Global Market Comments
August 15, 2019
Fiat Lux
EMERGENCY NOTICE ON MACY’S PUT OPTIONS CALLED AWAY
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Global Market Comments
August 15, 2019
Fiat Lux
SPECIAL AMAZON ISSUE
Featured Trade:
(WHY I’M LOOKING AT AMAZON), (AMZN)
There’s noting like buying quality at a discount, and there is no better opportunity to do so now than to buy Amazon (AMZN). I believe there is a good chance that this creation of Jeff Bezos will see its shares double over the next five years.
Amazon is, in effect, taking over the world.
Jeff Bezos, born Jeff Jorgensen, is the son of an itinerant alcoholic circus clown and a low-level secretary in Albuquerque, New Mexico. When he was three, his father abandoned the family. His mother remarried a Cuban refugee, Miguel Bezos, who eventually became a chemical engineer for Exxon.
I have known Jeff Bezos for so long he had hair when we first met in the 1980s. Not much though even in those early days. He was a quantitative researcher in the bond department at Morgan Stanley, and I was the head of international trading.
Bezos was then recruited by the cutting-edge quantitative hedge fund, D.E. Shaw, which was making fortunes at the time, but nobody knew how. When I heard in 1994 that he left his certain success there to start an online bookstore, I thought he’d suffered a nervous breakdown, common in our industry.
Bezos incorporated his company in Washington state later that year, initially calling it “Cadabra” and then “Relentess.com.” He finally chose “Amazon” as the first interesting word that appeared in the dictionary, suggesting a river of endless supply. When I learned that Bezos would call his start-up “Amazon”, I thought he’d gone completely nuts.
Bezos funded his start-up with a $300,000 investment from his parents who he promised stood a 50% chance of losing their entire investment. But then his parents had already spent a lifetime running Bezos through a series of programs for gifted children, so they had the necessary confidence.
It was a classic garage start-up with three employees based in scenic Bellevue, Washington. The hours were long with all of the initial effort going into programming the initial site. To save money, Bezos bought second-hand pine doors, which stood in for desks.
Bezos initially considered 20 different industries to disrupt, including CDs and computer software. He quickly concluded that books were the ripest for disruption, as they were cheap, globally traded, and offered millions of titles.
When Amazon.com was finally launched in 1995, the day was spent fixing software bugs on the site, and the night wrapping and shipping the 50 or so orders a day. Growth was hyperbolic from the get go, with sales reaching $20,000 a week by the end of the second month.
An early problem was obtaining supplies of books when wholesalers refused to offer him credit or deliver books on time. Eventually he would ask suppliers to keep a copy of every book in existence at their own expense, which could ship within 24 hours.
Venture capital rounds followed, eventually raising $200 million. Early participants all became billionaires, gaining returns or 10,000-fold or more, including his trusting parents.
Bezos put the money to work, launching into a hiring binge of epic proportions. “Send us your freaks,” Bezos told the recruiting agencies, looking for the tattooed and the heavily pierced who were willing to work in shipping late at night for low wages. Keeping costs rock bottom was always an essential part of the Amazon formula.
Bezos used his new capital to raid Walmart (WMT) for its senior distribution staff, for which it was later sued.
Amazon rode on the coattails of the Dotcom Boom to go public on NASDAQ on May 15, 1997 at $18 a share. The shares quickly rocketed to an astonishing $105, and in 1999 Jeff Bezos became Time magazine’s “Man of the Year.”
Unfortunately, the company committed many of the mistakes common to inexperienced managements with too much cash on their hands. It blew $200 million on acquisitions that, for the most part, failed. Those include such losers as Pets.com and Drugstore.com. But Bezos’s philosophy has always been to try everything and fail them quickly, thus enabling Amazon to evolve 100 times faster than any other.
Amazon went into the Dotcom crash with tons of money on its hands, thus enabling it to survive the long funding drought that followed. Thousands of other competitors failed. Amazon shares plunged to $5.
