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.

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 I

I've been looking around, mostly on Seeking Alpha, at some of the analysis of Amazon, and, of course, there are some people that say it's a buy, and others that say it's a sucker bet.  So, while I don't generally get terribly interested in unprofitable businesses, I decided that there was enough interest in it to start a series of posts analyzing and valuing Amazon.

This first post is really just to show anybody reading this how little I actually know about Amazon.  Most of what I think I know is rumor and speculation.  What I do actually know is that last year Amazon sold a whopping $60B or so of stuff, but managed to lose money.  Call me stupid, but that doesn't sound great to me.

The bull case seems to be centered around the idea that Amazon is doing a lot of capital spending, and that it's the huge depreciation expenses that are eating up the profits.  This is expected to change.  I can understand that, but what I don't get is that most of their capex (at least as far as I'm aware at this time) is on building new fulfillment centers; you know, buildings that are depreciated over about 30 years.  I'm not sure how that's going to work out to lower depreciation expenses any time soon, so I'll have to check that whole depreciation thing out.

One of the bear cases talked about competition with bricks and mortar retailers.  I think Best Buy was one that was offering a price matching deal.  In order to be competitive then, Amazon was having to offer free shipping on increasing numbers of orders, and the total bill for that was in the billions of dollars.  Again, I don't know the numbers, but I'll check on it.

Speaking of competition, while the bears are acknowledging competition for Amazon, at least some bulls seem to think that Amazon has no competition.  Of course, the do have competition.  And they actually have a competitive disadvantage to bricks and mortar stores in some ways.  I watch people in stores all the time, and it's clear, people like to be able to touch stuff before they buy it.  Of course, you could always go to the store to touch the stuff, then go home and order it on Amazon, but then, that brings up another weakness.  I know that once I've touched something and have decided I want it, I don't want to go home, find it on Amazon, order it, and wait a few days to get it.  And I don't want to pay extra for fast delivery.  So, I, at least, am more likely to buy whatever it is from the store.

Building all these new fulfillment centers also brings to mind one of the advantages that Amazon has, or did have until they started building a lot, which is not having buildings all over the place.  But, there is good reason for it: they can speed up deliveries and, perhaps reduce shipping costs somewhat.  Still, that used to be the big thing about Amazon; it didn't have the expense of buildings all across the country.

As you can see, I don't know much at all about Amazon, but that will change over the next little bit, and I'll keep posting things as I dig through the news and annual reports, eventually coming up with what I hope will be a compelling story about the company; whether it is a bull or bear story, we'll just have to wait and see. 

Retail sales for January

Higher Payroll Tax Pinches Those With Least to Spare

Chain-store sales have weakened over the course of the month. And two surveys released last week suggested that consumer confidence was eroding, especially among lower-income Americans.

Was this supposed to be surprising?  It isn't really.  Cut an individuals paycheck by 2% when that person basically lives paycheck to paycheck, and there really isn't any choice for that person other than cutting spending.

Retailing analysts and economists say high-end earners will largely be spared.

Do we really need to hear from retail analysts and economists to know this?  Yes, there is a cap on Social Security taxes, so for those that make a lot of money, the increase in this tax will hardly be noticeable.

“There is something going on,” said Chris G. Christopher Jr., senior principal economist at IHS Global Insight. “The payroll tax seems to be cutting into things.”

Ya think?

“The food that has a lot of fat and food coloring is cheaper,” she said. “It’s a lot more expensive to eat healthier. But now I’m actually looking at the price tag on things rather than grabbing them.”

Careful, now... the government may decide to fix that by outlawing cheaper food, you know, for your own protection.

This isn't surprising at all.  The questions that should be on everyone's mind is how this might affect the discussions on spending cuts, and whether the Fed's QE will be enough to buoy stock prices.

Not surprisingly, as I'm writing this stocks are down a bit, while bond yields are also down, indicating some movement back to safety.

Of course, there is also another story that seems to conflict with the above story:
Jobless claims point to healing in labor market

While the headline is about the labor market, and some promising signs there, further in, the article starts talking about retail sales.

