But Wait, There Are A Few Differences Between Amazon and the US Postal Service

When Amazon reported second quarter earnings, or rather losses, it surprised no one, though some people were surprised that it lost that much ($126 million). To make us feel better about those losses, and to be able to beat analysts’ expectations later, it preannounced losses between $410 and $810 million for the current quarter. Analysts fell all over each other dodging the question how a company with over $19 billion in revenues could lose that much, and so consistently.

Amazon has been doing this sort of thing for years. Countless analyses have been written about how terrible its financial performance has been, and how the metrics have been deteriorating, including the operating margin that has swooned from 4.9% in Q2 2010 to a nearly invisible 0.8% now (chart). The company made a tiny bit of profit in 2012, lost money in 2013, and is starting this year out in the hole as well.

“We continue working hard on making the Amazon customer experience better and better,” explained CEO Jeff Bezos in the press release. “We’ve recently introduced Sunday delivery coverage to 25 percent of the U.S. population, launched European cross-border Two-Day Delivery for Prime….” Etc. etc.

He sounded like Patrick Donahoe, CEO of the US Postal Service. Amazon has a lot in common with USPS: they’re in the same ballpark in terms of revenues, both dominate their markets, and neither can figure out how to make money.

But there are a few differences between Amazon and USPS:

Bezos can run his show as he sees fit. OK, there is a board, but it doesn’t seem to give him a hard time about the company’s performance. As long as the stock keeps going up, who cares?

The Postal Service, which had revenues of $16.7 billion in Q2, can’t even sneeze without Congress giving it prior approval. Shutting down unneeded post offices or dropping Saturday delivery? Addressing its huge pension obligations or switching to a pension plan of the kind Amazon has (LOL)? Forget it. Not if any of it would happen in any congressional district and impact negatively any voters. A lawmaker’s sole job is to hang on to his or her job, and everything else serves to get that accomplished.

In return for its valiant service as Congressional and public punching bag, USPS is allowed to perform financially about the same as Amazon: losses as far as they eye can see.

So traders weren’t amused with Amazon’s losses, and there were some hick-ups in revenues too, and the stock plunged over 10% in after-hours trading and stayed near that loss on Friday. It’s now down 20% from its $400 peak at the end of last year.

Bezos doesn’t care. At least Donahoe gets grilled ceremoniously by Congress from time to time about the losses USPS generates. And when he comes up with ways to save money, lawmakers in whose districts he wants to save money in whack him over the head.

Bezos is not subject to this sort of enlightened treatment.

After each loss, shares either jump or dive, depending on whether the loss was worse or less bad than expected, and then, the stock rises again to continue its incredible rally, independent of the company’s performance. At least that’s how it worked until the end of 2012.

During the dotcom bubble, Amazon became famous as a precursor. In December 1999, the stock peaked. A month later, it was down 40%. It had started crashing three months ahead of the market. Ironically, only hindsight will tell if it is once again a precursor.

But in late 2008, Amazon commenced its current mega-rally. It was the time when the Fed began throwing money and ZIRP at Wall Street and speculators, and from then on, nothing else mattered. In five years, the stock rose 10-fold. And the company is still not making any visible profits. The stock is simply surfing on the Fed’s endless sea of liquidity and Wall Street’s hoopla.

That’s why Bezos doesn’t have to produce profits. As long as the stock keeps going up, why bother? Having to produce adequate profits would crimp his style. He has thrown off these constraints normally imposed by owners and creditors on management.

Here is where that’s a problem.

Amazon competes with companies that must make money because their investors demand it, and if these companies don’t make money, investors and creditors walk away, and the money dries up, and they’re finished. Amazon, free from profit constraints, competes with bookstores that, like Borders, go bankrupt if they can’t make money, and with smaller stores that just shut down one day because they must make money to stay in business.

Their big competitor has unlimited resources by being able to raise billions at practically no cost. It can always sell more of its inflated shares, a safety blanket if it runs out of money. It pays executives and other employees via its equity compensation plans, which is like raising money by selling shares to the public and using the proceeds to pay these folks in cash. When Amazon needs additional money beyond that, it sells bonds that cost it, depending on maturity, less than the rate of inflation and are thus free money.

Throughout, neither creditors nor stockholders demand to see any profits.

If the owner of a small bookstore walked into the bank with red on its income statement and begged for a loan, the loan officer would ask, after the pleasantries, “You mean you want to get a loan to fund your operating losses?”

For a small business owner, that’s not a good place to be. And this questions, which was entirely rhetorical, would be followed by another one: “How are you going to pay this back if you can’t make any money already?”

You get the drift. This loan, if it materializes at all, is going to be very expensive and will likely entail the bane of small business, a personal guarantee.

Amazon is Exhibit A of how the Fed’s policy of flooding Wall Street and corporate mastodons with nearly free money is destructive to the rest of the economy.

It creates unfair competition.

Because Amazon can competes on its ability to not ever have to make a profit, it can cut prices to the bone, offer free shipping, etc., which initially is great for consumers until its monopoly power allows it to trample on consumers and suppliers alike – and suppliers, namely publishers, are already experiencing the wrath of Amazon.

