Follow up to Amazon Short-Call

Originally published at The No Buy List:

Though I myself didn't short shares of Amazon.com (AMZN) despite all of my recent negatively-slanted pieces, I am glad to report that shares are sitting lower than they were on every date that I published anything about them.

AMZN's recent decline can be attributed to the general market pullback, but looking forward, shares may continue to underperform. Below is a six month chart of AMZN:

Shares are still trading at $75 though the company is only expected to earn roughly $2/share next year. Even a 50% upward surprise (meaning yearly earnings of $3/share) still wouldn't make shares look cheap.

Looking at the chart, shares seemed to touch resistance (both 50 day moving average and some previous lows) today, so further movement downward could be looked at as a weak technical sign. Shares have also clearly broken the upward trend that began in march. Looking downward, there had previously been consolidation between $60 and $65, which could be a reasonable mid-term price if the wider market continues to correct. There's still a glaring gap between $50 and $57, but I wouldn't expect that to be filled anytime soon.

The bottom line, once again, is that Amazon is a great company but AMZN shares are still overvalued. I'm personally not initiating any short position at this point, but I'd rather short than buy long AMZN shares tomorrow.

And as always, if you're in the market for one of Amazon's new Kindle readers, please do through so my link below.

Buy a Kindle 2, Kindle DX, or anything else at Amazon.

More Kindle DX Details: Still Not Impressed

Originally published on the No Buy List:

Well, most leaked pre-release facts seem to be right: the new Kindle is big, pretty, and textbook- and newspaper-friendly. As I mentioned in my last post, a few colleges will be participating in trials to see if the Kindle textbook experience can catch on.

A troubling new piece of information is the price of the Kindle DX: $489. For $500, a consumer can buy a newest-generation iPod or iPhone, competing ebook reader, or one of many high-quality netbooks. I think that Amazon has priced the device far too high, as the allure of a device with relatively-limited functionality diminishes considerably as price increases.

And once again, Amazon is paying 10% to anyone that can sell one, which is a very significant amount of foregone revenue. On a similar note, if anyone was looking to buy a Kindle DX, feel free to put $48.90 in my pocket for (old-fashioned) textbooks, you can click this link to pre-order a Kindle DX.

My original thesis before the release of the Kindle 2 was that the new Amazon e-media readers would not be game-changers, and I stand by this sentiment. The function-to-dollar ratio for the Kindle 2 and Kindle DX cannot compete with an iPod or a netbook. The Kindle family is a wonderful niche product for a certain group of people - bookworms that travel - but I still cannot conceptualize mass appeal at this current level of high price and low functionality. Amazon's core business is still growing healthily, and shares may continue to enjoy a rich valuation, but I wouldn't expect the Kindle to add materially to Amazon's bottom line anytime soon.



Buy a Kindle 2
Buy a Kindle DX

Amazon's Kindle 2.5? Nothing to Get Excited About.

Would you like to buy a Kindle 2 or a Kindle DX?
Check them out at Amazon by clicking this link?


This post was originally published at The No Buy List:

Amazon is holding a press conference at a New York university tomorrow to probably announce what many optimistic investors had been waiting for: a Kindle with a bigger screen.

Much of the reason for the press conference seems lost as the important info has been leaking out over the past few days. Engadget, a popular electronics blog, published this post about the new Kindle, including leaked pictures.

Supposedly, the new Kindle will feature a 9.7 inch screen, enhanced browsing capabilities, and a built-in PDF reader, adding some more functionality to the device. However, the Kindle is still far from being a full-fledged computer-alternative (I'd argue that the most recent iPods are much more functional) so I don't know if the Kindle buzz is merited.

Newspaper and textbook publishers are looking to this bigger Kindle to try to increase popularity of their products: apparently, Case Western, Pace, Princeton, Reed, Arizona State, and Darden School at the University of Virginia will be participating in a trial where Kindles will be used in the classroom.

However, as a college student, I don't see this application of the device gaining much traction. Traditional textbooks are convenient because they can be taken everywhere (though not necessarily all at one time). The new Kindle will replicate this ability, with the added convenience of carrying a single device weighing ounces instead of lugging a half-dozen textbooks weighing 20 pounds. However, the appeal ends there. Paper textbooks can easily be marked up to enhance the learning experience; even with some sort of highlighting or annotation feature, the effect is largely lost on-screen. The best part about paper textbooks are their reusability; books used year after year are very cheap to buy secondhand, and even new books can be returned or resold for a significant portion of their face value. Though the user will likely be able to keep their Introduction to Macroeconomics book forever, it retains little value after the course is over.

