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Amazon’s latest move is a nightmare for retailers

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From Richard Smith, Founder, TradeStops:

Here is a little-known fact about Jeff Bezos. He once considered naming his online book store “Relentless,” and registered the URL in September 1994. In fact, if you type the web address www.relentless.com into your web browser, it redirects toward Amazon to this day.

That makes perfect sense, because Jeff Bezos is the most relentlessly brilliant businessman who has ever lived. He is like the Genghis Khan of e-commerce, conquering the Western World of retail.

But instead of laying siege to fortified cities and castles with moats and walls, Amazon — the trillion-dollar company Bezos founded — vanquishes brick-and-mortar foes. If you have stores and you sell to retail customers at scale, Amazon is terrifying.

The nosebleed valuation of AMZN shares suggests that e-commerce world domination is already priced in, making it hard to say whether AMZN is an immediate buy. But the implication here is not just to be bullish on Amazon. It is to be bearish on Amazon’s retail opponents, who are under siege by the relentless Amazon machine.

Believe it or not, sometimes the bearish side offers the easier trade. Consider the rise of the automobile in the early 20th century. It wasn’t clear which automobile company to buy, but it was a dead obvious move to short the horse and buggy.

This comes to mind in the aftermath of Amazon’s latest master stroke: Raising wages to $15 an hour for roughly 350,000 employees, while up-ending the entire retail employment landscape in the process.

Jeff Bezos already had credit for being a visionary, but the $15 wage move takes him to a whole new level of tactical brilliance. In raising wages to $15, Amazon has made peace with its loudest critics in a single stroke. It has insulated itself from political pressures. It has gone from “bad guy” to “good guy” in terms of big tech optics. And it has done all the above with a first-mover advantage in an area where it would have had to act anyway. And best of all, this $15 wage move could absolutely gut brick-and-mortar competitors.

Meanwhile, Amazon’s total cost for the move is estimated to be less than 1% of annual revenues. The company will be penalized far less than rivals for higher wage costs, because Amazon is a leader when it comes to labor-reducing innovation. In addition, the wage hike makes Amazon impossible to compete with in a super-tight labor market for seasonal workers ahead of the holiday season.

In this late stage bull market, happy investors are prone to assume that all stocks can go up. But they forget that “creative destruction” is a key aspect of capitalism, more cutthroat than Kumbayah. And in taking market share and profit from its rivals, Amazon is possibly the greatest destroyer since Shiva.

Consider the crazy optics of Bernie Sanders, arguably the most famous left-wing populist on the planet, tweeting out praises for Bezos, a CEO tech titan who made nearly $40 billion in a single year.

“What Mr. Bezos has done today is not only enormously important for Amazon’s hundreds of thousands of employees, it could well be a shot heard around the world,” Sanders tweeted in response to the $15 wage news. “I urge corporate leaders around the country to follow Mr. Bezos’ lead.”

Sanders had been a serious political threat to Amazon. He had just co-sponsored the Stop BEZOS Act, a bill that would tax companies based on how many workers are on public assistance. And now, he is cheering Amazon instead of criticizing them and urging other companies to follow suit. You can’t buy that kind of PR. (Or maybe you can actually… )

Amazon and Bernie Sanders are now on the same team in terms of broader wage movement. Amazon has promised to help lobby for a $15 wage all across the country. That’s huge in a time where the federal minimum wage is $7.25 and, as of this writing, no U.S. state has a minimum wage above $12.

The $15 level chosen by Amazon is no accident either. In theory, a $14 wage would have worked too. But in choosing $15, Amazon has also appeased the “Fight for $15” wage movement, which has a lot of attention and support. They, too, must now see Jeff Bezos as their strong ally, leading the way for $15 everywhere.

This is a nightmare for all of Amazon’s competitors currently paying less than $15, who now have to pay more to their employees or look like jerks, and who are now beaten in a time of labor shortages.

Wal-Mart had only gone to $11 per hour this year. Target had gone to $12 per hour, with a promise of $15 eventually, but not until the year 2020. Surprise! Now they are the bad guys unless they raise wages quickly, which will squeeze their profits and reduce their available expansion capital.