But the company kept on making money. Sales soared by 50% a month, eventually topping $1 billion by 2001. The media noticed Wall Street took note. The company moved from the garage to a warehouse to a decrepit office building in downtown Seattle.
Amazon moved beyond books to compact disc sales in 1999. Electronics and toys followed. At its New York toy announcement, Bezos realized that the company actually had no toys on hand. So, he ordered an employee to max out his credit card cleaning out the local Hammacher Schlemmer just to obtain some convincing props.
A pattern emerged. As Bezos entered a new industry he originally offered to run the online commerce for the leading firm. This happened with Circuit City, Borders, and Toys “R” Us. The firms then offered to take over Amazon, but Bezos wasn’t selling.
In the end, Amazon came to dominate every field it entered. Please note that all three of the abovementioned firms no longer exist, thanks to extreme price competition from Amazon.
Amazon had a great subsidy in the early years as it did not charge state sales tax. As of 2011, it only charged sales tax in five states. That game is now over, with Amazon now collecting sales taxes in all 45 states that have them.
Amazon Web Services originally started out to manage the firm’s own website. It has since grown into a major profit center, with $17.4 billion in net revenues in 2017. Full disclosure: Mad Hedge Fund Trader is a customer.
Amazon entered the hardware business with the launch of its e-reader Kindle in 2007, which sold $5 billion worth in its first year. The Amazon Echo smart speaker followed in 2015 and boasts 71.9% market share. This is despite news stories that it records family conversations and randomly laughs.
Amazon Studios started in 2010, run by a former Disney executive, pumping out a series of high-grade film productions. In 2017, it became the first streaming studio to win an Oscar with Manchester by the Sea with Jeff Bezos visibly in the audience at the Hollywood awards ceremony.
Its acquisitions policy also became much more astute, picking up audio book company Audible.com, shoe seller Zappos, Whole Foods, and most recently PillPack. Since its inception, Amazon has purchased more than 86 outside companies.
Sometimes, Amazon’s acquisition tactics are so predatory they would make John D. Rockefeller blush. It decided to get into the discount diaper business in 2010, and offered to buy Diapers.com, which was doing business under the name of “Quidsi.” The company refused, so Amazon began offering its own diapers for sale 30% cheaper for a loss. Diapers.com was driven to the wall and caved, selling out for $545 million. Diaper prices then popped back up to their original level.
Welcome to online commerce.
At the end of 2018, Amazon boasted some 306,000 employees worldwide. In fact, it has been the largest single job creator in the United States for the past decade. Also, this year it disclosed the number of Amazon Prime members at 100 million, then raised the price from $80 to $100, thus creating an instant $2 billion in profit.
The company’s ability to instantly create profit like this is breathtaking. And this will make you cry. In 2016, Amazon made $2.4 billion from Amazon gift cards left unredeemed!
In 2018, Amazon net revenues totaled an unbelievable $232 billion, generating an operating profit of $12 billion, most of which was earned from its AWS cloud services. It is currently capturing about 50% of all new online sales.
So, what’s on the menu for Amazon? There is a lot of new ground to pioneer.
1) Health Care is the big one, accounting for $3 trillion, or 17% of U.S. GDP, but where Amazon has just scratched the surface. Its recent $1 billion purchase of PillPack signals a new focus on the area. Who knows? The hyper-competition Bezos always brings to a new market would solve the American health care crisis, which is largely cost-driven. Bezos can oust middle men like no one else.
2) Food is the great untouched market for online commerce, which accounts for 20% of total U.S. retail spending, but sees only 2% take place online. Essentially this is a distribution problem, and you have to accomplish this within the prevailing subterranean 1% profit margins in the industry. Books don’t need to be frozen or shipped fresh. Wal-Mart (WMT) will be target No. 1, which currently gets 56% of its sales from groceries. Amazon took a leap up the learnings curve with its $13.7 billion purchase of Whole Foods (WFC) in 2017. What will follow will be interesting.
