"It Won't Be Long Now" - David Stockman Warns "Amazon Is The New Tech Crash"

Authored by David Stockman via The Daily Reckoning,

It won’t be long now. During the last 31 months the stock market mania has rapidly narrowed to just a handful of shooting stars.

At the forefront has been Amazon.com, Inc., which saw its stock price double from $285 per share in January 2015 to $575 by October of that year. It then doubled again to about $1,000 in the 21 months since.

By contrast, much of the stock market has remained in flat-earth land. For instance, those sections of the stock market that are tethered to the floundering real world economy have posted flat-lining earnings, or even sharp declines, as in the case of oil and gas.

Needless to say, the drastic market narrowing of the last 30 months has been accompanied by soaring price/earnings (PE) multiples among the handful of big winners. In the case of the so-called FAANGs + M (Facebook, Apple, Amazon, Netflix, Google and Microsoft), the group’s weighted average PE multiple has increased by some 50%.

The degree to which the casino’s speculative mania has been concentrated in the FAANGs + M can also be seen by contrasting them with the other 494 stocks in the S&P 500. The market cap of the index as a whole rose from $17.7 trillion in January 2015 to some $21.2 trillion at present, meaning that the FAANGs + M account for about 40% of the entire gain.

Stated differently, the market cap of the other 494 stocks rose from $16.0 trillion to $18.1 trillion during that 30-month period. That is, 13% versus the 82% gain of the six super-momentum stocks.

Moreover, if this concentrated $1.4 trillion gain in a handful of stocks sounds familiar that’s because this rodeo has been held before. The Four Horseman of Tech (Microsoft, Dell, Cisco and Intel) at the turn of the century saw their market cap soar from $850 billion to $1.65 trillion or by 94% during the manic months before the dotcom peak.

At the March 2000 peak, Microsoft’s PE multiple was 60X, Intel’s was 50X and Cisco’s hit 200X. Those nosebleed valuations were really not much different than Facebook today at 40X, Amazon at 190X and Netflix at 217X.

The truth is, even great companies do not escape drastic over-valuation during the blow-off stage of bubble peaks. Accordingly, two years later the Four Horseman as a group had shed $1.25 trillion or 75% of their valuation.

More importantly, this spectacular collapse was not due to a meltdown of their sales and profits. Like the FAANGs +M today, the Four Horseman were quasi-mature, big cap companies that never really stopped growing.

Now I’m targeting the very highest-flyer of the present bubble cycle, Amazon.

Just as the NASDAQ 100 doubled between October 1998 and October 1999, and then doubled again by March 2000, AMZN is in the midst of a similar speculative blow-off.

Not to be forgotten, however, is that one year after the March 2000 peak the NASDAQ 100 was down by 70%, and it ultimately bottomed 82% lower in September 2002. I expect no less of a spectacular collapse in the case of this cycle’s equivalent shooting star.

In fact, even as its stock price has tripled during the last 30 months, AMZN has experienced two sharp drawdowns of 28% and 12%, respectively. Both times it plunged to its 200-day moving average in a matter of a few weeks.

A similar drawdown to its 200-day moving average today would result in a double-digit sell-off. But when — not if — the broad market plunges into a long overdue correction the ultimate drop will exceed that by many orders of magnitude.

Amazon’s stock has now erupted to $1,000per share, meaning that its market cap is lodged in the financial thermosphere (highest earth atmosphere layer). Its implied PE multiple of 190X can only be described as blatantly absurd.

After all, Amazon is 24 years-old, not a start-up. It hasn’t invented anything explosively new like the iPhone or personal computer. Instead, 91% of its sales involve sourcing, moving, storing and delivering goods. That’s a sector of the economy that has grown by just 2.2% annually in nominal dollars for the last decade, and for which there is no macroeconomic basis for an acceleration.

Yes, AMZN is taking share by leaps and bounds. But that’s inherently a one-time gain that can’t be capitalized in perpetuity at 190X. And it’s a source of “growth” that is generating its own pushback as the stronger elements of the brick and mortar world belatedly pile on the e-commerce bandwagon.

