Is Jeff Bezos Killing Capitalism?

Lenin and Bezos

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A version of this article appeared on TheStreet)

My guess is that if you asked people to describe the face of the individual most tied to the idea of destroying capitalism you would evoke images of Marx, Lenin or Castro, men of distinctive features and great bluster who made no secret of their disdain.

Ask me and I see a man who is softly spoken, clean shaved, spares the bluster, lacks distinct or memorable features, although possesses a distinctive laugh and has greatly benefited from the system he is destroying. I see Jeff Bezos as the anti-capitalist who is methodically destroying the foundations that allowed the United States to thrive.

First, let’s acknowledge that Amazon (AMZN) is an American success story. Financed by family funds and embracing technology as none had before, it survived an era that many did not and turned a concept into reality that has subsumed retailing, forcing retailers to create online shopping strategies.

Amazon will report its earnings on January 30, 2014. While I don’t invest with items such as P/E, in mind, I know enough that Amazon’s P/E of 1414 puts to rest the derisive comments about it being a non-profit. But I also know that no one believes in the axiom “we make it up in volume” more than Amazon, which had a 0.19% profit margin last year, compared to a sector average of 9.5%. Of 20 national retailers, only four had profit margins lower than Amazon; JC Penney, Sears Holdings, Best Buy and Aeropostale.

And that is precisely the problem. That is how Amazon is killing capitalism in its methodic march to eliminate competition, beginning with the already wounded. As the saying goes, “the market can stay irrational longer than you can stay solvent.” Bezos, though, isn’t being irrational, as demonstrated by competitors that are slowly melting into irrelevancy. With size comes power, in this case pricing power, which to a degree has been supported by an asymmetric application of sales tax collection requirements. In essence, indirect government support undermining existing capitalist structure in support of a venture evolving toward a monopolistic or market controlling position.

At a time when consumer discretionary spending doesn’t appear to be consistent with an expanding and improving economy price sensitivity remains an important motivator and Amazon maintains its advantage by aggressive pricing at the expense of margins. With over $70 billion in revenues it trails Wal-Mart, but exceeds the combined revenues of Sears, JC Penney and Kohls, while matching Target’s revenues. The latter two companies have scarce cushion in their profit and operating margins to withstand further erosion by an energized Amazon, ready to continue decreasing its margins, as it has done over the past 3 years.

AMZN Profit Margin (Quarterly) Chart
AMZN Profit Margin (Quarterly) data by YCharts

Don’t get me wrong. I am a capitalist through and through and believe that competition is what drives us forward, while other systems are left to the ash heaps of history along with the dodo. The same fate should befall businesses that simply can’t compete on the basis of that blend of price and quality that appeals to varying segments of the population.

Competing against Amazon, however, is somewhat like the Aztecs being faced with gunpowder propelled projectiles.

Admittedly, I shop Amazon and will probably continue doing so even as it increasingly loses the sales tax advantage it held over brick and mortar retailers. However, it is now that next phase, as that artificial pricing advantage disappears, that Amazon can only do one thing to maintain its position. It has to further reduce its profit margins.

While Bezos may not be acting irrationally, investors may be accused of doing so, particularly in light of margins. Most any other retailing CEO would have been shown the door with performance such as Amazon delivers. However, it’s share price that talks and you can’t argue with a P/E of 1414, except that it’s 1414. The realization that profits and return on equity are important concepts is currently suspended as there is implicit buy-in from investors that the strategy of driving the competition out of business is a sound one in anticipation of even greater share appreciation rewards. Clearly the vision of near monopolistic existence has its perceived reward.

While Amazon may not solely be to blame for the woes at JC Penney (JCP) and Sears (SHLD), it may not be entirely coincidental that JC Penney and Sears profit woes began in earnest at the time that Amazon’s own profit margins began decreasing in 2011. Amazon is undoubtedly a contributor not just to those growing losses, but also to the degradation of the shopping experience as so graphically illustrated in a recent series of articles by Rocco Pendola. When you can no longer compete on the basis of price and are unable to generate sales revenues and cash flows, the only recourse remaining is to cut costs.

Fewer employees, bare shelves and lack of facilities maintenance are the natural next stages. As predictable as the “Five Stages of Grief,” except there may be no end stage healthy resolution in sight.

While Bezos is on a path that endangers capitalism, his continued success may really jeopardize Amazon’s own shareholders whose fortunes are predicated on a model that history has shown can’t be sustained. Eventually, profits and not promises, are the engine that drive companies and their stocks. Sooner or later, cash flow is no substitute for profits.