I also think that there is an emotional objection to electronic textbooks. In my Penn State-mandated public speaking course, the required text was electronic. It amounted to a PDF with links to a limited-access website with additional material and assignments. For this, the publisher charged about $70 - a hefty price for intellectual property. Students were outwardly angry and hostile, and many, like myself, didn't bother to even purchase the textbook. People would rather spend $100 for a paper version that they can sell to a friend or the bookstore for $50 than pay for material that feels like it should be free.

Maybe schools like Princeton will have free course materials or heavily subsidized textbooks, but I don't see the Kindle catching on at Penn State.

The other highly-touted new application is the reading of newspapers, and struggling companies like the Times are hoping that they can sell a lot of $10 monthly subscriptions to help stop the widespread bleeding. But as other bloggers and writers have pointed out, why would someone pay $10/month for the Times limited-feature Kindle edition when their regular website features much deeper and richer content for free?

Unless there are some mind-blowing details that haven't been leaked yet, I don't see this new Kindle creating much of an addition to Amazon's bottom line anytime soon. I think that Amazon's shares are already more than fully valued, so if AMZN shares do pop tomorrow, that pop simply provides a juicier entry point for a short position.

Buy a Kindle 2

Do Not Buy Amazon.com

Written and originally published by myself at The No Buy List - a blog focused on negative analysis of companies.



Amazon.com began as an internet book retailer and has expanded into sales of goods of all kinds. A consumer can now buy everything from groceries to the latest G-Unit CD on Amazon. Amazon's product offerings only continue to grow as they add more products to their site directly and invite outside sellers to sell through the Amazon portal. Amazon has even begun developing and selling its own products: the recently-introduced Kindle 2 created much buzz and will fluff Amazon's bottom line as they are the sole retailer of the high-margin product: "A teardown analysis of the Kindle 2 by market research firm iSuppli estimates the cost to build the device at $185.49, or about 52% of its retail price of $359" (Businessweek).

With other offerings like apparel, foodstuffs, and mp3 downloads, Amazon is attempting to diversify into a seller that can supply almost anything a consumer could want. The strategy does seem to be working, as revenue and profit keep increasing despite a sour economy. However, Amazon's weakness has always been tight margins, and margin expansion is unlikely. The internet is an ultra-competitive animal, as many websites (like SlickDeals.net) exist solely to alert consumers to good deals. Amazon's decision to allow outside sellers to sell products on the website (via the Fulfillment-by-Amazon program and the simpler Selling on Amazon option) allows sellers to attempt to match or undercut Amazon's prices, making it more difficult for Amazon to retain healthy markups (except on niche products like the Kindle).

When Amazon can't increase margins, they increase volume, which has worked thus far. I believe it will continue to work, as consumers will increasingly turn to Amazon to meet all of their discretionary needs, so I do believe that Amazon will continue to be a growing, healthy, and increasingly profitable company.

However, Amazon makes the Do Not Buy List due to an overly-rich current valuation. Amazon is expected to make $1.50 per share this year, slapping a price to earnings ratio of over 50 on shares. Even next year's earnings, currently estimated at $1.94, will maintain a P/E of over 40. Since I believe that Amazon will continue to perform well, I'll say that Amazon will make $2.75/share next year - even with such results, the shares would still trade at a 29 P/E. These ratios are much, much higher than competitors, and seem unsustainable despite recent enthusiasm.

eBay, Amazon's most comparable online competitor, trades at a P/E of just 10 (though that is partially attributable to problems with eBay's business). Wal-Mart, the diversified brick-and-mortar retailer, trades at a P/E of 15, while Target, Wal-Mart's smaller competitor, trades at a similar valuation. Best Buy, the electronics retailer, trades at roughly a 17 P/E.

Amazon's business model does differ from these retailers - Amazon is less of a pure-retail play with the addition of revenue streams like music sales, the Fulfillment by Amazon program, publishing, and more - but at its core, AMZN is a retailer. Amazon does have a world-class supply chain and does not have to pay for retail square footage like the aforementioned competitors do. But because a consumer can buy the same books, movies, and groceries from Target or Best Buy, Amazon's margins on such commoditized items will always remain slim.

The bottom line is that Amazon.com is a great company that trades at a somewhat-ridiculous valuation. AMZN will report earnings later this week, and I have a cannot believe that any news could propel shares much higher at this point. Therefore, Amazon will be placed on the Do Not Buy List for the short- to medium-term until margins show signs of improving, or earnings increase to a point where AMZN's P/E falls closer in line with competitors.



Buy a Kindle 2

Thoughts on Amazon and Kindle 2

Amazon shocked the street recently as its holiday quarter numbers held up as the wider retail industry suffered through a horrible holiday season. Analysts and investors digested Amazon's reasonably strong performance favorably and tried to assess why they are succeeding while others are struggling.

