|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.
“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.
|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.
Google (GOOGL, Weiss Ratings: B+) is launching a new project designed to identify genetic and molecular markers and traits in the human body. The idea? Make it easier to predict who might get sick down the road, and try to treat them in advance. Novel stuff, even if it does sound a bit more like science fiction!
Reminder: You can let me know what you think by putting your comments here.
Until next time,