Enthusiasm gone crazy
As I was leaving Australia back in the late 60’s, my boss said, “You’ll love the Americans. They’re just like you. They substitute enthusiasm for intelligence.”
He meant it as a compliment. And it is. With enthusiasm — as reflected in Nike’s slogan —
anything can be built, including massive numbers of new apartment buildings now scraping New York City’s heavens:
And we wonder why rents and apartment prices in New York City are plummeting amidst the greatest construction boom ever.
There’s a timing issue here — five years at least from buying the land, getting the permits, securing the financing, drawing up the plans and then the construction. And suddenly all your old profit projections evaporate.
Then there’s the biotech stocks. They have even longer time frames — eight to ten years before their “cure-for-cancer” miracle drug is approved and they can start selling it.
This is my way of reinforcing my love for industries with shorter time spans and instant scaleability.
No need to build buildings or factories. Just grab instant capacity: The beauty of the Internet’s Cloud.
I love the cloud producers — Amazon, Google, etc. — and I love the companies that hook their products and services to it. Two of my favorites — Adobe and Netflix — just reported blow-out growth numbers you simply don’t see from companies who have to build factories or apartment buildings.
Soon Amazon, the king of the cloud providers will report blow-out numbers, taking the stock back to $2,000+.
All about Amazon
I woke up this morning freaked by this chart of Amazon’s major acquisitions of the past several years.
The company has been on a major buying spree. I worried that the company would suffer indigestion, as many conglomerates earlier had.
But then I read a piece in Seeking Alpha that ended:
Growth has been the mindset throughout the company’s life and could remain that way for a while. Like all growth stocks though, expanding their company is their top priority. Once Amazon has decided that it no longer has the need to grow, it becomes a deadly company. Its profits should skyrocket as any successful growth stocks do once they make the transition to a sustainable business plan. This isn’t to say that Amazon will no longer spend any capital on expanding, but it will likely soon reach a point where expansion will happen much slower.
In 2017, Amazon generated $117.9 billion of revenue which is a 30.8% rise from the year prior. Amazon also had a gross profit margin of 37.07%, an operating profit margin of 2.31%, and a net profit of 1.71% in 2017. The dramatic drop in Amazon’s gross profit margin to operating profit margin should be dramatically reduced as Amazon continues to upgrade their own delivery fleet. Through this, Amazon will dramatically increase their profits. If Amazon completes its fleet and stops acquiring companies at the rapid pace it currently is, they could reach a market cap of 1.4 trillion by 2020.
Overall, Amazon is an incredible company with unrivaled potential. As an investor, purchasing Amazon stock while it is still growing will all but guarantee high rewards. Amazon is incredibly diverse, which allows them to generate all of their revenue, but as they begin reaching a point of relative stability, in terms of acquisitions, their profits will begin to increase at a rapid pace level.
You can read the full reassuring piece here.
But, wait there’s more. Here’s a piece from a web site called Hackernoon headlined:
Amazon: The Company with a 100 CEOs Cannot Be Stopped
A company with a 100 CEOs can do anything.
Which begins:
Amazon appears to be a unique success when it comes to not just the success it has achieved but the diversity of businesses it has succeeded in — from online retail to web services, and the march continues into many, many new lines of business.
Almost every large, successful company struggles with growing beyond its core business. Oracle is great at selling software, Salesforce is great at cloud CRM, Apple is great at selling devices and they do an okay to good job of selling products and services that are complimentary?-?often through the exact same distribution channel.
The constraint is senior leadership bandwidth.
If your CEO and executive leadership of the company need to be bought in before you can execute, as a business leader you have to now convince leaders who have great instincts for say a retail or ad business to grok an entirely new business model. This is not easy. Most companies fail here.
Google is a great example — it’s done a great job of winning the online search market and almost anything that can be monetized using the same business model — ads. But when it tries to get into new businesses like grocery delivery, selling phones (Motorola & now Pixel), robots that walk, cars that drive themselves? — it often appears to struggle on the goto-market and business side. Where it sets up clear business units with leaders it does well, YouTube under Susan Wojcicki being a great example.
What makes Amazon succeed where others struggle so hard?
Amazon appears to be one company run well by Jeff Bezos and his direct reports like Andy Jassy — but in reality Amazon has succeeded in building a culture of 100 CEOs — it hires, grooms, develops and builds “General Managers”– there is literally over 100+ of them*.
A company with a 100 CEOs can do anything.
While many companies give GM like titles to their executives, they are often constrained by central planning of some sort. They pay what is known as the corporate strategy tax. At a company like Oracle, I couldn’t price product A if it would impact the profitability and revenue of (cash cow) product B. Every
major successful company learns to protect its cash cow — and while this initially helps, often for decades, it eventually turns into a millstone around the neck of every business. Be it mainframes, databases, ERPs, ad revenue, or whatever.
(Technically speaking, the titles at Amazon are a little mixed. Not all GM’s lead businesses but many do — from Alexa to Redshift Analytics. But the business is structured around these BU (Business Units) leads some run all of India while some are growing new businesses like “live video”.)
Why can’t every company declare 100 CEOs?
Companies often talk about agility and the desire to move faster and move decision making to the edge but they are not truly built for it.
Amazon was built ground up on APIs and Categories
Amazon’s first foray into books meant when it entered new categories, it appointed GMs for new categories who ran them as businesses. Pretty close to how a brand manager at P&G can make decisions around Tide.