This type of competition stifles the local economy, leads to job losses among companies that are not so privileged, and cements the monopoly or oligopoly power of the corporate mastodons [read…. The Jobs Curse At Amazon, And How Obama Stepped Into It].

Of course, that’s how the Fed operates. These corporate mastodons (particularly the big banks) are the legal owners of the 12 Federal Reserve Banks that make up the main part of the Federal Reserve System, and their executives and former executives play important roles in that system. For example, GE owns a stake in the New York Fed, and GE CEO Jeff Inmelt was a Class B director of the New York Fed during the period when it handled the bailouts, including the bailout of GE. Amazon too got bailed out, but indirectly, by investors flush with this freshly printed cash which had to go somewhere.

This is one of the pernicious effects of the Fed’s policies.

They drove stocks to insane heights and the cost of money (for those with access to it) to insane lows in order to create that “wealth effect” and enrich the very top layer of society beyond any measures previously imaginable. But for the rest of the economy, the wealth effect has been an utter failure, a sham, and a pretext.

In the process, these policies destroy the functionality of the Main Street economy where investors and creditors keep companies in line by pushing them to produce real income – not ex-bad-items adjusted pro-forma operating income or some such contrived figure, but real income under GAAP. This form of discipline that every executive of a small or medium-size business is subject to, is completely absent for Amazon (and many other publicly traded companies, including the likes of Twitter). And the only cure is a decision by investors and creditors to walk away from them until they deliver real and adequate profits.

Bubbles are easy to discern – including the performance of Amazon’s stock – despite the Fed’s rhetoric that bubbles cannot be discerned. What’s hard is pinpointing the moment they top out. But that’s precisely what everyone wants to know to cash out before it implodes. Lacking reliable scientific indicators of when to get out, everyone has their own list of ersatz indicators. And I just added a new one to my list, concerning the startup and IPO bubble. You can’t make this up! Read…. Sign of Top? Banana Republic Trots out ‘Startup Guy’ Look

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  14 comments for “But Wait, There Are A Few Differences Between Amazon and the US Postal Service

  1. matt says:

    and they are just catching on? This has been going on for years. They have chosen to ignore it. Ignorance is What I believe it is called Wolf

  2. Miggy says:

    Good article on connecting the dots of the flow of money from QE to executives at companies like Amazon.

    It’s all madness.

  3. Simon says:

    So…… I have been watching the development of ‘things’ since ’09 and have spent a great deal of (enjoyable) time getting my head around what is going on (as much as any person can get their head around it).

    What is baffling me is just how long this charade is going on! It seemed to me that things would have come to a head loooooooong before now, but here we are. ZIRP, money printing, insane stock market, bond rates in Europe which defy belief (Spain today as a a lower rate than the UK. The former having 50% youth unemployment and an economy going nowhere).

    I have told myself that it could go on for another 5 years just so that I can stop watching on the edge of my seat.

    Is it possible that all this can just go on forever????

  4. Michael Gorback says:

    Amazon was doing this way before QE. QE just magnified the process. If this were an oil company selling gasoline below cost people would be saying it’s the second coming of Rockefeller.

    OTOH, I’d like to thank the shareholders and the states that didn’t collect sales taxes for subsidizing my lifestyle all these years.

  5. Stephen says:

    There is one huge difference between Amazon and the Post Office. Amazon offers the best customer experience I have ever witnessed, while the Post Office offers one of the worst.

  6. I’m over here in Seoul and there are many things I cannot buy in Seoul that are readily available on Amazon and EBAY. Can you imagine that?

    The problem with Amazon is they don’t include customs duties in their price. I have to pay this separately which is a very big pain.

    Ebay, on the other hand handles this superbly. I prefer to buy things through Ebay because of this. The delivery time is longer, since ebay sends them to a central location for the extra processing, but the added convenience is worth it.

    • Wolf Richter says:

      Hey jonnygeneric, good to hear from you again. Do you like buy your groceries on Ebay or Amazon if you get tired of the local cuisine?

  7. che says:

    you don’t mention that they don’t pay state sales tax (amzn’s raison d’etre)

    • Wolf Richter says:

      After a long standoff and threats that sounded like extortion, Amazon caved in California and is paying sales taxes. But the state had some big supporters, including sales-tax paying Walmart, without whom that would have never happened.

      • Hacker says:

        Amazon didn’t cave on collecting state sales tax. They saw a business need to have local presence for same day deliveries. Thus they started collecting state sales tax in some of the bigger markets. This was in the news at the time.

  8. Duane Snyder says:

    USPS is probably the only organization that has to fund its health care costs 75 years in advance. (Mandated by Congress in 2006). If the USPS were allowed to guide their own ship they would probably be doing much better. That 2006 mandate snuck in by some GOP clown in 2006 really hurt the company, which was probably the point. (USPS is the biggest labor union in the US, and a quasi government agency, two things the Greedy Oligarch Party can’t stand). And the USPS is also the biggest employer of military vets, so if we really wanted to support the troops we would quit making unwarranted, snide comments about the Post Office. they do a great job.

    • PNW_WarriorWoman says:

      Superb post pointing out the REAL reason why the USPS apprears to be making losses. So far the Post Office has placed about $44 billion in that pre-retiree account. Without the mandate, the Post Office’s financials — while still not completely healthy — would be much more stable. Amazon has no excuse like this.

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