As that euphoria was fading, Amazon kept its buzz strong by announcing the Kindle 2, Amazon's new and improved ebook viewer. The Kindle 2's release was anticipated after Amazon allowed the first Kindle to go out of stock during the holiday shopping season; the new Kindle will start shipping on February 24th. Many retail investors seem excited about the Kindle's prospects and some equate it with the early iPod. I think that such hopes are misguided.

The Kindle 2 is a very good product, and Amazon taking the time to upgrade it was a smart move. The new kindle is lighter, slimmer, sleeker, holds more books, can "speak" any text on the screen, has a sharper e-ink display, and still utilizes the free-forever cellular networks to quickly deliver content. The device retails for a hefty $359, but the yuppies that the Kindle is marketed to should be willing to pony up that price for the newest, coolest device.

Amazon is estimated to have sold about 500,000 of the first-edition Kindles. The Kindle 2 should surely break those numbers (rather quickly), and sales of the Kindle should help fluff Amazon's bottom line for years to come. But expectations of a game-changing device (as iPod-comparers imply) will lead to disappointment.

The iPod revolutionized how consumers accessed media. The iPod allowed consumers to carry their entire music library in their pockets for the first time ever, and there were no alternative devices at that time that performed any sort of similar function. It took a while for iPod sales to really start accelerating, and sales eventually boomed as internet speeds and music downloads (both legal and illegal) increased exponentially.

The Kindle 2 is the sleekest ebook devise on the market, but the market is much more limited than that which the iPod filled, and Kindle's market will only shrink. Virtually everyone has a few hundred songs that they'd like to be able to listen to at any time; a much, much smaller pool of people have a few hundred books they'd want to be able to read at any time. (I'm aware that the Kindle 2 can show newspapers, blogs, and more, but my point is the Kindle's less-universal appeal). Plus, netbook sales are increasing dramatically and prices are very affordable (even sometimes less than the Kindle), and some forthcoming tablet netbook will surely be able to emulate the Kindle's book-presenting abilities.

Amazon also seems motivated to sell as many Kindle 2's as possible. I have had an affiliate account with Amazon.com for years, though I have never attempted to sell products. Recently I noticed an email from Amazon announcing that Kindle commissions would be roughly double that of normal everyday sales. To me, this seems to indicate that Amazon's margins on the Kindle are fairly wide, which would obviously be good for investors. Amazon is willing to give up 10% of the cost of the Kindle to anyone who can sell one. (On a similar note, you have likely noted the hyperlinked "Kindles" littered earlier in the article; if you plan on buying a Kindle, please click one of the links above or this one here.)

I anticipate that Amazon will report good top- and bottom-line numbers over the next year as the Kindle should sell strongly; a couple million units are definitely within the realm of possibility. However, I wouldn't buy Amazon's stock on the expectation that they'll eventually sell 100,000,000 Kindles. The product is good, but the market is limited.


I also get another peek into Amazon's operations via my status as a seller on Amazon.com who is engaged in the Fulfillment-by-Amazon program. (I have discussed this program before; basically, a seller pays a fee to use Amazon's warehousing and supply chain - Amazon stores products and ships it when a customer makes a purchase).

I recently received a few emails from them about expanding my product lines within my category (sporting goods). In the most recent email, they were specific enough to suggest about 100 brands that they "want to get into FBA." Listed brands include major sporting icons like Nike, Burton and K2.

Obviously Amazon is urging sellers to expand to further their own interests, and this is a brilliant strategy. Rather than risking their own capital by buying, storing, and selling themselves, Amazon can have independent sellers do that for them and sit back, while collecting a significant chunk of revenue. Amazon charges FBA merchants a percentage of the purchase price (about 10% on average) as well as a base monthly fee, monthly storage fees (based on cubic feet of actual warehouse space used), and three fees per shipment - one base fee, a fee per item, and a fee based on total weight. Increasing FBA sales is the quickest and easiest way for Amazon to increase profits without increasing their own risks whatsoever.

I don't want my tone to suggest that I am unhappy with Amazon's attitude - the FBA program allows me to run my small business (Whacks Wax) from any internet-accessible computer. Without FBA, I would have quit selling ski wax from my bedroom became less attractive when I moved to college. If I had access to any of the brands Amazon is asking for, I'd gladly sell them through Amazon. Every experience I have had with Amazon and FBA thus far has been positive, and they are very smart for attempting to grow that segment of their business.


As a company, Amazon's prospects clearly seem positive as buyers look for deals and sellers try to make money. As a stock, these good prospects seem to be fairly factored in already, so I would neither buy nor sell shares at this point. The purpose of this article was simply to inform the public on my limited yet increased insight of some of the behind-the-scenes workings of the thriving internet retailer, and my observations indicate likely continued success for Amazon.com.






Ski Wax
Cheap College Textbooks

eBay: Personal Dissatisfaction, Investor Doubt, and I'm Gone.

