| MARKET ROUNDUP | |
| Dow | -123.23 to 16,960.57 |
| S&P 500 | -9.64 to 1,978.34 |
| Nasdaq | -22.55 to 4,449.56 |
| 10-YR Yield | -.04 to 2.469% |
| Gold | +$17.40 to $1,308.20 |
| Crude Oil | -$.18 to $101.89 |
You know that old quip? The one about losing money on every sale, but making it up on volume?
That seems to be the corporate strategy at Amazon.com (AMZN, Weiss Ratings: C). Under the stewardship of CEO Jeff Bezos, the firm has grown like a weed. It has expanded from selling books online to selling almost everything via the Internet.
Not only that, but it has also jumped headlong into the cloud computing and data storage business. It has launched Kindle Fire tablets that compete with Apple’s iPad. And it’s getting into smart phones, with a new product shipping for the first time this week, putting it up against market leaders like Apple and Samsung.
The problem? Amazon is losing money hand over fist! The company just reported a second-quarter loss of $126 million, almost double the $66.7 million that analysts were expecting. That was the biggest quarterly loss since late 2012, when it bled $274 million in red ink in the third quarter.
Sure, sales rose 23 percent to $19.3 billion. But expenses rose even more quickly, by 24 percent. And there’s no end in sight.
Amazon forecast an operating loss of anywhere from $410 million to $810 million for the third quarter of this year. A key culprit? The massive cost of building out all the infrastructure it needs, such as warehouses and workers, to get its products into customers’ hands more quickly.
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“But as an investor, I want to see profits! Actual black ink, not red.” |
Look, my daughters both have Kindle Fires. They love them. I also order lots of products from the company, and would like nothing more than to be able to get them the same day or the next day, rather than wait a few days or a week.
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| Sales remain high at amazon.com — but where are the profits? |
But as an investor, I want to see profits! Actual black ink, not red! Analysts who weighed in after the latest report brutalized the cult stock with downgrades, with one saying it’s the worst plunge in Amazon profitability for this time of year since 2003!
For a company that was recently trading at a stunning 569 times earnings, that’s not exactly reassuring! No wonder it plunged more than $34 in price after the news.
So what do you think? Is Bezos a visionary who will ultimately reward investor patience by showering them with profits? Or is he expanding recklessly with no hope of ever reporting solid results? Do you think Amazon’s new product offerings, such as its upgraded Kindle tablets and smartphones, are better or worse than the alternatives out there?
Lastly, would you buy Amazon shares on this pullback? Or would you avoid it like the plague? Let me know at the Money and Markets comments section here.
| OUR READERS SPEAK |
It’s Friday, which means the weekend is right around the corner. It also means I’m going to try to touch on as many of your comments as I can!
First, on the topic of taxation and Master Limited Partnerships, Reader Annette said: “Learn how to do the taxes yourself. I have many MLPs and do my own taxes. Tax people do hate them. It takes a little extra time to do them. The IRS can’t answer a lot of questions about them.
“One thing is to hold them and collect the great rates and leave to your heirs. They will owe no taxes on all the distributions you have received.”
Good points all around. Like I said yesterday, I try not to put the taxation cart before the investment horse.
Regarding the euro and Eurodollar futures, two comments stand out.
Reader Clare Spiegel said: “When you speak of Eurodollar futures prices, does that have any bearing on the relationship of the euro to the U.S.$?”
And Reader Brenda said: “I cringe at the term ‘Eurodollar’! There is no such currency in the world called Eurodollar. Would that be US Dollardollar, Australian Dollardollar or Canadiandollardollar? The european unit of currency is a EURO. Plain and simple EURO.”
Clearly, there is still some confusion here. So let’s tackle it head on.
Yes, the euro currency is simply called the euro. But I specifically — and intentionally — used the term “Eurodollar” in yesterday’s column because Eurodollar futures are a completely different financial instrument! They have nothing to do with the euro currency.
Specifically, a Eurodollar futures contract tracks the value of a $1,000,000 face value time deposit of U.S. dollars held in European banks. These futures are traded on the CME Group, and you can read more about the contracts here.
As I mentioned in my column, the value of Eurodollar futures rises and falls with expectations about future short-term interest rates. If the market starts believing the Federal Reserve will raise interest rates sooner and by a bigger margin than previously thought, Eurodollar futures prices will fall.
Now, that may also cause the euro currency to lose value against the dollar. That’s because if one country has higher short-term rates than another, it tends to attract investors to that country’s currency.
