Amazon (AMZN) missed earnings estimates in the third quarter and is expecting more pain in the near term, which one analyst says are a sign that the company is spending now to set itself up for more upside later on.
“The most important investment that they’re making is in wages,” Anthony Chukumba, an analyst at Loop Capital, told Yahoo Finance Live (video above). Even after increasing workers’ starting compensation from $15 an hour to over $18 an hour, adding benefits, and creating $3,000 signing bonuses, “they’re still struggling,” he added.
“We’re seeing all the same stories … from so many different companies — it’s becoming increasingly difficult to hire unskilled workers as well as to retain them,” Chukumba explained. “You need to have these people in the warehouse, you need to have them on the trucks. Otherwise, the whole system just breaks down, quite frankly.”
Chukumba has a Buy rating and a $3,775 price target on Amazon. Shares of Amazon closed at $3,372.41 on Friday and are up 5.83% so far this year.
‘It’ll be expensive for us in the short term’: Amazon
Amazon posted third-quarter results and guidance that left Wall Street balking as the e-commerce giant forecasted billions of dollars in additional costs heading into the holiday shopping season.
“In the fourth quarter, we expect to incur several billion dollars of additional costs in our Consumer business as we manage through labor supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs — all while doing whatever it takes to minimize the impact on customers and selling partners this holiday season,” Amazon CEO Andy Jassy said in the company’s earnings release. “It’ll be expensive for us in the short term, but it’s the right prioritization for our customers and partners.”
Chukumba’s view is that Jassy’s decision was the right one, given the intense supply chain issues and labor shortages that the country is experiencing amid the economic recovery. Many employers have proactively raised wages to attract more talent on top of offering perks like paying for their workers’ education.
Supply chain issues continue to drag on as well.
“We expect… strained supply chains to last until the early parts of 2023,” Peter Sand, chief shipping analyst at Copenhagen-based BIMCO, a shipping trade group, told Yahoo Finance in a previous interview. “We are basically seeing a global all-but-breakdown of the supply chains from end to end.”
The losses reported by Amazon on Friday were an acknowledgment by Amazon that “we have to pay our employees more. We have to give them the sign-on bonuses,” Chukumba said. “We’re seeing this sort of inefficiency in our supply chain and we’re going to eat it. We’re not going to pass that along to our customers. We’re not going to pass that along to our… sellers. We’re going to going to eat that.”
And ahead of the holiday season, choosing to stomach higher costs rather than raise prices is “quite frankly… the right decision,” he added.
Amazon could raise Prime cost, prices in longer term
Longer-term, there are many options the company could take to recover many of these losses.
“It’s been over three years since they increased the price of Amazon Prime, it’s now $118 a month. I really think that they could increase that,” Chukumba explained. “I don’t think the vast majority of Prime subscribers would blink at that.”
Another one of Amazon’s options would be to “increase their rates that they charge the third-party sellers and they could even increase prices on first party,” Chukumba said. “And by the way, we’re hearing from a lot of companies that, you know, consumers are not blinking at price increases.”
Aarthi is a reporter for Yahoo Finance. She can be reached at email@example.com. Follow her on Twitter @aarthiswami.
Opinion: Ottawa must aim its fiscal powers at lagging business investment in the next phase of recovery – The Globe and Mail
In a prebudget consultation last winter, Bank of Nova Scotia chief economist Jean-François Perrault warned Finance Minister Chrystia Freeland that she was in danger of oversubsidizing labour at the expense of capital. Nine months further along an economic recovery that has become complicated by labour shortages, he’s stressing that point to her again.
“It’s certainly my view that [government policies] have favoured supporting the labour side versus the capital side in the pandemic. There’s no question,” he said in an interview this week.
“There needs to be something to turbo-charge Canadian investment.”