Consumer spending has looked more robust, and many U.S. retailers on Thursday reported strong sales in January.

Well, maybe not a real conflict... it's possible that higher earners have picked-up the spending since the first article specifically addressed lower wage earners. Maybe, though, this is a temporary thing brought on by the surge in dividend income from December, when a lot of companies hurried to make dividend payments early to avoid the higher taxes.

Well, no matter.  I don't see anything to celebrate about the economy.  I do think we are heading toward recession, if we're not already there.

Bill Gross needs a raise, I think

Stock Rally Not Sucking Cash Out of Bonds: Gross

Gross also insisted there's money to be made in bonds, despite the record low yields caused by the Federal Reserve's near zero interest rate policy.

Well, I'm not "the bond guy," but I did say that yesterday.  In fact, with the Fed's near zero interest rate policy, there's a lot of money to be made trading bonds.  But, there's a lot of risk there too.

"When observers talk about the stock market being a market of stocks, the bond market is a market of bonds," he said.

I'm actually at a loss for words here.  Really.

I'm not humbled

Dow’s Run to 14,000 Humbles the Worriers — For Now

I'm a worrier, but I'm not feeling terribly humbled.  At this point, everyone should be worried, but instead the exchanges cheer as they watch the Fed's cash push the indexes to multi-year highs, then slap each other on the back as if they're some kind of geniuses.  Of course, now the big back slapping show is drawing in more retail investor money, in part because there just aren't any returns anywhere else, so perhaps there is some reason to celebrate.

"So far in 2013, the "risk" has resided in over-thinking the situation by focusing on the potential pitfalls and complications that might arise from a slow-growth economy, peak corporate profit margins, policy dysfunction and stock prices that had already doubled since the March 2009 market bottom."

Over-thinking?  No, the risk is under-thinking, a phenomenon that is occurring with greater and greater frequency.  The analysis of the market is becoming something like "It went up, therefore it will go up."  The kind of "thinking" that results, eventually, in crashes.  In the meantime, though, this "thinking" looks like sheer genius.

 The rest of the above-linked article proceeds to analyze the current market in terms of historical markets.  But today's stock market is not really comparable to past stock markets, so, it's really not a good idea at all to compare this year, which sported a great January, to past years that also started with a great January.  This time is different, although we still really can't say whether this year will end up all that different.  The end result could be the same, but for significantly different reasons.

Then again, the assumption that this year will somehow resemble past years could lead to a significant, bad outcome, and that's what I'm worried about.  The days of "buy and hold" investing really are over.  Of course, if you've paid much attention to the stock market over the last decade or so, you would already know this.

So, how can we avoid being "humbled" in the future?  By simply admitting that we don't really know what's going to happen, or at least admitting we don't know when it will happen, and act accordingly.  Diversify.  Keep some cash.  Buy some whiskey.  Learn to live sustainably.  And, recognize that the more the stock market went up yesterday, the more ready you need to be to pull the trigger and sell tomorrow.

Gross states the obvious

Pimco's Gross Calls US Economy 'Supernova' on Path to Extinction

The end of credit markets will begin, said Gross, when assets offer too much risk and too little return, causing an investor exodus into alternatives such as cash or real assets.

I love how these guys state the obvious.  Anyway, according to my quick estimate, the S&P 500 is priced with slightly over a 4% risk premium.  This indicates that investors think there is little risk at all in equities, and the same probably holds true for credit.  But the lower the risk premium gets, the greater the actual risk.  So, the longer this apparent bull market continues, the riskier it is getting but with the Fed pumping more cash in, I'm still waiting it out.  It's still possible to have a good outcome, although I actually do think that's not very likely in bonds, and maybe not in stocks either.

I have to wonder whether the Fed has actually averted an actual depression, or if it has just delayed the inevitable.  I think it depends on how the Fed handles things going forward... and how lucky we are.

Why do they pay these guys so much?