And sure enough, as Eurodollar futures prices have started to sag, so has the euro currency against the dollar. It just hit an eight-month low, in fact, pushing one of my Safe Money Report positions that targets the euro further into open profit territory (Want the details? Just call us at 800-291-8565!)
But please make sure you understand that the euro currency — and Eurodollar futures — are two different instruments entirely!
Also on the subject of interest rates, Reader Bret S. said that past advice to buy RYJUX and TBT (inverse bond mutual funds and ETFs that rise in value when bond prices fall) hasn’t panned out. He added:
“You and Martin have continued to write about the ‘mother of all investment bubbles’ — but the bond market rate explosion has yet to materialize, and I hope other subscribers don’t fall prey to your Chicken Little recommendations.”
Hmm. Well, if you’re a Safe Money subscriber (where actual “Buy” and “Sell” recommendations are maintained, as opposed to columns that may mention an investment but never explicitly tell you when to buy, what to pay, when to sell, etc.), you would know that RYJUX isn’t in the model portfolio. In fact, it hasn’t been recommended for several years. TBT also hasn’t been in the model portfolio for a long time.
I have recommended its UN-leveraged cousin, TBF, which hasn’t worked out this year. But after I started warning of a bond market crash in late 2012 and early 2013, the bond market did in fact crash. Virtually every category of bond lost value last year, with diversified bond funds suffering their worst annual losses since 1999.
Will things turn around? Are rates set to rise across the board, and TBF ready to rally? You know that’s my forecast, and I believe it’s only a matter of time.
Meanwhile, even as 30-year yields have fallen in early 2014, short-term interest rates (2-year Treasury yields and 5-year Treasury yields) are still at or near multi-year highs! The five-year yielded 1.69 percent earlier today, only a few basis points shy of its multi-year high of 1.85 percent, set last September.
So I guess it’s a matter of perspective. But please do keep those opinions coming — even when they don’t agree with mine!
One last question comes from Reader George P., who asks: “I have a question for you, Mike, but before I ask it, I want to say, thanks a million for telling us about the bursting bond bubble. Now, the question that I and my fellow gold investors have is: How it will it affect the price of gold?”
Thanks George. I believe gold can rise along with interest rates, as long as rising inflation is a key driver of the move. After all, gold has been a traditional inflation hedge for hundreds of years.
Eventually rates may get so high and bite so badly that all commodities, including gold, get dragged down. But I believe that’s farther down the road, potentially much farther.
Phew! That was a lot to cover, but I hope you find the information valuable. If you have other questions, hop on over to the comment section and fire away!
| OTHER DEVELOPMENTS OF THE DAY |
 Protests against the ongoing bloodshed in Gaza broke out in the West Bank overnight. Four Palestinians lost their lives in clashes with Israeli security forces, which were prompted by explosions at a U.N. school that killed 15 and wounded several more. Hamas and Israel disagree about who was behind that tragic event.
Reminder: You can let me know what you think by putting your comments here.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 28 comments }
I am not a buyer yet, but….. They are genius. I never liked shopping on line before Amazon. At first I noticed I could find things cheaper without much trouble. But now. I buy everything on Amazon because I had bad experience’s with other vendors. When I had a bad experience I had to first remember where I got it. Then try and figure out how to deal with the problem according to that vendors rules. I gave up more often than I followed through. Now…. I know where I bought it and I know how they work. It is kinda like Nordstrom’s online. I find my self needing the smallest items and I just go to my computer right than and order it. It just shows up. Half of the time when I get it, I had forgot I needed the item.
Bottom line if they keep building bullish customers like me, they can raise their prices and I won’t care….. No one goes to Nordstrom’s for a good deal. Amazon Rocks !
Kevin
My guess is that they will use bankruptcy to restructure. I wouldn’t want them owing me money.
I would buy.
I guess I’m kinda partial to Amazon because of everything they offer but yes, they do need to start showing a profit. I was lucky and bought shares when they were $18, so I’m not complaining that much with all of the splits in the past. I think they need to limit their growth a little and show some profit or less loss anyway. I’ll keep my stock until the whole market starts taking a nosedive with all of the financial turmoil.
Sorry, forgot to add that I go there to get reviews on anything before I buy something so I love that feature they offer.
I love Amazon for its prices and fast service BUT to invest,different story.You know its all about profit,there aint none,period.Until then.
Here we go again. From no money down subprime mortgages to no money making conglomerates. The central bank is creating another bust.
Hi Mike. Thanks. So at what price does Amzn become a roaring buy?
Odds are the management will get the message.
