to pay taxes, which didn’t actually happen because, surprise, the company reported a net loss.

Because treasury stock is growing, it appears that AMZN is repurchasing shares, but it looks like it’s more to offset share based compensation than actually returning anything to stockholders.

So, I’m not really seeing much to get excited about here.  Maybe I missed something.  Next time, though, I’ll be looking at cash flows, and being the finance guy, that’s what I’m most interested in.  Thanks for reading!

Thursday, February 14, 2013

Using Twitter Followers as a Gauge for Brand Loyalty

The other day, I read this post on Seeking Alpha about Ford (F).  What really caught my attention was a discussion about the number of Twitter followers to gauge brand loyalty between Ford and General Motors (GM).  So, I decided to check for myself, and sure enough, Ford, with 191,028 followers easily topped GM with 84,588 followers.  There’s even an Experian Automotive press release that appears to back this up.

Of course, there’s just one, okay more than one, problem with this whole comparison.  Ford is actually a brand, whereas GM (or General Motors) isn’t.  So, in looking at these two we’re comparing apples to oranges.  Chevrolet is, though, and with 172,851 followers, it doesn’t appear that Ford has that much of an edge.  But wait, there’s more.

Chevrolet sold 4.95 million vehicles in 2012, while Ford sold 5.7 million.  Dividing unit sales by the number of followers results in 28.6 sales per follower for Chevrolet and 29.8 sales per follower for Ford.  The fact that these two numbers are fairly close makes me think there could be some kind of use for Twitter data. 

After a while, I realized that I was going to wind up being the victim of my own confirmation bias, since I was trying too hard to find a use for the Twitter data.  So, I looked at some other brands.  Walmart has only 310,463 followers, while Target has 527,185.  And perhaps most surprising, is Pepsi has 1,088,584 followers compared to Coca Cola with 673,177.

To make a long story short, the number of followers doesn’t really seem to be related to much of anything at all to do with the brands.  I think it’s just that people follow those companies from whose tweets they get the most utility.  I know this is what I do, and it doesn’t affect my brand loyalty at all.  Here’s an example, although it isn’t Twitter based.

I used to love watching those Mac versus PC commercials on television.  But the truth is, no matter how good I thought those commercials were, they never changed my mind about whether I would own a Mac or PC.  I had no interest in Macs, only in their commercials.  Incidentally, Apple doesn’t have an actual Apple Inc. Twitter account, so I couldn’t compare it to, say Samsung.  They do have some iTunes related accounts though.

So, it appears that there’s not really some easy way to use Twitter followers as a gauge for brand loyalty or much of anything else.  In the case of Walmart versus Target, it could be that Target has greater brand loyalty, but it doesn’t mean anything if more people shop at Walmart, at least so long as Walmart is cheaper.  It could mean that if Target could compete with Walmart pricing that Target would win more customers.  Or, it still could mean nothing.

In the case of Pepsi versus Coca Cola, I think it’s an indication of the marketing strategy that Pepsi has always used: an effort to appeal to the next generation of soft drink consumers.  Last time I looked, Twitter’s user base was skewed toward the young side.  Unfortunately, the strategy of winning over youth, in my opinion, can lead to alienation of the previous “Pepsi generation,” who will then decide that they want to “teach the world to sing.”

So, maybe someday we’ll find a use for Twitter data.  Until then, it seems that the only way to even be able to place much meaning in the data is by already knowing something about the business.  It turns out that stock and business analysis isn’t as easy as looking at a single number.

Wednesday, February 13, 2013

That's where we get equilibrium!

Japan Stocks Extend Gains on BOJ Decision, Iwata Comments
Expectations remain high for the Abe administration and for the BOJ. The stock rally won’t slow down.
Uh oh. That statement is the kind of thing that nearly always makes me expect a slow down.
Iwata, a former Bank of Japan deputy governor, said the Japanese currency at 90 to 100 yen to the greenback is a return to equilibrium.
Okay, so economics actually doesn't work at all.  Only central bank manipulation can bring about equilibrium.  I never had that much faith in economics anyway.

Tuesday, February 12, 2013

Yeah, we're not trying to devalue our currency

Yen near lows vs dollar, Asian shares ease in subdued trade

Apparently, it's okay to take steps to devalue your currency, so long as you don't say that's why you're doing it.  Sounds good to me.  Besides, what would the U.S. be able to say about it?

Saturday, February 9, 2013

When will it be time to panic?

Stocks end higher for sixth straight week, tech leads

Turns out, there was some actual positive news, and stocks ended higher again last week.  It's old news, though, meaning it doesn't reflect the tax hikes that took place in January.  Still, the relatively good earnings are a good sign, the trade deficit came out smaller than expected, China's growth bodes well for the global economy, and there are signs that employment may pick up. On the other hand, from a few days ago:

NYSE Margin Debt Rises To Fresh Five Year High As Short Interest Slide Continues

[margin debt]  rose for the fifth consecutive month, reaching $331 billion - the highest since February 2008, when the market was declining, and back to the levels from May 2007 when the market was ramping ever higher to its all time highs which would be hit 3 short months later, and just as the subprime bubble popped.
 I just have to wonder when panic is going to set in.  I think we'll see some more positive action for a while.  The market almost can't help but rise.  But, I really think that's going to change soon.

Amazon (AMZN) Part III

I’ve included a picture of the spreadsheet at the end of this post.  In that spreadsheet, I have separated out the shipping fees collected on purchases from revenue because AMZN doesn’t actually sell shipping.  Instead, I included the shipping fees collected as part of non-operating income.  The 10-k implied that there were some shipping costs associated with “net services sales,” but I haven’t seen a specific amount, and I’m thinking that it isn’t much, so I’m just going to assume that all of the shipping fees collected were included in “net product sales.”  As far as total net sales go, it won’t make any difference anyway.  The shipping fees paid by AMZN for receiving goods is included in inventory, which as far as I’m concerned is fine, and results in those costs being recognized at the same time as sales are recognized.  Outbound shipping charges when AMZN offers free shipping are also included in the cost of sales, but I have chosen to separate those charges out, and list them as a separate expense, near Marketing.  This makes sense to me because AMZN states in the 10-k that they view those costs as marketing costs.

