Tag Archives: Amazon

The Truth Behind Amazon’s Reported Earnings

This article below is from my Seeking Alpha post earlier this week.  I’ve studied AMZN’s financials and business model for several years. I’m probably one of the few analysts who bothers to scour the footnotes of AMZN’s financials. I was taught by the best at University of Chicago to start with the footnotes and work “up” when pulling apart GAAP financial statements.  I can say with 100% certainty that the “Free Cash Flow” that Jeff Bezos promotes with ardent zeal is a fictional number, if not fraud.  The SEC looks the other way.  Suffice it to say that AMZN’s true trailing twelve month free cash flow  based on strict GAAP is nearly negative $4 billion. I demonstrate this below.

Amazon Perfects the “Beat the Street” Game – Amazon (AMZN) reported 52 cents per share “earnings” on October 26th vs. the consensus 2 cent estimate after the market closed. The stock soared 7.8% after hours as hedge fund algos and retail daytraders chased the stock higher on the headline report. AMZN “walked” Street analysts’ estimates down to a number that was easy to “beat.” Ninety days ago the consensus estimate for Q3 was $1.09, with one estimate as high as $1.59. cents. By the time AMZN was about to report, the consensus estimate was two cents. This is how the game is played.

The graphic below from Yahoo Finance shows a 3-month timeline of this “walk-down” process for AMZN’s consensus earnings forecast for Q4 2017, Q1 2018 and the full-year 2017. The current estimates were again revised after the Company’s Q3 report (source: Yahoo.com/finance w/my edits):

Make no mistake: the company knowingly “guides” analysts down in order to engineer a “headline” surprise. The “beat the numbers” game is one of the many games connected with corporate earnings reports. That said, AMZN’s actual EPS in Q3 2017 was the same as Q3 2016 – zero EPS growth. Bear in mind that GAAP acquisition accounting is heavily at play here. Acquisition accounting enables a company to boost revenues and hide expenses.

[Note: All numbers are taken directly from AMZN’s Third Quarter 10-Q]

Here’s a fact that Wall Street or Bubblevision won’t report: in Q3 2016, AMZN’s GAAP tax rate was 47% vs 18% in Q3 2017. Anyone who has taken a basic accounting course knows that the GAAP tax rate is highly arbitrary and a major source of EPS manipulation. If AMZN had simply used a constant GAAP tax rate in Q3, its net income in Q3 would have declined to $200 million this year from $252 million in Q3 last year (remember these are GAAP earnings, not actual cash earnings). On this basis, AMZN’s EPS would have shown a drop from 53 cents last year to 41 cents this year. Anyone paying the current price of AMZN at a PE of 290 is likely ignorant of the fact that AMZN’s operating income is declining and its debt outstanding is increasing.

AMZN’s operating income plunged yr/yr for Q3 by $228 million, or nearly 40%. Operating income in its North American e-commerce business plunged $143 million, or 56%. AMZN’s e-commerce business lost $824 million on an operating business in Q3 (see p. 26 from the 10-Q linked above). YTD AMZN’s e-commerce business has lost nearly $1 billion). It likely would have been worse without Whole Foods numbers in mix. This is because, when AMZN acquired WFM, WFM’s operating margin was 4%. AMZN’s has been running near zero – it was 0.7% in Q3. Acquisition accounting, among other things, allows AMZN to present its numbers “as if,” meaning “as if” AMZN owned WFM since AMZN’s inception.

One of the primary reasons that AMZN’s operating margins decline continuously is the cost of fulfillment. “Fulfillment” is the cost of getting a product from the warehouse to the customer’s doorstep. In Q3 2016, AMZN’s fulfillment costs were 19.4% of product sales. By Q3 2017, it had jumped to 22.3%. Fulfillment is a cornerstone of AMZN’s e-commerce model. Offering free shipping to Prime members is a guaranteed money-loser.

In general and on average, AMZN loses money on every e-commerce sale. AMZN’s e-commerce/consumer products operating margin will continue to decline because the Company is implementing an aggressive price-cut program at Whole Foods. This will drive the WFM business margins toward zero.

AMZN’s only source of operating income is the AWS (cloud services) business. The revenue growth rate from 2016 to 2017 for Q3 was 41%. This is down from the 55% growth rate that occurred year over year from Q3 2015 to Q3 2016. Part of this is a function of “scale.” As the business grows in overall size, the growth rate will tend to decline mathematically. But the AWS revenues are just 10% of AMZN’s total revenues.

Furthermore, AMZN’s AWS business is now under heavy attack. Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Cisco (CSCO) announced that they are teaming up to go after AWS’ cloud territory. More ominously for Amazon, Microsoft (MSFT) is quickly moving into and taking away AMZN’s market share in the commercial cloud space. Based on its FY Q1 numbers released Thursday, MSFT’s commercial cloud revenue annualized now exceeds AMZN’s AWS revenues annualized. AMZN historically has held the largest market share in cloud computing services. Given the new competition from dedicated tech companies, the profitability and growth of AMZN’s AWS business segment is at risk.