Just a few months ago, I defended eBay’s business as it was being attacked on all fronts; fee hikes had disenfranchised big sellers, who were being lured by Amazon’s fulfillment program.

I proclaimed confidence in eBay’s marketplace, even as they began to squeeze too many pennies out of small sellers like myself (peddling my ski wax, Whacks Wax), right as Amazon.com was allowing sellers to list their items for free.

I also noted that PayPal was much of the reason to invest in eBay’s stock. PayPal still is a great brand, but Google is pushing hard to popularize its payment processing service, Google Checkout, by offering new buyers a free $10 discount on their first purchase.

My problem with eBay, the corporation, has grown from a personal problem, but I feel as though it also sheds light on many of the issues currently facing eBay, and it shows that they may be failing to properly address those issues.

I have been selling various goods on eBay for over five years through three different accounts. I began selling trinkets, mirroring eBay’s promoted image as a worldwide 24/7 garage sale. However, a few years ago, I invented and began selling my own ski wax, and eBay was a great market place to promote a brand in its infancy.

Over the years, I have sold approximately $10,000 of goods through eBay. My average selling price was no more than $10, so I logged about 1,000 transactions through the different accounts. Considering that eBay charges a listing fee, a final value fee, promotional fees (I often did choose featured listings to attract attention), and most of my payments were processed through PayPal (which charges a base fee AND a percentage of the transaction), I would estimate that I generated $1000-2000 of revenues for eBay and its entities over the years.

Now, in an effort to promote “marketplace security,” the account that I sold ski wax through (which generated the majority of personal revenue and eBay fees) has been permanently suspended. The account’s feedback rating (the metric that eBay uses to establish confidence in transactions) is excellent, with a 97+% positive rating, including about 400 total positive transactions. The other two household accounts also may be suspended – each of them was sporting a 99% positive rating.

However, the very last transaction I conducted resulted in a negative feedback, and because of some silly computer search eBay must conduct, my account was blacklisted and suspended. (An aside: The circumstance was unusual, and I refunded the customer’s money right after negative feedback was left, so the transaction was resolved. My integrity as a seller remains intact.) eBay suspended the account because of a “result of your violation of site policy on Seller Non-Performance” because I “generated unacceptable levels of buyer dissatisfaction in your transactions.” This is solely based on the one most recent feedback.

A reasonable person could see that I have established and re-established credibility as a merchant. A reasonable company would allow real customer service people to review and overturn suspensions such as mine when their computers clearly take transactions out of context. However, eBay seemingly will not let customer service employees breach official policy, even if the situation merits it.

eBay clearly has issues policing its increasingly-dangerous marketplace, and this is an example of an overreaction that may have broader implications. As many larger sellers are already flocking to Amazon or other auction websites, fleeing the stranglehold of the new fees eBay has imposed, eBay should not be barring willing merchants from using the website. Yes, this may be an isolated, individual incident, but it is an example of policy and bureaucracy of an inefficiently-large corporation destroying the very nuances that led to its success.

Whacks Wax will survive. I already began using Amazon.com’s fulfillment system last year, which streamlines my operations and makes selling my product immensely easier. An eBay presence was certainly beneficial to the company, but this past winter it accounted for the smallest percentage of sales yet. The nostalgia of eBay, where I had built my company from the ground up, may have been one factor that continued to attract me to the increasingly expensive marketplace.

Bigger niche sellers have no need for eBay anymore. Amazon is a worldwide marketplace that attracts deal-seekers just like eBay, except they charge no upfront fees. Merchants leaving eBay can spend the money that would have paid on fees (in my case, between 10-40% of final selling price) to invest in their business or advertise, and probably more than make up for lost sales.

eBay will always exist as a marketplace to promote knickknacks, but its heyday as a serious marketplace seems to have already passed . Now, through websites like pricegrabber.com and shopping.com (eBay owns the latter), consumers can quickly and easily find the cheapest price for a good, instead of having to devote hours to manual browsing as they would have to have done in the past (which led to bidding on eBay, a relatively-cheap marketplace). Powersellers with significant draw can simply promote their own websites, which requires a greater sunk cost but little (if any) incremental costs compared to eBay selling. As Amazon.com continues to expand into groceries, people may become accustomed to look there as a first place for anything they desire, not eBay, as may have been the case in the past.

Luckily for shareholders, eBay’s non-core businesses are continuing to grow the company as the auction marketplace has stagnated. PayPal is still the only widely accepted online payment processer, and no matter how many $10 credits Google throws at consumers to encourage them to use their checkout, PayPal’s dominance should continue. PayPal is also now being used unconventionally, as family may send remittances cross-border through PayPal, and traditional merchants (airlines, etc.) are now accepting it.