The Fed’s Actions Are Counterproductive: Jim Grant

 

Okay, I don’t know how much this guy gets paid to do his job but I’m sure it’s more than I get paid.  I can tell by his tie.  Anyway, he thinks that the Fed is being counterproductive.  I think he meant ineffective, but counterproductive probably makes a better headline.  Whether the Fed is being ineffective, we have to understand where we would be if the Fed had not taken the actions that it has.

So, let’s think about this for a minute.  First, the Fed has dropped short-term rates to as low as they can go.  The theory is that other rates will follow the short-term rates lower; businesses will borrow to increase investment spending, followed by increasing hiring and decreasing unemployment, which is then followed by increasing consumption spending.  It didn’t really work out that way.  While longer term rates did fall, it wasn’t enough to really entice businesses to invest because they didn’t see an increase in demand coming.  This could be explained, at least in part, by falling home prices which resulted in a large decrease in wealth among consumers.

Lower mortgage rates would normally lead to increased demand for real estate, but the Fed apparently believed that the rates weren’t low enough to drive enough demand for housing to drive housing prices higher, so they decided to take a direct approach and purchase MBSs to push mortgage rates lower.  But, the action is limited again by market factors, which includes the rates on long bonds, which effectively put a floor on how low mortgage rates can fall.  So, the Fed decided to purchase long bonds to drop the yields on those, which would allow mortgage rates to fall a little more.  It certainly seems as if that has happened.  Home prices, at least on average, are rising.

But the problem with mortgage rates is that, if the Fed actually does increase home buying by pushing rates down, the increase in demand for new mortgages will push rates back up, so the effect on real estate prices is probably short-lived.

In the meantime, the Fed’s actions are pushing investment money into higher risk assets because the Fed has effectively crowded investors out of low risk investments.  This is good for the stock market, as well as lousy analysts because when the stock market rallies, it’s easy to look like a genius.  But I digress.

There actually is another reason for the flight to high risk investments - the dividend yields on a lot of stocks, which are higher than bank interest and taxable at a lower rate than bank interest.  And why are dividend yields so high?  Because businesses aren’t investing in capital, like they normally would be because they don’t expect the demand to be there.

So, all that’s happening right now is there is a lot of extra money in the financial markets, and that’s where it will stay until everyone realizes that even stocks aren’t offering a reasonable return.  But what happens then?  The big question is what people will do with their money when every investment is a bad investment.

Optimism

Everybody seems to be getting on board with making optimistic predictions for economic growth this year, but I think it's still a little early to be jumping on the bandwagon.  The data that I'm seeing is, well, old data that doesn't reflect the tax increases that went into effect earlier this year.  Still, we do have the Fed pumping more cash into the financial markets, so I don't see much at all to worry about at this point, unless the reports of planned increased hiring come to fruition, in which case, we may see inflation begin to tick up and the Fed put an end to the easy money available in financial markets.

Currency

Why America's Top Detergent Is a Black Market Hit
And today, PG announced earnings that beat expectations.  Looks like there are a lot of people stocking up on "currency."

1600?

Amazingly, or perhaps not so much, analysts seem to be edging up their forecasts for the S&P for the year.  So far, the only rationale for this upward revision appears to be because the S&P 500 is up.  It goes something like this: "Well, we broke through the psychologically important 1500 level, so, outside of that pesky fiscal cliff thing in March, it's pretty much clear sailing to 1600."  I'm really expecting something much lower than that, but then, I usually underestimate the irrationality of markets, so we'll see.  I actually think that once we start to see the effect of the tax increases in the economy, we'll see a lot of analysts reversing their optimism.

A little of both

Gary Shilling: Cash Is King, Stocks Are Still Doomed

Say this stuff often enough, and sure enough, you'll be right.  In this case, though, look at the returns you would have missed out on.  Still, I actually think it may be time to start moving more toward cash, because, yes, the crash is coming.  We just can't be sure when. Of course, I wouldn't take this Mr. Shilling's advice on bonds either, because the same holds true with them.  Cash or whiskey.  Whiskey if you expect inflation, and cash if you expect deflation, so maybe a little of both.