Amazon.com is going to open up its delivery service to allow Prime members to use its payment and shipping facilities on rival retailers’ sites. The tech giant unveiled its ‘Buy with Prime’ service Thursday, which will see the Prime logo on some products in non-Amazon online stores. Free next-day delivery and returns would be organized through Amazon’s logistics network using stored Prime payment and shipping information. Right now, this future service will be confined to the online eCommerce of non-Prime companies. This is how it always starts with AMZN, they start with a basic service, like with AWS. The original offering for Amazon Web Services (AWS) was just online storage. Over the next number of years, AWS expanded its offerings of cloud services until it became the titan astride the entire cloud services industry. For now, the offering is just providing a last-mile service to online merchants. It doesn’t take much of an imagination to see that consumer shipping with customer pick-up for Prime members would be next since they are always looking for great services to add to Prime membership. The next step would then be small businesses since that could be a good way to recruit new members to their Amazon marketplace business. Will AMZN lose money on this service, and fail? Absolutely not. All the big pieces are in place already. That means they need very little free cash flow to break even, and then every nickel offset the cost of the entire operation. As they lower overall costs the logistics business is no longer a cost center, it’s now a profit center.
The DNA of AMZN is to be a fierce competitor
What does this mean for FDX, UPS, and USPS for that matter? Frankly, a lot of PAIN. Let’s start with the famous maxim of founder Jeff Bezos, “Your margin is my opportunity”. Andy Jassy is a disciple of Bezos, his logistics execs will calibrate the delivery service to generate enough cash flow to cover costs for the service plus a suitable net margin. The more cash he captures the more profitable the entire logistics and last-mile delivery becomes. Again, what was once a cost center becomes a profit center. That changes the perception of this part of the business with all the investment in physical plant and moving capital equipment as a sunken investment. It’s possible that the entire cost of the physical plant that makes the delivery business operable could possibly be viewed as revenue for a service rendered to the parent company. Accounting aside, for which I have very limited value-add, it doesn’t require a crystal ball to see that this nascent service will assume all the services that UPS and FedEx provide. Prime Delivery will be free to undercut them because it is built on top of what was once a cost center.
What does that mean for the share prices of UPS and FDX?
However now that AMZN Prime Delivery has entered the fray high margins and easily raised rates will all end. So will their valuations, FDX is trading at a market multiple of 19X while UPS is trading near 14X. I was under the impression that FDX was having operational issues. Even the venerable founder Fred Smith has given up his CEO chair. I believe that it was due to integrating TNT a European ground service. Now, what happens when AMZN introduces Prime free delivery service in Europe? Their profits overseas are about to shrink as well, aside from FDX and UPS, what happens to the US Postal Service? There will be a free-for-all with 4 powerful competitors. It will all be great for the consumer, and another example of how costs are endemically undergoing disinflation. Right now, the notion is that inflation will now be with us forever and that wages and prices will spiral out of control. I just don’t see it. Perhaps it will take longer for productivity growth and labor-saving technology will get back to reducing inflation. I have faith that disinflation will return once again.
Let’s look at the 3-Month for FDX and see what it tells us.
The above is a very simple chart. It looks like FDX was attempting to rally back toward old highs and experienced a reversal. I am picking on FDX as they now have an unproven CEO promoted from within. I am not throwing shade, specifically on this new CEO. However, compared with the UPS CEO Carol Tome, who was the CFO of Home Depot (HD), and who came into UPS with a very good reputation. I am not looking to differentiate between the two. Until the media wakes up to the fact that AMZN is about to scalp these huge companies, I think they are equally vulnerable to downgrades by analysts. In any case, this looks like a benign 3-month chart. Just note that they are very near the last bastion of support after that it’s a long way down. Once it breaks under 200 though there is no support for an additional 40 points. Let’s zoom out to a few years.
