Yawn, are we there yet?
This is the same chart we were using since the beginning of February and, in March, the markets have been full of sound and fury which has signified nothing as all that bluster has us right back where we started, with the S&P 500 finishing yesterday's session at 2,716 – exactly 3 points higher than we were 30 days ago.
When we did finally break out over the Strong Bounce Line at 2,728, the S&P flew all the way up to 2,800 (3/12 and 3/13) when I said we were going to short the S&P (/ES Futures) back to 2,400 and we hit 2,700 (up $5,000 per contract) on Monday and 2,720 is a weak bounce from that. My comment on the overall market was:
"I said we plan on deploying more cash when the S&P drops to 2,400, which is 15% down from the current 2,800 but that includes people paying $1,600 for a share of Amazon (AMZN) that generated $4.56 in profit last year for a return of 0.285% – Japanese bond investors laugh at Amazon shareholders! Come on folks, this is ridiculous – markets can't sustain these kinds of gains."
Now you know what I meant by that comment – markets can't go up just because – there needs to be real money flowing in and a real economy to sustain it – we have neither of those things. Yes, the economy is growing, but not fast enough to justify those kinds of market moves and that's why we have our 5% Lines™, especially our Must Hold Levels™ – to remind us where the REAL value is in the markets and that keeps us from losing our heads and chasing ridiculous valuations.
It also tells us when things are too cheap and, just like there was a mania to buy stocks at sky-high valuations, there's a mania to sell perfectly good stocks like GE (GE), L Brands (LB) or Chipotle (CMG) at fire-sale prices – surprisingly in the midst of the same rally (see our March 12th Top Trade Review for those trade ideas).
Even now, Amazon (AMZN) added back $41.50 (2.7%) yesterday as it retests $1,600, which is almost an $800Bn market cap – just 10% less than Apple (AAPL) who made a $48 BILLION profit last year. And how much did AMZN make last year? $3Bn. So AMZN can doulbe ($6Bn) and double ($12Bn) and double again ($24Bn) and it STILL wouldn't be making 1/2 of what AAPL already makes yet traders are considering them of essentially equal value now?
That's what is ridiculous and unsustainable about the market and what's most ridiculous is that we're too scared to short AMZN because, no matter how crazy you think traders are – they can be even crazier than that! And you will hear blowhard analysts and TV pundits gushing over Amazon while they open up grocery stores and retail stores that CAN NOT POSSIBLY sustain the margins that their on-line business has (in theory – it's never actually made money but that's another article).
Like Tesla (another massive scam disguised as a company), Amazon sustains themselves by misdirection – constantly entering new businesses and rolling out new product – even though the old ones don't make any money. Amazon makes money selling cloud computing, not selling products, yet the cloud computing aspect of Amazon is facing slowing growth and Oracle (ORCL) just dropped 10% after reporting that cloud revenue growth continues to slow and margins are being squeezed.
Now, an Amazon optimist may say that AMZN is taking their market share but it's not just AMZN, it's MSFT, IBM and DELL and GOOGL – tough competition for ORCL and AMZN yet all of them are growing because cloud computing is new and exciting and AMZN just so happened to have a huge competitive advantage because they had to maintain a massive computer presence for their own operations (as does GOOGL), so it was very profitable to use those same computers to service the needs of other companies as well.
For Alphabet (GOOGL), who make $13Bn a year and carry a $762Bn valuation, cloud services add 10% to their bottom line and for Microsoft (MSFT) cloud services are now 28% of their $21Bn in profits against their $717Bn valuation. IBM (IBM) did $15Bn (18%) in cloud revenue last year out of $80n in sales and AMZN did $14.5Bn (8%) out of $178Bn in sales but cloud profits for Amazon accounted for $3.5Bn of the $3Bn the company made in 2017.
Wait, isn't $3.5Bn more than $3Bn? That's right, the other 92% of AMZN's operation runs at a $500M loss. What analysts get wrong when projecting Amazon's growth is that they extrapolate the company's growth in retail sales and then assume profits will grow along with them but this is what happens when a company has so many different revenue streams – you need to look at them separately, not together.
In Amazon's case, the more they grow retail, the more they have to sell just to break even and the easy money has already been made on the cloud and the competition for go-forward Dollars is going to be fierce and Amazon isn't actually a tech company – they are a company that bought a lot of tech, had extra space on their servers and had the great idea to rent out something they had already paid for. The big boys will eat them for lunch down the road.
Fortunately for AMZN, that lunch can be eaten at Whole Foods as Bezos has prayed at the Temple of Musk and bought that company (and their profits) to distract you from the fact that AMZN itself doesn't have any. Look over here – groceries! No, over here, Echo! No, over here, Prime! That's what Tesla does with their Gigafactory and SpaceX and Boring Company, Hyperloop and Solar City – Elon Musk keeps you distracted long enough to hide his actual financials behind the curtain while promising the illusion of profits in – THE FUTURE!!!
Well, investors, like voters, are pretty much idiots and they will walk right past a company like Apple, that is ACTUALLY making $12Bn PER QUARTER now for a company that makes less than $1Bn per quarter just because AMZN is willing to bullshit investors while Apple, who make more money than any other company on Earth, tends to be quiet and conservative in their outlook.
Here's a handly chart illustrating Revenue (outside circles) vs Profits (inside dots) for the World's Top 100 companies in 2016 (nothing more recent). As a rule of thumb, we like the ones with bigger dots!
Until insane valuations on companies like Amazon and Tesla are washed out of the market – we're going to remain very cautious at these nose-bleed highs.