April 30, 2019

Mad Hedge Technology Letter
April 30, 2019
Fiat Lux

Featured Trade:

(AMZN), (WMT), (TGT), (UPS), (FDX)

Amazon’s New Game Changer

Amazon’s free 2-day shipping for Prime Customers is on the verge of becoming free 1-day shipping after the company recently announced this new wrinkle to their business model.

Amazon’s competitors should be shivering in their wake.

But it’s not all doom and gloom for the other e-commerce giants, hardly so, the gap up in the fierce competition will do what General Data Protection Regulation (GDPR) rules in Europe did to competition – enclose the existing players off from the smaller fish.

In examining who will be the last man standing, I have come to the conclusion that it will not just be one or two grinding it out in a vacuum, but more like several winners that will all benefit to certain degrees.

The outsized denominating factor in the e-commerce wars is logistics and who can best put this segment together.

E-commerce companies are being bullied into leaner models because of the premium on heavy scaling that will pile on added costs to make 1-day free shipping a reality.

This isn’t selling lemonade on your driveway, getting 1-day shipping to work will be a tough nut to crack.

The result will be the imminent deterioration of FedEx (FDX) and United Parcel Service (UPS) on the expectation that Amazon will crowd them out.

It could be the case that Amazon improves its logistical capabilities to the point that FedEx and UPS will have to sell itself off or risk death by a thousand cuts.

There looks like no navigational path ahead for these two legacy logistic companies because of the nature of being lower down on the value chain.

The only other choice is if FedEx or UPS is able to jump into the e-commerce business themselves by buying a Kroger to maneuver into the integration process through the other side.

Either way, acquiring a supermarket is no guarantee of future success considering the stakes are about to become higher and higher.

I believe that Walmart will respond to Amazon by rolling out free 1-day shipping with no membership fee, boosting its customer experience while attracting and retaining customers.

Walmart is in this fight until the bitter end and they have invested heavily in improving the technological aspects of the company.

Where does this end?

Logistics will perpetually improve as companies drain more money into logistics, and customers will eventually receive their e-commerce packages in a drone less than 1-hour after payment.

Amazon CFO Brian Olsavsky told investors that Amazon is plunking down $800 million over the quarter in its fulfillment network and that number should rise every year as Amazon has targeted logistics as a huge competitive advantage that they must capitalize on and thrive in.

Amazon already has the option for 1-day free shipping in the European Union and Japan where the delivery distances are truncated.

America poses geographical challenges that will cost more to solve and will rely on the deregulation of future drone flights and cooperation with Amazon sellers to deliver this big step up in customer experience.

The constant iteration upgrades in logistics for the past 20 years have made this possible, and I believe Amazon would be well served to bite the bullet and splurge for UPS or FedEx to make it easier on themselves.

It is not shocking there is a scarcity value of logistic carriers and e-commerce giants will need more logistical capacity to execute free 1-day shipping and eventually free 1-hour shopping.

Amazon hasn’t figured out how to transport physical goods through a computer yet, but I am certain, if there was the technology, they would spend unlimited amounts to get it to that point.

The most ironic aspect of the e-commerce wars is that supermarkets, being a part of e-commerce and the logistics behind it, is the most innovative part of technology at this moment.

Tech companies have identified that customers need to eat three times per day as paramount and are sizzling through cash to build this unfathomable logistics system – effectively working miracles and becoming whirling dervishes to seize this part of the economy.

I would probably label automobiles and the self-driving autonomous technology behind logistics as the second most innovative part of technology at this moment.

As for Amazon’s earnings report, it was a mixed bag, but the good in the bag was astounding.

Profitability boosts through the scaling and efficiency savings inflated the bottom line with EPS in Q1 at $7.09 compared to expectations of $4.72.

Amazon Web Services (AWS) is still commanding enormous growth rates which is miraculous for a division its size, the cloud unit grew 41% YOY which is down from 49% last year.

On the negative side, the advertising business experienced a sharp slow down growing only 34% YOY to $2.7 billion.

Remember that ad sales were expanding over 100% YOY in prior quarters.

Total Revenue only grew 16.9% which shows how difficult it is to grow at Amazon’s size and brings down the digital ad growth rate almost on par with Facebook.

Walmart and Target will be forced to compete with free 1-day shipping, and this will make their services better as well.

The question is how much pain can investors handle in terms of capital investments?

I believe substantially more.

Walmart and Target shares are poised to move higher on the news because the improvements in their logistical services will widen the gap between the haves and have nots. 

These companies are in the midst of persuading investors they should be revalued as tech companies and duly receive growth multiples.

They are doing a great job and imagine how badly this news feels for medium-tier grocers with a minimal digital footprint.

Investors will come to grips that Amazon, Walmart, and Target will pull away from the pack and trade blows with each other.

This time it’s Amazon, but it’s not the last laugh.

Where does this all lead?

