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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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Charts show steady investor optimism, more upside for stocks

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The stock market rally that began 2019 has not yet run its course, even with Tuesday’s Washington-induced surge, CNBC’s Jim Cramer said after consulting with technician Carley Garner.

“The signs suggest that this market can have more upside before the rally exhausts itself,” Cramer recapped on “Mad Money.” “Eventually the market will become too optimistic and stocks will peak, but we’re not there yet.”

Garner, the co-founder of DeCarley Trading and author of Higher Probability Commodity Trading, has an impressive track record. In mid-December, one week before the Christmas Eve collapse and subsequent rebound, she told Cramer that pessimism was peaking and stocks were due for a bounce.

But now that the S&P 500 has gained over 15 percent since those midwinter lows, it’s worth wondering the reverse: what if optimism is approaching its peak?

Lucky for Wall Street, Garner says it’s not. She called attention to CNN’s Fear and Greed index, which uses a variety of inputs to measure what CNN sees as investors’ chief emotional drivers.

Right now, the index sits at 67 out of 100, signaling more greed than fear, but still “a far cry from the extreme levels where you need to start worrying,” Cramer explained. When the major averages peaked going into the fourth quarter of 2018, the index hit 90, and according to Garner, “we usually don’t peak until we hit 90 or above,” he said.

Add to that the fact that only half of professional traders and investors polled for the most recent Consensus Bullish index said they felt bullish; the recent downtrend in the Cboe Volatility Index, which tracks how much investors think stocks will swing in the near future; and that, historically, this is a good time of year for stocks; and Garner sees more momentum ahead.

The S&P 500’s technical charts seem to uphold Garner’s theory. Its weekly chart shows fairly neutral readings for two key indicators: a momentum tracker called the Relative Strength Index and the slow stochastic oscillator, which measures buying and selling pressure.

“Even if the S&P 500 keeps climbing to, say, … 2,800 — up 2 percent from here — Garner doesn’t anticipate either the RSI or the slow stochastic [to] hit extreme overbought levels,” Cramer said, adding that the technician could even see the S&P climbing to 3,000 if it breaks above the 2,800 level.

If Garner is wrong and the S&P heads lower, she said it could trade down to its floor of support at 2,600, and if it breaks below that, fall to 2,400. But that scenario is highly unlikely and, if it happens, would be a buying opportunity, she noted.

The S&P’s monthly chart told a similar story, Cramer said. The index is currently trading at 2,746, between its “hard ceiling” at 3,000 and its “hard floor” of 2,428, he said, which means it’s “basically in equilibrium.”

“To Garner, that means going higher is the path of least resistance for the S&P,” the “Mad Money” host said. “Once the S&P climbs to 2,800, or perhaps … to the mid-2,900s, that’s where Garner expects things will turn south and the pendulum will start swinging in the opposite direction.”

“Remember, … Carley Garner has been dead-right, and the charts, as interpreted by Carley, suggest that this market still has some more upside here,” Cramer continued. “But if we get a few more days like this wild one, she thinks we’ll need to start worrying about irrational exuberance. For now, though, she thinks we are headed higher, and I agree.”



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What Jeff Bezos’ private life means for investors

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Daniel Ek, chief executive officer and co-founder of Spotify AB.

Akio Kon | Bloomberg | Getty Images

Daniel Ek, chief executive officer and co-founder of Spotify AB.

Cramer said Wall Street has misread Spotify‘s latest earnings report and guidance, and that misunderstood stocks like these give investors an opportunity to make some money.

he called out stock analysts like Everscore ISI’s Anthony DiClemente who have downgraded the equity over concerns about subscriber growth.

“I think this is lunacy,” said Cramer, who has been bullish on the music streaming platform since it went public last April. “It’s like the market just doesn’t know how to read this company or its quarterly guidance. In my view, Spotify is very much on the right track.”

The stock was rocked after a seemingly mixed quarterly earnings released Wednesday, Cramer said. After Spotify reported lower-than-expected sales, tight cash flow and conservative guidance across the board including subscriber growth, shares sold below $129 at one point in Thursday’s session.

But Cramer noted that the company beat expectations on operating profit and gross margin, which was 120 basis points higher than was asked for.

“I think the sellers were missing a lot of context here and the context is something I like to talk about a lot and it’s called UPOD. They under promise … and then they over deliver,” he argued. “At this point, CEO Daniel Ek and his team have established a track record of giving cautious guidance—under promise—and then beating it—over delivering.”

Spotify’s guidance includes planned investment costs and the company could “become the premier platform for podcasts,” a hot market for hard-to-reach millennials, Cramer said.

Click here to read Cramer’s full take.



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Charts show investors ‘can afford to be cautiously optimistic’

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Investors can afford to be “cautiously optimistic” at this point in the stock market’s cycle, CNBC’s Jim Cramer said Tuesday after consulting with chartist Rob Moreno.

Moreno, the technician behind RightViewTrading.com and Cramer’s colleague at RealMoney.com, sees a convoluted path ahead for stocks. After calling the December bottom, Moreno noticed that the Nasdaq Composite’s late-2018 decline was about a 24 percent drop from peak to trough.

That’s important because, in a bull market, stocks tend to see “periods of consolidation — pauses in a long-term bull run,” Cramer explained. “To [Moreno], the decline here looks very similar to what we saw from the Nasdaq in 2011, 2015 [and] 2016,” three consolidation periods of recent past.

If he’s right, that could be bad news for the bulls, who may have to wait at least seven months for stocks to break out of their consolidation pattern, during which they tend to trade in a tight range, Cramer warned. But Moreno still sees some opportunity for investors.

“If you believe his thesis about the market — that we’re in a consolidation period, one that will last until September — then you can afford to be … cautiously optimistic right now,” Cramer said on “Mad Money.”

Part of Moreno’s confidence came from his analysis of the S&P 500’s daily chart, which also included the support and resistance levels from its weekly and monthly charts.

Even after a 16 percent rally from its December lows, Moreno saw more room to run for the S&P based on its Relative Strength Index, or RSI, a technical tool that measures price momentum. The RSI, he explained, hasn’t yet signaled that the S&P is overbought, and the Chaikin Money Flow, which tracks buying and selling pressure, shows big money pouring in.

“Moreno thinks that these new buyers are the kind of investors who won’t be panicked out of their positions by short-term volatility,” Cramer said, adding that the technician sees about 3.5 percent more upside for the S&P before it hits its ceiling of resistance at 2,818.

But if the S&P manages to trade above its ceiling of resistance and return to its October highs, Moreno expects a “synchronized reversal” in the stock market that could crush the major averages, the “Mad Money” host warned.

“At least until September, Moreno says you should be a seller if the averages approach their October highs — that’s around 2,930 for the S&P 500,” Cramer said. “Eventually he expects a breakout from these levels, but it won’t happen any time soon.”

So, what’s the right move for investors? According to Moreno, not all is lost. He still expects to see strong gains — a roughly 7.5 percent move — before the current rally peters out. But he doesn’t want buyers to get too trigger-happy, especially considering the months of sideways trading he’s predicting for 2019.

“Until [September], he expects the market to trade in a fairly wide range, with the S&P bouncing between 2,350 and 2,930. For now, we’re headed higher, but he says you should use these key levels as entry and exit points until the consolidation pattern finally comes to an end later this year and the averages resume their long march higher,” Cramer said. “Even if he’s right and this rally will lose its steam after another 7.5 percent gain, that’s still pretty good, but I am very wary and it makes me want to do some selling after this run.”



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