FDX is on my list for a possible downside bet via a Put Spread. My call to buy AMZN is merely a note to myself to build my AMZN position which I already Intended to do because of its 1 to 20 split. The AMZN split is coming in June, and this week might just find its bottom. I think AMZN is going to be one of the best plays going from 2022 and into 2023. AMZN hasn’t gone anywhere for about a year. In the past AMZN has gone through these dormancy periods due to periodic investments in logistics and delivery, massive hiring, or technology investments. It is also having union issues which are not great for the stock. That is what has been weighing on the AMZN stock price. Now that the logistics and delivery piece will be paying its way, I think the dormancy is over. What’s left is labor relations and the union battle. Andy Jassy is well equipped to help in that area as well, there is a tremendous amount of information technology, automation, and robotics going into reducing rote work. Currently, the way to create efficiency is to demand faster operations from humans. This can cause low morale and employee turnover. This is where unions find adherents’, especially in jobs requiring redundant movement that is especially prone to cause injury. I am not in a hurry to buy AMZN all at once. For one, no one in the media is making any kind of fuss over this announcement. I guess everyone was so focused on the Fed making the sky fall, that they missed this nuance. Once the smoke clears someone might go back to this announcement and say hey! “AMZN is going to disrupt the entire parcel delivery space, I better rerate all the players’ price targets, pronto”…
What does this mean for the economy?
We are talking about a small group of titanic companies in an Oligopoly, making it easy to ratchet up prices. They don’t need to actually collude, when one company raises a price, they all can just match that price. AMZN by adding delivery service to the public none of its new competitors will be able to raise rates lest they lose share. In fact, if they don’t lower their rates to meet Prime Delivery, they will lose customers. Especially Prime Service members, presuming Prime subscribers will get steeper discounts, or perhaps free if the package is local. Remember all the delivery has to do is generate cash flow just under the competitors, and the service will be generating Free Cash Flow that goes right to the bottom line. The larger number of customers the greater the profits and the lower the shipping rate to undercut the competition. This is a microcosm of what has been going on in the economy for the last decade or more. This is why I am optimistic that an inflationary wage-price spiral akin to the ’70s is not going to happen.
Since I am mentioning the economy, inflation and the Fed let me address how that affected the market
There is no denying that last week was difficult and humbling. I have been moving cash into the oil and gas names, I consider this sector the closest to bouncing back to recent highs. I am operating under the assumption that we are not going into a recession, and therefore we are not going into a long-term bear market. I have to admit to myself and of course, to you all, that last week had me hearing the growl of the bear. The way every rally reversed and took great stocks with really good earrings right down. The key cause for this is Jay Powell’s statement that he favors front loading rate raises sooner rather than later. Combine that with new chatter regarding going to 0.75% raises as a possibility really set the chattering class tongues a-wagging. In the recent prior weeks, the market has been spending time discounting 0.50% as the highest increment the Fed will resort to. Now with 0.75%, it will take another week or week and a half of turbulence, but that level will be adjusted as well. Participants will realize that what Powell was saying is that he wants to front-load the raises so he can stop sooner. The Fed Chair has no interest in shocking the market into a recession. I believe that he will accomplish what he set out to do, and that is to retard demand so that it matches the limited supply right now. The project now is to manage further downside pressure. I think it’s important for me to say that if you sell any position of any decent company now it will likely be substantially higher 6 to 12 months from now. This is especially true if you bought a name that was intended to be a long-term investment. They should be high-quality companies that generate a dividend that you are not only confident they can pay but also that they will raise that dividend over time. DO NOT SELL QUALITY LONG-TERM INVESTMENTS. In fact, if you are purely a long-term holder, sit back and watch the rest of us scurry around trying to protect our gains. Try not to be too cruel about it. If you own a name like AAPL and it falls down to the $140s you know that whatever dividends you get, if you have your DRiP set up you will get shares at that lower price, so just relax and collect. I am still medium and long-term bullish. I am not Pollyanna and it is clear we are in for more turbulence.
If you want to start a position in AMZN just remember that they report earnings on April 28. Perhaps buy a little before the earnings reports and wait for the report. It seems like even the best stocks are getting sold hard. As a matter of fact, Apple (AAPL) reports on April 28 as well, Alphabet (GOOG, GOOGL), and Microsoft (MSFT) report on April 26 and they have to exceed perfection in order to stave off the market hitting the canvas. GOOGL is also set to report on April 26. All it will take is for one or two of these names to sell off further than the overall market, especially in the tech area will sell-off.