If you want to see capitalism saved, the answer is a plummeting Amazon share price and subsequent investor pressure to increase profit margins, restoring balance to the retail sector and giving the likes of JC Penney and Sears the ability to dodge those projectiles.

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Daily Market Update – January 17, 2014

 

  

(see all trades this option cycle)

 

Daily Market Update – January 17, 2014 (9:00 AM)

The Week in Review will be posted by 7:00 PM tonight and the Week in Review will be published by Monday 12 Noon.

 

Today’s possible trades or outcomes include:

Assignment: MDLZ, MOS, WY

Rollover:   ANF*, CPB, CY, DRI, FAST, LB, LXK, RIG, PM, YUM

Expiration: AGQ, GPS, WFM

* ANF puts are at $35 strike and are currently expected to expire. Otherwise, will look for equivalent opportunity to rollover those puts, preferably to a lower strike price again.

Trades, if any, will be attempted to be made prior to 3:30 PM EST.

 

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 Access prior Daily Market Updates by clicking here

 OTP Sector Distribution* as of January 16, 2014

 * Assumes equal number of shares in positions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Posting of trades is not a recommendation to execute trades

 

Monday through Thursday? See “Daily Market Update” with first edition published by 12 Noon and Closing Update published by 4:30 PM

Friday? See Week in Review for summary statistics and performance

Sunday? See Weekend Update for potential stock choices for coming week

Any day? See Performance for open and closed positions

Subscribers may see  ROI statistics  on all new, existing and closed positions on a daily updated basis

 

 

 

 

 

 

 

 

 

 

 

See all Trade Alerts for this monthly option cycle

  
 

   

Daily Market Update – January 16, 2014 (Close)

 

  

(see all trades this option cycle)

 

Daily Market Update – January 16, 2014 (Close)

After some nice, but expected, earnings from JP Morgan, Wells Fargo and Bank of America, comes Citigroup to put a damper on the whole thing.

Morgan Stanley reports tomorrow, but isn’t likely to follow along the same path, although it, too, is an example of a high beta big money center bank and could easily have a magnified response to its earnings report. It certainly has seen its share of share gains and has something to give back in the event of disappointment, but it has an essentially different business model from some other sector mates.

At the very least it did get caught up in today’s Citigroup induced downdraft, but not enough to make it an appealing earnings related trade.

Magnified responses may be a theme this earnings season as fundamentals may get more scrutiny and there are lots of stocks that have enjoyed significant climbs in the past 15 months, as the market has carried many along for the ride.

Goldman Sachs, which used to be a favorite of mine, also reported earnings this morning. It usually makes large moves in the days before earnings and then immediately upon the news, but this time was different. It essentially did nothing, but it was mixed news that greeted the street, so perhaps a flat reaction could be justified and even be interpreted as a positive sign of a discerning, rather than emotional market.

The high beta names are going to be especially vulnerable, as Best Buy demonstrated this morning, giving up about 9 months worth of gains in the pre-market.

Lately, both the after-hours and pre-open markets have underestimated the extent of the damage, whereas in the past it was often a place to pick up relative bargains in the aftermath of people over-reacting to bad news and having price moves magnified by low volume and wider than normal spreads.

Seeing some of these big drops it is certainly tempting to want to pick up shares, but that’s where the question of “value trap versus value” enters the picture. For many high beta stocks, especially those that have never demonstrated the ability to recover from a significant price decline, they really need to prove that the fabled story isn’t finally over.

Next week, besides being a holiday shortened trading week is one that has little meaningful economic news scheduled to be released, but will be a busy one for earnings and is more likely to give us some information regarding the economy than the big money center banks are able to do.

Hopefully the next two trading days will allow a good mix of assignments and rollovers, as there may be plenty of opportunity ahead to start thinking about whether some new lower stock prices represent value or trap.

The challenge, as always when a monthly cycle approaches its end, is to get out of the process intact and be able to move forward. With more and more stocks now beginning to offer expanded weekly options there is less need to be so heavily loaded at a monthly option expiration date, such as this Friday.

Instead, the monthly options may wind up being more strategic choices to allow the cushion of time when earnings are due to be announced or when trying to capture a dividend.