Skype also seems to finally be gaining some traction, and eBay has already written off most of the (ultra-inflated) value of the purchase it made a few years ago. Integration into the auction website has made Skype more relevant as corporations and consumers have simultaneously started to use it. Skype is now a positive contributor to the eBay brand, and if eBay chooses to get rid of it, they could probably sell it for more than the value they now have booked.

Still, the street continues to look at the auction website as the most important component of eBay’s businesses (which it is). That business is no longer growing. The exodus of Powersellers and banning of lowly, innocent, above-average sellers will not help stop the bleeding. eBay needs to focus on re-attracting the big sellers, possibly creating a different way for them to list items (think eBay stores, but better) that can rival the appeal of Amazon.com. If the core business continues to decline, it will be hard to make up that gap with the growth of other the brands.

I am angry and disappointed enough by my ordeal to sell my stake in eBay. Investments shouldn’t be an emotional decision, but I cannot have confidence in a brand that has treated me, a shareholder and merchant, so horribly. With few exceptions, brands with poor customer service are eventually passed over in favor of competitors that treat them better - I had personal phone calls with an Amazon Fulfillment representative a handful of times before I even set up an account, but I can’t even get a non-automated response when I’ve made eBay thousands of dollars. My decision was made for me, but it was time to move on anyway. eBay, I don’t need you, and many other sellers don’t either. Even if you don’t kick them out, they'll eventually leave.

Wednesday

Apple's announcement of a 3G iPhone during the conference call may offset an otherwise disappointing report. Mac sales will be great, but the slowdown of consumer spending will hurt iPod and iPhone sales. iPhone sales in Europe are slow.

Amazon.com will also cite the challenging retain environment, and unless they improve margins, I don't see investors being impressed with their report.

Then again, VMW just met and confirmed guidance, still sporting a 40 forward P/E, and investors applauded. I'm not that good at guessing market sentiment, I guess.




"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Ebay and Amazon.com - From a Merchant's Perspective

As none of you (probably) know, along with writing this blog, managing my portfolio, and attending college, I also founded, own, and operate a small ski wax company, Whacks Wax.

(I founded Whacks Wax in 2004 as a sort of science project. But the wax worked well, so since then, I've been selling the stuff commercially, having now sold to customers in over 20 countries.)

I owe the existence of my little company to the internet, and for most of the company's existence, exclusively eBay. I set up a website to provide background information, but until this winter, virtually all of WW's sales (90+%) came through eBay. I loved and appreciated eBay; a magical marketplace existed where an unheard-of company could peddle their products for a tiny fee. I didn't have to borrow money to advertise - my item could be seen by many interested customers for virtually no cost to the company.

I'm still very content with eBay (though not a fan of the new fees - but more on that later). This winter marked a big divergence from WW's exclusively-eBay model of the past. By some stroke of SEO (Search Engine Optimization) genius or dumb luck, I managed to push my website into the top-ten results for ski and snowboard wax queries on Yahoo!. The influx of organic traffic created many more off-eBay purchases than in the past.

Also, this winter, I enrolled in a little-known program offered by Amazon.com called "Fulfillment." Fulfillment is a wonderful thing for tiny e-entrepreneurs like myself. Here's how it works:

With Fulfillment, the merchant prints out scannable labels and affixes them to his products. He then ships products to an Amazon.com warehouse (my warehouse is in Lexington, Kentucky, which is excellent because the area also has huge shipping hubs). Amazon scans the items as they enter the warehouse, and then store them right next to Amazon's own merchandise. Then, when someone purchases a piece of wax through my website, I simply provide Amazon.com with that customer's information, and they'll ship it out of their warehouse, usually the same day. (Also, a participating merchant can choose to sell their product through Amazon.com's website; my listing can be seen here.)

I actually decided to sign up in October because it was free through the end of the year, but now, all of that supply-chain streamlining will come at a price; Amazon charges:

• A flat fee per month for participation in the program
• A processing fee for each transaction
• A storage fee based on average square footage per month

(The above information is accurate to my best knowledge; maybe I'll be blindsided with some fee I don't know about this month.)


I have had almost 20% of my purchases come through Amazon.com, so it's certainly a powerful marketplace, even ignoring the Fulfillment service. Coupled with the organic traffic, eBay has become less important to me. That's a bad thing for them, especially as they hiked fees (in a way that hurts consistent sellers like myself most).

Here's a realistic example (based on my company) of how the higher fees will crush big sellers:



Current listing fees for a fixed-price listing of $199.99 of product: $2.40
20 $6 pieces of wax sell - $6 x 5.25%= .30c/each, = $6 total

Total fees for listing = about $8.40

New fee structure:

New listing fee = $2.00 (oh boy, huge savings!)
current final value fee = .50c/each, $10 total

Total under new structure = $12



That's about 30% more for sellers of small items like myself. Ok, so a snowboard wax company isn't crucial to eBay's business, but the sellers of CDs, DVDs, iPod cases, video games, and all other knickknacks under $25 are. (Above $25, the fees don't change significantly.)

