Thursday, October 21, 2010

Amazon's "Beat" a Bad Omen

Amazon is out with earnings. The AP reports they are a "surprise" to the upside:

Amazon says its third-quarter net income rose 16 percent as more shoppers flocked to its online retail site. The results are well ahead of analyst expectations.

For the July-September quarter, Inc. earned $231 million, or 51 cents per share -- 3 cents higher than what analysts polled by Thomson Reuters expected, on average. This compares with income of $199 million, or 45 cents per share, a year ago.

Yet per Yahoo, consensus analyst's estimates for the quarter were at 61 cents 90 days ago. Conveniently they quickly came down to 48 cents so there could be a "surprise" beat.

Yet AMZN traded as low as below $110 after it guided earnings lower and was around $117 three months ago. Now, it has been as high as $166 and is around $160 after hours. Yet its all-time high in the springtime was around $150.

So here we have a stock coming in drastically below prior expectations but trading well above its prior record and perhaps a full 50% above the price it hit when said expectations were in force.

This price-earnings action is a danger signal for momentum and growth stocks. It does not mean that AMZN is doomed. It does however support the view that prices are simply too high.

For the nonce, gold and silver are caught up in the downturn that I suspect is in store for Amazon (in which I have no position or financial interest).

Let's consider valuation, not whether Amazon is on an operational hot streak. Amazon's tangible book value was about $4 B as of June 30. Its market capitalization was about $74 B as of today. That's $70 B it has to earn after taxes simply to be worth on paper what it's allegedly worth. But as an ouside stockholder, one is simply a minority owner of a business that, in practice, will tend to reward insiders first. I say this as a generality, with no knowledge of how AMZN stands on the scale of fairness to outside shareholders. Certainly one looks in vain for any dividends being paid. In bad markets and if a company's business prospects look dicey, stocks can easily sell below book value. After all, who can forget that now-mighty AAPL sold for just about the value of its cash on hand (with no debt)a mere 6 years ago, said stock price having gone down from 17 years earlier.

What we do know about AMZN is that per its filings, almost 5 1/2 million AMZN shares were sold by insiders in the prior 6 months. There were no buys by insiders. Perhaps $700 M worth of shares were sold in this time frame. Except for purposes of options exercise, it doesn't look as if any AMZN insiders bought the stock any time within the past two years, even when it was under $110.

Meanwhile, gold and silver just sit there. There are no earnings expectations to manipulate. There certainly are leveraged short-covering maneuvers and leveraged sellers.

When I look at the chart of AMZN, now that it has (re-) entered the class of earnings manipulators by "beating" drastically lowered expectations, I cannot even try to guess at a proper "buy" point.

Meanwhile, using SLV as a proxy for silver, SLV based around $18 for much of the past 12 months. It recently peaked around $24, while silver the metal reached 30-year price highs. A 50% retracement of SLV toward its recent base of $18 would give about a $21 target. If that happens, that would be above the March 2008 spike high of about $20.42 and if it proves to be the bottom would strike me as uber-bullish and would mirror gold's breakout action of last year.

Less bullish would be a drop toward $19, which is roughly the midpoint of the last 12months' trading range for SLV and which is also an area of price resistance from 2008. Should this happen while gold would happen to stay well above its 2008 high, I would tend to pay no more attention to silver than to oil.

Unlike 2008, which featured a typical commodity down-cycle following years of Fed tightening (plus the exaggerated sell-offs in August-October relating to the cataclysmic events of those months), the Fed has of course been in "easy" mode ever since the cataclysm. Due to ongoing Fed accommodation of monetary conditions, I therefore now take the price "risks" in silver to continue to be to the upside.

Copyright (C) Long Lake LLC 2010

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