Oh, and if they don’t raise to $15 an hour, then aside from the bad press (Sanders is now trained on them) they will fall further behind in the competition for seasonal workers ahead of the holiday season, which is now so brutally competitive it is practically a knife fight on the docks among big retail players.

Everyone of note in retail is trying to add tens of thousands of seasonal workers ahead of Thanksgiving and Christmas, some of them seeking a hundred thousand or more — including logistics players like UPS and FedEx. Amazon just took a lead on all of them, while garnering huge publicity in doing so.

This wage move by Amazon is reminiscent of what they did with sales taxes. For many years, Amazon resisted paying state sales taxes — a crucial move as the company plowed every penny it could find into scaling and growing at a breakneck pace.

But then, one day, Amazon happily changed its tune — and it now voluntarily collects sales taxes in 45 states and the District of Columbia. Why the change? Because Amazon switched to a new strategy of building warehouses across the country, which would have required tax collection anyway.

It’s similar with wages. At some point, Amazon would have had to raise wages regardless, just to stay competitive in a hot labor market. The average wage for warehouse workers had also been rising at least twice as fast as the national average, and $12 an hour was already seen as a floor.

So, Amazon is now getting rounds of applause from its biggest critics for making a move that it would have eventually had to do anyway while putting the big hurt on its competitors. And, as if that weren’t enough, Wall Street is likely to penalize Amazon less for wage hikes, because the company is on a fast path to automating its warehouses.

It is far easier to gear up robot shelf pickers and box packers than it is to replace human retail workers. Yet another pain point for brick-and-mortar competitors — and more Wall Street love for Amazon.

Bezos is also thinking about political threats, which will only intensify as Amazon gets bigger.

The tech giants have increasingly been under a microscope, with the threat of regulation looming and consumer sentiment souring. And yet all of a sudden, as a result of the $15 move, Amazon has become one of the good guys (while Google, Facebook, and even Apple, are increasingly treated as bad or questionable on multiple fronts).

As a side note, we have to wonder, perhaps a bit cynically, if the multi-state competition for Amazon’s second headquarters was always fixed in favor of Washington, D.C. After all, Amazon has already doubled its lobbyist count since 2016. It is the most active D.C. lobbyist in big tech by far, with lobbying interests in drones, autonomous vehicles, air cargo, cyber security, data privacy, intellectual property infringement, cloud computing, pentagon procurement, and tax and food stamp issues (according to the Financial Times).

It makes perfect sense, then, for Bezos to have his second HQ and his second home where he entertains top D.C. power players — in easy reach of the political movers and shakers whose plans he will need to influence as he seeks to protect and grow his empire.

Again, the brilliance here is epic. And the CEOs of large brick-and-mortar retail companies should be throwing up in their wastebaskets. Bezos is coming for them.

Consider, for example, what happens in a super-tight labor market for seasonal holiday workers. With $15 wages on offer from November 1, it becomes far more rational for a seasonal worker to choose an Amazon warehouse job over a lower paying one at a brick-and-mortar retail store.

This means the customer service experience for brick-and-mortar retail outlets will suffer — due to worker shortages — at a time of year when the crowds are thickest and sales staff are most needed. That could lead to lost sales, longer checkout lines, soured customer experiences, and more customers swearing off brick-and-mortar permanently and switching more toward e-commerce — turning primarily to Amazon.

At the same time, we are now seeing weak brick-and-mortar retail players on the brink of extinction, with their implosion having a knock-on effect on larger retail outlets. Amazon is accelerating that extinction process to its own compounding benefit.

In recent days Bed Bath & Beyond (BBBY) and Pier 1 Imports (PIR) both saw greater than 20% share price declines in a single day, as poor sales numbers accelerated a sense of crisis. In fact, Pier 1 Imports has seen a stock price decline of greater than 90 percent over the past five years. But Pier 1 still has nearly 1,000 brick-and-mortar stores. So does Bed Bath & Beyond.

What this means is that, as PIR and BBBY start to inevitably shutter their large network of stores, the shopping centers where they have a presence will see reduced traffic. The blight of empty stores will be harmful to the other tenants that are still alive. And more customers will shrug and shift more of their purchases to online retailers such as Amazon.