Mr. Perrault delivered that message to Ms. Freeland personally last week, as the Finance Minister met virtually with a panel of senior private-sector economists – the traditional consultation in advance of the government’s fall economic and fiscal update, promised for sometime in the next three weeks. This week’s third-quarter gross domestic product report from Statistics Canada underlines the point that the recovery is top-heavy on the consumer side, while business investment brings up the rear.
While real GDP (that is, excluding inflation) expanded at a brisk 5.4-per-cent annualized pace in the quarter, the main driver of that growth was household consumption, which surged nearly 18 per cent annualized. Business gross fixed capital formation, on the other hand, contracted nearly 18 per cent, its second consecutive quarterly decline. Since the start of the pandemic, household spending is up 2 per cent, in real terms; business investment in non-residential structures, machinery and equipment is down 11 per cent.
It’s not as if the private sector lacks the money. Canadian Imperial Bank of Commerce economist Benjamin Tal estimates that during the pandemic, the collective stockpile of corporate cash is about $175-billion higher than its prepandemic trend.
There are some encouraging indications – most notably, from the Bank of Canada’s fall Business Outlook Survey – that the private sector may be prepared to loosen its purse strings considerably. That quarterly report showed that capital spending intentions over the next 12 months are the highest in the 23-year history of the survey.
But the reality is that the government’s economic policies in the pandemic have done remarkably little to stimulate business investment, while delivering a great deal indeed to protect the labour market and support household incomes.
As the economy has recovered, that significantly tilted the scales in favour of hiring rather than capital spending. That may have contributed to the labour crunch many businesses and sectors are now experiencing.
“If we had somehow found a way to steer more dollars to encourage capital spending, as opposed to maintaining the labour force as it was, perhaps we wouldn’t have a million job vacancies now,” Mr. Perrault argued. “Perhaps firms would have taken the last 18 months to try and rethink, retool, invest, in a way that would make the expansion less labour-intensive.”
This certainly isn’t an issue unique to Canada. In a global economic outlook published Wednesday, the Organization for Economic Co-operation and Development worried that governments’ fiscal focus is still too much on emergency measures to lean against the impact of the pandemic, and not nearly enough on the building blocks for a strong recovery.
“We are more concerned by the use made of debt than its level,” OECD chief economist Laurence Boone wrote in the report. “It is time to refocus fiscal support on productive investment that will boost growth, including investment in education and physical infrastructure.”
For Canada, though, the solution must go beyond a refocusing of public spending over the next few years. It needs to include incentives to light a fire under business investment that was, frankly, a problem long before the pandemic came along. Crisis policies may have merely encouraged a long-standing tendency in our private sector to favour investments in labour over capital.
In the five years prior to the pandemic, total employment in this country rose 8 per cent. Over the same period, non-residential business investment, excluding inflation, fell 15 per cent.
Mr. Perrault suggested that the optimistic investment outlook in the Bank of Canada’s business survey masks the bigger picture: that Canada remains an underperformer relative to our global peers, even in this recovery.
“Canadian investment is probably going to rise less than a lot of our competitors this year; investment is rising everywhere,” he said. “The temptation is going to be to say things are improving … [but] if our relative investment continues to decline, then our competitiveness hurts, our productivity hurts.”
In a report this week, National Bank of Canada chief economist Stéfane Marion noted the country’s private non-residential capital stock – basically, all the physical structures, machinery and equipment owned by the private sector – actually declined last year, for the first time on record. While the pandemic was undoubtedly a contributing factor, growth has been generally trending downward for more than a decade.
“Whatever the cause of this lack of private investment, we must turn it around,” Mr. Marion said.
“Canada, as a small, open economy … must do a better job of growing its capital stock to take advantage of a highly successful immigration policy, and harness the productive power of a growing work force of highly skilled people.”
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Oil rises as investors focus on OPEC+ decision amid growing Omicron fears
Oil prices rose on Thursday, recouping the previous day’s losses, as investors adjusted positions ahead of an OPEC+ decision over supply policy, but gains were capped amid fears the Omicron coronavirus variant will hurt fuel demand.
