Amazon, Wal-Mart, and the Middle Class

Source: Amazon.com

For many, the American Dream of good schools, white picket fences, stable family communities, and tree-lined streets has become all but an illusion. Over the past several years, the middle class has been fighting a war on two fronts. Middle-class citizens have remained well aware of the idea that their tax dollars may go toward housing, child-care services, food stamps, cell phones, and spending money for those citizens who do not work.

At the top, of course, social critics have railed against an elite 1 percent group of private individuals and corporations that allegedly stymie upward mobility. Amazon (NASDAQ:AMZN), Jeff Bezos, Wal-Mart (NYSE:WMT), and the Walton family dynasty are symbolic of the 1 percent and a new American normal.

The American middle class is likely to remain under pressure into the near future. Cheap labor overseas and at home threatens wage and employment growth. Meanwhile, Federal Reserve policy has crimped savings rates while also elevating inflation risks. For now, students and families are often burdened with more than $100,000 in tuition costs.

Upon returning home, many a young graduate has observed a Main Street littered with trash, shuttered businesses, and petty criminals. Many economists will highlight a secular shift away from Main Street and toward Big Box exurbia and online retail. Ironically, these trends do not exactly bode well for long-term Amazon and Wal-Mart shareholder returns.

Web 2.0 retailing

Web 2.0 retailing, of course, is an extension the late ’90s dot-com era and big-box build outs. Today’s most successful retailers often combine brick-and-mortar locations alongside online retailing in order to attract customers and compete on price. Retailers that lack a solid online presence are often dismissed as showrooms where prospects enter stores simply to handle physical product before returning home, logging onto the Internet, and shopping for bargains. Reuters and has specifically dismissed Best Buy (NYSE:BBY) as a showroom for the likes of Amazon.com.

Taken further, an eerie subculture has emerged to document the emergence of dead malls, or abandoned retail strips. Again, legions of financial analysts have blamed declining shopping mall traffic counts and sales figures upon the emergence of Web 2.0. Electronic retailing, of course, has inevitably decimated jobs and commercial real estate values. Teenagers, who once worked their first jobs as mall employees, must now cope with unemployment rates approaching 25 percent in their particular age demographic.

The Web 2.0 business model often adds a social component to traditional websites. Web 2.0 engineers effectively operate as broker dealers that match an established user base to customized goods, services, and advertisements. Both Wal-Mart and Amazon online platforms allow for users to create accounts, review products, apply for credit, and classify merchandise. Cookies embedded within the software have replaced physical salesmen in terms of hawking goods to prospects.

Amazon, of course, has further built out its Web 2.0 marketplace with self-published books and affiliate marketing programs. Technically savvy individuals can now cut out the middleman and generate their own revenue streams. Amanda Hocking went on to sell more than 1.5 million books via Amazon Kindle after filling up shoeboxes with rejection letters from traditional publishing houses. A strong case may be made that the Amazon eBook was the primary catalyst that drove Borders into bankruptcy court.

Middle-class America and small businesses must learn to change with the times and embrace the Web 2.0 economy in order to counteract the financial risks of job losses. Wal-Mart executives often argue that their business practices have saved consumers 3 percent on purchases, or $2,500 per year, per family, dating back to 2005. Progressive critics, such as Tim Worstall of Forbes, however, have ripped Wal-Mart for haughtily presenting biased results from its own commissioned studies. Worstall has gone on record to proclaim that Wal-Mart “destroys jobs.”

The Fed, boom, and bust

In fourth-quarter 2008, the Federal Reserve Board dropped its federal funds target rate to an unprecedented zero amid a debilitating housing bust and credit crisis. From there, Federal Reserve and Treasury officials installed the Term Asset-Backed Securities Loan Facility, Money Market Investor Funding Facility, and Operation Twist programs.

In summary, the various Federal Reserve programs called for the central bank to enter financial markets and purchase government bonds. The series of transactions have ballooned the Federal Reserve balance sheet to $4.1 trillion while also keeping interest rates at the floor. After accounting for inflation, middle-class savers are likely exposed to negative real returns on cash reserves and short-term bonds. On, December 31, the Dow Jones Industrial Average established an all-time record high at 16,588.25.

Today, Amazon stock may be described as the poster child signaling capital flight out of conservative savings and toward speculative assets. Amazon closed the Thursday session at $354.59 per share. At that level, Wall Street traders applied a $162 billion price tag onto the Amazon business model. Be advised that Amazon closed its 2013 fiscal year (Amazon fiscal years match calendar time) having banked a mere $274 million in net income off $74.5 billion in revenue.

Of this amount, Amazon took down $239 million of its net profits during fourth-quarter 2013. John Shinal and USA Today, of course, were to promptly rip the Amazon figures as an “earnings debacle.” In near lockstep fashion, Amazon stock was to lose 14 percent of its value one month after reporting earnings on January 31, 2013. Going forward, prospective investors can expect more of the same. Amazon still trades for roughly 600 times earnings and has been priced to perfection. Amazon shares are to be avoided, as they will collapse even further amid the inevitable market correction to end the Web 2.0 bubble.

Wal-Mart, as the world’s largest retailer, will obviously serve as a leading indicator for the state of the global economy. As such, Wal-Mart shareholders must remain content to hold an investment that simply tracks the S&P 500 Index and returns larger amounts of capital back to shareholders through stock buybacks and dividends. Prospective investors should also remain cognizant of the idea that Wal-Mart shares may also be dragged down by the undertow of a looming Web 2.0 bust.

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