Considering Fulfillment, Amazon's excellent, easy-to-use supply chain, coupled with fees at eBay that will squeeze profit margins, eBay is dangerously close to completely alienating high-volume small-item sellers that are crucial to its success.

eBay, as a corporation, has one great thing going for it: PayPal. There's still no serious competitor, and more traditional merchants (airlines, hotels, etc.) are accepting it. Also, I read an article about six months ago that more immigrants are sending remittances through PayPal - its instant and easy.

Revenue from items sold through Amazon's site is accumulated in an account and then transfered into a linked bank account. Since Amazon is a household name, they have no need for the trust, security, and ease of PayPal that has made it successful with other merchants.

So, logically, I think Amazon is making advances while eBay may be making a huge mistake. But when it comes to investing, eBay sports a 15 forward P/E while Amazon's ratio is still bloated at 35. But as Amazon expands overseas and steals domestic business, eBay may be forced to reevaluate its structure if it wants to remain a premier internet marketplace.


P.S. If you ski or snowboard, give Whacks Wax a try.



"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more."

Brace for some Rapids: Amazon's Earnings Thoughts

This earning season, we have already seen the humbling of technology prodigies Apple (AAPL) and VMWare (VMW). Even Intel, the blue-chip giant, plummeted 15% after good earnings.

I think that history will repeat itself when Amazon.com (AMZN) releases results after the bell today.

Yes, Amazon reported the best Christmas quarter ever. Yes, with eBay changing fee structure, some big (million-dollar) salespeople may be moving accounts to Amazon. Yes, they are expanding internationally.

So what's wrong with being long Amazon now?

Valuation.

One benefit (at least to value-oriented investors like myself) of the recent market retraction has been a restoration of rationality. We have seen Apple's forward P/E drop from 40 to a reasonable 25. VMWare, which went into its earnings with a forward P/E of 70, was quickly humbled and delivered a 30% decline from sobered investors.

Amazon is going into its call with a forward P/E of 45. Amazon is becoming a blue-chip, mature company; no longer can it be driven by speculation. I don't believe that it'll drop 50% after earnings to join Google and Apple at a 25 forward P/E, but when a company is looking to make $1.50 next year, the shares shouldn't be sold for $75.

Analysts and investors will look at this quarter's profits and margins, and price movement may indeed be determined by that. But if Amazon fails to pump up next year's numbers, look for a healthy revaluation a la Apple, VMW, and other former high-flyers.


"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more."

SHORT!

I want capitalize on the current volatility.

Right now, my real-money portfolio is nearly 90% invested; I have some SPY puts, and then about 8 different stocks. I'm happy with all my positions right now, so I'm not really looking to actively trade that portfolio soon.

However, I just entered a trading competition sponsored by my university. Finally, I get to employ lots of risky strategies that I wouldn't do with my real money.

The competition opened today, and my first move was to short, short, short.

I shorted:
Apple
Bidu
AIG
Amazon.com
Google
RIMM
QQQQ
Petrochina
SPY
F

If the market continues to be sour (after the 3% loss on Nov. 7), the returns will be lucrative. All of the above stocks (except for the exchanges, F, and AIG) are high-growth momentum plays. If momentum stops, there's no telling where the floor will be.

Of course, I'm long stocks too (I'm about 1m more short than long in a $5m portfolio). I own:

BWLD
ANF
ATVI
TM
JAVA
and a few others that I'll update later.

Literally every stock, both long and short positions, fell today, but the shorted ones fell more, so I'm currently in the lead.... after the first day of trading.

As for my general take on the market:

It seems like there's a lot of reasons why there could be a correction now. The dollar is crashing, oil is still high, Morgan Stanley just wrote down $4B, WMU, Freddie Mac and Fannie Mae are under review for lending policies, and the market has just been strong lately.

Could the market rebound nicely tomorrow? Sure.
Could it fall 10% over the next two weeks? Believe it.

Predicting the market movement on a day-to-day basis is impossible and fruitless, so I cannot and will not say if the market will be up, down, or flat tomorrow.

But keep in mind that stocks like Apple, Google, and Baidu have P/Es that are 2 or more times higher than there rest of the market. When momentum runs out, it's a recipe for disaster stocks like those above. Google is itself a big enough entity to drag down the entire market; just keep an eye out for the potentially-dangerous situation that this can create.

Back to Mindless Buying...

Pardon me if I sound a little bitter, because I am on the sidelines, missing out on the spectacular gains.

But the enduring bull run of the hot tech stocks like BIDU, GOOG, RIMM, AMZN, AAPL, and others truly baffles me.