But it was the key technological architectural decision of being API driven for every single (micro) service in the company that truly enabled Amazon to be a network of business units?-?interacting and doing business with each other with clear APIs and rules of engagement.
You can read the full piece here.
Amazon remains my largest position.
Pot stocks may be too late
I tried to buy some pot when I was recently in Denver. I never did. The shop was intimidating. They told me the stuff was a thousand times stronger than when I last tried pot in the 1970s. The new improved stuff is frightening. I didn’t buy any. Nor did I invest in any pot stocks — though I knew they’d boom and soon have the over-capacity as best illustrated by my two photos of Manhattan apartment buildings above.
I’m not good enough for the delicate timing necessary to make a bundle with pot stocks. Especially as I am convinced that over-capacity and over-production will crash and burn the industry.
Canada is legalizing full recreational use today. It’s the second country in the world to do so, the first being Uruguay. The New York Times did a piece on everything you need to know about Canada and cannabis, also called marijuana. Click here.
Portfolio changes
Out with BAC and CENT. Back in with SQ.
The full list is in the right hand column on the web site. Click here.
Recent volatility
Last year was straight up. This year is up with major volatility. Here’s Nasdaq year to date:
The dumbest thing we all do is to sell when it goes down and buy when it goes up.
I am guilty of this. I fight my panic instincts every time the market drops. I know intellectually we’re doing just fine. My emotions are another thing.
I have trouble avoiding the panic instinct. I suspect we all do.
I suspect that mass panic has caused much of the volatility this year — and the “causes” — China, higher interest rates, inflation, tariffs, etc. have simply been excuses that we used for our bad behavior. Heck you can’t not have a faith in an economy that’s doing so well — full employment, booming demand, new technology/new productivity, etc. etc.
Which brings me to the latest Ross Rant. Here’s an excerpt:
So the market did not crash, and we had a little correction, which is not unusual in October. Consumer sentiment is still at 100.1 in September and 99 in October, only the third time in 15 years it has been that high. Factory orders were up 1.4%, The PMI dropped from 61.3 to 59.8, but that is still an excellent number. New orders were down from 65.3 to 61.8, also still a very good number, and new orders can fluctuate based on defense spend and aircraft orders. Demand is reported to remain very strong, and employment is 58.8 up .3. These indexes will move around a bit month to month, but they remain high by any standard. The rate of change from here will be less since the indexes are already at such high levels. Some companies report tariffs are impacting margins, but that seems a bit questionable in some cases since the tariffs on all but steel and aluminum have not been fully in place, and most of the China tariffs are just going into place. There is some belief among some economists that some managements are using tariffs as an excuse for less than stellar performance. Importantly for the election, consumers felt that Republicans would be better for the economy, with the usual divergence by Dems, although even they have materially more confidence now than before. Overall, the numbers remain very strong, and the economy should continue to be very good for at least another 3-5 quarters.
The real issue for stocks is the Fed, and potentially the EU. Trump is not alone suggesting the Fed is moving too much now, and with inflation still at around 2%, there is less need to push rates as hard. There are others who suggest the Fed not raise much in 2019, if at all. As I have been pointing out, the economy is very different today than it was even 5-10 years ago before Amazon and Walmart were having such an impact, before tech and efficient logistics were as prevalent to keep costs down, and before it was so easy to compare prices online, thereby creating price transparency we never had before. With global logistics so efficient now, it is easy to source goods all across the world, and for US producers to shop prices for components, and seek out the best prices. This is a different economy than the Fed models have been created for in the past. If the Fed is looking ahead, they should be more concerned with how they are going to deal with what some good economists forecast will be a recession in early 2020 when the deficits will catch up to us, and the impact of the tax cuts and fiscal stimulus has already been ingrained in the economy.
Do not be surprised is the Fed does one more in December, and maybe one in March, but then maybe pauses a bit. More likely they will keep raising, but we will see. The ten year should level out here around 3.1%-3.25% for a while. Although mortgage rates are now around 5%, they are still far below the norm of the past generation. The problem is, young people buying a house think 3.5%-4% is the norm, when it is really 8%. In my view the issue is more psychological due to the 3.5%-4.5% rates of the past 8 years being all that buyers know. In many cases it is the requirement now for 20% down which many do not have because they have student loans or just did not save. The other issue is that home prices have risen a lot, and in many places the prices are now possibly too high. Maybe the Fed will decide they have pushed up mortgage rates and slowed housing enough for now. We will just have to wait and see.
You can (and should) subscribe to Joel Ross’s Ross Rant here.
Spoof on art critics. You must play it through. It’s short and funny.
Two wonderful cartoons
Harry Newton, who loved yesterday’s huge bounce in stock prices. I don’t believe we’ve seen the end of October’s misery. We’ll have more down days. Perhaps today. But writing today’s blog gave me a good injection of anti-panic serum.
I haven’t owned IBM for eons. I know they’re getting big in the Cloud. But I also know they’re not organized with 100 CEOs. There’s too much bureaucracy at IBM and far too much obsession with cost-cutting. It’s moved jobs to Asia — a strategy that seems to me to be cutting off your nose to spite your face. (I hope I have the right metaphor.)
I’m playing tennis at 7:00 AM this morning. Maybe I’ll hit a down the line backhand winner? And that will keep me buoyed today. The necessity to always feel good is the hallmark of an immature personality. I plead guilty.
