## ….Or “How I Learned to Stop Worrying and Continue Loving Amazon” ##

As the threat of nuclear war once again rears its head we reiterate that local risks bear more immediate and higher likelihood of occurrence. It would appear (ex-locally) that everything is a buying opportunity until it isn’t.

Locally however it’s looking a little sick at the big end of town. The Australian S&P 200 has traded in a 207 point range for the last 3 months and only today appears to have broken down from this painfully tedious price action. Observe…

Not the healthiest chart I’ve looked at. Also frustrating for clients and for advisers. Courtesy Iress

Funnily enough it’s my old friend the CBA leading the charge. In April it almost touched $88. Today it almost touched $75. A devastating fall from grace.
An interesting change of the guard happened today as well which isn’t rare but still worthy of note. BHP overtook CBA for biggest stock by market cap. We see too many “unknown unknowns” in the Big Yellow to be a buyer. I still suspect there’s more cockroaches…

Not world changing, just interesting.

Avoiding to get hung up on reporting season is an art form. Trying to keep up with the speculation vs facts at global Fed gathering Jackson Hole late last week is a little harder. Sleep deprived, we can say that nothing of note about a change of direction or timing of the Fed reducing their balance sheet or of the ECB winding down their QE.

The Euro rose 1.1% vs USD on Friday night and touched the highest level since early 2015. It travelled in a similar fashion vs the AUD so although our European positions stayed fairly flat the fact we own them in unhedged Euros is a huge positive.
Last week I made the comment “The best way to deal with it is to own European stocks, in Euros, that benefit from a reduction in Central Bank fiddling of bond prices.”
Whilst Super Mario didn’t say anything about fiddling bond prices we still know it’s a matter of when, not if. The ECB Governing Council meeting is September 7th which is the next “big thing”  for the Euro.
Note also the Fed policy meeting is September 19-20th  with an announcement expected on reducing their balance sheet.
Both have real needs to act on each of their issues despite their relative inflation numbers remaining below the 2% level they’ve each set as a target. What’s puzzling is that with unemployment lower in the US and all the signs there that economies are growing it’s not being seen in the inflation numbers.

(Now comes the Amazon part…)

Finally!

 

Speaking of Amazon (which I wasn’t but thought it due for another run on my note) the much covered purchase of US grocery chain Whole Foods was given the all-clear to complete the acquisition by US Antitrust regulators so it has immediately started slashing the price of items in Whole Food stores in the US & the UK.

Stocks of grocery competitors in the US hit the floor on the news on Friday last week which should serve as a warning to our grocers (should something similar happen here).
What’s interesting is that analysts in the US predict competitors to drop prices to match Amazon (I’m being reminded of Gerry Harvey all of a sudden) which not only means that margins are tighter for competitors but food is cheaper for the average consumer.
This is further interesting because the cost of food is one of the factors making up the Consumer Price Index, which is a key determinant of inflation numbers. I’m no economist but I’d say with the global phenomenon that is Amazon cutting the cost of goods I think we’re seeing a divergence in the real economy vs inflation. Maybe we should find another way to count things?
As mentioned though, I’m no economist. (ed. seriously, he’s not)

Some clever Whole Foods marketing. I apologise for posting this photo…

Sticking with my favourite subject there was some rather excellent research out from Morgan Stanley this week regarding the Whole Foods (jokingly known as “Whole Paycheck” due to their high prices) purchase that I managed to take time to read. It drew a few things of note to me which I’m keeping an eye on for Australian warnings:

  1. 70% of people who don’t shop at Whole Foods list price as the main barrier.
  2. Amazon are great at operating on tiny margins
  3. Whole Foods is operating on 34% gross margins
  4. This week Whole Foods had dropped prices in their Manhattan store by as much at 43% (Organic Avocados from $US2.79/each to $US1.99/each, organic free-range chicken from £7.99 to £6.50 per kg in the UK).
  5. Amazon Prime is the sun around which the Amazon solar system revolves. It’s the place you do all your shopping. The more members, the more 2 day delivery looks attractive, the more regular users, the better for Amazon. A grocery user connecting to Amazon Prime immediately sees the benefits of being in the Amazon family. (Prime is the online ordering service, video streaming, music streaming $99/year service)
  6. Prime members spend ~4.6x more money on Amazon than non-Prime members
  7. Amazon Prime will be the Whole Foods customer rewards program.
  8. Apparently only 62% of Whole Foods members are Prime Members, meaning up to 5 million potential users that will see the attractiveness of Prime very soon.

There’s plenty to make of this if you’re looking for a reason to buy Amazon (not a recommendation) but more importantly is the model that it potentially places on the Australian market.
Competitors may be able to slash prices to complete and keep customers in-store temporarily but without margin and with nothing else to offer their customers it seems a fruitless endeavour. Look at our retailers. Look at their margins. Look at how much their share prices are made up of said margins. Now look at the above list.

Some food for thought, and on that terrible pun I’ll go to bed now.

Stay safe & all the best,

James Whelan & the VFS Global Macro Fund
Level 30 Australia Square, 264 George Street, Sydney NSW 2000
t +1300 220 360  | m +61 407 958 036 |  www.vfsgroup.com.au/gmf 

Cover photo courtesy Business Insider


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