AMZN’s deceptive presentation of free cash flow – Every quarter AMZN presents an earnings slideshow, the first slide of which prominently shows trailing twelve month free cash flow. But this presentation of FCF is highly deceptive. On the first slide, AMZN shows its latest trailing twelve month FCF to be $8.050 billion. But that is a cherry-picked, non-GAAP derivation of actual free cash flow. Here’s AMZN’s actual GAAP FCF as derived from its Q3 10-Q (source: AMZN 10-Q, with my edits):

Free cash flow is technically defined as operating cash flow less capex expenditures and debt payments, the latter of which is negligible for AMZN – for now. Note the difference claimed to be $8.050 billion in “free cash flow” by Jeff Bezos and the negative $3.969 bullion actual GAAP FCF. Here’s the deal. Jeff Bezos conveniently omits the amount of cash AMZN spends to acquire property and equipment using capital leases and build-to-suit leases. To the extent that these expenditures are non-recurring, that presentation of FCF is valid. However, not only are AMZN’s expenditures under capital leases serially recursive, the payments increase every quarter and have been for several years. In 2014 AMZN’s full year cap lease expenditures was $4.9 billion. Thru Q3 2017, AMZN’s trailing twelve-month expenditure was $12 billion.

Furthermore, a “build-to-suit” property is built specifically for AMZN’s purposes. It likely is not easily sold re-leased for a next best use. Because of this, the lease functions as debt used to fund this capex. As such, the payments under build-to-suit leases should be treated as capex and not excluded from the derivation of free cash flow. Again, it’s an accounting sleight-of-hand employed by Bezos for the purposes of deception.

The use of capital leases to manipulate financials is not uncommon. However AMZN intentionally uses this financing techniques as mechanism to manipulate its numbers. Among other superficial accounting “benefits,” using capital leases rather than debt to fund expenditures enables keeps the appearance of debt off the balance sheet. It also allows AMZN to keep the cash used to fund capital leases out of the “Financing Activities” section of AMZN’s Statement of Cash Flows. AMZN is required to disclose the amount spent on cap leases, which it accomplishes in the footnotes. Very few analysts or investors bother to read the footnotes.

AMZN’s debt load – AMZN used $16 billion in near-junk bond rated debt to finance the Whole Foods acquisition. Its long term debt is now $24.7 billion. At the end of 2007, its long term debt was $1.2 billion. AMZN’s debt-load has grown by over 20x. However, at the end of Q3 2017, AMZN also had $18.8 billion in “other long-term liabilities.” This is almost entirely the capitalized leases used to fund property and equipment acquisitions. At the end of 2007, this number was $292 million. Use of cap leases has grown by a factor of 64x. Now, imagine if AMZN were forced by GAAP to include cap leases as part of its long term debt – not an unreasonable standard in this case. AMZN’s debt load would be $43.5 billion – nearly double the current disclosed level of debt.

See how this works? If AMZN were forced to consolidate cap leases into “long term debt,” its recent $16 billion bond deal would have been rated as non-investment grade – aka junk. The average cost of the $16 billion issued is 3.56%. If AMZN had been rated junk, it would have raised the cost of this deal by at least 100 basis points (1%) and likely more. Assuming an added cost of 1%, this would have added $160 million in interest expense. It might look like a smart move for Bezos to exploit GAAP accounting like this but it serves to pull the wool over the eyes of the investors who bought the bonds. This is because the true credit quality and ability to service the debt is significantly lower than that assumed by these investors.

The point here is that every facet of AMZN’s financials is highly misleading. AMZN is not what it appears to be. Yes, the stock has done remarkably well considering the ugly nature of the underlying truths. Note that AMZN did have a brush with insolvency in 2003-2004, but Warren Buffet bailed out AMZN by loading up on junk bonds Amazon had outstanding at the time. This was a temporary stay of execution that was followed up with the rapid inflation of the mid-2000’s credit and stock bubble, which enabled AMZN to refinance the junk bonds Buffet had bought. This gave AMZN plenty of cash to keep spending money to generate sales. AMZN also was bailed out by the bond market a couple years ago, as it issued $3 billion in debt in 2012 and $5 billion of debt in 2014. If AMZN is truly generating free cash flow, why does it continuously have to issue debt to fund its operations?

Amazon has thus been given a free pass by the financial markets for most of its existence. Make no mistake, AMZN can do this only for as long as market bubbles inflate. If the current credit/stock bubble is in the process of deflating or has popped when it comes time for AMZN to start paying down its heavy debt load, including the capital leases, it’s highly likely that the market won’t enable AMZN to continue kicking the can down the road by refinancing the debt payments. AMZN clearly does not generate free cash flow that can be used to make the debt payment obligations. Thus, in this scenario, there’s a strong probability that AMZN would hit the wall, inconceivable as that may seem right now.

AMZN’s stock has had a remarkable run this year in defiance of the true underlying fundamentals (click to enlarge):

Amazon is a difficult stock to short because of its correlation with the overall stock market. However I’ve been able to scalp profits on an intra-day basis using near-money weekly puts. Anyone who is willing to manage a short position on a daily basis will eventually be rewarded. When AMZN surprised the market by missing its Q2 earnings, the stock sold off $140 from top to bottom over 2 months. If AMZN misses Q4 earnings the stock could, minimally, fill the gap in the graph above ($980) – a $160 decline using the closing price on November 21st.

