Extremism is so easy.  You've got your position and that's it.  It doesn't take much thought.  And when you go far enought to the right, you meet the same idiots coming around from the left.  Clint Eastwood

Nicholas Taleb made famous the idea of the black swan, or a three standard deviation event.  If you are not familiar with this concept, it is even an extremely low probability occurrence may take place, and they happen more than statistics would indicate.  You might say it would be an extreme situation.  In today’s society, one could make the argument these black swan events are essentially the norm.  In politics, Donald Trump, the casino magnate, is the President of the United States.  Both the major parties are headed by individuals, Trump for Republicans and Sanders and Warren for Democrats, who routinely use inflammatory language and cast aspersions which make people, at the very least, shake their heads.  In the financial markets, large popular internet based companies trade at sky high valuations traditionally not thought possible.  Yesterday, one of these entities, Amazon.com, decided to upend the brutally competitive world of supermarket retailing.  It did so by buying Whole Foods for the cool price of nearly $14 billion dollars.  From a strategic perspective, the deal makes sense because Amazon buys its way into the position of immediately competing with many of the major players.  Over time, it can use those existing stores and integrate its wildly successful Amazon prime program to give Whole Foods access to all those customers who might be accustomed to buying groceries elsewhere.  Investors went wild over the deal and boosted Amazon’s stock price, while summarily selling any competitor, Kroger’s especially as well as Wal-Mart, Target, and even Costco.  Far be it for me to come off as bucking conventional thought, gosh, that might be, maybe even a bit extreme, but there are more than a few questions about how good a deal this actually is.  Let’s take a closer look, shall we?

First, from an efficiency standpoint, you have to kind of shake your head at the way it is being done.  All cash, nearly 14 billion of the $24 billion pile Amazon has.  Amazon’s stock price trades at an all time high, so using the stock as a currency for at least some of the purchase price might make sense, especially when it trades at nearly half a trillion in value and a hard to believe P/E multiple.  Second, with interest rates at rock bottom levels, nearly 2.5% on the 10 year treasury, Bezos could use 3 billion of cash, borrow the rest, and still not dilute the stock, if that was the primary concern.  Also, he would maintain more of his own cash hoard.  Regarding the price, he paid a fair multiple for a premium brand, which is a distant fourth in market share for groceries.  Strategically, with far more competition in the cloud space coming from Microsoft and Google, it will require more attention from senior management, potentially making Amazon Web Services more vulnerable on that business front.  The ownership of Whole Foods will continue to run the company, but how long that lasts remains to be seen.  Also, if the fellows at Wal Mart, Target, Macy’s, and Costco weren’t focused on Amazon before, well, you know they are now enemy number one, two, and three.  Clearly, this was an extreme event, very consistent with the current environment.

Elsewhere in the financial world, Janet Yellen and the Federal Reserve Board decided to raise interest rates 25 basis points.  With May retail sales coming in quite soft, many believe the odds of another rate hike later in the year is probably not in the cards, with the economy being quite weak.  Here in Las Vegas, a deal was done which now creates a third strong competitor in the local market, Golden Entertainment.  It purchased the Stratosphere and Arizona Charlies Hotel and Casinos from the real estate arm of Goldman Sachs.  Yahoo’s operating assets were finally eliminated from corporate existence as Verizon completed that acquisition.  If ever there was the poster child for extremism in compensation, well loved CEO Marissa Meyer wound up with nearly $200 million dollars of reward when the ink on the deal dried.  It took her four years to amass such a haul, and very little was tied to operational performance, but I will say shareholders did quite well as she created over $40 billion dollars of value during her tenure.  Clearly, she benefited from the Yahoo position in Alibaba, so she should certainly send Jack Ma some kind of commission.  Yahoo was one of the young internet Turks many years ago, and that it has faded into oblivion reminds us the danger in anointing kings too quickly.

Finally, the shooting of House Majority Whip Steve Scalise by an extremist, who else, should remind us all of the danger of using inflammatory language, especially our political leaders.  In our day to day lives, remaining centered, calm, rational, and trying to withhold judgment until you get all possible information remains a pretty good philosophy.  It is unfortunate so few in the public eye consider adopting it and instead flock to the cameras to assign blame at the quickest opportunity.  Here in Las Vegas, the temperatures will approach 115 degrees all week long, so I need to make sure to remain cool at all costs, just to deal with the extreme temperature.  It is only natural the weather would be consistent with other areas of society’s extreme approach.  

Thanks for reading the blog this week and if you have any questions or comments, please email me at information@y-hc.com

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