The end game is voice-triggering smart speakers where Amazon and its Echo speaker have a distinctive lead and a market share of around 70%.

Graphic interfaces will exist in only voice-activated form and content will be bundled into voice technology where even managing a Walmart order will require Amazon Echo to register sales.

That type of future is still a way off, but these are the next baby steps in that direction.

In short, revelations of free 1-day shipping to Amazon prime customers is convincingly bullish for Amazon, quite bullish for Walmart, Target, and a death knell for smaller e-commerce platforms and logistic dinosaurs.





February 28, 2019

Mad Hedge Technology Letter
February 28, 2019
Fiat Lux

Featured Trade:

(ETSY), (AMZN), (WMT), (TGT), (JCP), (M)

Why ETSY Knocked it Out of the Park

I wrote to readers that I expected online commerce company Etsy to “smash all estimates” in my newsletter Online Commerce is Taking Over the World last holiday season, and that is exactly what they did as they just announced quarterly earnings.

To read that article, click here.

I saw the earnings beat a million miles away and I will duly take the credit for calling this one.

Shares of Etsy have skyrocketed since that newsletter when it was hovering at a cheap $48.

The massive earnings beat spawned a rip-roaring rally to over $71 – the highest level since the IPO in 2015.

Three catalysts serving as Etsy’s engine are sales growth, strength in their core business, and high margin expansion.

Sales growth was nothing short of breathtaking elevating 46.8% YOY – the number sprints by the 3-year sales growth rate of 27% signaling a firm reacceleration of the business.

The company has proven they can handily deal with the Amazon (AMZN) threat by focusing on a line-up of personalized crafts.

Some examples of products are stickers or coffee mugs that have personalized stylized prints.

This navigates around the Amazon business model because Amazon is biased towards high volume, more likely commoditized goods.

Clearly, the personalized aspect of the business model makes the business a totally different animal and they have flourished because of it.

Active sellers have grown by 10% while active buying accounts have risen by 20% speaking volumes to the broad-based popularity of the platform.

On a sequential basis, EPS grew 113% QOQ demonstrating its overall profitability.

Estimates called for the company to post EPS of 21 cents and the 32 cents were a firm nod to the management team who have been working wonders.

Margins were healthy posting a robust 25.7%.

The holiday season of 2018 was one to reminisce with Amazon, Target (TGT), and Walmart (WMT) setting online records.

Pivoting to digital isn’t just a fad or catchy marketing ploy, online businesses harvested the benefits of being an online business in full-effect during this past winter season.

Etsy’s management has been laser-like focusing on key initiatives such as developing the overall product experience for both sellers and buyers, enhancing customer support and infrastructure, and tested new marketing channels.

Context-specific search ranking, signals and nudges, personalized recommendations, and a host of other product launches were built using machine learning technology that aided towards the improved customer experience.

New incremental buyers were led to the site and returning customers were happy enough to buy on Etsy’s platform multiple times voting with their wallet.

The net effect of the deep customization of products results in unique inventory you locate anywhere else, differentiating itself from other e-commerce platforms that scale too wide to include this level of personalization.

Backing up my theory of a hot holiday season giving online retailers a sharp tailwind were impressive Cyber Monday numbers with Etsy totaling nearly $19,000 in Gross Merchandise Sales (GMS) per minute marking it the best single-day performance in the company’s history.

Logistics played a helping hand with 33% of items on Etsy capable to ship for free domestically during the holidays which is a great success for a company its size.

This wrinkle drove meaningful improvements in conversion rate which is evidence that product initiatives, seller education, and incentives are paying dividends.

Overall, Etsy had a fantastic holiday season with sellers’ holiday GMS, the five days from Thanksgiving through Cyber Monday, up 30% YOY.

Forecasts for 2019 did not disappoint which calls for sustained growth and expanding margins with GMS growth in the range of 17% to 20% and revenue growth of 29% to 32%.

Execution is hitting on all cylinders and combined with the backdrop of a strong domestic economy, consumers are likely to gravitate towards this e-commerce platform.

Expanding its marketing initiatives is part of the business Josh Silverman explained during the conference call with Etsy dabbling in TV marketing for the first time in the back half of 2018, and finding it positively impacting the brand health metrics particularly around things like intending to purchase.

However, Etsy has a more predictable set of marketing investments through Google that offers higher conversion rates and the firm can optimize to see how they can shift the ROI curve up.

Etsy can invest more at the same return or get better returns at the existing spend from Google, it is absolutely the firm’s bread and butter for marketing, particularly in Google Shopping, and some Google product listing ads.

With all the creativity and reinvestment, it’s easy to see why Etsy is doing so well.

Online commerce has effectively splintered off into the haves and have-nots.

Those pouring resources into innovating their e-commerce platform, customer experience, marketing, and social media are likely to be doing quite well.