I have started to bet against select stocks as a way to hedge. I am doing this in addition to my regular hedging. So far, I started building a bet against Digital World Acquisition Corp. (DWAC). This is the Trump Spac for Truth Social. This is not a political act, DWAC has some issues in filings with the SEC, and a few weeks ago two key executives head of product and head of technology resigned. Also on Fox’s Sunday Morning Futures, Devin Nunes – the putative CEO of Truth Social – was not identified as such, moreover, there were no questions about it either. I would think that a CEO enthusiastic about an emerging tech company would put in a few words about it. I also executed Puts on Starbucks (SBUX) with Howard Shultz coming back for the 3rd time and the current CEO mysteriously leaving, plus the complete shutdown of stores in China. Layer on the labor strife and unionization and I think SBUX has broken under the 52-week low, and I think there is more to come. This approach is similar to FDX in some ways. Fortunately, or unfortunately, there are plenty of other short candidates to choose from. If great stocks are getting hammered that not as great names even temporarily will get hammered even more. To be clear I have not executed Puts on FDX, even though the chart and pressure on prices in the future I am not 100% I am going to pull the trigger on FDX until perhaps it violates 199-200. I may just execute a Put on Netflix (NFLX), or Microsoft before earnings.
I read a fantastic piece on www.oilprice.com. They clued me in on what is going on with refiners they are not putting in the effort to reconfigure for the summer driving season. Instead, they are producing more and more Jet Fuel and Diesel because of demand in Europe.
This is why I’ve been buying refiners. They may very well have historic profits coming in this year. Why? Because of something I mentioned in earlier pieces. The US refiners are beating the pants off of everyone else on the planet because NatGas is comparatively cheaper here than nearly anywhere else. NatGas is used to cook crude to crack it into all the different constituents, like gasoline. So, prepare for much higher gasoline prices this summer. WTI may break well above 130 per barrel in just a few months
I am continuing to add to my Oil and Gas names. The only new name is HF Sinclair (DINO), I am still building my Phillips 66 (PSX), and all the small refiners I mentioned last week. Not related to the Oils but a building block in our modern economy is Copper. Freeport-McMoRan (FCX) had a very nice earnings report and sold off super hard. I think it should behave like the oils and bounce back hard.
Analyst downgrades BHLB for using Upstart (UPST)
“Compass Point analyst Laurie Havener Hunsicker on Thursday has downgraded Berkshire Hills Bancorp (BHLB) to Sell from Neutral as its partnership with artificial intelligence lending platform Upstart raises additional risks.”
My Take: Perhaps low quality as per FICO. Leave aside that many of the loan applicants are people of color who don’t get a fair shake in conventional credit determinations. UPST uses self-training AI. This is a concept little understood by banking analysts. UPST founders come out of Google Labs which is the acknowledged leader in AI technology. Their algorithm becomes more powerful with every credit approval. They have a 10+ year head start over everyone else. Right now, the average consumer has savings and is not maxed out credit-wise. The assumption is that the system will continue to approve the same data configuration that starts to be late on payments. However, with self-training AI it will instantly tighten the proper data points in near real time. They use thousands of discrete data elements for each credit analysis. That means the AI can very finely adjust its own algorithm to a very small sliver of applicants. Hope this clears some things up. In short, I think the bank analyst should do some reading. AI for Dummies perhaps.
I just want to remind you that I and my new partner Serop Elmeyen are debuting our Dual Minds subscription service soon and I can’t wait to share our day-to-day analysis. As you can tell from today’s piece my stance has evolved since last weekend. If I was able to share the information that I have been evaluating day to day you wouldn’t be so surprised.
Additional disclosure, Please note: You should not take the above text as investment advice. I am not a broker, Registered Investment Advisor, or certified money manager, I cannot give financial advice. What I am doing is chronicling my thought process. If I use the word you in a sentence, I am really talking to myself, or it was a simple typo, in no way did I mean to advise you. Always do your own research and understand what you are buying, what your risk is, and be sure before you make a purchase. Also, only trade what you can afford to lose.
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