Friday, October 23, 2009

The Signs of a Market Top?

The following is a theory that I told the guy who cuts my hair a few years ago.

As a contrarian, I believe the market likes to do the opposite thing that most people expect or think is sure to happen. If it didn't, all day traders would be filthy rich by now.

Answers.com: Day Trader

A 2000 study by the North American Securities Administrators Association, quoted in Forbes, found that "77 percent of day traders lose money. And of those who did profit, the average was just $22,000 over the space of eight months. Of the 124 accounts surveyed, only two—people, not percent—netted $100,000 or better. The highest was $160,000." And that was at a time (1998-1999) when the stock market was soaring. Now that it has come back down, there is even less money being made.

So here's the theory.

Bull markets are started when bad news drives stocks higher. At some point the never ending bad news exhausts all sellers and the investors who are left become desensitized to any further bad news. Once the selling stops, the market can rise. The market's rise eventually leads to higher investor confidence and therefore turns into a virtuous upward spiral.

Similarly...

Bear markets are started when good news drives drives stocks lower. At some point the never ending good news exhausts all buyers and the investors who are left become desensitized to any further good news. Once the buying stops, the market can fall. The market's fall eventually leads to lower investor confidence and therefore turns into a vicious downward spiral.

So what did we see today? I turned on the TV this morning and the bulls assured me that the market would in fact have to go up. The Microsoft and Amazon numbers were completely unexpected and would propel the market to higher highs. For all intents and purposes, it was a SURE THING!

What did we actually get though? As I look at the intraday chart of the stock market today I see that we had about 30 minutes of bull market and then the buyers completely and utterly dried up. Even Amazon's 25% increase in stock price could not support the market overall.

The following question was asked repeatedly on CNBC today. Would Amazon's numbers be enough to save the economy? I laugh at the very thought and for a reason you might not suspect.

There are 300+ million people in this country. According to Yahoo's profile of Amazon, there are just 20,700 employees working at Amazon.


Amazon's Early Holiday Cheer

On Oct. 22, Amazon said third-quarter net income surged 68%, to $199 million, while revenue jumped 28%, to $5.45 billion, compared with Wall Street's estimate of $5 billion.

That's roughly $260,000 in revenue per employee in just one quarter. It's a productivity miracle. Why should this be concerning? Let me put it this way. When I order something from Amazon.com I don't actually need to talk to an employee. Amazon.com therefore needs fewer employees than most retailers would. Fewer employees means fewer jobs. With unemployment at 10% and rising, fewer jobs means... big problems ahead.

Let's put this in perspective.

2,100,000 employees work at Wal-Mart.
351,000 employees work at Target.
324,000 employees work at Sears.
167,000 employees work at Macy's.
147,000 employees work at J.C. Penney.

Just 20,700 employees work at Amazon.com though.

BLS: Retail Salespersons

Employment is expected to grow by 12 percent over the 2006-16 decade, which is about as fast as the average for all occupations. In fact, due to the size of this occupation, retail salespersons will have one of the largest numbers of new jobs arise, about 557,000 over the projections decade. This growth reflects rising retail sales stemming from a growing population. Many retail establishments will continue to expand in size and number, leading to new retail sales positions. Since retail salespeople must be available to assist customers in person, this is not an occupation that will suffer negative effects from advancements in technology. To the contrary, software that integrates purchase transactions, inventory management, and purchasing has greatly changed retailing, but retail salespersons continue to be essential in dealing with customers. There will also be an increased demand for retail salespersons in warehouse clubs and supercenters, which sell a wide assortment of goods at low prices, since they continue to grow as many consumers prefer these stores.

Despite the growing popularity of electronic commerce, the impact of electronic commerce on employment of retail salespersons is expected to be minimal. Internet sales have not decreased the need for retail salespersons. Retail stores commonly use an online presence to complement their in-store sales; there are a limited number of Internet-only apparel and specialty stores. Retail salespersons will remain important in assuring customers, providing specialized service, and increasing customer satisfaction. Most shoppers continue to prefer to make their purchases in stores, and growth of retail sales will continue to generate employment growth in various retail establishments.