If you are interested in short-sell ideas like AMZN, please visit this link:  Short Seller’s Journal, where I offer a weekly newsletter that focuses on shorting the stock market.

A Conversation About Tesla, Amazon and Gold

Allegedly (note: emphasis on “allegedly”) Craig “Turd Ferguson” Hemke was awarded a Nobel Prize for his weekly A2A podcast.  If true, the award is more legitimate than the Nobel Peace Prize given to Obama and the Nobel Prize for Economics given to Paul Krugman.  Perhaps those latter two folks should have been awarded the Nobel Price for Charlatanism.

Craig invited me onto his show this week to discuss a variety of issues, including the economy, Tesla and Amazon and, of course, the precious metals market.  I explain why I think there’s one more “shock and awe” attack by the Comex paper bandits on the gold market before the precious metals make a stunning move higher.  I also discuss a couple of my favorite mining stock ideas and the head-scratching market cap of Novo Resources

You can access the podcast here:  TF Metals A2A Conversation

In my latest issue of the Mining Stock Journal I feature a $27 million market cap gold exploration company that I think will eventually be worth at least $100 million.  If you would like to find out more about my Journals click here:  Mining Stock Journal  and Short Seller’s Journal.

“Never Let A Good Crisis Go To Waste” – And Short AMZN

The “crisis” quote above originated with Winston Churchill. Several U.S. politicians have referenced it since then (most recently Rahm Emanuel when he was Obama’s Chief of Staff). I’m sure the Wall Street snake-oil salesmen and economic propagandists are more than happy to attribute the deteriorating economic numbers to the hurricanes that hit Houston and southwestern Florida.

Retail sales for August were released a week ago Friday and showed a 0.2% decline from July. This is even worse than that headline number implies because July’s nonsensical 0.6% increase was revised lower by 50% to 0.3% (and it’s still an over-estimate).

Before you attribute the drop in August retail sales to Hurricane Harvey, consider two things: 1) Wall St was looking for a 0.1% increase and that consensus estimate would have taken into account any affects on sales in the Houston area in late August; 2) Building materials and supplies should have increased from July as Houston and Florida residents purchased supplies to reinforce residences and businesses. As it turns out, building supplies and material sales declined from July to August, at least according to the Census Bureau’s assessment. Furthermore, online spending dropped 1.1%. Finally, the number vs. July was boosted by gasoline sales, which were said to have risen 2.5%. But this is a nominal number (not adjusted by inflation) and higher gasoline prices, i.e. inflation, caused by Harvey are the reason gasoline sales were 2.5% higher in August than July.

Too be sure, the retail sales overall were slightly affected by Harvey. But the back-to-school spending is said to have been unusually weak this year and AMZN’s Prime Day no doubt pulled some August online sales into July. However, back-to-school spending reflects the deteriorating financial condition of the middle class. I have no doubts in making the assertion that the factors listed in the previous paragraph which would have boosted sales in August because of Harvey offset significantly any drop in retail sales in the Houston area during the hurricane.

Note – John Williams published his analysis of retail sales and it agrees with my analysis above (Shadowstats.com): Net of Hurricane Harvey Effects – Headline Economic Numbers Still Were Miserable, Suggestive of Recession – Hurricane Impact on August Activity: Mixed, Probably Net-Neutral for Retail Sales – August Real [inflation-adjusted] Retail Sales Declined by 0.61% (-0.61%) in the Month, Plunged by 1.24% (-1.24%).

The Fed Continues To Target Stock Prices. The Dow and the SPX continue to hit new all-time highs every week. At this point there’s no explanation for this other than the fact that, according to the latest Fed data, the Fed’s balance sheet increased by $18 billion two weeks ago. This means that the Fed pushed $18 billion into the banking system, which translates into up $180 billion in total leverage (the reserve ratio on high-powered bank reserves is 10:1).

The good news – for Short Seller’s Journal subscribers – is that, despite this overt market intervention, a large portion of the stocks in the SPX are trading below their 200 dma:

The chart above shows the percentage of stocks in the SPX trading above their 200 dma. In March nearly 80% of the stocks were above the 200 dma. By late August the number was down to 54%. Currently 60% are trading above the 200 dma, which means 40% are trading below.

It’s uglier for the entire stock market, as only 43.5% of the stocks in the NYSE are trading above their 200 dma, which means that 56.5% are trading below the 200 dma. This explains why neither the Nasdaq nor the Russell 2000 were able to close at new all-time highs.

Without the Fed’s direct support of the stock market, there’s no question in my mind that the stock market would be crashing. Perhaps more frightening is the increasing amount of debt being added throughout the U.S. financial system. The debt ceiling limit was suspended until December. The amount of Treasury debt outstanding jumped over $300 billion to over $20 trillion the day the ceiling was suspended. John Maynard Keynes’ macro economic model was one in which Governments could stimulate economic growth through debt-financed deficit spending. But once the economy was in growth mode, the Government was supposed to operate at a surplus and pay down the debt. Never did Keynes state that it was acceptable to incur deficit spending and debt to infinity, which is the current course of the U.S. Government.