I would like to have been able to do the same kind of thing with depreciation, but AMZN includes depreciation expense in whatever the corresponding operating expense category is, and I’ve not been able to find a breakdown of how much is included in what category.

After changing the Income Statement around a bit to suit me, i.e. taking shipping fees received out of revenues, AMZN’s operating income was negative in 2011 and 2012.  Perhaps I should have netted out the shipping, which would have resulted in the same operating income as before, but the way I see it, the money AMZN collects for shipping isn’t really part of their operations, as I said earlier, but the cost of shipping is since shipping has to be paid on most of the stuff that AMZN sells, and AMZN stated in their own 10-k that they view those charges as marketing expenses.

Sales growth has been admirable, to say the least.  I just read an article somewhere that expressed concern about the deceleration of sales growth, which made me laugh because I think it’s a little bit unreasonable to think that sales are going to increase at 40% for long, when total sales are over $60B.

I’ve also included a same-size income statement, which shows everything on the income statement as a percentage of sales.  As I noted in my last post, there doesn’t really look like any single item that is alarmingly out of control.  The problem looks more like nearly every operating cost is rising slightly faster than sales, and in retail, where the net profit margin is only around 3% or so, it doesn’t take much to fall from a profit to loss.  And as it turns out, AMZN’s profit margin was only 3.5% when they were profitable.  The good news here is that AMZN’s gross margin is actually expanding a bit, just not fast enough to make up for the increasing cost of just about everything else.

So, at this point in time, I’m feeling pretty negative about AMZN.  Profitability has never been exceptional; it is about comparable to most retailers.  I realize that in the end what matters are cash flows, and having not really looked at those yet, I’m just going to take a guess and say it looks good.  I don’t say that for any reason other than AMZN put their statement of cash flows first in their 10-k, which is a subtle way of saying “this is the most important thing.”  I don’t know why, I just tend to look at things in this order: Income statement, balance sheet, and then cash flows.

I’m sure I’m missing all sorts of stuff here, and would appreciate any comments anyone out there might have.  Sometime in the next few days, I hope to move on to AMZN’s balance sheet.

Friday, February 8, 2013

Amazon (AMZN) Part II

In part I, I demonstrated how little I know about Amazon, so now today, I’m going to start learning about the company.  I’ll start with taking a look at some of the key statistics available on Yahoo! Finance.

AMZN closed today, up $1.72 at 261.95.  Because the company showed a net loss last year, the TTM PE is not meaningful.  However, analysts project positive earnings for this year, so the forward PE is 71.88, and a 5 year expected PEG ratio of 4.20.  In my opinion, the PEG is pretty high, as is the forward PE ratio, both of which certainly indicate that this is not a value investment, which everybody already knows.  Like I said in the beginning, I don’t know a whole lot about AMZN, but that’s about to change.

Again, because AMZN is not profitable, the profitability ratios and effectiveness ratios aren’t terribly meaningful.  AMZN does have a current ratio of 1.12 so liquidity is okay.

The stock is up about 37% over the last 52 weeks, while the S&P 500 is up only about 12%.  Its beta is 0.88, which I actually expected to be higher.  Anyway, that’s enough of that.  I want to take a look at the annual report, and specifically the depreciation and shipping expenses I mentioned yesterday.

As far as depreciation goes, I don’t really see that it has much at all to do with land and buildings, like I was under the impression they were.  It’s mostly for “internal use software and equipment,” which constitute about 2/3 of the gross assets.  According to the 10-k, these items are depreciated straight-line over the useful lives of the assets, so I don’t see why anyone would expect depreciation to decline substantially any time soon, since that statement implies that the assets will need to be replaced once they have been depreciated, although that may not happen.  There is, though, a small note that says:

“In December 2012, we acquired our corporate headquarters for $1.2 billion consisting of land and 11 buildings that were previously accounted for as financing leases. The acquired building assets will be depreciated over their estimated useful lives of 40 years. We also acquired three city blocks of land for the expansion of our corporate headquarters for approximately $210 million.”

So, it looks as if there’s going to be significant capex (and depreciation) for the corporate headquarters in the future.  Also, at only $2.1B (I say only when compared to over $60B in sales) I have to say that I don’t buy the depreciation explanation.

Looking at shipping costs now, the first thing I noticed is that when a customer does pay for shipping, that’s added to revenue.  I don’t think it really should be, but what do I know?  Anyway, the breakdown on shipping costs shows a net expense of about $2.8B and as a percentage of sales that cost is declining.  So again, this doesn’t really appear to be a major problem area.

In fact, AMZN’s margins have shrunk a little, and scanning through the notes it appears that this is due to expanding payrolls, which isn’t surprising considering the increasing sales.  Of course, these expenses can’t keep growing at a faster rate than sales.  These appear to be the biggest drivers behind AMZN’s lower operating profit in 2012.

Some fairly substantial differences between 2011 and 2012 look more like non-operating expenses, like interest.  There was also a substantial increase in the provision for income taxes, as well as a substantial loss from AMZN’s investment in LivingSocial.

At this point, it looks like there really isn’t a single issue that can account for why AMZN is unprofitable, and I certainly haven't found any reason to think that anything is going to get any better.  So, over the next few days, I’ll put together a spreadsheet and dig a little deeper into the MD&A and notes to see if I can shed any more light on what’s going on with AMZN.