"If we will not endure a king as a political power, we should not endure a king over the production, transportation, and sale of any of the necessaries of life."
--Sen. John Sherman
As mentioned late yesterday, despite the enormous success of "Prime Day," the continued expansion of product offerings and an all-time record stock price, Amazon.com Inc. (AMZN) is likely to face its greatest existential threat from regulatory agencies and legislators in Washington, D.C., over the next year:
"I am shorting Amazon today because I have learned that there are currently early discussions and due diligence being considered in the legislative chambers in Washington, D.C., with regard to possible antitrust opposition to Amazon's business practices, pricing strategy and expansion announcements already made (as well as being aimed at expansion strategies being considered in the future).
If I am correct, word of this could lower Amazon's shares by 10% overnight. And if expansion or pricing prohibitions are attacked for antitrust reasons (or for other reasons), a far more severe market impact is possible."
-- Kass Diary, "Shorting Amazon"
Here is more on Amazon from a July 11 column:
"With the Whole Foods transaction, Amazon's vast power will be under the microscope. Is Amazon a productive change agent and force for the good of the consumer by virtue of a reduction in product prices? Or is Amazon's disruption of the general retail business a destroyer of jobs, moving previously productively employed workers into the unemployment line?
... It is my view that Amazon's shares should be sold on strength as the company could face regulatory restrictions in reaction to its expansion plans and customers who use the service could face a rising tax burden over the intermediate term. It is not clear to me, given the extended valuation, that investors will be so patient with this possible threat.
Given the disruptions in jobs, malls and elsewhere, I wouldn't be surprised if the proposed acquisition and future acquisitions will be opposed by many, possibly including politicians and regulatory authorities. Note: Retail stores are closing with rapidity -- an estimated 8,000 stores in 2017 alone compared to about 4,000 in recession-savaged 2008 -- as the business landscape radically has changed due to Amazon's strategic alliances and business objectives and strategies....
Frankly, in the face of bona fide threats of regulatory and political opposition to Amazon, we against all odds finally may be facing "Peak Amazon," but for different reasons than many would have expected."
- Kass Diary, "The Carnage in Retail: Opportunity or Game-Ender?"
Three added points on Amazon, which is part of the Trifecta Stocks portfolio:
- Amazon only needs to build volume as to date investors have paid little heed to Amazon's bottom line, to the detriment of traditional retailers who are evaluated on cash flow and profits and, typically, have large debt loads.
- Amazon has a zero cost of capital -- a large differential advantage over its competition.
- Numerous industries (including retail) are and will continue to be disrupted by Amazon's vertical and horizontal mergers and acquisitions.
Is A Disruptive Amazon a Jobs Killer or a Provider of Low-Cost Products?
At the core of the threat is whether Amazon is perceived as a disruptive jobs killer or as a company that delivers lower prices to the consumer.
U.S. antitrust law is expansive. It is a collection of state and federal laws that are intended to promote fair competition for the benefit of consumers. The main statutes are the Sherman Act (1890), the Clayton Act (1914) and the Federal Trade Commission Act (also 1914). The acts restrict cartels and prohibit other collusive acts that restrain trade. The acts also restrict mergers and acquisitions that could lessen competition and prohibit the creation of a monopoly and the abuse of monopoly power.
As it relates to Amazon, the Federal Trade Commission and the U.S. Department of Justice have a broad scope and the laws are open to interpretation.
There are basically two schools of interpretation of the antitrust laws:
* A free markets interpretation (The Chicago School of Economics), which has been influenced by Judge Robert Bork's writings on antitrust law since 1970. This theory focuses on what is best for the consumer rather than a company's practices. It argues that antitrust law solely should focus on the price/cost benefits to consumers and have no other purpose:
"In short, the financial demise of a competitor is not the same as getting rid of competition. The courts have long paid lip service to the distinction that economists make between competition - a set of economic conditions - and existing competitors, though it is hard to see how much difference that has made in judicial decisions. Too often, it seems, if you have hurt competitors, then you have hurt competition, as far as the judges are concerned."
* By contrast, there is a broad range of theory that maintains the role of antitrust laws should weigh on the control of economic power for the public interest. The Supreme Court has called the Sherman Antitrust Act a "charter of freedom" designed to protect free enterprise in America. This view of the statutory purpose, originally supported by Justice Brandeis and reinforced by Justice Douglas, was that the goal of antitrust law not only was to protect consumers, but at least as importantly to prohibit the use of power to control the marketplace:
"We have here the problem of 'bigness.' Its lesson should by now have been burned into our memory by Brandeis. The Curse of Bigness shows how size can become a menace--both industrial and social. It can be an industrial menace because it creates gross inequalities against existing or putative competitors. It can be a social menace...In final analysis, size in steel is the measure of the power of a handful of men over our economy...The philosophy of the Sherman Act is that it should not exist...Industrial power should be decentralized. It should be scattered into many hands so that the fortunes of the people will not be dependent on the whim or caprice, the political prejudices, the emotional stability of a few self-appointed men...That is the philosophy and the command of the Sherman Act. It is founded on a theory of hostility to the concentration in private hands of power so great that only a government of the people should have it."
--Dissenting opinion of Justice William O. Douglas (in United States vs. Columbia Steel)
Finally, a Bipartisan Agreement?
Regardless of one's views of antitrust, the Chicago School/Bork interpretation is a plus for Amazon while the Brandeis/Douglas position is potentially a big negative. Consequently, we should consider the political environment and its possible adverse impact on Amazon.
My understanding is that certain Democrats in the Senate have instituted the very recent and preliminary investigation of Amazon's possible adverse impact on competition.
But, in the Trump administration we also have a foe against Jeff Bezos, who not only runs Amazon but happens to own an editorially unfriendly (to President Trump) newspaper, The Washington Post.
The president is no fan of Jeff Bezos and Amazon, as seen in these tweets:
Though Amazon's sales growth and business successes have been extraordinary -- as reflected in a record share price -- the company now faces a potential existential threat from both politicians and regulatory bodies.
Few, if any, are aware of this new threat, which is real and, given the current political reality, may even gain bipartisan support.
Given Amazon's disruptive influence over numerous industries and the associated loss of jobs in what is still a fragile domestic economic recovery, opposition to further company expansion plans finally may be something with which everyone in Washington agrees!
(This commentary originally appeared on Real Money Pro at 7:43 a.m. ET on July 13. Click here to learn about this dynamic market information service for active traders.)