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Amazon Is Cheap At Any Price, Say Carnivorous Animals

"Changing the world" is not an investment thesis.
By Yolo0906 (Own work) [CC BY-SA 4.0], via Wikimedia Commons

By Yolo0906 (Own work) [CC BY-SA 4.0], via Wikimedia Commons

After the bell on Thursday, Amazon turned in a quarter that included a mile-long list of “highlights” that reads like a world domination manifesto penned by some guy having a bipolar manic episode while barricaded in his basement one night.

You can read the entire list here, but suffice to say Jeff Bezos “accomplished” a lot in the three months ended September 30, including, but certainly not limited to: buying an entire grocery chain on the way to revolutionizing organic food, releasing three variants of a device that lets you communicate with a talking personal assistant “who” can now do everything from make phone calls to “play NFL Trivia with Marshawn Lynch”, literally securing access to your physical house via Amazon “Key”, closing deals with The Walking Dead creator Robert Kirkman and Gilmore Girls creators Amy Sherman-Palladino and Daniel Palladino, and of course launching a giant wind farm in Texas.

The numbers that accompanied Jeff’s Michael Jordan-ish highlight reel blew away estimates and the shares are surging.

I bring this up because Amazon is the poster child for a consensus view about “world-changing” companies. That consensus is basically that no price is too high when it comes to staking your claim on a share (figuratively and literally) of the future. Undoubtedly, there are plenty of people taking victory laps on Friday as Amazon hits all-time highs and Bezos once again becomes the world’s richest human being.

A couple of things worth noting about that. First of all, “I’d pay anything for a piece of a company that’s going to change the world” isn’t really a “thesis.” It’s just common sense. If you know that something or someone is going to change the world, then the only way you’re not bullish on that something or someone is if you’re bearish on human progress, and I’m not sure “neanderthal nostalgia” is really a thing.

So it’s not that people who aren’t willing to pay any price for tech high-flyers are bearish on human progress as much as it is that those people don’t believe in crystal balls. I’m a bit of a Howard Marks quote machine sometimes, but you’ll forgive me if I channel him just once here:

Bull markets are often marked by the anointment of a single group of stocks as “the greatest,” and the attractive legend surrounding this group is among the factors that support the bull move. When taken to the extreme – as it invariably is – this phenomenon satisfies some of the elements in a boom listed on page four, including:

  • trust in a virtuous circle incapable of being interrupted;
  • conviction that, given the companies’ fundamental merit, there’s no price too high for their stocks; and
  • the willing suspension of disbelief that allows investors to extrapolate these positive views to infinity.

In the current iteration, these attributes are being applied to a small group of tech-based companies, which are typified by “the FAANGs”: Facebook, Amazon, Apple, Netflix and Google (now renamed Alphabet). They all sport great business models and unchallenged leadership in their markets. Most importantly, they’re viewed as having captured the future and thus as sure to be winners in the years to come. That raises the question of whether investors in technology can really see the future.

Yes, that “raises the question of whether investors in technology can really see the future.” Marks is a bit more generous than I am when it comes to speculating on whether market participants have crystal balls. Investors in today’s technology cannot in fact “see the future” for the simple reason that seeing the future is impossible.

Of course just because you can’t see the future, doesn’t mean you can’t make a prediction based on available evidence and if the available evidence suggests that a given company is more likely than other companies to change the world, well then you should indeed pay a premium. In light of that, the list of “highlights” from Amazon’s quarter is enough to make you want to join the “no price is too high” camp.

But here’s the thing: while you can’t see the future, you can remember the past. And if memory serves, overpaying on the assumption that you can see the future is fraught with peril.

Well one person who remembers a time when overpaying went wrong “as clearly” as if it weren’t yesterday is SocGen’s incorrigible bear Albert Edwards. To wit, from his latest note:

I remember [1987] as clearly as if it were yesterday –- actually I can’t remember yesterday. I remember [1987] as clearly as if it were yesterday –- actually I can’t remember yesterday. For me, the trigger for the 1987 crash was the fear of US recession caused by the likelihood of US rate rises to stem a hypothetical dollar collapse. I am clear in my mind both at the time and now, that the US equity market was priced for a continuation of rapid economic and profit growth and this was under threat. The Dow was on nose-bleed valuations, especially as it had ignored the bond sell-off for most of 1997 (was it really 30 years ago that US 10y yields briefly crawled back above 10% - the last time we would see double-digit yields). None of this would have mattered if the US equity market had been cheap. In my view the record 25% ‘Black Monday’ October 19 decline was due to a horrendously expensive equity market suddenly confronted with the fear of recession. Equity valuations matter. 

Yes, “equity valuations matter” because when you have no valuation cushion, fear is magnified. You do not have the psychological cushion that comes from knowing you bought at a discount. And that means that in the event you start to think you can’t depend on multiple expansion (i.e. on everyone paying up for the future), you and everyone like you are going to be prone to selling at the same time.

But times have changed. These days, Jeff Bezos talks to you in a woman’s voice via a speaker he sold you while you’re putting away organic hummus he also sold you. And that’s assuming he didn’t put it up for you while you were at work via Amazon “Key.” So you know, maybe this is a different world no longer governed by the same laws that prevailed during all the various yesterdays that Albert Edwards vividly doesn’t remember.

If that’s the case, and the investing landscape can no longer be explained by common sense assumptions about valuations, well then I’ll leave you with a requiem for “simpler” time, as recounted by Edwards who, in the same note cited above, recalls the good old days when you could bring carnivorous pack animals to board rooms:

’I’ve been travelling for work for a couple of weeks; hence the brief interruption in normal service. Most of you have realised by now that the Global Strategy Weekly never actually comes out weekly. It used to be published weekly though in the early 1990s when I worked at Kleinwort Benson under my old boss, the late Roger Palmer. I was thinking about him the other day – one tends to reminisce at my age. He was certainly an unforgettable character. His enduring legacy is that he used to keep the only ‘tame’ wolf pack in the UK and formed the UK Wolf Conservation Trust, which his wife still runs. I remember the Head of Research refusing Roger permission to bring his wolves to one of our big strategy presentations held in our buildings near Monument Station (now the Walkie Talkie building). Although those were the days before stifling Health and Safety strictures, many of us had reasonable concerns that parading the wolves up and down aisles and getting the clients to pet them might end very badly indeed. Roger being Roger, he went over his line manager’s head straight to the Chairman who granted permission. I will never forget the look of fear in some of those clients’ faces as the wolves were allowed to roam around the conference room!

Catch more Heisenberg over at Heisenberg Report.



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