Brent crude futures rose 85 cents, or 1.2%, to $69.72 by 0402 GMT, having eased 0.5% in the previous session.
U.S. West Texas Intermediate (WTI) crude futures gained 85 cents, or 1.3%, to $66.42 a barrel, after a 0.9% drop on Wednesday.
“Investors unwound their positions ahead of the OPEC+ decision as oil prices have declined so fast and so much over the past week,” said Tsuyoshi Ueno, senior economist at NLI Research Institute.
Global oil prices have lost more than $10 a barrel since last Thursday, when news of Omicron shook investors.
“Market will be watching closely the producer group’s decision as well as comments from some of key members after the meeting to suggest their future policy,” Ueno said.
The Organization of the Petroleum Exporting Countries and its allies, together known as OPEC+, will likely decide on Thursday whether to release more oil into the market as previously planned or restrain supply.
Since August, the group has been adding an additional 400,000 barrels per day (bpd) of output to global supply each month, as it gradually winds down record cuts agreed in 2020.
The new variant, though, has complicated the decision-making process, with some observers speculating OPEC+ could pause those additions in January in an attempt to slow supply growth.
“Oil prices climbed as some investors anticipate that OPEC+ will decide to maintain the current supply levels in January to cushion any damage on demand from the Omicron spread,” said Toshitaka Tazawa, an analyst at Fujitomi Securities Co Ltd.
Fears over the impact of the Omicron variant of the coronavirus rose after the first case was reported in the United States, and Japan’s central bank has warned of economic pain as countries respond with tighter containment measures.
U.S. Deputy Energy Secretary David Turk said President Joe Biden’s administration could adjust the timing of its planned release of strategic crude oil stockpiles if global energy prices drop substantially.
Gains in oil markets on Thursday were capped as the U.S. weekly inventory data showed U.S. crude stocks fell less than expected last week, while gasoline and distillate inventories rose much more than expected as demand weakened. [EIA/S]
Crude inventories fell by 910,000 barrels in the week to Nov. 26, the Energy Information Administration (EIA) said, compared with analyst expectations in a Reuters poll for a drop of 1.2 million barrels.
(Reporting by Yuka Obayashi; Editing by Tom Hogue)
Toronto market hits 7-week low on Omicron uncertainty
Canada‘s main stock index fell on Wednesday to its lowest level in over seven weeks as the United States reported its first case of the Omicron variant that investors fear could impede economic recovery, with the index giving back its earlier gains.
The Toronto Stock Exchange’s S&P/TSX composite index ended down 195.39 points, or 0.95%, at 20,464.60, its lowest closing level since Oct. 12.
Wall Street also closed lower as the U.S. Centers for Disease Control and Prevention said the country had detected its first case of the new COVID-19 variant, which is rapidly becoming dominant in South Africa less than four weeks after being detected there and has spread to other countries.
It might take longer than expected for supply chain disruptions to abate, “especially if we have renewed shutdowns in Asia,” said Kevin Headland, senior investment strategist, Manulife Investment Management.
Still, Headland does not expect the new variant to lead to an economic recession or a bear market for stocks in 2022, saying: “Reaction to headline news provides opportunities for those that have a longer-term timeframe to add in the equity markets.”
The TSX will add to its recent record high over the coming year as the domestic economic recovery helps underpin corporate earnings, but gains are expected to slow from 2020’s breakneck pace, a Reuters poll found.
The technology sector fell 2.7%, while energy ended 1.9% lower as oil was unable to sustain an earlier rally. U.S. crude oil futures settled 0.9% lower at $65.57 a barrel
The materials group, which includes precious and base metals miners and fertilizer companies, lost 2.2%.
Financials were a bright spot, advancing 0.4%, helped by gains for Bank of Nova Scotia as some analysts raised their target price on the stock.
Bombardier Inc was among the biggest decliners. Its shares sank 10.4%.
(Reporting by Fergal Smith; Additional reporting by Amal S in Bengaluru; Editing by Peter Cooney)
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