3) Banking is another ripe area for “Amazonification,” where excessive fees are rampant. It would be easy for the company to accelerate the process through buying a major bank that already had licenses in all 50 states. Amazon is already working the credit card angle.
4) Overnight Delivery is a natural, as Amazon is already the largest shipper in the U.S., sending out more than 1 million packages a day. The company has a nascent effort here, already acquiring several aircraft to cover its most heavily trafficked routes. Expect FedEx (FDX), UPS (UPS), DHL, and the United States Post Office to get severely disrupted.
5) Amazon is about to surpass Walmart this year as the largest clothing retailer. The company has already launched 76 private labels, with half of them in the fashion area such as Clifton Heritage (color and printed shirts), Buttoned Down (100% cotton shirts) and Goodthreads (casual shirts) as well as subscription services for all of the above.
6) Furniture is currently the fastest growing category at Amazon. Customers can use an Amazon tool to design virtual rooms to see where new items and colors will fit best.
7) Event Ticketing firms like StubHub and Ticketmaster are among the most despised companies in the U.S., so they are great disruption candidates. Amazon has already started in the U.K., and a takeover of one of the above would ease its entry into the U.S.
If only SOME of these new business ventures succeed, they have the potential to DOUBLE Amazon’s shares from current levels, taking its market capitalization up to $1.8 trillion. Amazon will easily win the race to become the first $1 trillion company. Perhaps this explains why institutional investors continue to pour into the shares, despite being up a torrid 83% from the February lows.
Whatever happened to Bezos’s real father, Ted Jorgensen? He was discovered by an enterprising journalist in 2012 running a bicycle shop in Glendale, Arizona. He had long ago sobered up and remarried. He had no idea who Jeff Bezos was. Ted Jorgensen died in 2015. Bezos never took the time to meet him. Too busy running Amazon, I guess. Worth $160 billion, Bezos is now the richest man in the world.
Global Market Comments
August 8, 2019
Fiat Lux
Featured Trade:
(HOW TO KNOW IF THE BULL MARKET IS WELL AND TRULY OVER),
(THE TALE OF TWO ECONOMIES),
(FB), (AAPL), (AMZN)
I’m looking at my screens this morning and virtually every stock sold short by the Dairy of a Mad Hedge Fund Trader cratered to new six-month lows.
Call it lucky, call it fortuitous. All I know is that the harder I work the luckier I get.
If you are in the right economy, that of the future, you are having another spectacular year. If you aren’t, you are probably posting horrific losses for 2019. Call it the “Tale of two Economies.”
I suspected that this was setting up over the last couple of weeks. No matter how much bad news and uncertainty dumped on these companies, the shares absolutely refused to go down. Instead, they flat lined just below their 2019 highs. It was a market begging for a selloff.
When the Facebook (FB) hacking scandal hit, investors were ringing their hands about the potential demise of Mark Zuckerberg’s vaunted business model and the shares plunged to $123.
However, while analysts were making these dire productions, I knew that Facebook itself was signing a long-term lease for a brand new 46-story skyscraper in downtown San Francisco just to house its Instagram operations.
Months later, and the company that misused Facebook’s data, Steve Bannon’s Cambridge Analytica, is bankrupt, and (FB) is trading at $185, a new high. Facebook was right, and the Cassandras were wrong.
Amazon was given up for dead during the February melt down as the shares withered from a daily onslaught of presidential attacks threatening antitrust action. Today, the shares are up a mind-blowing 38% above those lows.
And when Apple announced its earnings, the shares tickled $222, putting it squarely back into the ranks of the $1 trillion club ($949 billion at today’s close).
It turns out that technology companies are immune from most of the negative developments that have caused the rest of the stock market to drag. I’ll go through these one at a time.
Falling Interest Rates
Tech companies are sitting gigantic cash mountains, some $245 billion in Apple’s case, which means that as net lenders to the credit markets, they are beneficiaries of the credit markets. This makes tech companies immune from the credit problems that will demolish old economy industries during the next rate spike.
