“The concept of disruption is about competitive response; it is not a theory of growth. It’s adjacent to growth.” — Clayton M. Christensen
Amazon (AMZN) is, quite simply, “The Disruptor”. After seismically altering the way people shop, what is simply the world’s greatest (of all time) logistics company stayed in the headlines all weekend in the wake of its agreement to buy Whole Foods Market (WFM. Grocers such as Kroger KR and Walmart (WMT) took an absolute pasting in the marketplace on Friday. In fact, that back alley beat-down spread wide, beyond the grocers and broadly to retailers in general.
This sudden changing of the landscape was probably overdone a bit on Friday, and that is due to Amazon’s reputation. This firm does not just eliminate individual competitors; it eliminates competition itself. As an Amazon shareholder who enjoyed watching the action unfold, I have to admit that Amazon will not likely dominate the field in groceries, nor make all that much more money, at least not very quickly, due to this deal. The fear that spread on the side of the nation’s grocers, though, is far more legitimate than was the positive reaction on the e-commerce side.
This will likely be painful for Amazon. Books and consumer goods are not ice cream. They are not plums, and they are not pork chops. The grocery business is a business that was already struggling. Industry-wide sales nearly stopped growing in 2016, after years of merely pedestrian growth at best. This is without the competition from e-commerce that has plagued the rest of the retail space. A mere 2% of grocery shopping was done over the internet in 2016. This while the total number of stores in the United States that sell groceries rose by 17% in 10 years time. I have not even brought up the growing competition from German newcomers Aldi and Lidl. In a tough economy, where there has been little wage growth for many years for the lower and middle classes, these bargain basement-type sellers have quickly shown an ability to grab market share. I have an Aldi in my neighborhood. The store is always crowded.
Speaking of market share, that is something that our disruptor knows a thing or two about. Amazon has consistently shown the ability to suffer through years of foregone profit, competing at the lowest end of the price range in order to gain market share. Whole Foods has 460 outlets across the country. That’s 460 outlets that bring maybe as much overhead as potential in terms of space, labor and debt. This remains to be seen. What Whole Foods does bring to the national level is the improvement to Amazon’s ability to provide distribution for perishable goods — something the rest of Amazon’s world-class logistical chain had thus far not proven capable of. This story remains a long way from where it’s going. It will hold your interest. More important than simply how this impacts me as a trader, I just have one question.
Amazon’s Jeff Bezos just dropped a bomb on retail.
How Do I Profit From This?
Exactly. Time to put on your inner mercenary. One can see that the perception of Amazon possibly knocking another entire industry into orbit over time adds value. As has been the case in the past with this firm, that perception will likely continue to allow this name to trade at an over-sized premium to what its earnings would otherwise imply. As for the other side of this trade, it’s rent-able. I rented Kroger (KR) on Friday. I bought it on the morning dip, and puked it out late in the day. That was a nice trade, and the stock appears to be headed higher in the overnight, but you know what? I never considered it more than a trade, and I was afraid to hold it over the weekend. Walmart has long been one of my favorites. I recently sold my shares in that name, and had planned to buy them back should the stock dip below $75. Well, I had that opportunity on Friday, but I was a lot more comfortable flipping a $20 stock experiencing a two-day melt-down than a $75 name that just saw half of its sales threatened.
You all know, if you read me often, that I like the fight WMT has put up against AMZN. I have not been long the Walmart name for the last time, but figuring out what to do with said name will take some thinking. One will likely have to see what this means on the charts after a couple of weeks, or maybe even a couple of months. No, Walmart will not sell less groceries today, but that perception thing? The pendulum swings both ways, and that could be a problem. You may root for a sports team, or even a business. But that’s not why you invest. In and out, without emotion. That’s how you go there, for now.
Talks finally began today between the U.K. and the EU on the departure of the first from the latter. The long awaited “Brexit” negotiations are to held in Brussels, and after the embarrassing showing in the British snap elections by the conservative party, Prime Minister Theresa May will likely be forced to go much softer on her planed extrication from the EU than planned prior. From a human point of view, the key point may simply be the rights of EU citizens that live and work on British soil (and of the UK citizens who live and work in the rest of the EU).
From a markets point of view, this will be all about currency valuations and the performance of British debt. The pound sterling has taken a beating over the last few weeks in the wake of that election, but has strengthened this morning. Gilts have performed well as the Bank of England has been put in the space between a rock and a hard place. Dissension has arisen at the monetary policy committee (MPC) as the central bank was forced into a state of paralysis by these oncoming negotiations, as well as rising U.K. inflation that seems to exist by itself, without the aid of improving macro-economic conditions or significant wage growth. Every headline will swing these markets, for now.
08:00 – Fed Speaker: New York Fed Pres. William Dudley will speak this morning from Plattsburg, NY. As the regional president, New York, Dudley holds a permanent voting slot at the FOMC. I would not expect Dudley to stray too far from the official policy statement published last Wednesday, as Dudley has seemed to focus for the last nine months or so on market preparation. I have not seen word on whether or not there will be a Q&A session at the conclusion of this event.
19:00 – Fed Speaker: Chicago Fed Pres. Charles Evans is set to speak on policy from New York City this evening. Evans is a voting member of the committee, and has been seen as dovish in the past, though he did not dissent with Minneapolis Fed Pres. Neel Kashkari last week. There will be time made for both the media, and the audience to ask questions tonight.
Sarge’s Trading Levels
These are my levels to watch today for where I think that the S&P 500 and the Russell 2000 might either pause or turn.
SPX: 2449, 2443, 2436, 2430, 2421, 2411
RUT: 1426, 1419, 1411, 1405, 1398, 1390
There are no significant quarterly earnings results scheduled for release today.
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