Wal-Mart’s e-commerce sales, for example, have exploded after its purchase of Jet.com last year — with sales rising by 63% in the most recent quarter.

Moreover, Wal-Mart has finally figured out the free shipments game and has upped its e-commerce offering from 10 million to 50 million items just in the past year.

Wal-Mart is also tapping for e-commerce fulfillment duty in its vast logistics system — including its 147 distribution centers, a fleet of 6,200 trucks and a global sourcing system which is second to none.

In this context, even AMZN’s year-over-year sales growth of 22.6% in Q1 2017 doesn’t remotely validate the company’s bubblicious valuation — especially not when AMZN’s already razor thin profit margins are weakening, not expanding.

Based on these basic realities, Jeff Bezos will never make up with volume what he is losing in margin on each and every shipment.

The Amazon business model is fatally flawed. It’s only a matter of the precise catalyst that will trigger the realization in the casino that this is another case of the proverbial naked emperor.

Needless to say, I do not think AMZN is a freakish outlier. It’s actually the lens through which the entire stock market should be viewed because the whole enchilada is now in the grips of a pure mania.

Stated differently, the stock market is no longer a discounting mechanism nor even a weighing machine. It’s become a pure gambling hall.

So Bezos’ e-commerce business strategy is that of a madman — one made mad by the fantastically false price signals emanating from a casino that has become utterly unhinged owing to 30 years of Bubble Finance policies at the Fed and its fellow central banks around the planet.

Indeed, the chart below leaves nothing to the imagination. Since 2012, Amazon stock price has bounded upward in nearly exact lock-step with the massive balance sheet expansion of the world’s three major central banks.

At the end of the day, the egregiously overvalued Amazon is the prime bubble stock of the current cycle. What the Fed has actually unleashed is not the healthy process of creative destruction that Amazon’s fanboys imagine.

Instead, it embodies a rogue business model and reckless sales growth machine that is just one more example of destructive financial engineering, and still another proof that monetary central planning fuels economic decay, not prosperity.

Amazon’s stock is also the ultimate case of an utterly unsustainable bubble. When the selling starts and the vast horde of momentum traders who have inflated it relentlessly in recent months make a bee line for the exits, the March 2000 dotcom crash will seem like a walk in the park.

Comments

Oliver Jones DJ Happy Ending Thu, 08/03/2017 - 00:38 Permalink

Terraform (HashiCorp) also made choice of cloud provider irrelevant, and made provisioning in the cloud provider-agnostic. (Infrastructure as code.) Together with the modern immutable configuration model (where new virtual machines are just provisioned with the new config, and the old virtual machines destroyed once they're in place), it means cloud providers have zero leverage over their customers: If someone's offering a cheaper deal, we just switch to that deal on the next reconfiguration.Whether they like it or not, Amazon, Azure, Google, Oracle, et al, just got commoditised - and you know what happens to profit when that happens...

In reply to by DJ Happy Ending

Philo Beddoe Wed, 08/02/2017 - 12:25 Permalink

Whatever. Most people stopped calling tops years ago. What's wrong with experts these days? Fucked in the head I reckon or they are selling fucking newsletters...or both. 

2ndamendment Wed, 08/02/2017 - 12:26 Permalink

Why don't you just put SNAPCHAT in there and you can capitalize the "S" in "FAANG's". Seems like a much better choice than Sears, but what do I know. ;-)

spastic_colon Wed, 08/02/2017 - 12:26 Permalink

"Amazon’s stock has now erupted to $1,000per share, meaning that its market cap is lodged in the financial thermosphere (highest earth atmosphere layer)." gee thanks for explaining this to us tards...............

JLee2027 Wed, 08/02/2017 - 12:30 Permalink

It's all algo trading. Whose still (as a person) in the stock market? In 2000, guys in every cube in the office were trading stocks. Not anymore...

