Financial Review

Amazon Clicks Whole Foods

Sinclair Noe — June 16, 2017

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DOW + 24 = 21,384 (record)
SPX + 0.69 = 2433
NAS – 13 = 6151
RUT – 3 = 1406
10 Y un = 2.16%
OIL + .26 = 44.72
GOLD – .30 = 1254.30
BITCOIN – 2.07% = 2475.70 USD
ETHEREUM + 2.52% = 370.29

The Dow Jones Industrial Average notched its 21st record of 2017. The tech-heavy Nasdaq Composite ended lower and booked a second-straight weekly loss, extending what has proven a painful weekly stretch for tech’s high-fliers.

Amazon is buying Whole Foods for $13.7 billion, which works out to $42 per share. Yesterday, Whole Foods closed at $33.06 per share. Amazon made an unsuccessful run at Whole Foods last year. Since that attempt, Whole Foods share price dropped about 30%, or roughly the premium that Amazon is paying.

After announcing the deal, Amazon shares closed 23.54 at 987.71, gaining about $12 billion in market cap – so they almost paid for it today.

It’s not clear yet what Amazon plans to do with Whole Foods, but it has big plans for the future of grocery stores. Last December, Amazon revealed a concept for a physical store. It involves using an app as you shop.

The idea is that you open the app when you enter the store; whenever you add a product to your shopping cart, the app automatically recognizes the product, and you walk out of the store with your products, without going through a checkout line, and your Amazon account is automatically debited.

Amazon opened an Amazon Go grocery store in downtown Seattle earlier this year. Amazon has also worked on the idea of ordering your groceries online, then driving by the store and picking up your order; kind of a drive-through grocery. If Amazon can train us to pick up our grocery orders, it’s just a matter of time until they make us pick up our own deliveries.

Amazon had said it wanted to open 2,000 Amazon Fresh – branded grocery stores over the next 10 years. Don’t look for an immediate transformation at Whole Foods stores, but this clearly puts Amazon on a faster track.

The grocery market is the single largest shopping category in the US, at $600 billion in spending last year, but it’s also a tricky one because of its notoriously thin profit margins and high operating costs. Amazon might use membership fees to offset the high operating costs of grocery stores.

On the other hand, eliminating the membership requirement could help the stores reach a broader set of customers and increase sales faster. There are plenty of possibilities and as of today, it is speculation but the Whole Foods purchase changes the landscape dramatically.

Suddenly Amazon owns a nationwide network of 460 already-popular grocery stores that have already solved the tricky logistical problems involved in sourcing and storing fresh food. What Amazon brings is the world’s largest online sales portal and its mastery of the home-delivery business.

If you’re in the grocery business and your name is not Amazon or Whole Foods, today is not a good day for you. Kroger dropped 9%, Target down 8%, Costco, Sprouts, and Walmart dropped around 5% each.

If you’re a consumer, this is the next step to Amazon becoming the dominant retailer. Adding groceries means Amazon will be a one-stop destination for everything you buy. And you will visit on a more regular basis. And if you visit to buy groceries, you might just pick up a new shirt, and a flashlight, and even a book. It reinforces the behavior by which customers search for things to buy on Amazon.com, rather than on a search engine like Google.

It builds Amazon’s two-hour delivery business, which it sees as crucial to its future. It also encourages people to use the Amazon Echo smart speaker for shopping lists and purchases, which makes far more sense when you’re ordering groceries than it does when you’re trying to buy, say, a new lamp or a pair of shoes.

The Whole Foods deal is Amazon’s biggest acquisition, but certainly not the only one. In the past decade, Amazon has also purchased the web’s biggest independent online shoe store, its biggest independent online diaper store, and its biggest independent online comics store. It is already the country’s biggest online retailer of cleaning supplies and home goods.

Last year, Amazon sold six times as much online as Walmart, Target, Best Buy, Nordstrom, Home Depot, Macy’s, Kohl’s, and Costco did combined. Amazon also generated 30 percent of all U.S. retail sales growth, online or offline.

