We don’t usually spend much time talking about individual stocks here on Financology, but yesterday we made an exception for the crash in Meta stock (FB). That may have been ill-considered, because given the almost mirror image performance of Amazon stock (AMZN) today, we now feel compelled to give it equal time.
It was pretty obvious why Meta crashed, but not so obvious why Amazon soared. The company reported small shortfalls relative published analysis; traders may have been on their guard for worse. Some commentary has attributed it to the company’s announcement of a large increase in the price for Amazon Prime. Yet this should not be too surprising … having put so much of its competition out of business, Amazon is now in a position to raise prices with impunity.
How did it do it? Amazon is a heck of a business. But it’s not just a good idea and good execution. Investors have been subsidizing it almost from inception, giving it a huge leg up on almost every other retailer. For a small startup that’s to be expected, but it’s unusual for a trillion dollar company. It also uses its web services business to generate the lion’s share of its profits. Historically, long before a company has reached this size investors begin to demand returns from the business in the form of dividends. So far though, Amazon has been able to get away with using investor capital rent-free.
How is that? Might it have something to do with the fact that for most of its existence as a large company, interest rates have been vanishingly low? That banks have also ceased paying a yield on savings? In effect, the Federal Reserve has been subsidizing huge corporations by eliminating yields on savings. So it’s much easier for corporations to justify paying no yield on their capital, even as they grow very large. It’s no wonder so much capital has become so concentrated in so few hands. You can be sure your local mom and pop shop doesn’t get free capital.
Meanwhile though, it’s easily lost among all the breathless media coverage that Amazon stock, even after today’s big surge, is still nearly 20% below where it changed hands last summer. So for any reader that may have been wondering, nothing we’ve seen today changes our position that the big picture remains that of a bear market. Interest rates are rising, bringing a long overdue end to the corporate behemoth free ride.