Trump has suggested removing the debt ceiling. I’m certain it was “trial balloon” to see how vocal the opposition to this idea would be. The Democratic leaders love the idea. I have not heard much resistance from the Republicans. My bet is that by this time next year, or maybe even by the end of the year, there will not be a debt-ceiling on the amount of money the Government can borrow. In truth, this is no different than giving the Government an unlimited printing press.

Corporate high yield debt issuance has exploded globally, as you can see from the chart to the right, which shows the amount of junk bond debt issuance annually on a trailing twelve month basis. Globally the amount outstanding has increased by more than 400%. Close to 60% of this issuance has occurred in the U.S. In conjunction with this, U.S. corporate debt hits an all-time high every month. Most of this debt is being used either to re-purchase stock or over-pay for acquisitions (see the AMZN/Whole Foods deal).

Currently the amount of debt issued to complete acquisitions as a ratio of Debt/EBITDA is at an all-time high, with 80% of all deals incurring a Debt/EBITDA of 5x or higher. The last time this ratio hit an all-time high was, you guess it, in 2007. As an example, let’s look at AMZN’s acquistion of Whole Foods. AMZN issued $16 billion of debt in conjunction with its acquisition of Whole Foods. No one discussed this, but the Debt/EBITDA used in the transaction was 13x. Whole Foods operating income plunged 25% in the first 9 months of 2017 vs the first nine months of 2016.

A 13x multiple outright for a retail food business with rapidly declining operating income is an absurd multiple. That the market let AMZN issue debt in an amount of 13x Whole Food’s EBITDA is outright insane. What happened to all that “free cash flow” that Amazon supposedly generates? According to Bezos, it was $9.6 billion on a trailing twelve month basis at the end of Q2. If so, why did AMZN need to issue $17 billion in debt?  We know that the truth (see previous analysis on AMZN) is that AMZN does not, in fact, generate free cash flow but burns cash on a quarterly basis. Currently AMZN is busy slashing prices at Whole Foods, which will drive WF’s operating margin from 4.5% toward zero. This is the same model that is used in AMZN’s e-commerce business, which incurred an operating loss in Q2.

In my view, AMZN continues to be one of the best short ideas on the board – the graph below is as of last Friday (Sept 15th) when AMZN closed at $986, Short Seller Journal subscribers were given some put option ideas as alternatives to shorting AMZN outright (click to enlarge):

The chart above is a 1-yr daily. Technical analysis adherents would see the head and shoulders formation I’ve highlighted in AMZN’s chart. This is potentially quite bearish. Despite the Dow and SPX hitting a series of all-time highs this month, AMZN has not come within 5% of its all-time high on July 26th ($1052 close). It traded up to $1083 intra-day the next day before closing below the previous day’s close and then dropped its Q2 earnings bombshell when the market closed. Based on its $986 close this past Friday, it’s 9% below its July 27th intra-day high-tick. Some might say that’s “halfway to bear market territory.”

AMZN lost $31 last week despite the SPX hitting a record high on Wednesday. This negative divergence is bearish.  In addition, Walmart has taken off the gloves and is directly attacking AMZN’s e-commerce business model.  WMT offers 2-day free shipping on millions of items without the requirement of spending money upfront to join a “membership.”  WMT is also running television ads during prime time which attack some of AMZN’s marketing gimmicks.

Some other bearish technical indicators, a highlighted above: 1) Since the end of July, the volume on down days in the stock price has been higher than the the volume on up days; 2) The RSI has been declining gradually since early April; 3) the MACD (bottom panel) has been declining steadily since early June. All three of these indicators reflect large institutional and/or hedge funds selling their positions.

The stock is sitting precariously on its 50 dma (yellow line above). I would not be surprised to see it test its 200 dma, currently $904, before it reports Q3 earnings. If you want to speculate on this possibility, the October 6th weekly $920 – $930 puts, depending on how much premium you want to pay, might be a good bet. You might also want to out another week to the October 20th series. One caveat is that AMZN will no doubt manipulate its numbers using merger and acquisition accounting gimmicks, which give the acquiring a window in which to egregiously manipulate GAAP numbers. I don’t know if the market will “see” through this or not. But based on the performance of the stock since AMZN dropped its Q2 earnings bombshell, I’d say the stock on “on a short leash.”

The above commentary and analysis is directly from last week’s Short Seller’s Journal. If you would like to find out more about this service, please click here:  Short Seller’s Journal subscription info.

Crashing Auto Sales Reflect Onset Of Debt Armageddon

July auto sales was a blood-bath for U.S auto makers.  The SAAR (Seasonally Manipulated Adjusted Annualized Rate) metric – aka “statistical vomit” –  presented a slight increase for July over June (16.7 SAAR vs 16.5 SAAR).   But the statisticians can’t hide the truth.  GM’s total sales plunged 15% YoY vs an 8% decline expected.  Ford’s sales were down 7.4% vs an expected 5.5% drop.   Chrysler’s sales dropped 10.5% vs. -6.1% expected.  In aggregate, including foreign-manufactured vehicles, sales were down 7% YoY.

