In Thin Air

The Kelly Letter Excerpt
The following is from the August issue of The Kelly Letter, which went out to subscribers last Sunday morning.

I wrote two weeks ago about Amazon (AMZN $237):

“Amazon, despite being a company I love, is a stock I hate. From $247 last October, it fell to $180 by the end of last year during its strong Christmas season. It recovered to $210 in March, collapsed to $184 in April, shot to $234 at the end of April and into May, and is now at $218. On a rise into much more strength, I think it’s a short candidate. I wouldn’t pay more than $150 for it based on its sales projections and iffy margins. It’s constantly fighting a battle of low margins because it must beat the likes of Wal-Mart (WMT $73) on price even when factoring in shipping. This is why Amazon has always been a low-profit operation, with high P/E ratios such as its current 180. Yes, 180. Profits slipped 35 pct last quarter.”

The company reported a 96 pct drop in 2Q earnings on Thursday and forecasted more losses to come because expenses are rising as it invests in a wider network of distribution centers. For this quarter, it expects a loss in the range of $50-350M on revenue of $12.9-14.3B. Needham said it understands that Amazon is investing in its infrastructure. “We know that Amazon is going to have razor thin operating margins, but what we don’t know is if we’re ready for them to have no [operating] margins.”

Goldman thinks Amazon’s operating margin will bottom later this year and reach 3.7 pct in 2013, and Nomura seconded the notion that margins will rise. This quarter’s North American segment results showed a 0.7 pct increase in operating margin to 4.7 pct, so they may be on to something. Forrester Research added that it’s a consistent story: “Grow market share and don’t worry about earnings. They have the reach and scale that makes them now formidable, but when will they use that to grow more profitably?”

Not in the short term, if our suspicions are correct — and so far they are.

The stock rose 4 pct last week and is up almost 9 pct since we became interested in shorting it two weeks ago. Now that its chart sports a triple-top breakout above $230 sure to get technicians excited, it stands a good chance of reaching last October’s peak at $247. Look to short it at more than $250.

Also in the letter:

The eurozone crisis came back into focus with downgrades, bad manufacturing data, and euro-era record-high bond yields. Later in the week, the ECB said it would do whatever is necessary to protect the euro — and investors believed it.

Markets are anticipating more QE, and it will probably happen and move asset prices higher, but won’t mean any more to the economy than previous QEs meant. Banks aren’t lending.

Good luck forecasting the interest rate market and when to enter ProShares 20-Yr Treasury -1x (TBF). Our take on this complex puzzle is that QE3 is on the way, Treasury prices will rise in anticipation and then from the program itself, and we’re therefore likely to get a lower entry price in TBF.

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  1. Marilyn
    Posted August 7, 2012 at 12:25 pm | Permalink

    It is great to read your letter again. Still a whitty guy I must say:)

  2. Dave Bradbury
    Posted August 6, 2012 at 2:58 am | Permalink

    I think that since Amazon has now started collecting State sales tax on purchases, that a lot of customers will start to look around to other online retailers than Amazon and is one more reason that they will lose even more market share. As it stands now, not all retailers collect sales tax. This has in the past been a big reason to buy online. No More is this true and I think that customers will vote with their feet. I believe that Amazon gets a kickback break on taxes collected and so they think that they won’t lose, but, I think more people will leave than stay. Just my opinion.

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