Born2Bwired Wed, 08/02/2017 - 12:31 Permalink

Stockman would eventually be correct about everything if the Fed lets the market go. So far he is outta luck on that one... Can't last forever but has been way longer than anyone rational has anticipated.I believe the "this time is different" phrase is correct in that the algos and the Fed are doing everything they can to keep the plates in the air, and if they are ever allowed to come down is only answered by 33 Liberty folks.

runnymede Born2Bwired Wed, 08/02/2017 - 13:46 Permalink

 Stockman is a critical thinking realist in a world of manufactured reality primarily composed of the distorting tools of:institutionalized organized crime and crony protection racketfiat moneyState curriculum of mass conditioningManias are the logical result. You all know it, else you wouldn't be here. There just hasn't been sufficient passage of time for the laws of nature to exert themselves, which is actually a perverted testament to human cleverness. We've (almost) all been reduced to playing the game to survive, and it's disgusting. If your existence is dependent on the speculation ponzi surviving, then admit your part. At least be candid with yourself if nothing else. Stockman is an anachronism in an artificial reality world. As is any truth seeker. Anyone who has profited from the stawk bubble--- good for you. May your way of life and belief system continue to your approval. Just don't bag on Stockman for lack of precise timing. Who knows, maybe humans have evolved sufficient to create their own laws of nature. We are God's highest creation after all. So, carry on---the center will hold. I'm sure if it. And if not, there's always someone who will sell you what you want to hear.

In reply to by Born2Bwired

shoWTHyme runnymede Wed, 08/02/2017 - 14:52 Permalink

Bullshit. Stockman is a moron representing the voodoo economics branch of astrology.You can't even claim he'll someday be right when the shitgasm happens because he has no more insight into when that will be than a cow that continually moos. Is the cow right? Is the cow a critical thinking realist? Not in my reality, buddy.

In reply to by runnymede

Never One Roach Sliced into ribbons Wed, 08/02/2017 - 12:54 Permalink

I know. Seems like that's all I hear from ZH and many other web sites and financial analysts...as the stawk market hits a new high every day. It does seem paradoxical considering over 98 million Americans are out of work. However, there are many stawks that have, indeed, collapsed like anything to do with mining, oil, oil drilling, etc. Not ot mentiona retialers.

In reply to by Sliced into ribbons

just the tip Wed, 08/02/2017 - 12:38 Permalink

i think i've got this stockman guy figured out.  i think i've got all these financial buzzards figured out.  gartman was the easiest.  this is just the basic stockman screed.  change the name of the company.  put in a few different charts.  change the captions, and, VIOLA!, a new article ready for posting at ZH.  it only took me about two years to figure that out.  the first twenty three months i actually believed this shit and tried to understand it.  it is, afterall, ZH.

OpenThePodBayDoorHAL just the tip Wed, 08/02/2017 - 13:38 Permalink

Buy a list with 1,000,000 names, write two investment newsletters. Send 500,000 to people saying the market's going up, 500,000 to people saying it's going down. Wait 6 weeks, send two more of the same newsletters to the 500,000 who got the right one last time. Repeat. Repeat. Repeat. Repeat. Now you have 35,000 people who think you are an absolute market timing guru, tell them the newsletter is now $1,000 per year, if you get 20% to sign up you get $7,000,000.00. Send them Dilbert cartoons for 12 months.

In reply to by just the tip

youngman Wed, 08/02/2017 - 12:36 Permalink

What is Amazon...a bookseller..they were at one time..or a movie studio...they are now...I think they need to focus a little more instead of trying to be everything...

FoggyWorld youngman Wed, 08/02/2017 - 15:17 Permalink

Their increasing use of third party sellers is driving me away.  The packaging tends to be awful and 90% of the time the stuff inside arrives crushed.   To that, they take longer to ship than things from an actual Amazon warehouse.  And Amazon has no quality control over those third party sellers until enough people complain. Several recent orders look to me like knock offs.   The packaging is close but not exactly what the previous orders looked like and the quality of the actual item often is lacking.   I live out in nowhere so do need internet shopping but am beginning to make efforts to check others out and will keep my book orders at Amazon as long as they keep their prices lower than the competition.  So I really agree with you that they need to focus on just what they are selling and get back some control of the items selected and then ship them themselves.    

In reply to by youngman