Note:  These numbers are compiled by Automotive News based on actual monthly sales reported by manufactures.  Also please note:  A “sale” is recorded when the vehicle is shipped to the dealer.  It does not reflect an economic transaction between a dealer and an end-user.   As Automotive News reports:  “[July was] the weakest showing yet in a year that is on tract to generate the industry’s first decline in volume since the 2008-2009 market collapse.”

The domestics blamed the sharp decline in sales on fleet sales.  But GM’s retail sales volume plunged 14.4% vs its overall vehicle cliff-dive of 15%  And so what?  When the Obama Government, after it took over GM,  and the rental agencies were loading up on new vehicles, the automakers never specifically identified fleet sales as a driver of sales.

What really drove sales was the obscenely permissive monetary and credit policies implemented by the Fed since 2008.  But debt-driven Ponzi schemes require credit usage to expand continuously at an increase rate to sustain itself.   And this is what it did from mid-2010 until early 2017:

Auto sales have been updated through June and the loan data through the end of the Q1. You can see the loan data began to flatten out in Q1 2017.  I suspect it will be either “flatter” or it will be “curling” downward when the Fed gets around to update the data through Q2. You can also see that, since the “cash for clunkers” Government-subsidized auto sales spike up in late 2009, the increase in auto sales since  2010 has been driven by the issuance of debt.

Since the middle of 2010, the amount of auto debt outstanding has increased nearly 60%. The average household has over $29,000 in auto debt.  Though finance companies/banks will not admit it, more than likely close to 40% of the auto loans issued are varying degrees of sub-prime to not rated (sub-sub-prime).  Everyone I know who has taken out an auto loan or lease has told me that they were not asked to provide income verification.

Like all orgies, the Fed’s credit orgy has lost energy and stamina.  The universe of warm bodies available to pass the “fog a mirror” test required to sign auto loan docs is largely tapped out.  The law of diminishing returns has invaded the credit market.  Borrower demand is tapering and default rates are rising.  The rate of borrowing is rolling over and lenders are tightening credit standards – a little, anyway – in response to rising default rates. The 90-day delinquency rate has been rising since 2014 and is at a post-financial crisis high.  The default rates are where they were in 2008, right before the real SHTF.

The graph above shows the 60+ day delinquency rate (left side) and default rate (right side)
for prime (blue line) and subprime (yellow line) auto loans. As you can see, the 60+ day
delinquency rate for subprime auto loans is at 4.51%, just 0.18% below the peak level hit in
2008. The 60+ day delinquency rate for prime auto loans is 0.54%, just 0.28% below the
2008 peak. In terms of outright defaults, subprime auto debt is just a shade under 12%,
which is about 2.5% below its 2008 peak. Prime loans are defaulting at a 1.52% rate, about
200 basis points (2%) below the 2008 peak. However, judging from the rise in the 60+ day
delinquency rate, I would expect the rate of default on prime auto loans to rise quickly this
year.

We’re not in crisis mode yet and the delinquency/default rates on subprime auto debt is near the levels at which it peaked in 2008. These numbers are going to get a lot worse this year and the amount of debt involved is nearly 60% greater. But the real problem will be, once again, the derivatives connected to this debt.

The size of the coming auto loan implosion will not be as large as the mortgage implosion in 2008, but it will likely be accompanies by an implosion in student loan and credit card debt – combined it will likely be just as systemically lethal.   It would be a mistake to expect that this problem will not begin to show up in the mortgage market.

Despite the Dow etc hitting new record highs, many stocks are declining, declining precipitously or imploding.  For insight, analysis and short-sell ideas on a weekly basis,  check out the  Short Seller’s Journal.  The last two issues presented a uniquely in-depth analysis of Netflix and Amazon and why they are great shorts now.

The Accounting Ponzi Scheme Is Catching Up To Amazon

“‘Faith’ is defined as “belief without evidence.” AMZN is a stock investment that thrives on
investor faith. Investor greed transforms into irrational faith when the faith is rewarded with stock gains. This will ultimately burn out but it’s impossible to predict timing. The stock is trading at 178x TTM net income. This is an insane multiple for a company with a deteriorating business model that is under attack from all angles by large, well-capitalized competitors who specialize in Amazon’s business segments.

Having said that, I continue to believe that money can be made trading AMZN from the short side but it requires discipline and diligent capital management. Amazon is one of those stocks in which you need to maintain some short exposure because, when it finally goes, it will go quickly and you’ll be waiting for a big bounce to short that will never materialize” – excerpt from the latest Short Seller’s Journal

In last week’s issue of the Short Seller’s Journal, I did an in-depth analysis of Netflix’s (NFLX) accounting and demonstrated how NFLX manipulates GAAP accounting to manufacture fake net income. I advised subscribers to short NFLX on Monday at $188. This week I focus on the key areas of Amazon’s quarterly financials and show how Jeff Bezos transforms actual negative free cash flow into the Bezos $9.6 billion LTM “free cash flow.”

I also demonstrate the ways in which Amazon’s business model is beginning to break down – that it’s e-commerce model is under attack from all angles by well-capitalized, more profitable retailers like Walmart and its cloud computing business is being attacked aggressively by traditional software development and applications companies like MSFT, IBM, GOOG and ORCL.