Rising Oil Prices
While tech companies are prodigious consumers of electricity, many power these with massive solar arrays and they sell periodic excess power to local utilities. So as net energy producers, they profit from rising energy prices.
Rising Inflation
Since the output of technology companies is entirely digital, they can handily increase productivity faster than the inflation rate, whatever it is. Traditional old economy companies, like industrials and retailers can’t do this.
Remember that while analogue production grows linearly, digital production grows exponentially, enabling tech companies to handily beat the inflation demon, leaving others behind in the dust.
Share Buybacks
While technology companies account for only 26% of the S&P 500 stock market capitalization, they generate 50% of the profits. Thanks to the massive tax breaks and low tax repatriation of foreign profits enabled by the 2017 tax bill, share buybacks are expected to rocket from $500 billion to $1 trillion this year. Companies repurchasing their own shares have become the sole net buyers of equities in 2019.
And companies with the biggest profits buy back the most stock. This has created a virtuous cycle whereby higher share prices generate more buybacks to create yet higher share prices. Old economy companies with lesser profits are buying back little, if any, of their own shares.
Of course, tech companies are not without their own challenges. For a start, they have each other to worry about. FANGs will simultaneously cooperate with each other in a dozen areas, while fight tooth and nail and sue on a dozen others. It’s like watching Silicon Valley’s own version of HBO’s Game of Thrones.
Also, occasionally, the tech story becomes so obvious to the unwashed masses that it creates severe overbought conditions and temporary peaks, like we saw in January.
Global Market Comments
August 7, 2019
Fiat Lux
Featured Trade:
(WHY I SOLD SHORT MACYS’),
(AMZN), (WMT), (M), (JWN), (KOL)
(TESTIMONIAL)
Sorry, the Trade Alert to sell short Macys’ (M) went out late yesterday. I was speaking to a retail expert and his list of things wrong with the marquee name was so long that I couldn't get off the phone. New Yorkers are going to have to find something else to do on Thanksgiving Day than attend their famous parade.
His bottom line? Retail is in a death spiral from which it will never recover. Trying on clothes in a shopping mall will soon become a thing of the past, going the way of the buggy whip, black and white TV, and six-track tapes.
If you had to pick the biggest loser of our ongoing trade wars, which have just been ratcheted up in intensity, it would be the retail industry (XRT). Higher costs and tariffs can’t be passed on, minimum wages are rising in the big cities, lower selling prices are lower, and a massive inventory glut is NOT what money-making is all about.
The stocks have delivered as expected, providing one of the worst-performing sectors of 2019. Half of them probably won’t even make it until 2020.
In fact, Sears (S) and Macy’s (M) have announced more store closings nationwide. The overhead is killing them in a micro margin world.
So, I stopped at a Walmart (WMT) the other day on my way to Napa Valley to find out why.
I am not normally a customer of this establishment. But I was on my way to a meeting where a dozen red long-stem roses would prove useful. I happened to know you could get these for $10 a dozen at Walmart.
After I found my flowers, I browsed around the store to see what else they had for sale. The first thing I noticed was that half the employees were missing their front teeth.
The clothing offered was out of style and made of cheap material. It might as well have been the Chinese embassy. Most concerning, there was almost no one there, customers OR employees.
The Macy’s downsizing is only the latest evidence of a major change in the global economy that has been evolving over the last two decades.
However, it now appears we have reached both a tipping point and a point of no return. The future is happening faster than anyone thought possible. Call it the Death of Retail.
I remember the first purchases I made at Amazon 20 years ago. Even though I personally knew the founder, Jeff Bezos, from my Morgan Stanley days, the idea sounded so dubious that I made my initial purchases with a credit card with only a low $1,000 limit. That way, if the wheels fell off, my losses would be limited.
And how stupid was that name Amazon, anyway? At least, he didn’t call it “Yahoo” because it was already taken.