Apple gets some leeway, because it did just report excellent earnings, and it seems to be the most fundimentally-solid out of the above mentioned companies. However, it was one of the laggards of the group today, up ONLY 7%. (Of course there's nothing to prove this next claim, but if my father is reading this he could agree: I actually thought Apple would blow out the quarter on good Mac numbers. In my opinion, that's going to be the the main (or only) thing that will allow them to keep up their hypergrowth.)

Google was up $25 to $675 on no real substantial news; it looks to blow through $700 easily. The momentum is simply unstoppable.

Amazon was up 10% today purely in speculation of good earnings. With at trailing P/E of 140 and a forward P/E of 70, the earnings are going to have to be unbelievably good to merit the gains.

And best of all, BIDU and RIMM were both up a solid 10% on no major news. I guess if you have a four-letter symbol and are either selling smartphones, a search engine, or have a website, the value of your shares will ALWAYS be too low at the current prices.

Meanwhile, there's companies like NutriSystem (NTRI), which trades at a current P/E of 9 and a forward P/E of 8, that are getting no love during the rally around them. Sun Microsystems (JAVA), a reliable producer of tangible software and goods, has been flat lately as the gains of the intellectual-tech companies are halfway to the moon.

Whenever people write articles like these, Techlovers will always reply that this is what people said when Google was at $160 and after AAPL and RIMM had merely doubled (both are up much more since then).

However, people were obviously still buying tech stocks at the height of the bubble in 1999 and 2000. There are huge difference between then and now; the above-mentioned companies all ARE making money, while 7 years ago, many techies were not. However, the above companies will not all grow at 30% or 50% indefinitely; if Apple can't think up the next "IT" product, or if Google can't enter a market besides search, growth rates will surely fall, and P/Es should too, back down to earthly levels.

Just think: If Amazon's forward P/E fell to the level of Apple's - a generous 30-35x, it would be trading at half of its current price.

Black Monday 2: October 22, 2007

Note: The chance of this actually happening is minute. This isn't a prediction of what WILL happen, but just speculation over an event that has a tiny chance of occurring.


Investors marked the 20th anniversary of Black Monday on Friday by selling off each of the major exchanges by 2-3%. Bad earnings may have initially triggered the downturn, but it seemed as though investors simply wanted to mark the anniversary with a decline.

However, as the official anniversary passes, I think that the conditions now are the most reminiscent of 1987. If there was or is a time to speculate about a crash, that time is this weekend.

Here's why:

During the week preceeding the crash, the Dow lost about 10% of its value. This past week was not nearly as bad, as the market lost a little less than 5%, or about 600 points. Though not as severe as a drop, it still bears a very eerie resemblance to what happened then. Here's a chart of the Dow over the past week:

Not a pretty chart.

As it's been stated in every other writeup about a potential 2007 crash, the general market conditions are similar; high oil, weakening dollar, and more.


So, why do I think that there's a slight chance of a crash (or correction) in the future?

First, the emotional aspect to this coming Monday. As I am writing this post, a front-page article on MarketWatch.com compares this past week to the week proceeding the crash. As analytical articles of 1987 state "investors had a weekend to ponder losses from the week before," now, today's investors are pondering this week's losses in light of 1987. There's certainly possibility of an irrational, emotionally-driven over reaction on Monday.

The other thing that increases the possibility of a crash, and concerns me, is the high valuations of certain stocks and industries. It's true that the overall market valuation today is less than it was in 1987, with P/Es then higher than they are today.

However, certain sections of the markets have rich valuations: popular tech companies like Apple, Google, VMWare, Amazon.com, and Research in Motion all trade at 30-80 forward P/Es. A 10-20% shaving off of the top of any of those stocks would not be uncalled for.

If Apple or Google were to lose 15% of its value, it could easily trigger a ripple-effect sell off through the broader market. Those tech heroes both represent the current bull market and actually hold lots of investors assets, many of whom may have purchased recently as companies are making new all-time highs. Investors may sell off early to minimize losses, and this effect could be worsened by stop-limit orders that some investors have in place.

Lots of Chinese companies are similarly situated; speculation over the high-growth stocks has created rich valuations, and as the recent 50+% decline in some solar stocks shows, losing a significant amount of value in a very short period of time could occur.


This hypothetical crash would probably begin the same way that 1987's Black Monday did: US investors wake up to news of major, but not crash-level, sell offs in Asian and European markets, in response to US losses on Friday and their own sky-high valuations. (With India's market losing 10% of its value in one day just a week ago, and with Shanghai doing the same earlier this year, a 10% decline on any Asian market isn't too unrealistic).

American investors, shaken by the 5% drop last week and the 5-10% Asian drop overnight, coupled with the emotional fear of a repeat of Black Monday, start selling as soon as the premarket opens. Baidu falls $100, or 33%. Google loses 15%. Apple (who releases earning after the bell, which everyone now forgets about) is down 15% too. Banks, who reported bad earnings this past week, would mirror this fall due to financial fears. Investment banks, with lots of money tied up in mortgages and tech stocks, would also begin to suffer.