On a year over year LTM basis, the amount of cash burned by AMZN has increased 89.2%, from negative $2.476 billion to negative $4.685 billion. – this seek’s Short Seller’s Journal shows why this statement is fact. Recently subscribers have cleaned up on Chipotle (CMG), Sears (SHLD), Beazer (BZH) and others. This week’s issue shows why AMZN will eventually be a home run short. You can learn more here: Short Seller’s Journal info.

Netflix And Amazon: Case Studies In Accounting Games

Over the time since I started the Short Seller’s Journal, several subscribers have asked about Netflix (NFLX). For some reason I have refrained from presenting it as a short idea, instead choosing AMZN and TSLA as my insanely overvalued “tech poison” short-sell ideas. However, knowing that NFLX was reporting this week, I decided what if – and really more like when – it spiked up on a headline “beat,” I would take a close look at the numbers to see what’s going on with NFLX accounting. Sifting through NFLX’s web of accounting chicanery took a lot longer than I anticipated…

As I expected, I found a company that pushes the envelope in an area of GAAP accounting in which there is substantial “grey” area that enables companies like NFLX to manufacture and manage reported GAAP net income. But NFLX bleeds cash, as I’ll show. The quote at the top summarizes the NFLX business model: it will burn cash “for many years.”

In a sense, NFLX is similar to a Ponzi scheme. As long as cash received in the form of revenues and stock or bond financing exceeds cash expense outflows each year, it can continue operating. But as soon as revenues decline or the capital markets refuse to give NFLX money, it will collapse. As you will see below, while NFLX is generating growth in its net income, the amount of cash burned by its operations has been increasing dramatically. And it has been financing this cash flow deficit with debt.

The above narrative is from last week’s Short Seller’s Journal. I walked through the areas in which NFLX exploits grey areas in GAAP accounting rules to manipulate the cash flows from its business model (cash revenues minus actual cash expenses) in order present GAAP net income. The primary lever it uses is the guidelines (note: “guidelines” – not “rules”) for depreciating media capex. I show step-by-step how NFLX exploited the grey areas in GAAP to manufacture the $0.15 earnings per share it reported.

I also discussed strategies for shorting NFLX, which included shorting the stock outright and using puts. Subscribers who shorted NFLX on Monday morning this past week are green on their short positions. I also suggested capital management strategies.

This week I will be showing how to dissect the numbers AMZN must disclose in the footnotes to its 10-Q filing to see what’s really going on beneath the Jeff Bezos show. For instance Bezos opens his earnings presentation every quarter with a slide and a discussion of the “Free Cash Flow” produced my AMZN on an LTM basis. It’s the very first slide in the earnings call slide show. He’s now claiming LTM FCF of $9.7 billion.

BUT in the footnotes to the 10-Q – a place where no Wall Street analyst ever dares to venture, assuming they even know the footnotes exist – there’s a disclosure that explains that Jeff Bezos FCF is not GAAP FCF. Using GAAP, the Bezos FCF is reduced to $4.1 billion. I’m using ETIDA minus Capex minus Capital Lease Amortization payments. I even give him the benefit of adding back the non-cash share compensation portion of salary, which technically is not allowed in GAAP because share dilution is a form of cash use ultimately from the shareholders perspective. The $4.1 billion is GAAP free cash flow, not the Bezos bullshit FCF.

And not only that, but the AMZN core business model is starting to break down. But that analysis will be saved for this week’s Short Seller’s Journal.   Subscribers to the SSJ also get 50% off a subscription to the Mining Stock Journal.   Click here to learn more about the SSJ:   Short Seller’s Journal info.

Dave, just a moment for some feed back. I just placed and order for 1 oz gold eagles thanks to my profits off Tesla and BBBY. Thanks, as always. – Subscriber email received in early July

Short All Retail, Especially Amazon

“Bubbles require ever more money to sustain them. Currently that’s not happening. A severe market selloff could come at any moment.”

The quote above is from Fred Hickey, who writes the The High-Tech Strategist newsletter. Mario Draghi, Chairman of the ECB, is under pressure to reduce the Central Banks’ asset purchases (it’s buying corporate bonds, including junk-rated bonds). Apparently some Dutcn legislators presented Draghi with a tulip in reference to the Dutch tulip mania in the 1630’s.

The Bank of Japan and the Chinese Government are working to reduce their money printing. The Fed is still buying mortgages but it seems determined to slowly tighten monetary policy. The problem faced by these Central Planners is that they’ve created a massive global Ponzi scheme that requires an increasing amount of liquidity (money printing + credit expansion) in order to sustain valuation levels. Once they slow down the liquidity spigot, all fiat currency- driven assets (except physical precious metals) are at risk of collapsing.

The Dow finished the week closing down 4 days in row to close essentially unchanged for week (up 9 pts). The SPX also was flat for the week (up 6 pts). It managed to squeak out a slight gain on Friday to avoid 4 consecutive down days. Both the Dow and SPX started out Friday with a big rally from Thursday’s close but faded over the last 2 hours of trading on no apparent news triggers. This for me is a possible indicator that the stock market losing energy.