Today, I do almost all of my shopping at Amazon (AMZN). It saves me immense amounts of time while expanding my choices exponentially. And I don’t have to fight traffic, engage in the parking space wars, or wait in line to pay.
It can accommodate all of my requests, no matter how bizarre or esoteric. A WWII reproduction Army Air Corps canvas flight jacket in size XXL? No problem!
A used 42-inch Sub Zero refrigerator with a front-door icemaker and water dispenser? Have it there in two days, with free shipping at one fifth the $17,000 full retail price.
So I was not surprised when I learned this morning that Amazon accounted for 25% of all new online sales in 2018 in a market that is already growing at a breathtaking 20% YOY.
In 2000, after the great “Y2K” disaster that failed to show, I met with Bill Gates Sr. to discuss his foundation’s investments.
It turned out that they had liquidated their entire equity portfolio and placed all their money into bonds, a brilliant move coming mere months before the Dotcom bust and a 16-year bull market in fixed income.
Mr. Gates (another Eagle Scout) mentioned something fascinating to me. He said that unlike most other foundations their size, they hadn’t invested a dollar in commercial real estate.
It was his view that the US economy would move entirely online, everyone would work from home, emptying out city centers and rendering commuting unnecessary. Shopping malls would become low-rent climbing walls and paintball game centers.
Mr. Gates’ prediction may finally be occurring. Some counties in the San Francisco Bay area now see 25% of their workers telecommuting.
It is becoming common for staff to work Tuesday-Thursday at the office, and from home on Monday and Friday. Productivity increases. People are bending their jobs to fit their lifestyles. And oh yes, happy people work for less money in exchange for personal freedom, boosting profits.
The Mad Hedge Fund Trader itself may be a model for the future. We are entirely a virtual company with no office. Everyone works at home in four countries around the world. Oh, and we all use Amazon to do our shopping.
The downside to this is that whenever there is a snowstorm anywhere in the country, it affects our output. Two storms are a disaster, and at three, such as last winter, we grind to a virtual halt.
You may have noticed that I can work from anywhere and anytime (although sending a Trade Alert from the back of a camel in the Sahara Desert was a stretch), so was sending out an Alert while hanging on the cliff face of a Swiss Alp, but they both made money.
Moroccan cell coverage is better than ours, but the dromedary’s swaying movement made it hard to hit the keys.
The cost of global distribution is essentially zero. Profits go into a bonus pool shared by all. Oh, and we’re hiring, especially in marketing.
It is happening because the entire “bricks and mortar” industry is getting left behind by the march of history.
Sure, they have been pouring millions into online commerce and jazzed up websites. But they all seem to be poor imitations of Amazon with higher prices. It is all “Hour late and dollar short” stuff.
In the meantime, Amazon soared by 49% from December to the May high, and was one of the top performing stocks of 2018. There are now a cluster of Amazon analyst forecasts around the $3,000 mark.
And here is the bad news. Bricks and Mortar retailers are about to lose more of their lunch to Chinese Internet giant Alibaba (BABA), which is ramping up its US operations and is FOUR TIMES THE SIZE OF AMAZON!
There’s a good reason why you haven’t heard much from me about retailers. I made the decision 30 years ago never to touch the troubled sector.
I did this when I realized that management never knew beforehand which of their products would succeed, and which would bomb, and therefore were constantly clueless about future earnings.
The business for them was an endless roll of the dice. That is a proposition in which I was unwilling to invest. There were always better trades.
I confess that I had to look up the ticker symbols for this story as I never use them.
You will no doubt be enticed to buy retail stocks as the deal of the century by the talking heads on TV, Internet research, and maybe even your own brokers, citing how “cheap” they are.
Never confuse a low stock price with “cheap.”
It will be much like buying the coal industry (KOL) a few years ago, another industry headed for the dustbin of history. That was when “cheap” was on its way to zero for almost every company.