It also lends credit, publishes books, designs clothing, and manufactures hardware. And it operates Amazon Web Services, a $12-billion business that rents servers, bandwidth, and computing power to other companies. Slack, Netflix, Dropbox, Tumblr, Pinterest, and the federal government all use Amazon Web Services.

During its first 10 years in operation, Amazon rarely returned profits, and investors allowed Bezos to invest in infrastructure and market share. The result is today’s Amazon: a behemoth company that returns a meager profit, and increasingly exerts its dominance over a large part of the economy.

President Trump has ordered tighter restrictions on Americans traveling to Cuba and a clampdown on U.S. business dealings with the Cuban military. Trump signed a presidential directive rolling back parts of Obama’s historic opening to the Communist-ruled country after a 2014 diplomatic breakthrough between the two former Cold War foes.

But Trump left in place many of Obama’s changes, including the reopened U.S. embassy in Havana. Trump’s revised approach calls for stricter enforcement of a longtime ban on Americans going to Cuba as tourists, and seeks to prevent U.S. dollars from being used to fund what the Trump administration sees as a repressive military-dominated government.

U.S. homebuilding fell for a third straight month in May to the lowest in eight months as construction activity declined broadly.  Housing starts fell 5.5% to an annual rate of 1.09 million in May.

And the University of Michigan consumer-sentiment index fell to 94.5 in early June reading, the weakest since November. The modest 2.6 percentage point decline in sentiment masked a much larger decline since June 8 when Comey testified to the Senate Intelligence Committee.

Prior to the testimony, the sentiment index had averaged 97.7, but since June 8 the index registered at 86.7, a decline of 11 points. The decline was observed across all political parties, but Republicans had the bigger loss of confidence.

Aside from the weekly jobless claims, most of the economic data released this week—inflation, retail, housing—was below expectations.

We’ve told you about the problems at Wells Fargo, how they opened more than 2 million bogus accounts, how they changed mortgage terms without customer approval, how they retaliated against whistleblowers.

Now, it seems it is contagious. A CenturyLink employee claims she was fired for blowing the whistle on the telecommunications company’s high-pressure sales culture that left customers paying millions of dollars for accounts they didn’t request, according to a lawsuit filed this week in Arizona state superior court.

The complaint alleges CenturyLink “allowed persons who had a personal incentive to add services or lines to customer accounts to falsely indicate on the CenturyLink system the approval by a customer of new lines or services.” This would sometimes result in charges that hadn’t been authorized by customers, possibly millions of dollars in unauthorized fees.

CenturyLink is amid a $34 billion merger with Level 3 Communications. CenturyLink shares lost 7% today. T-Mobile was the subject of a critical report in December from a labor group called Change to Win Retail Initiatives that said the carrier put its sales staff under pressure to meet difficult sales goals. The pressure caused T-Mobile employees to force some customers to enroll in services they didn’t necessarily want or authorize.

Seriously, this might be a contagion. Maybe we should call it Wells Fargo-itis.

Financial Review

No Fear

Sinclair Noe — October 31, 2016

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

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DOW – 18 = 18,142
SPX – 0.26 = 2126
NAS – 0.97 = 5189
10 Y – .01 = 1.83%
OIL – 1.94 = 46.76
GOLD + 2.30 = 1278.00

Another Merger Monday. For the second consecutive week, we have a batch of big mergers announced. US mergers and acquisitions activity in October was already at a record high before these deals were announced, led by AT&T’s giant deal for Time Warner.

GE is merging its oil and gas business with Baker Hughes. GE will own 62.5% of the new publicly traded company, which will have combined revenue of $32 billion, while Baker Hughes shareholders will own 37.5% and will receive a one-time special dividend of $17.50 a share when the deal closes. The combination of GE Oil & Gas and Baker Hughes will create the second-largest player in the oil-field services industry in terms of revenue after Schlumberger.