Bed Bath and Beyond (BBBY) was hammered Friday, down over 12%, as it badly missed earnings and revenue estimates. I presented BBBY as a short idea in the December 16th SSJ issue at $47.27. I hope some of you jumped on it then, as 4 days later it had closed at $41.38.

Amusingly, Jim Cramer, et al attributed BBBY’s lousy quarter to competition from AMZN. But nothing could be further from the truth. Its sales were up slightly from Q1 2016 and
its digital channel sales grew 20%. If anything, BBBY’s e-commerce business presents intensified competition for AMZN. Why? Because AMZN’s e-commerce operating margin is 0.3% vs. BBBY’s, which was 5.4% in Q1. BBBY has plenty room to go directly at AMZN on pricing.

BBBY’s net income dropped 39% vs. Q1 2016. The primary culprit was that BBBY lowered its free shipping threshold to $29 from $49. which in turn forced BBBY to absorb shipping costs on more orders. AMZN does not properly accrue the cost of its free shipping to its cost of sales (the SEC looks the other way on this one), burying the expense across the income
statement and balance sheet. But we know it has a reported 0.3% operating margin in e-commerce. The hit to BBBY’s operating margin, which declined 242 basis points (2.42%), gives us some insight about true cost inflicted on AMZN from its free shipping program.

My point here is that the overall retail environment is going to get more competitive and margins are going to decline even more. Companies like Walmart and BBBY have taken the gloves off and can afford to undercut AMZN across the board because they have significantly more room to cut prices and attack AMZN’s pricing and free shipping model without driving their operating margins down to zero. AMZN’s e-commerce profit margin, for all intents and purposes, is zero. The bottom line here is that retail in general remains a great sector to short.

I believe BBBY has a lot more downside and can still be shorted, with patience, for some nice gains:

The more interesting short is AMZN. About a month ago, right before completing the check-out process on AMZN, I received a message in which AMZN was offering a $5 shopping credit to fund a gift card with $100. Why is AMZN paying 5% to raise cash? It effectively is taking a 5% operating profit margin hit on the $100, because its overall e-commerce operating margin is essentially zero. And I discovered yesterday that AMZN was offering a $5 shopping credit to Prime members who opted for the slow shipping option rather than the 2-day shipping.

These cash-raising and cash-saving policies make no sense if AMZN is producing the billions in free cash flow as represented by Bezos (on a non-GAAP basis, of course). Something is very wrong beneath the surface. In fact, AMZN burns cash every quarter. I have demonstrated that in previous research I have produced. It’s a fact.

In the meantime, AMZN continues to be, along with TSLA, the greatest Ponzi scheme in history. Bernie Madoff is green with envy. The irony surrounding all of the analyst – and Jim Cramer – noise about AMZN is that its acquisition of Whole Foods makes it more vulnerable to competition. The idea that AMZN will now be a “grocery killer” is absurd. Just like the idea that it’s a retail killer. BBBY’s e-commerce grew at 20% year over year.

If anything is true, it’s that BBBY, Walmart, Target and Kroger present intensified e-commerce competition for AMZN.  And all four of those companies can cut prices to compete and still turn an operating profit.  AMZN does not have that luxury. That’s probably why AMZN is encouraging Prime customers to take the slow shipment option with a $5 shopping credit.

Most of the above analysis is an excerpt from this week’s Short Seller’s Journal, released Sunday evening. I discussed strategies for shorting BBBY. I also discussed shorting Kinder Morgan (KMI) in the context of declining energy price and usage and included for subscribers a somewhat dated, in-depth research report on KMI which details with proof the Ponzi scheme set-up at KMI. You can get more details about the subscription, including a “handful” of back-issues here:  Short Seller’s Journal info.  (Note: new subscribers also get a copy of the somewhat-dated full AMZN research report I wrote).

The Housing Market Bubble Is Popping

As with all other highly manipulated data, the financial media has a blind bias toward the “bullish” story attached to the housing market. Understandable, as the National Association of Realtors spends more on special interest interest lobbying in Congress than any other financial sector lobby interest, including Wall Street banks.

New home sales were down last month, according to the Census Bureau, 11.3% and missed Wall Street’s soothsayer estimates by a rural mile. Strange, that report, given that new homebuilder sentiment is bubbling along a record highs. Existing home sales were down 2.3%. You’ll note that the numbers reported by the Census Bureau and NAR are “SAAR” – seasonally adjusted annualized rates. There is considerable room for data manipulation and regression model bias when a monthly data sample is “seasonally adjusted/manipulated” and then annualized.  You’ll also note that mortgage rates have dropped considerably from their December highs and May is one of the seasonally strongest months for home sales.

It’s becoming pretty clear to me that the housing market’s “Roman candle” has lost its upward thrust and is poised to fall back to earth. I believe it could happen shockingly fast. Fannie Mae released its home purchase sentiment index, which FNM says is the most detailed of its kind.

The report contained some “eyebrow-raising” results. The percentage of Americans who say it’s a good time buy a home net of those who say it’s a bad time to buy a home fell 8 percent to 27% – a record low for this survey. At the same time the percentage of those who say its a good time sell net of those who say its a bad to sell rose to 32% – also a new survey high. In other words, homeowners on average are better sellers than buyers of homes relative to anytime since Fannie Mae has been compiling these statistics (June 2010).

