Earnings AMZN and GOOG

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Has the market found a support level? We have become accustom to the Fed riding in to the rescue and injecting 100′s of billions in the system, yet Bernanke seemed to ignored the market, currency crisis, earnings, and even lack luster economic data. Of course, I am of the ilk that believes Bernanke is trying to close his tenure by marking his legacy as saving the economy with extraordinary measures and also taking responsibility to end it. Yet the Keynesian’s, the likes of Yellen and Krugman, believe we can’t end it and, in fact, Krugman believes we should increase it. Will legacy perhaps trump ideology? Regardless, Bernanke is out and Yellen is in. I remain a firm believer that Yellen is not going to continue with Bernanke’s taper schedule. Because of the political and economic shenanigans at the Fed and dealing with a handover, legacy, and extraordinary measures – the market feels that it has been left to its own devices and that means the current support level may not hold.

Earnings Amazon and Google

We saw initial sales reports after Christmas and they weren’t good. In fact, we saw a contraction over Black Friday for the first time in years. Earnings have been mixed and we are seeing that those that beat are doing so by managing costs, as top-line revenue and sales domestically are weak. We did see an increase in online sales, but we saw massive margin compression across the board as online and brick-and-mortar competed. That impacted the bottom line, domestically, and the only real growth continues to remain in the emerging markets.


Courtesy of Wikipedia

Amazon (AMZN) has been the world’s benchmark online retailer. They have dominated online sales and have been the go-to website for price comparison, reviews, and free shipping. They boosted sales by adding a new vertical market with their e-Reader, the Kindle, and the company expanded into cloud storage and other services. No doubt Amazon is an amazing company and continues to innovate in how we shop, but much like Apple and other innovators you reach a point in which you move from a growth company to a commodity type company. Growth companies are driven by two factors; first, is their expansion into customer acquisition and having not reached maximum penetration. The second factor is innovative services, which creates new vertical sales and revenue. Apple was the master of this. Every 4-5 years they created a new technology that created a new vertical sales product that saw new customer acquisition. Eventually, they hit maximum market penetration, competition, started fighting over the pie, and their growth is now based on “next generation” replacements. However, when you don’t continue to innovate, face maximum penetration, face competition, and look for growth in “placement” for next generation, then growth slows dramatically. Amazon is facing other hurdles with competition and margin compression. In order to gain more market share they must continue to lower prices. With Amazon Prime and free shipping, this can be a huge loss leader factor. Interesting story: a friend of mine looked for the heaviest item that falls in the “Free shipping” Amazon Prime program. It was a massive safe. The company that sells the safe charges about $700 in shipping, but under Amazon Prime, it is FREE. That means that every one of these safe’s that Amazon sells at the competitive price and low margin, then ships for FREE, they are losing $100′s of dollars.

A very short holiday season, margin compression, losing money on “free shipping” and weak consumer demand is now being realized in their latest earnings report, which fell short of analyst’s expectations. The company reported $25.59 billion in sales, below the $26.06 billion expected. Sales guidance is also disappointing at $18.2 to $19.9 billion. Part of the bottom line problem has been the huge margin compression and costs from the current Amazon Prime program. The company is considering raising their Prime fee by $20 to $40 per year, which will hopefully offset some of their losses in shipping.

Margin compression, lower growth forecasts, and existing concerns over costs have stung the company. Those that were buyers in Amazon because of growth factors have realized that probably the heady days of double digit growth is behind them and the company is changing (much like Apple) into a commodity driven company where the focus is on margins as it faces more competition. The stock is down sharply, over 7%, in the pre-market. I would look at the $360 level, as a broader support area, with a low of $320 if we see continued weakness. I would not be looking at buying the stock today as we need to see how their margins look going forward. They just lowered their forecast – which means even the company feels that next quarter is going to be weaker than expected.

Courtesy of Wikipedia

Google (GOOG) reported earnings that have missed expectations, but as I have pointed out before, sometimes it is not the bottom line that matters. Top line revenue and sales is always the core driver of any business and, in the long run, if that is growing then it’s just about managing costs. Google’s core revenue business rose a massive 22%, which is STRONG double digit growth and always good news. Remember, bottom line impacts come from everything: costs, write-downs, acquisitions, etc. Google missed on the bottom, with $12.01 per share, expectations were for $12.20. However, the expectations for the top line were $16.75b, but they came in at $16.86b. That is the news that is creating some pre-market excitement in the stock. In a weak economic 4th quarter, short-holiday season, with weak economic data and consumerism, and lowering expectations, for a company to see strong revenue and sales growth is a bright spot and is certainly good news. The company is also shedding its money-losing Motorola unit, which saw revenue fall from $1.51b to $1.24b. Another bright spot was seeing that paid clicks for their online ads jumped 31%, costs per click did decline 11%. The good news is that they are gaining more of the market share in a competitively priced market. Yahoo is not faring well in that regard. The company also announced a long awaited stock split that is expected to happen at the beginning of April. All in all, the news was better than expected and in economic cloudy days it is surely welcomed. The stock is up sharply, over 3%, in the pre-market.

Looking at the indices, the only stock looking higher in the pre-market is Google. The rest of the world is focused on the problems in currency woes from some of the heavily indebted, emerging nations. There are also concerns about the socialist countries in Europe that are facing need for more money. Additionally, the domestic economic data has not been good and earnings continue to reflect a consumer that is struggling.

Support & Resistance

INDU 15,700
The pre-market futures are under serious pressure. The question is on whether we can hold this support level. If we don’t bounce after the opening, we could start sliding lower and see margin calls kick in, that could feed on the sell-off.

NDX 3500
Google is up strongly, but it is not enough to keep the rest of the stocks in this index from declining. Apple and Amazon are continuing to decline. Look at 3500 as support, if we can’t close above that – I would look expect broader selling pressure.

SPX 1775
Between 1770 – 1780 is a broad support area, we will certainly test it in the morning, but we will have to see if it can hold. Remember, we are at all-time high margin levels; the market rallied on borrowed money. If we start getting any margin calls, a sell-off just feeds on itself. The VIX will probably get back above 18 this morning, but it is all about the close. Do we close strong and stay above 1775 or see weakness?

RUT 1120
The broader market is what I am watching and we really need to see it hold at this level. If we see volume pick-up and break-down below 1120 we could see selling feed on itself, especially if we start seeing margin calls. Watch the close and set your alerts. The 10-year bonds are falling to 2.6%, as we see a rush in to treasuries as if that is the safe place to be.

Central Bank Action Pending?

I am still a strong believer that we will see Yellen, the IMF, ECB, and even Germany step in with some kind of monetary policy change. The IMF already announced some serious concerns and that they are closely monitoring the situation. What they are saying is they have their fingers on the bailout button. Yellen could announce some emergency measures as well, if things start falling apart.

I would also not be surprised to see a nation or two (like Argentina) announce some kind of devaluation on Sunday and as quietly as possible not to alarm the world markets. They are doing whatever they can to keep hyperinflation from exploding in their faces, but the irony is that their Socialist and Keynesian measures are actually just inflating the bubble even more.

I believe that Yellen and the central banks can contain the panic and bring a reprieve to the market, but this is psychological only and will most likely come from some massive money printing and asset purchase scheme. Again, another massive can-kick and, of course, creating more hidden inflation in the West.


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