A wave of selling has spread throughout the entire market by noon. The tech-heavy, high-PE Nasdaq loses 15%. The Dow and S&P don't fare as poorly, but both are down about 10% too. Things could get very, very ugly.




Now that my scenario is outlined, do I believe that this WILL happen? No. If I did, 70% of my money wouldn't currently be long in equities. I do own puts in ConocoPhillips and the SPDR ETF, so I have slightly insulated my positions against a big loss. But if I thought a crash was inevitable, I'd be 100% cash, or puts, or shorted stock.

The possibility of a 1% gain tomorrow is much, much bigger than the prospect of a 10% loss, but I just figured I'd chronicle my thoughts as every investor is nervously awaiting Monday. Do I want a crash to happen? Absolutely not. But, as my position in SPDR puts suggests, I do expect a correction in the reasonable future, and wouldn't be absolutely shocked with a more sudden drop.

Cramer's hype and two lessons on 10/11

I am not a fan of Jim Cramer's mad money show. I have to credit him for being a great investor during his hedge fund days, but he has been reduced to a cheerleader on his television show.

Take, for example, what he said on his show just yesterday. Here is a direct excerpt from the TheStreet.com writeup about the October 10th show:


"At this point you have a duty to yourself and a duty to your wealth," Cramer said, "never to take financial advice from anyone who doesn't recommend Google." Analysts that knock Google can only be so wrong about a stock for so long before admitting they're wrong, he said, and it's time for investors to stop paying attention to the bears.

Cramer said his price target for Google has always been lower than where he actually thinks it's going to go.

Cramer then raised his price target to $750. "This is a total and unequivocal lowball estimate," Cramer said.

This estimate might seem overly exuberant, but Cramer believes it's based on genuine arithmetic. If Google earns $20 a share next year and continues its trend of 30% growth, it should hit $750. He then said that a nonconservative but rational price estimate would be $900.

It's truly irresponsible and unprofessional for a man of Cramer's reputation to pump up a stock like that. Calling analysts that do not recommend Google sissies or idiots is disrespectful and uncalled for.

Let's see how well Cramer's "four horsemen" did today:

Google, -.5%
Research in Motion, -8%
Apple, -3%
Amazon.com. -6%.

Those numbers don't necessarily show how bad a Cramer-follower could have done; all but Amazon rebounded from intraday lows. At one point:

Google traded at prices as low as $609, after an intraday high of over $640. An ameture trader could have really gotten burnt.
Research in motion spent much of the last two hours of the day down over 10%.
Apple also fell almost 10% before recovering some ground.

It's also worth mentioning that Baidu.com, another stock Cramer pumps, lost over 10% of its value today.

My point is that Cramer's constant pumping reminiscent of the market sentiment in 1999 will only hurt his beloved viewers. As his four horsement hit daily highs, Cramer hit "Buy, Buy, Buy." If these stocks correct to appropriate levels, average, ignorant investors that fell victim to Cramer's antics will be left holding the bag.

So my two lessons:

Don't by into hype; do your own independent research. Are Google and Apple good companies? In my opinion, yes. Are they good investment ideas right now? Maybe not.

Secondly,
Don't be as yellow-bellied as I am; have a little courage.

I bought an Apple October 160 put contract for $1.60 on Octover 9th, looking for a pullback that I believe is due. I sold them early today for no gain, because I was worried about a continued rally.

The options closed at $3.60 today, after a few trades above $6. If i had followed my CORRECT investment instincts, I would have made out handsomely while the market got punished. However, I bought into the hype myself and it cost me a couple hundred dollars.

And, because I love being kicked while I'm down, I decided to personally add some insult to my injury.

After I sold the Apple puts, I bought Google's October 560 Puts for $.90. I sold them for a modest gain after the stock dipped for $1.20.

Once again, I should have followed my instincts; the options closed at $2.25 today after trading above $3. I would have realized returns of hundreds of percent today if I would have just believed in my ideas.


So enough rambling. My point is, I made to very, very stupid trades, influenced by the sentiment that I was trying to play against - the overhyped, artifically-inflated hysteria that had been sweeping the market.

Just to clarify, Those two trades represented less than 2% of the money that I manage; my equities were actually up today. So, I didn't lose money, but stupid, sheepish trading prevented me from making a couple hundred dollars today.

My message to you is this: be braver than I am. Do your own research, and when you come to factual conclusions and believe in your idea, stick with it.

Don't be influenced by Cramer, any talking head on TV, or even myself. I encourage independent, smart investing.

I'll admit my mistakes, and chock this one up to a powerful, yet unfortunate, learning experience.