Telecommunications company CenturyLink said it would buy Level 3 Communications in a cash-and-stock deal with an equity value of about $24 billion, or about $34 billion, including debt. The deal implies a purchase price of $66.50 per share – a premium of approximately 42% above where Level 3 shares were trading last week, before reports surfaced of a potential acquisition. The combination will increase CenturyLink’s fiber network in the US to 450,000 miles from about 250,000.

Blackstone Group will buy TeamHealth Holdings in a deal valued at about $6.1 billion. TeamHealth is a hospital staffing provider. Blackstone will pay TeamHealth shareholders $43.50 per share held, a premium of about 18 percent to the stock’s Friday close.

 Multiple sources say a long-rumored merger between DraftKings and FanDuel is imminent; the pair’s recent settlement with NY Attorney General Eric Schneiderman cleared a key obstacle to the pair-up. Some of the major details discussed last week included executive leadership, the name of the company, whether one site or two will be used, and where the company headquarters will be located. Combined, the two firms cover 90-95% of the daily fantasy market.

Brocade Communications spiked as much as 24% today after a report that the company is finalizing talks to sell itself. Bloomberg reported that a sale of the data-storage and networking provider could be announced as soon as this week, and Broadcom is one of the interested potential buyers. Broadcom makes semiconductors, part of the components that go into Brocade’s networking equipment – so it might make a good fit.

Consumers boosted their spending in September at the fastest pace in three months, while their incomes grew by a modest amount. Consumer spending increased 0.5 percent, a significant rebound from August when spending fell 0.1 percent. The increase was led by a 1.3 percent surge in spending on autos and other durable goods. Incomes increased 0.3 percent in September, slightly faster than the 0.2 percent gain in August. With spending rising faster than incomes, the personal saving rate slipped slightly to 5.7 percent in September, down from 5.8 percent in August.

A key inflation gauge followed by the Federal Reserve was up a slight 0.2 percent in September, while core prices, excluding food and energy, rose only 0.1 percent. Over the past year, core prices are up just 1.7 percent, still below the Fed’s 2 percent inflation target. The Atlanta Federal Reserve’s GDP Now forecast model showed the economy is on track to grow at a 2.7% annualized pace in the fourth quarter.

Fed officials meet this week, but they are expected to its key policy rate unchanged at 0.25 percent to 0.5 percent, where it has been since December of last year. The FOMC will wrap up their 2-day meeting on Wednesday. Still, it looks like a rate hike will come in December, and so this week’s FOMC statement will likely include some sort of vaguely blunt Fedspeak sending a clear message to markets that, barring any unforeseen hiccups, the Fed is a go for a December hike.

On Friday, we have the October jobs report. The economy has been averaging 178,000 new jobs per month for 2016, and that is the estimate for the past month; however, the September numbers were off a bit – only 156,000. This will be the biggest economic report before next week’s election.

Bond markets around the globe are acting rattled by inflationary pressures and October was a bad month for bonds, down 3%; and even US Treasuries lost 1.2%. People are responding to this idea that central banks will be suddenly shifting away from their excess accommodation.

Commercial banks in the US have amassed $90 billion of Treasuries and non-mortgage debt from federal agencies this year alone, bringing the total to $754 billion, according to data compiled by the Fed. The 5 biggest US banks held a combined $206 billion of government debt at the end of the second quarter, according to the latest available filings. That’s a 74 percent increase over the past three years.

Including federally guaranteed mortgage-backed securities, banks now own $2.4 trillion of government bonds, which would be the most since the central bank began compiling data in 1973. Why are banks hoarding all that debt? One reason is tighter regulations; the other is banks aren’t lending more because the economy isn’t growing as fast as we’d like it to grow. A big reason banks are funneling so much money into safe assets is that deposit growth is outstripping loan demand.

Eurozone economic growth remained steady at 0.3% in third quarter, indicating 1.6% over the year and suggesting the bloc’s steady recovery has not so far been knocked off course by Britain’s vote to leave the EU. Inflation figures, released at the same time, saw a modest rise in October. The service sector helped boost the Flash Inflation figure to 0.5%, up from 0.4% in September, but the number narrowly missed expectations for a 0.6% rise.