I would not buy the stock, but I am A very happy user of their service. It will be interesting to spectate and see how much rope Bezos is given by the market. I believe the infrastructure will prevail and Amazon will survive and thrive.
Your calls for higher interest rates have been spot on. Interest rates have been consolidating for much of this year. But when that ends, an impulsive move will commence. Staying out of markets that considate after a burst higher is the hallmart of a trader.
When cash is scarce, cost of money can be expected to rise. Americans stopped saving money decades ago. Everybody needs credit to survive these days. The fed interfered in the capital markets using the interest rate markets. The bond market is among the biggest markets in the united states. It is likely the bond markets are in a bubble if the extra money printed to buy bonds do not result in a good return on investment for the people of this country. The fed by buying bonds, has lent money out. If the money somehow does not get paid with interest, money gets destroyed and deflation like in 2008 ensues.
The US economy is leveraged. I wish somebody could come up with the exact leverage in the economic system. Money destruction beyond a point cannot be tolerated. It will cause systemic instability. There has got to be consequences for expanding the fed balance sheet to 4 trillion dollars. How much of a loss can the fed take? How would it affect their bond buying operations? What effect does this have on the bond markets? What are the limits to feds interference in the bond markets? Can the fed continue buying bonds forever? Will thy also start buying other assets such as stock, commodities etc? Will all debts issued since 2008 get paid back with interest? If not, what will be the consequences? Also, how would derivatives at investment banks affectthe fed policy.
I would love answers to these questions.
AMZN invests its money in the business. It seems to be working. Revenues are growing quite well. If they continue to see opportunities to increase revenues by such investments, they should do so.
Amazon is a joke! All this talk about expenses due to “building out” the infrastructure, etc. is complete rubbish. Look at any of it’s competitors, either e-commerce or brick and mortar and they’re profitable.
Walmart had to spend money on building stores, supply chains, etc. and it makes money. Ebay makes money, lots of it. This is simply a company where the model is broken. Amazon doesn’t make money because its model is not working. Plain and simple.
Hi Michael,
Your Afternoon Edition is an excellent overview of each day’s investment related activities presented in one concise package.
Market volume has always been of interest to me. Would it be possible to include a quantitative indication of each day’s market volume the Market Roundup section?
An explanation of the significance of market volumes would be of great interest to your readers.
Keep up the good work.
Don
AMZN: Bezos doesn’t care about short term performance; his view is long term, and he wants to dominate the world of providing goods and services (he has stated this explicitly many times). As long as he brings in $19.8 billion/qtr, he’s going to be able to spend $19.4 – 19.6 billion, particularly when people can see new products and infrastructure. Note that his reach is way beyond anything WMT has ever thought to do.
GOOG: The project to identify human genetic and molecular markers… Is really two different things. The genetic markers (I.e. Genes) tell of possible predisposition toward various diseases. The easy ones (single gene diseases) like Tay-Sachs are already known, but many diseases in love multiple genes in complex ways, and still need to be understood.
On the other hand, the search for molecular markers usually means a search for low concentration proteins or peptides that are produced by abnormal–usually cancerous–cells. So here the goal is very early diagnosis.
None of this seems like science fiction to me. Science fiction is when doctors can diagnose and repair any medical problem non-invasibly, like they did on Star Trek.
Just a word of explanation to the reader who questioned the term ‘Eurodollar’, Way back in 1973 the price of oil suddenly spiked, ginormously. The winners were, of course, the oil-producing companies (OPEC), who suddenly found themselves awash with U.S. Dollars, the currency in which oil sales have always been invoiced. Many oil-producing countries preferred, for political reasons, not to leave their dollars in U.S. banks. The City of London obliged by accepting large amounts of dollars in accounts in London, and Frankfurt, Paris and Zurich soon followed suit. Thus was born the Eurodollars which, originally, merely meant USD held outside the US.
The volume of Eurodollars held in London eventually became so large that it was the London banks which fixed international dollar lending rates (the so-called LIBOR (London Interbank Offered Rate). This development in the 1970’s was the root cause of the 2008 world financial crisis, but that is another story (which I shall be pleased to share with any readers who may be interested).
Diamonds are Forever
This market remains a speculative market with popular, big name momentum stocks like Amazon or Facebook setting new highs. Now and then, these high-fliers have their own independent corrections, as Apple did in 2012-2013. The overall market indexes continue to rise with few if any real corrections. Thus, this market is full of diversity and differing valuations.
I suspect the more recognizable stocks have already been bid-up to at least full value, but secondary stocks that are not as closely followed (value stocks) may ultimately reward patient investors. Price and time frame are important to consider if you are a long term investor vs. a shorter term momentum player.