Currently the prevailing propaganda promoted by the National Association of Realtors’ chief “economist” is that home sales are sagging because of “low inventory.” He’s been all over this fairytale like a dog in heat. The problem for him is that the narrative does not fit the actual data – data compiled by the National Association of Realtors – thereby rendering it “fake news:”

The graph above shows home inventory plotted against existing home sales from 1999 to 2015 (note:  when I tried to update the graph to include current data, I discovered that the Fed had removed all existing home sales data prior to 2013).   As you can see, up until Larry Yun decided to make stuff up about the factors which drive home sales, there is an inverse correlation between inventory and the level of home sales (i.e. low inventory = rising sales and vice versa).   I’m not making this up, it’s displayed right there in the data that used to be accessible at the St Louis Fed website.

Furthermore, if you “follow the money” in terms of new homebuilder new housing starts, you’ll discover that housing starts have dropped three months in a row. The last time this occurred was in June 2008.   IF low inventory is the cause of sagging home sales – as Larry Yun would like you to believe – then how come new homebuilders are starting less homes? If there’s a true shortage of homes, homebuilders should be starting  as many new units as they can as rapidly  as possible.

Although the Dow Jones Home Construction Index is near a 52-week high – it’s still 40% below it’s all-time high hit in 2005.  Undoubtedly it’s being dragged reluctantly higher by the S&P 500, Dow, Nasdaq and Tesla.   Despite this, I presented a homebuilder short idea to subscribers of the Short Seller’s Journal that is down 13.6% since  I presented it May 19th.  It’s been down as much as 24.2% in that time period.   It is headed to $7 or lower, likely before Christmas.  I also  presented another not well followed idea that could easily get cut in half by the end of the year.

The next issue of the Short Seller’s Journal will focus on the housing market.  I’ll discuss housing market data that tends to get covered up by Wall Street and the media. I have been collecting some compelling data to support the argument that the housing market is rolling over…you can find out more about subscribing here:  Short Seller’s Journal info.

In the latest issue released yesterday, I also reviewed Amazon’s takeover of Whole Foods:

I just read it and the analysis on Amazon is awesome. This has the potential to be the short of year when the hype wanes and reality sets in – subscriber, Andreas

Portrait Of A Stock Bubble

Just like the Dutch Tulip Bulb bubble, internet stock bubble, and the  mid-2000’s financial asset bubble, the current stock market is no longer  a price-discovery mechanism.   It has deteriorated into a venue in which Central Bank-manufctured liquidity – in the form of printed currency and credit creation – has flooded into the system, enabling investors to chase the few stocks rising in price at the highest velocity (click to enlarge, graph on the left sourced from Jesse’s Cafe Americain).

The drivers of this modern day Dutch Tulip phenomenon are the so-called “Five Horsemen” stocks – AAPL, AMZN, FB, GOOG,MSFT. To that grouping I toss in TSLA.  Among all of those bubble stocks, TSLA has become, by far, the most disconnected from any remote intrinsic, fundamental value.  AAPL alone is responsible for 25% of the YTD gain in the Dow and 13% of the YTD gain in the S&P 500. AAPL’s revenues and operating income have declined over the last three years (2014 to 2016).  More often than not, even on days when the S&P/Dow are red, most if not all of the Five Horsemen + TSLA  seem to close green.

Eventually, the music will stop and this “no-price-discovery-possible” market will become a “can’t find a seat” market.  The abruptness and rate of decline will be breathtaking. Perhaps only matched by the outflow of capital from the cryptos by “investors” who leveraged up their cryptocurrency holdings to throw more “money” at TSLA.

The good news is that a lot of money can be made shorting stocks.  Since April, stocks like IBM, GS, SHLD, BZH and GE presented in the Short Seller’s Journal as shorts have outperformed the SPX/Dow.  SHLD is down 47% in 7 weeks – a home run.  BZH is down 18% in three weeks.  In the next issue, a “funky” financial stock will be featured that has the potential to drop at least 50% over the next 12 months if not sooner.

No one knows what event will trigger the stock bubble collapse.  One possibility is the ongoing financial implosion of the State of Illinois.  In stock bubble periods, all news is imbued with “the glass is half full.”  As an example, Illinois’ credit rating was reduced recently to BB+/Baa3.  That is a junk rating. But the media characterizes it as a “the lowest investment grade” rating – i.e. the “glass is half full.”

Both rating agencies never downgraded Enron to junk until it was weeks from Chapter 7 bankruptcy.  Illinois is on the brink of financial disaster.   See this article as an example:  Illinois Owes Billions.  This problem is absolutely dwarfed by Illinios’ public pension problem, which Illinois underfunded by a couple hundred billion (officially about $130 billion but that’s not on a true mark-to-market basis).

When the music finally stops, the perma-bubble bulls will be looking for that proverbial “seat” in all the wrong places.  But the next stampede of capital will be out of stocks, bonds, cryptos and “investment” homes and into physical gold, silver and mining stocks.