ClaaP Meets CRaP

Amazon recently announced that they are combing through the list of things they warehouse and sell to determine which items “can’t realize a profit” (CRaP).1 We found it very interesting how they are determining which items to pare from their website list. Simultaneously, the U.S. stock market became an investment market in the last four months of 2018 where you “can’t invest at a profit” (CIaaP). Since late summer all the major indexes have plummeted. Is CIaaP related to CRaP and can understanding the connection help us prosper going forward?

First, the FAANG-trade mania of the last five years was led by Amazon and Netflix.2 At its heart, the mania is about e-commerce and massive revenue growth. Public companies were allowed years of unprofitable growth as they sold “CRaP” to adoring consumers who could sense what a ridiculous bargain free shipping was, or how inexpensive unlimited entertainment was on their relative’s Netflix account. See the chart of maniacal markets since 1977 below:

Source: Merrill Lynch Global Investment Strategy, Bloomberg

This e-commerce bubble ranks right up with the worst ones. Since the FAANG stocks (and tech-related companies) reached 30% of the S&P 500 Index in August 2018 and started a fight over trillion-dollar market-cap supremacy, it doomed the index to perform poorly when the glam tech stocks got hit harder than the broader stock market in this decline.

Second, how Amazon determines CRaP is different than how we determine it or how the anti-trust division of the United States may determine it. We believe that most things sold from Amazon’s own inventory lose money when delivery is included. They do it to make their “Prime” membership attractive and to shovel a significant part of that revenue to their technology company, Amazon Web Services (AWS). As we parse their income statements, there is no way to really see if they can make money retailing items because Federal Express and UPS tell us it costs $5 to deliver the packages.

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Disclaimer: The information contained in this missive represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past performance is no ...

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