They can't be serious. Let's look at the actual numbers again using a crude back of envelope calculation.

In 2008, Amazon's 20,700 employees generated roughly $19 billion in sales.

In 2008, J.C. Penney's 147,000 employees generated roughly $19 billion in sales.

Amazon.com was able to generate the exact same sales with 1/7th the number of employees. So what is going to happen to the overall retail sales employment picture as Amazon.com continues to grow? Does it really take a great leap of faith to realize that retail sales employment will struggle going forward?

8 comments:

  1. Mark,

    Our household uses Amazon on a bi-monthly basis, on average, for a wide variety of items. With free shipping the price is often better than shopping at a brick and mortar store, and we're saving time and money on travel. Plus, in a brick-and-mortar store you can only compare and buy what's available at the time - it's limited compared to what Amazon offers. If a brick-and-mortar store doesn't have what you're looking for you're traveling again. I especially like Amazon for their relatively hassle-free return policy. If you don't like something you have 30 days to return it, no matter the reason. And they've got a great rating system, too, which I think reduces the need for returns. I'm not at all surprised by Amazon's success and I don't doubt it's future potential for growth.

    But in the bigger picture, as it relates to the economy and jobs, I can see where you're coming from. The Amazon model, as it gains the market share, would have to reduce retail sales employment in our economy. But at the same time, wouldn't the Amazon model increase the need for delivery positions? I think it would be interesting to see retail sales jobs lost versus delivery positions gained. How many jobs did UPS add to the economy as a direct result of the growth of Amazon over time? According to Wikipedia UPS employs 358,400 staff in the US - don’t know where the figures come from or how old they are. If we can turn back the clock and make Amazon disappear, I wonder how many staff at UPS would disappear?

    The other thing about Amazon that I think needs consideration is the fact that it pulls in business for other retail vendors. We ended up buying directly from vendors we never even heard of as a result of Amazon. For instance, I just a bought a brush for an old Kirby vacuum cleaner from a place called Go-Vacuum through Amazon. I’d like to see if business increased and if jobs were added for other, relatively unknown retail vendors who have a presence on Amazon. I bet it did. Even in a downturn, when transactions slow, exposure on Amazon has to help. If you could turn back the clock and make Amazon disappear what would be the overall effect on jobs today?

    Still, 147,000 jobs at JC Penney compared to only 20,700 at Amazon… that’s a huge gap and with roughly the same 19 billion in sales. It’s hard to fathom all the other considerations I noted here compensating for that much difference, though I wonder...

    Ed G

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  2. Ed G,

    You make excellent points. Thanks for offering your input!

    In fact, FedEx was my primary "dotcom" investment and it treated me VERY well while I owned it. It was my attempt to invest in shovels for the gold rush. (As a side topic, I also tried it with Nortel, but those shovels all broke. It was a modest investment at $11, watched it go to $100, got out at $1 for the tax write-off, lol.)

    Here are a few more problem as I see them (in addition to the empty malls which would devastate local communities). I don't believe delivery jobs will scale well as the volume and/or population increases. It becomes more efficient as more and more people take deliveries (no more stragglers where the driver has to drive miles just to drop off one packaage).

    While the Internet is certainly adding some delivery jobs as you have mentioned, it is also managing to destroy some delivery jobs as well. We may find that there is little or no net gain once this has fully run its course.

    Note the drop in USPS jobs in the following pdf. There's easily 100,000 jobs missing since 1988! Email can be blamed for much of that.

    http://www.usps.com/postalhistory/_pdf/Employees1926to2008.pdf

    USPS is bleeding money thanks to the Internet. There is talk of reducing the number of days mail is delivered. This could easily destroy another 100,000 jobs from these levels.

    Look what automation did to farm industry jobs and wages in my link below (there's a chart). We're now attempting to do the same thing to retail jobs and wages in my opinion.

    http://illusionofprosperity.blogspot.com/2007/09/automation-and-inequality.html

    "The extrapolator in me has always wondered what would happen if we could automate all of our jobs away. Now I think I might know. As it relates to farm labor, wages are simply redistributed. The total amount of real wages (wages adjusted by the CPI) has held fairly constant over the years. If you are lucky enough to keep your job, you'll be worth more. You'll be happy. If you aren't, well, sorry about that.