So here is the trade in all of this. If you are worried about nosebleed market valuations in terms of an overbought market in general or just want to hedge your portfolio a bit in these lofty times, you might consider put options on XRT, the SPDR S&P Retail ETF.

Amazon is not represented in the top holdings of XRT. And most of the companies in XRT are retailers now under siege, either indirectly or directly, by the Amazon machine. Here are XRT’s top 10 holdings by weight via Yahoo Finance (as of today):

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In fact, the news of Amazon’s $15 wage move was attributed as a driving factor for the recent sharp drop in XRT, which took a nasty tumble on Oct. 2. To use Sanders’ words, “a shot heard around the world,” indeed.

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As of this writing, XRT has not shed its green zone status with respect to TradeStops.

But a few more days of decline could break an uptrend that had been in place for more than a year (since August 2017) and the bloodletting could now be underway.

The $15 wage hike was a warning shot: Amazon is not only coming for the business of the brick-and-mortar players, it is coming for their employees, too, while raising their costs and degrading their seasonal holiday offerings.

We are agnostic as to Amazon’s immediate outlook due to its lofty valuation these days (world domination already priced in) — but things could hardly look more bearish for XRT, and investors are only just waking up to this.

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Richard


Crux note: Choosing when to be greedy and when to be fearful can wreak havoc on your portfolio if you get it wrong…

That’s when you’ll be glad you use TradeStops. Dr. Richard Smith’s investment tools take the guesswork out of the equation by telling you when to sell a losing stock – meaning you can make more money while taking less risk.

Richard’s philosophy is to cut your losses and let your winners ride… And his results speak for itself. You can discover why one satisfied investor called TradeStops his “safety net”  right here.


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Retail earnings reports, China trade impact

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CNBC’s Jim Cramer on Friday said he expects more of the same in the week ahead of stock trading.

“Next week, once again, is all about trade and retail,” the “Mad Money” host said. “This is the week when most retailers report, so we will be listening closely to what they say about the trade war.”

Monday: Trade watch

The stock market will confront the same issues on Monday as the week prior. The days following will see a lot of retailers hold conference calls, and Cramer is looking to see what they have to say about tariffs on Chinese imports.

“The market will punish companies that source in China and reward companies that don’t, because that’s what [President Donald Trump] is doing,” he said.

Tuesday: Home Depot, TJX, Nordstrom

Home Depot: The home improvement retail giant reports earnings before the bell. Cramer is expecting weather to weigh on earnings again.

“There’s much too much rain this gardening season, and I bet that hurt them,” he said. “I still believe Home Depot can tell a decent story about trade, but it won’t matter if gardening season, their equivalent of Christmas, turns out to be a bit of a bust.”

TJX: The T.J. Maxx parent delivers its quarterly results to shareholders in the morning.

Nordstrom: The luxury department chain has an earnings call at the end of trading. The stock is down more than 20% this year and more than 27% in the past 12 months.

“At these levels, it pays you a 4% yield. I think it may be too cheap to ignore,” Cramer said.

Wednesday: Lowe’s, Target

Lowe’s: Lowe’s, the main rival to Home Depot, presents its quarterly earnings before the market opens. CEO Marvin Ellison is guiding the home rehab chain through a turnaround.

“Wall Street loves Ellison, though,” Cramer said. “If Lowe’s gets hit, either before or after the quarter, I’d be a buyer of the stock.”

Target: Target comes out with its latest results before trading begins. The stock is about $20 per share off its September high and has a 3.6% yield.

“I know it’s battling both Walmart and Amazon, which might be too much competition for any one company, ” Cramer said. “But I think CEO Brian Cornell’s doing a terrific job. You know what, I like the stock here.”

Thursday: Best Buy, Splunk

Best Buy: The tech gadget store reports earnings in the morning. The stock is up 30% this year, and Cramer is warning not to take a chance on it at current levels.

“I’m betting they’re going to have to talk about tariffs on the whole darned conference call,” he said.

Splunk: The software analytics company, one of Cramer’s “Cloud King” stocks, presents its financial report after the market closes. Cramer expects Splunk to put up a good conference call out of CEO Doug Merritt. He said Merritt continues to deliver on promises.