Ideally, I would like to see a fairly even distribution of expiration dates between any given day and the coming monthly expiration, but that still proves to be a challenge that is in part dictated by such things as availability and the timing of earnings and dividends, but it would be a nice way to spread risk out in a market that may be prone to sudden moves.

Hopefully, those sudden moves will wait a bit. For now, steady seems to be a nice way to go.

 

  

  

 

   

 Access prior Daily Market Updates by clicking here

 OTP Sector Distribution* as of January 16, 2014

 * Assumes equal number of shares in positions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Posting of trades is not a recommendation to execute trades

 

Monday through Thursday? See “Daily Market Update” with first edition published by 12 Noon and Closing Update published by 4:30 PM

Friday? See Week in Review for summary statistics and performance

Sunday? See Weekend Update for potential stock choices for coming week

Any day? See Performance for open and closed positions

Subscribers may see  ROI statistics  on all new, existing and closed positions on a daily updated basis

 

 

 

 

 

 

 

 

 

 

 

See all Trade Alerts for this monthly option cycle

  
 

   

Daily Market Update – January 16, 2014

 

  

(see all trades this option cycle)

 

Daily Market Update – January 16, 2014 (9:30 AM)

After some nice, but expected, earnings from JP Morgan, Wells Fargo and Bank of America, comes Citigroup to put a damper on the whole thing.

Morgan Stanley reports tomorrow, but isn’t likely to follow along the same path, although it, too, is an example of a high beta big money center bank and could easily have a magnified response to its earnings report. It certainly has seen its share of share gains and has something to give back in the event of disappointment, but it has an essentially different business model from some other sector mates.

Magnified responses may be a theme this earnings season as fundamentals may get more scrutiny and there are lots of stocks that have enjoyed significant climbs in the past 15 months, as the market has carried many along for the ride.

Goldman Sachs, which used to be a favorite of mine, also reported earnings this morning. It usually makes large moves in the days before earnings and then immediately upon the news, but this time was different. It essentially did nothing, but it was mixed news that greeted the street, so perhaps a flat reaction could be justified and even be interpreted as a positive sign of a discerning, rather than emotional market.

The high beta names are going to be especially vulnerable, as Best Buy demonstrated this morning, giving up about 9 months worth of gains in the pre-market.

Lately, both the after-hours and pre-open markets have underestimated the extent of the damage, whereas in the past it was often a place to pick up relative bargains in the aftermath of people over-reacting to bad news and having price moves magnified by low volume and wider than normal spreads.

Seeing some of these big drops it is certainly tempting to want to pick up shares, but that’s where the question of “value trap versus value” enters the picture. For many high beta stocks, especially those that have never demonstrated the ability to recover from a significant price decline, they really need to prove that the fabled story isn’t finally over.

Next week, besides being a holiday shortened trading week is one that has little meaningful economic news scheduled to be released, but will be a busy one for earnings and is more likely to give us some information regarding the economy than the big money center banks are able to do.

Hopefully the next two trading days will allow a good mix of assignments and rollovers, as there may be plenty of opportunity ahead to start thinking about whether some new lower stock prices represent value or trap.

The challenge, as always when a monthly cycle approaches its end, is to get out of the process intact and be able to move forward. With more and more stocks now beginning to offer expanded weekly options there is less need to be so heavily loaded at a monthly option expiration date, such as this Friday.

Instead, the monthly options may wind up being more strategic choices to allow the cushion of time when earnings are due to be announced or when trying to capture a dividend.

Ideally, I would like to see a fairly even distribution of expiration dates between any given day and the coming monthly expiration, but that still proves to be a challenge that is in part dictated by such things as availability and the timing of earnings and dividends, but it would be a nice way to spread risk out in a market that may be prone to sudden moves.

Hopefully, those sudden moves will wait a bit. For now, steady seems to be a nice way to go.

 

 

 

.

 

 

 

 

  

 

   

 Access prior Daily Market Updates by clicking here

 OTP Sector Distribution* as of January 15, 2014

 * Assumes equal number of shares in positions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Posting of trades is not a recommendation to execute trades

 

Monday through Thursday? See “Daily Market Update” with first edition published by 12 Noon and Closing Update published by 4:30 PM

Friday? See Week in Review for summary statistics and performance

Sunday? See Weekend Update for potential stock choices for coming week

Any day? See Performance for open and closed positions

Subscribers may see  ROI statistics  on all new, existing and closed positions on a daily updated basis

 

 

 

 

 

 

 

 

 

 

 

See all Trade Alerts for this monthly option cycle