Value investors, on average tend to be long term buy and holders by nature. You can do well if you stick with dividend paying quality companies and find them before the are widely recognized. In that respect, its getting quite a bit harder to find the “diamonds in the rough”. They are always there in any time or any market. The inability of most investors and professional managers to find very many of them affects their long term returns and performance.
You asked if we should avoid Amazon stock like the plague. Amazon is the plague! Just like Walmart was the plague of the 1990s and 2000s. Walmart came to town and put many small retailers out of business because they did it better and cheaper. Now Amazon is the plague for many more retailers. It is very hard to compete against Amazon’s marketing muscle.
Amzn hammered all the way to a PE of 850 and 15x book. JB appears to playing monopoly, corner the market and leave the profits ’til later. Wouldn’t be surprised to see a preditory marketing suit from the likes of Walmart.
Jeff Bezos DOES produce results – just not the kind you have in mind. He’s made himself EXTREMELY RICH. THAT IS THE RESULT. AMZN is not a company being run for it’s (other) shareholders. It does not show evidence of being built for profits, and probably not even for longevity. Rather it’s Bezos’ source of wealth and his personal playground at the same time.
This explains all the new spending on everything you can think of, and the way he “buys the business” (old term for selling below cost) to get it all to move forward. And since there are no profits he’s presumably been brining in money the “Wall St. way” – through creative financing and the liberal use equity sales. (That is, the company creates and sells new stock so the proceeds from sales to go AMZN and Bezos, not to other investors. It’s the corporate way of printing money.) After all he recently had the gall to claim “we’ll obviously be looking to get great returns on invested capital.†Who do you think he has in mind for that statement? Considering his company’s ROE is only 3.2% (you get more than that with a bank CD) and it doesn’t report a lot of it’s business activities, presumably because they’d be embarrassing – (see link to article below) that is quite a claim. But I have no doubt that he knows what he’s doing when it comes to courting stock investors. That may be the only thing he does well.
http://www.bloomberg.com/news/2014-07-25/amazon-loss-widens-as-ceo-alarms-investors-with-spending.html
But Mike – as for your “lead line” – I lose a little money on every sale but make it up on volume – that was a joke my grandfather used to tell, at places like the dinner table. But then he’d look around to see if you were listening, and maybe crack a sly smile if you were. He knew better. My grandfather, a New York businessman from the “old days” knew how to run his business. And he also knew how to keeping a tight right on expenses so it would be successful. In fact keeping it modest (office, perks, capital equipment) was one of his best business attributes. And as a result, my grandfather’s business made money.
But I wouldn’t hold my breath for AMZN to do the same. There’s an old adage “You can fool some of the people all of the time, and all of the people some of the time, but you can’t fool all of the people all of the time”. I think Bezos is trying to disprove this… (but he won’t).
I bought a book from amazon just the other day. But what did surprise me a bit is that you can now download their Kindle reader for free. No profit there!
Having been a long time investor (I’m just old). I have avoided AMZN for years with it’s stock price continued to advance. I am a long time investor in AAPL (they make a nice profit), but the largest part of my portfolio is in oil stocks.
I will consider buying a stock (and have) that has “great potential” but after a number of years of growth with no profits, I start to find a OUT. THIS is were a smart investor find the exit.
Hi Mike, good post on Amazon. Amazon has about $8 billion in cash equivalents, $3 billion in debt. That means Bezos has a $5 billion venture fund to invest however he sees fit, and he is doing that. He doesn’t care about Wall Street’s profit measures, or about paying taxes on those profits to an incompetent government. He thinks he knows better ways to invest it, and so do his shareholders. And the good thing is, he can reload his venture fund periodically by slowing down his new investment just enough to earn a small profit. He has been doing this for years. This is the new paradigm. If people want a few tiny dividends on the profits of more traditional stocks, most of which goes to the government as taxes and not to them, they should invest in those.
AVOID LIKE NOONELSE THE FALL WILL BE HUGE!!!!
I would like to see the shorts load up and really hammer AMZN. Then I’ll back up the truck and load more than I already did this week.
Well…some years ago, Wall Street brutalized the stock for the same reason. It was then that I bought shares in Amazon, along with a very positive BUY article from Mary Whitman, who I highly admired. At that time, I bought it at $7.00/per share. I can’t recall what at the time was the market high price for the stock at that time though. If it ever came down to a similar price point, I would buy it again….only this time I would back up the truck!!
I wouldn’t touch Amazon with a 10 foot barge pole!
Big box need to deliver free