    If one was to keep extrapolating this trend to its logical conclusion, at some point there will be just one farmer. He'll have all the wages and will simply press the "harvest" button on his desk."

    We are told the importance of productivity miracles to keep our economy humming along. There is a dark side to it though. If we could automate all jobs away it would be a productivity miracle of epic proportions. Not so sure that it would make a strong economy in anything but a futuristic sci-fi movie though.

    I also hear what you are saying about places such as "Go-Vacuum". I have a Sebo vacuum and I bought a LOT of bags (in one BIG shipment) from a similar place online (EZVacuum). It was MUCH cheaper than driving to my nearest Sebo dealer (a good 25+ miles away). Like you, I would argue that this is clearly a positive for our economy. It is certainly more energy efficient to have it delivered to me than it is to have me drive 50+ miles round trip in my car. Since we are so dependent on foreign oil this is definitely a good thing.

    On the other hand, just imagine the downward spiral if people stopped going to the mall. Think of all the restaurants scattered around the mall. The last thing this economy needs long-term is more people like me. I enjoy staying home. If everyone did it, watch out below.

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  3. Mark,

    I always hated malls. When I was a kid my uncle owned a local hardware store. That old store brings back memories. He would talk to my dad about the mall they were planning to build in a big beautiful field that wasn’t far from the store. He knew what was coming… that mall was going to eat up small retailers like him. I guess you can always take this back a step further… I’d take my uncle’s old hardware store to any mall. I hate Walmart, too, though I’m there every week for groceries and to curse it, lol.

    Ed G

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  4. Mark - For the 1st time, I disagree with your analysis.

    Amazon doing well (possibly) signals growth in the economy, not because it helps retail employment (you correctly note it does not) but because what Amazon sells is not made by Amazon. It's made by other companies.
    Amazon doing well may signal that "things" are selling, thus manufacturers may do better.

    - jus me

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  5. Ed G,

    "I hate Walmart, too, though I’m there every week for groceries and to curse it, lol."

    I hear that!

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  6. jus me,

    "Amazon doing well may signal that "things" are selling, thus manufacturers may do better."

    I don't think I've said anything that would disagree with that. I had two somewhat contradictory points to make and probably didn't do a good job making the case.

    My main point was that Amazon's "good news" was seemingly driving stocks lower. In other words, the overall market dropped on Amazon's good news. As a contrarian (skeptic), it is something I have said in the past. When good news can no longer drive stocks higher, watch out below. Just imagine what any unexpected bad news can do.

    My other point was the long-term employment "bad news" based on Amazon taking business from employers with more employees.

    I certainly did my part to spur the economy last night though (through a brick and mortar business). My Playstation 3 died just (out of warranty) and I therefore bought another one. At least it is $100 cheaper, has 3x the hard disk space, is twice as small, and is MUCH quieter. Go figure!

    Amazon's story reminds me a bit of China's story. Both grew exponentially for a good decade. Both were thought to be benign in the early days. At some point they both became the elephant in the room though.

    Should Amazon continue to grow exponentially from these levels, I would expect brick and mortar companies to really suffer. I'm not a believer that Amazon's sales are somehow "bonus" sales and consumers can continue to shop at malls just like they have been.

    Should China continue to grow exponentially from these levels, I would expect to be paying a lot more for oil in the future. I'm not a believer that China's growth is somehow "bonus" growth and we can continue to do as well as we have been doing.

    Just thoughts!

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  7. Mark,

    I've always heard that when the stock market is going to fall in a big way it tends to begin that fall on good news. And I've been hearing a lot people confused about the latest stock market rise - just didn't seem supported by reality. Was there alot of good news, though? Yes, I guess so. Recovery, recovery, and more of the same... I think we're all a little tired of the news of recovery. Your theory makes sense.

    Ed G

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  8. Ed G,

    "I think we're all a little tired of the news of recovery."

    I am. I am especially tired of it because I know how much we had to borrow to fund it. A trillion dollars here and a trillion dollars there and pretty soon we're talking about real money. ;)

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