As we have been saying for over a year now, there are two key issues (one of which follows logically from the other) that central bankers are banging their heads against: the increasing scarcity of money good-assets, i.e., credible collateral, that can be pledged in exchange for debt at both the private and public level, and the collapsing cash flows at the corporate and household level (both incidentally direct artifacts of ubiquitous central planning and central banker intervention). This, among various other reasons chief among which is the parallel collapse in CapEx and R&D spending at the corporate level, is the main reason for the now secular decline in corporate revenues, which in turn will impact corporate profitability for years to come (now that the easy cost cuts have been made and firms have no choice but to cut into the muscle), and why any expectations that currency dilution will transform into higher profits in a time when input costs rise far more aggressively than revenues, are merely pipe dreams, as is the market's obsession with expanding PE multiples. Perhaps the best confirmation that the much needed cash flows continue to not materialize, is the news that first Amazon, and now Google, are slowly migrating to a model of vendor financing, whereby they provide credit to their product and service vendors to stimulate top line growth. And while this may boost AMZN and GOOG stock price briefly, all it indicates is what we have all know for a long time: the US consumer is once again tapped out, and is unwilling and/or unable to spend money at the rate needed to justify either the forecast S&P earnings or the applied multiple, confirming fundamentals are even more disjointed from market surreality than previously expected.
From the FT:
Google is getting into the credit business for the first time, with the launch on Monday of a programme in the UK to finance purchases of its search advertising by businesses.
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The move marks the opening of a new front in the battle between the biggest internet companies, as they turn to their balance sheets as a source of competitive advantage. Amazon said last week that it had begun making loans to independent sellers that offer their products on its marketplace, marking the online retailer?s first move into financial services.Google?s decision to issue its own credit card, which will also be made available in the US within weeks and other unspecified countries later, signals the company?s first attempt to use its huge cash reserves to support its core search advertising business by subsidising low-interest rate credit lines.
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It said it would offer customers credit of between $200 and $100,000 a month to pay for their use of Adwords, which places messages next to the results in its search engine and made up the bulk of its $37bn in advertising revenues last year.
Where it gets downright scary however, is the admission of Google's Treasuer for the reason why Google is entering the crediting business:
?They weren?t buying Adwords as much as they need to,? said Brent Callinicos, Google?s treasurer. A pilot lending programme begun in the US a year ago had led to customers advertising more, he added.
Or, stated differently, we have crossed the IRR threshold where without Google's model no longer generates the rate of return our shareholders demand of it. The same shareholders who recently pushed Google to its all time high price and who are perfectly oblivious to this very disturbing dynamic below the otherwise shiny surface.
As for Amazon's endless "diversification" strategy, no surprise there. The one time retailer, which is now into video streaming, cloud sharing, stock exchanging, who knows what else and recently entered the real estate business, has been desperate to expand into something, anything, that will boost its meager profitability, so far without success. The time to experiment may have now run out, since AMZN now too has to provide debt to lever up its "vendors":
Amazon also indicated that its lending was aimed at credit-starved
businesses that would otherwise struggle to finance initiatives such as
expanding the inventory of products they sold on its site.?We?re
providing a solution to a problem that is vexing many sellers,? Amazon
said. ?A lack of access to cash can inhibit their growth.?
What is left unsaid, is that a lack of cash will lead to a lack of transactions, and a lack of commissions which will immediately crash AMZN's already razor thin margins.
Finally, the admission that corporate cash now has to be used to fund the lowest possible returning IRR project, where discharges and bad loans will soon galore as the ongoing depression once again strikes with a vengeance, in the process crippling long-term profitability prospects, will not be easy to extract. Instead we get spin:
Google executives did not rule out going deeper into financial services with the provision of more lending products to the small and medium-sized businesses that make up the bulk of its 1m search advertising customers, though they said the company was not planning any moves at present.
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?We are helping them, uniquely, with online marketing ? we aren?t going into a finance business as Google,? said Francoise Brougher, vice-president of sales and operations for small and medium businesses at Google.
Of course not. For now. Because suddenly those massive growth multiples will have to be dramatically readjusted, not to mention starting to value online "retailers" as... banks?
Which finally brings us to the topic of Apple, and its Braeburn hedge fund, which for the time being is allocating its $120+ billion cash stash for safe purposes. How long before shareholders demand a boost to ROEs and insist that Apple pull an AMZN and/or GOOG, and launch Apple Credit Corp, providing credit cards that can only be used to purchase AAPL products?
If we were betting people we would say 3-6 months...
P.S. the currently offered Barclaycard financing option for Apple product purchases is not the same, as the balance sheet risk lies with Barclays, not with Apple's balance sheet. Soon that will change.
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