Friday, 29 January 2016

The Amazon Delta.

Now I am not a multifaceted equity geek, though I know my EBITDAS from my P/Es, but thee Amazon results do not sound like a cracking return. Granted, it beats the return on German Bunds which are currently negative yield out to about 7 years, but it isn’t the sort of profit margin you’d think a behemoth retailer would be churning out. So on that basis - sell. And a resultant 15% vanishes off their stock price.

But though that profit looks rubbish, what I do know is that whatever the profit margin is, even my mother uses them as first port of call for buying commoditised goods. The way Amazon is taking over retail, not owning their shares would be like not owning shares in oxygen. Ah, now here is an interesting point. We don’t own shares in oxygen because oxygen isn’t owned by anyone and is free, though it is exceedingly vital to life. So if we think of Amazon as the ultimate oxygen of retail, providing us with free retail respiration, then shouldn’t we think that though it isn’t making much money at the moment, one day, when they hit the critical level, they can do what OPEC should be doing and start to close the taps on us consumers and crank up margins.

Amazon may be looking like a charity with respect to profits, but it has the capacity to be a complete and utter bastard to it’s users. In this respect owning Amazon shares is a bet on their utter bastardnesss against the likelihood of anyone being able to replicate what they do to act as competition. I really don’t know where the competition is. Ebay is fast becoming the Friends Reunited of online trading and I haven't spotted anyone else on the horizon. So whilst Amazon may be turning in profits that look like a Google tax bill, I am ultimately wary of what the retail Borg can ultimately do. Like most tech companies, it isn't about the actual here and now profit, it is about the rate of change. The delta on the profits.

The next question to ask is 'was the Amazon price reaction nothing to do with Amazon per se but more a reflection on market fragility?’. Was that spat a clue towards a general market sell off ahead on ‘not much’ or a fracture in the FANG complex, or even a spin on a Unicorn / commodity spread? Oil is continuing to go higher and commodity stocks versus tech are closing in on the spread. As with most pieces of evidence left lying around in financial crime scenes, the evidence can be used to support all sorts of arguments. I will, perhaps, use it to support the argument that the last review I left on a Bosch food slicer has been the butterfly wings to the next financial crisis.

There is one other explanation. Instead of manipulating tax domiciles to reduce tax, it may just be easier not to make any profits on which one has to pay tax. Profits may be small, but the behemoth is growing.

Now for something completely different - FX. Something happened yesterday that worried me. Someone said they were watching FX for clues towards other market moves. Now whilst I would grant you that FX moves in emerging currencies in times of stress are important (TRY, ZAR etc) watching FX for signs of anything other than intelligent life is pretty pointless. FX markets spend all their days watching other markets for clues as to what to do as they are, in effect, the overlapping central part of a multi-circled Venn diagram of other assets (FX is NOT an asset by the way. A currency may be, but not an asset). So when I hear that other asset markets are looking at FX for clues I know confusion reigns.

Finally a comment on UK Brexit. I don’t think that all my friends are stupid, in fact I think quite a lot of them are pretty smart on recognised measures. But the one outstanding feature I see is that most of my friends in finance think that they will vote OUT in a BREXIT poll. This process is not going to be easy on UK assets. Whilst many say that finance would emigrate to Frankfurt or Paris on an exit, first I disagree that the exodus would be huge and second I would be buying real estate in Dublin before Paris or Frankfurt.


Eddie said...

I think AMZN is able to shell out significant profits at some point in time. The big question is: when? So today's price may be ok if you expect those profits in 2 years but if they come in 10 years you overpaid massively.

Btw, I remember some analyst saying back in 2011 that AMZN should be very profitable by 2013 or 2014 latest... I guess they will be in 2 years' time... no matter when you ask.

Theta said...

Can you expand on the Brexit thoughts? So your finance friends think they'll be better off outside the EU? Is it because they believe that reduced regulation will benefit the sector that will still largely stay in London or because they are tired of London and would prefer to move elsewhere? Could be worth a post on its own.

Polemic said...

Eddie ..agree.. hence the title reffing Delta. It's the rate of change of profits that count rather than the current snapshot.

Theta. If I do that it would become hugely political and I would probably trip myself up somewhere on a technical detail. But basically belief is most EU laws are set for benefit of rest of EU rather than UK, EU would love city activity to go to fft or paris and to be under close eu reg control. EU regs stifle financial evolution competitiveness and market efficiencies so UK should stay loose and be even more attractive. On a trade basis, efficiency = cost benefit = business. Trade will follow the money and not be constrained by regs. The more regs EU throw at restricting GB trade the more they will be circumvented. Of course trade will continue and these 'number of jobs to be lost = millions' quotes are rubbish. Swiss and Norway are Fine. The counter to EU firms leaving to go back in the basketcountries is countered by making it too cost attractive for them not to stay. Eg swiss again.

But if you do think that firm s will race to leave UK then the trade isn t to buy FFt or Paris. It's to buy Dublin property.

Oh.. looks like I did say something in the end.

Theta said...

Yes, you did :)

I still fail to see the case for Dublin over other more established EU cities. I mean if the reason for the relocation is political, and not economic, why go to a new location rather than an existing centre? Unless the argument is that you need an English speaking country.

But what I asked and was more interested in is not which city/country will benefit more in the case of an exodus of firms from the UK. But rather why would your finance friends prefer a Brexit. So you are saying it's because they want less regulation, which means they expect that their jobs will stay in London and they will be better off as a result. Would this be your prediction as well?