Officials and experts from OPEC countries and non-OPEC nations including Azerbaijan, Brazil, Kazakhstan, Mexico, Oman and Russia met for consultations in Vienna on Saturday and they could not agree to a specific commitment to join OPEC in limiting oil output levels to prop up prices, suggesting they want the oil producing group to solve its differences first. On Friday, OPEC members failed to agree how to put in place a global deal to limit production, following objections from Iran which has been reluctant to freeze its output. The non-OPEC did agree to meet again in November before a scheduled regular OPEC meeting on Nov. 30.

Elon Musk has unveiled a new kind of solar roof that will be offered starting next year through SolarCity, the home solar installation company that he is seeking to merge into Tesla. Whether meant to emulate clay tiles on a Spanish-style house or shingles on a colonial, Musk said they have 98% of the ray-collecting power of a conventional solar panel, are durable and will last longer than the house itself. Tesla gave little detail on cost, except to say that the cost of the roof would be less than a conventional roof plus solar. The plan is to combine the solar roof tiles with a bank of batteries called Powerwall, and provide power to an electric car.

Moody’s Investors Services just issued a bond rating report explaining how and why it considers climate change risk in rating energy companies. Among the G20 economies, electricity production and central heating account for 45 percent of the country’s carbon emissions. This is, of course, the economic sector that can utilize renewables right now. The firms in the electric business are capital intensive and issue bonds often. If the rating agencies become negative on the sector and lower the bond ratings, companies will pay more to raise money and a few will not be able to raise money.

Moody’s argument could be boiled down to this. The cost of renewable energy is falling, and lower renewable prices will put pressure on wholesale energy prices just as carbon pricing adds to the costs of the carbon-fueled generators. Thus, margins will fall the most for the least efficient carbon-fueled facilities. Moody’s entitled its report, “Carbon Transition Brings Risks and Opportunities”. In sum, it appears that big money is beginning to speak, and it says, “Carbon emissions count and if you don’t believe that, you’ll pay dearly if you need money and you might not get our money at all.”

Volkswagen plans to cut more than 10,000 jobs in coming years as the German auto giant switches its focus to making electric cars in the wake of its Dieselgate scandal.

Prime Minister Justin Trudeau has finally signed Canada’s free trade agreement with Europe at a ceremony in Brussels. CETA will remove 98% of tariffs – and officials hope it will generate an increase in trade worth $12 billion a year. For a while it looked like the trade deal might not happen because Wallonia, a province in Belgium objected to certain provisions, which were ultimately changed.

But the Walloon intransigence has underlined the extent to which trade has become politically radioactive as citizens increasingly blame globalization for growing disparities in wealth and living standards. What about implications for the much-debated US –EU trade deal? EU Trade Commissioner Cecilia Malmstrom declared, “TTIP is not dead,” adding that negotiations will continue after the November election.

Putting the fizz back into its line-up, Coca-Cola Ginger was launched in Australia today, as the South Hemisphere country ushers in summer. Coca-Cola South Pacific noted that sales of ginger-flavored drinks were up 6% in Australia over the past year, and Bundaberg Ginger Beer has been a favorite since it was launched in 1960.

Sony Corp cut its annual profit outlook due to losses related to the sale of its battery business – disappointing a market that had been hoping for an upward revision on sales momentum for PlayStation 4 and the launch of its virtual reality headset. Sony will announce its first-half results tomorrow.

Happy Halloween to everyone. I hope you enjoyed my costume today –if you haven’t noticed, I’m dressed as a weary broadcaster, sick to death of this seemingly never-ending political campaign where issues have fallen into a bottomless abyss, never to see the light of day. Eight more days until the 2016 campaign is over. Unless … No we won’t even go there. It’s gonna be over. Anyone who mentions the 269-269 electoral vote scenario gets banned.