“I like it a lot. … [It’s got] no China exposure — I say buy,” he said.

Friday: Foot Locker

Foot Locker: The shoe retailer will lay out its quarterly report for investors before stocks start trading. With a presence in shopping centers across the country, Foot Locker carries Nike, Adidas, Under Armour and a range of other sports apparel brands in its stores.

“The stock’s been held back by trade war worries,” Cramer said. “I bet it will prove to be immune, or at least more immune than most people think.”

WATCH: Cramer breaks down the week ahead in earnings

Disclosure: Cramer’s charitable trust owns shares of Amazon.com and Home Depot.

Questions for Cramer?
Call Cramer: 1-800-743-CNBC

Want to take a deep dive into Cramer’s world? Hit him up!
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Questions, comments, suggestions for the “Mad Money” website? madcap@cnbc.com



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Charts suggest markets could soon get a deep correction

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CNBC’s Jim Cramer said Thursday that his colleague is warning that danger could be on the horizon for the stock market.

The “Mad Money” host took a look at chart analysis as interpreted by technician Carolyn Borogen, Cramer’s coworker at RealMoney.com who also runs FibonnacciQueen.com, to understand what could come of this volatile market.

The major U.S. averages were taken for a ride this week as investors attempted to gauge whether the United States would raise existing tariffs on imports from China on Friday. Because of this uncertainty, the best way to get an empirical reading of the market is through studying chart action, Cramer said.

The high-to-high cycles, as explained by Boroden, in the weekly chart of the S&P 500 is cause for concern, the host said.

Highs on the index have ranged between 31 weeks and 36 weeks, and the most recent peak was recorded last Friday, he said. Prior to that, the last major high was set in September, which preceded the stock sell-off in October.

Markets tend to repeat themselves, and because stocks sold off this week after a big run, Boroden thinks there could be cause for concern.

“In fact, she’s looked at a series of previous high-to-high cycles, and what she’s noticed is that there’s a whole confluence of them coming due this month,” Cramer said. “That’s why she’s throwing up a caution flag, because Boroden thinks we might finally get a deep downside correction — even deeper than what we’ve already experienced during hell week.”

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These 6 stocks could make or break the S&P 500’s run

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Call them the Supersized Six.

Microsoft, Amazon, Apple, Alphabet, Facebook and Berkshire Hathaway — six of the most highly valued companies in the S&P 500 — don’t just boast the index’s biggest market caps.

In fact, those six companies are worth about as much as the bottom 290 companies in the S&P combined. Taken together, their market caps total $4.2 trillion, while the bottom 290 S&P companies are worth roughly $4.3 trillion.

It’s fairly common knowledge that the top 50 S&P stocks are worth more than the bottom 450, and it’s not unusual that the market is frequently this “top-heavy,” says Carter Worth, chief market technician at Cornerstone Macro.

But the concentration in these six names is noteworthy, and it could mean trouble for the market, Worth said Tuesday on CNBC’s “Fast Money.”

Considering the influence they have over the S&P’s direction, it makes you wonder: “Is it an index, or is it a few big names that drive everything?” Worth said. “That’s what makes beating the index so hard.”

He called attention to this chart tracking the six-stock basket against its 150-day moving average, as well as the number of times it has traded above or below that average.

“Literally, every single time we have gotten this far above the 150-day moving average, we have peaked. It is right at that level yet again,” Worth said, pointing to the uptick in the bottom panel’s trend line. “So, as this goes, so goes the market. I think you’ve got a crowding that’s not so good. Just to put it in real context, think of those six names relative to the S&P. It’s all so dependent on these big names.”

Moreover, while the market’s “heavy hitters” have made up 15% of the S&P’s total market cap, on average, since at least the 1990s, that percentage is also ticking up, Worth noted.

“We’re starting to get back to a level that is typically indicative of when markets peak. That’s ’07, so forth and so on,” he said. “None of this is particularly healthy.”

By market cap, Microsoft is worth about $963 billion, Amazon is worth $949 billion, Apple is worth $969 billion, Facebook is worth $540 billion, and Berkshire Hathaway is worth $515 billion.

The broader market mounted a recovery Wednesday, with the S&P lifting off its Tuesday lows early in the session.



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