So the next time someone recommends that you buy retail stocks, you should probably lie down and take a long nap first. When you awaken, hopefully the temptation will be gone.
Or better yet, go shopping at Amazon. The deals are to die for.
To read “An Evening with Bill Gates Sr.”, please click here.
Mad Hedge Technology Letter
August 2, 2019
Fiat Lux
Featured Trade:
(THE GREAT LATIN AMERICAN INTERNET PLAY),
(MELI), (PYPL), (AMZN), (EBAY)
How do you get exposure to the e-commerce story in Latin America?
The best way to do that is to dive into Mercado Libre (MELI), meaning “free market” in Spanish, an Argentine company incorporated in the United States that operates online marketplaces dedicated to e-commerce and online auctions, including mercadolibre.com.
Mercado Libre was established as an Argentine company in 1999 and Founder & CEO Marcos Galperin, while attending Stanford University, acquired funding from HM Capital Partners co-founder John Muse to start his brainchild.
Mercado Libre received additional funding from JPMorgan Partners, Flatiron Partners, Goldman Sachs, GE Capital, and Banco Santander Central Hispano.
The company has used M&A along with organic growth to drive the company.
Relevant examples are of eBay (EBAY) buying a 19.5% stake in the company and then selling its stake in Mercado Libre in 2016, but the companies continue to expand eBay sellers into Latin America.
The cooperation remains strong with eBay opening its first branded store on the Mercado Libre marketplace from Chile in March 2017.
Mercado Libre has acquired iBazar Como, the Brazilian subsidiary of eBay's earlier acquisition, iBazar S.A.
The success culminated with becoming the first Latin American technology company to be listed on the NASDAQ, under the ticker symbol MELI.
The firm offers investors a way to invest in one of the fastest-growing e-commerce markets in the world.
The company has 280 million registered users out of 644 million people who live in Latin America.
The stock has soared 543% in the last five years making the firm one of the fastest growing e-commerce companies in the world by many metrics.
The main drag is that the valuation looks frothy at these price levels.
Mobile payments have mushroomed naturally because of its title, the "eBay of Latin America."
They can also claim to be the PayPal of the region, thanks to robust growth happening in the MercadoPago digital payments business.
In the first quarter, total payment volume rose 82.5% year-over-year.
Off-marketplace payment volume is up 194% – accelerating each and every quarter.
Off-marketplace payments now comprise 45% of the company's total payment volume, and management sees high penetration trends happening in certain areas.
PayPal (PYPL) have become huge supporters of MercadoLibre with an investment of $750 million into MercadoPago.
The deal will join the firms together to work on the shared vision to digitize the economy, especially for the underbanked, in Latin America.
It's a stamp of approval of Mercado's brand recognition in the region that PayPal chose to invest in the company instead of competing.
How fast is the addressable market growing?
Investors have been seduced by the company's impressive growth in payments, but the core marketplace business is still doing backflips.
Gross merchandise volume (GMV) expanded 27% year-over-year in the first quarter, driven by 70% growth in Mexico.
Brazil is the largest market and expanded GMV by 18% year-over-year in the quarter.
Management referenced supermarket items in Mexico and increasing apparel selection as two areas that are showing strong results.
Apparel is the fastest-growing category, up 79% year-over-year last quarter.
With signs that new development is headed in the right direction, new categories and the company expanding its logistics footprint, the market will definitely expand.
MercadoLibre can grow beyond the marketplace business to become a formidable fintech company.
As it expands into other services, Mercado is fortifying its strong brand across Latin America.
Even as Amazon.com (AMZN) enters the high stakes industry, Mercado's first mover advantage can’t be underestimated.
The stock is pricey so lay off it for the time being but add with any major dips.
Global Market Comments
July 29, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR THE BAD OMENS ARE THERE),
(INTC), (GOOGL), (AMZN), (JPM), (FXB),
(PLAYING THE SHORT SIDE WITH VERTICAL BEAR PUT SPREADS), (TLT)