Retailers such as JCPenney (JCP) and Macy’s (M) have borne the brunt of the e-commerce migration wrath and will go down without a fight.

Basing a retail model on mostly physical stores is a death knell and the models that lean feverishly on an online presence are thriving.

At the end of the day, the right management team with flawless execution skills must be in place too and that is what we have with Etsy CEO Josh Silverman and Etsy CFO Rachel Glaser.

Buy this great e-commerce story Etsy on the next pullback – shares are overbought.



October 3, 2018

Global Market Comments
October 3, 2018
Fiat Lux

Featured Trade:
(USO), (AMZN), (MCD), (WMT), (TGT)

September 24, 2018

Global Market Comments
September 24, 2018
Fiat Lux

Featured Trade:
(SPY), (XLI), (XLV), (XLP), (XLY), (HD), (LOW), (GS), (MS), (TLT),
(UUP), (FXE), (FCX), (EEM), (VIX), (VXX), (UPS), (TGT)

The Unintended Consequences of the Euro Crash

For those of you who heeded my expert advice to buy the ProShares Ultra Short Euro ETF (EUO) last July, well done!

You are up a massive 48%! This is on a move in the underlying European currency of only 18.5%.

My browsing of the Galleria in Milan, the strolls through Spanish shopping malls, and my dickering with an assortment of dubious Greek merchants, all paid off big time. It turns out that everything I predicted for this beleaguered currency came true.

The European economy did collapse. Cantankerous governments made the problem worse by squabbling, delaying and obfuscating, as usual.

The European Central Bank finally threw in the towel and did everything they could to collapse the value of the Euro and reinvigorate their comatose economies. This they did by imitating America?s wildly successful quantitative easing, which they announced with local variations last Thursday.

And now for the good news: The best is yet to come!

Europe is now six days into a strategy of aggressive monetary easing which may take as long as five years until it delivers tangible, sustainable results. That?s how long it took for the Federal Reserve?s QE to restore satisfactory levels of confidence in the US economy.

The net net is that we have almost certainly only seen the first act of a weakening of the Euro which may last for years. A short Euro could be the trade that keeps on giving.

The ECB?s own target now is obviously parity against the greenback, which you will find predicted in my own 2015 Annual Asset Class Review released at the beginning of January (click here).

Once they hit that target, 87 cents to the Euro will become the new goal, and that could be achieved sooner than later.

However, you will not find me short the Euro up the wazoo this minute. I think we have just stumbled into a classic ?Buy the Rumor, Sell the News? situation with the Euro.

The next act will involve the ECB sitting on its hands for a year, realizing that their first pass at QE was inadequate, superficial, and flaccid, and that it is time to pull the bazooka out of their pockets once again.

This is a problem when the entire investment world is short the Euro. That paves the way for countless, rip your face off short covering rallies in the months ahead. Any smidgeon or blip of positive European economic data could spark one of these.

Trading the Euro for the past eight months has been like falling off a log. It is about to get dull, mean and brutish. So for the moment, my currency play has morphed into selling short the Japanese yen, which has its own unique set of problems.

As for the unintended consequences of the Euro crash, the Q4 earnings reports announced so far by corporate America tells the whole story.

Companies with a heavy dependence on foreign (read Euro and yen) denominated earnings are almost universally coming up short. On this list you can include Caterpillar (CAT), Procter and Gamble (PG), and Microsoft (MSFT).

Who are the winners in the strong dollar, weak Euro contest? US companies that see a high proportion of their costs denominated in flagging foreign currencies, but see their incomes arrive totally in the form of robust, virile dollars.

You may not realize it, but you are playing the global currency arbitrage game every time you go shopping. The standout names here are US retailers, which manufacture abroad virtually all of the junk they sell you here, especially in low waged China.

The stars here are Macy?s (M), Family Dollar Stores (FDO), Costco (COST), Target (TGT), and Wal-Mart (WMT).

You can see this divergence crystal clear in examining the behavior of the major stock indexes. The chart for the Guggenheim S&P 500 Equal Weight ETF (RSP), which has the greatest share of currency sensitive multinationals, looks positively dire, and may be about to put in a fatal ?Head and Shoulders? top (see the following story).

The chart for the NASDAQ (QQQ), where constituent companies have less, but still a substantial foreign currency exposure, appears to be putting in a sideways pennant formation before eventually breaking out to new highs once again.

The small cap Russell 2000, which is composed of almost entirely domestic, dollar based, ?Made in America? type companies, is by far the strongest index of the trio, and looks like it is just biding time before it blasts through to new highs.

If you are a follower of my Trade Alert Service, then you already know that I have a long position in the (IWM), which has already chipped in 2.12% to my 2015 performance.

You see, there is a method to my Madness.

EUO 1-27-15

FXE 1-27-15

RSP 1-27-15

QQQ 1-27-15

IWM 1-27-15

IMF Jan 2015 WEO

John ThomasNever Underestimate the Value of Research