Seeking Alpha
What is your profession? ×
Long/short equity
Profile| Send Message|
( followers)

Some interesting questions regarding the debt ceiling debacle have been raised recently, as Stanley Druckenmiller came out swinging after a long hiatus-- since hanging up his jersey as hedge fund guru last August. In response to Druckenmiller's comments and the remarks of many Tea Party Members that the debt ceiling should not be raised, Tim Geithner suggested that America will slip into a financial crisis in which the GOP will be the responsible party for the decline of the U.S. Economy.

A couple of weeks ago Druckenmiller stated that not raising the debt ceiling will be tough on Americans in the short run, but went on to say:

"I don’t think it’s going to be the end of the world. It’s not going to be catastrophic. What’s going to be catastrophic is if we don’t solve the real problem.”

Druckenmiller is not the first econometric heavyweight to question the government's policy of massive deficit spending. It appears that by continuing to borrow from Treasury to fund spending, the deflationary forces that crushed the markets in 2008 are kept in check, yet longer term this is not sustainable. My view is that the rebirth of the latest internet bubble (linked in at 1,000 times earnings and 40X revenues for example) has not helped the job market, and that by driving up stock prices the job market is actually getting worse, as companies that are automating their supply and distribution chains and have no need for workers have been able to rapidly accelerate their growth rates thanks to plenty of liquidity chasing the highest potential returns.

With a strong stock market, companies such as LinkedIn-- with no need for plant machinists-- have been able to raise vast amounts of capital to expand their business models. These companies actually streamline the U.S. economy away from needless employees -- hence we are truly in a jobless recovery. Yet I am an entrepreneur myself, and I am all for innovation and growth. How will the Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) effect create long term employment when the trend is clearly towards streamlined distribution models?

I am all for the free market and for capitalism, but I do think that Mega Corporations pose a threat to the American worker when many of these companies simply don't need to hire people to make vast sums of money. Part of me loves the idea of striking it rich, and while I can't deny the excitement behind the internet business, I also realize that newspapers are simply not going to be hiring paper delivery boys by the thousands any time soon. What is also clear is that this trend is only getting stronger, and likely only going to become more prominent in the future.

Here are 8 amazingly well run companies, whose growth has streamlined the manufacturing and labor processes to such a large degree that their growth represents a longer term loss of jobs for each of their respective industries. I have included their valuations and the headwinds investors face due to this jobless business model effect.

AMZN -- Amazon is a great business model (maybe the best on Earth): employee costs are cut out of the retailing equation almost completely, overhead in the form of store leases are cut to zero, and state taxes can be avoided completely, thanks to the Supreme Court's ruling that internet businesses don't have to pay sales taxes. The growth in automation is a major driver of the current "jobless recovery." In other words, because the government is friendly with technology companies and does not allow states to tax them, the trend towards less jobs for the working class will likely grow stronger as the tech space expands. The valuation of AMZN (88X earnings, declining earnings growth and margins, etc...), as well as the push-back from the states and the state rights advocates, will provide headwinds for investors-- as i have mentioned in past articles. The parabolic chart is also worrisome, and in a bear market I expect this high beta name to underperform. That said, the new economy and in bull markets high beta tech names shoot straight up.

GS -- Goldman Sachs is a great business with the best minds in finance working as traders and investment bankers for the firm. The company has an entrepreneurial culture and is incredibly merit based. That said, the power this firm wields and the pay packages that their bankers earn clearly sucks money out of the real economy. After glass Steagall was repealed, the incentives for banks to wield their buying power against the order flow of the general public are too strong to ignore, in my opinion. Goldman shares are reasonable at current prices with a price to book value of around 1X and a PE under 10.

MCD -- McDonald's recently announced that it has automated its order process at several European locations. In essence, a computer could be asking "do you want fries with that" at the golden arches at some point in the very near future. This troubling trend toward total automation, if left unregulated, will benefit MCD shareholders. However, that incremental growth in share price will likely come at the expense of U.S. jobs. MCD shares have rallied since I have been covering them, but given the company's ability to streamline costs, this name could be a strong performer in both bull and bear markets. MCD is a staple stock at this point, because even though poor Americans may not be able to find a job at this company anymore (I think 1 in 6 or more Americans have actually worked at a McDonald's at some point in their lives) they will still likely be eating off of the dollar value menu going forward.

WMT -- Wal-Mart is the biggest retail consolidator in history, but even WMT can't completely keep up with the online automation process that has taken retail by storm. Wal-Mart has rolled over millions of mom and pop retailing outfits that typically operate with more employees per dollar of revenue (no one is more efficient than Wal-Mart). With the struggling consumer making up more and more of the shopping populace, WMT's low price product assortment will likely continue to suck money out of the rest of the economy. Wal-Mart's CEO recently came out saying that gas prices are crushing the company's core consumers (that, and the fact that they don't have jobs). WMT is cheap at 12X earnings, but growth has slowed recently. Covered calls or leap calendar call spreads (buying an in the money January 2012 call and selling front month at the money calls) seems like a reasonable play here.

CRM -- is the ultimate streamlined business model: by making supply chain management and CRM functions more efficient and cost effective, CRM can aggregate the jobs onto the cloud. In addition to its CRM cloud offering, Chatter and other services offered by the company have the potential to make many IT jobs and software engineering positions completely obsolete. The valuations of software companies show the wide discounting which is pricing in "the end of software" and as a result, the end of the software engineer and manufacturing companies. While this trend is still in its infancy, the bottom line is that the market is pricing in a more automated world which requires less jobs to make profits. CRM shares are overvalued in my opinion, and the stock is likely worth around $80-$100 per share if the company can execute its growth strategy over the next few years. The stock is in a bubble at $150. CRM trades for 317X earnings.

DHR -- Danaher is a very well run "roll-up" company which has made a fortune acquiring businesses, cutting costs and redundancies by laying off workers, and by streamlining the business models of its portfolio companies. Danaher has proven that strong cash flows and an LBO model works well in an environment of extremely low interest rates. I like the stock, and think that investors will make money in the name over the longer term. Much like a Fairfax, Berkshire Hathaway (NYSE:BRK.A), or Leucadia (NYSE:LUK), DHR is a conglomerate business run by astute investors and business executives. To be sure, the M&A business has been criticized for destroying jobs, but many times in consolidating industries the mom and pop companies soon go out of business anyways, making a roll-up strategy actually neutral or even positive on a net jobs basis.

NFLX -- Netflix has destroyed many a brick and mortar competitor, and has made hundreds of thousands of jobs obsolete. I like the company and the service, but certainly the trend toward low prices and automation will continue to hurt the movie studios, retailers, and state tax collection revenues in the future. Netflix is the ultimate streamlined low overhead business mode,l and the company's ability to automate has been a big boon for shareholders. With that said, the company's growth rate may be slowing and the film studios are clearly aware that NFLX's growth is not in its best interest over the longer term. NFLX shares are expensive at just under 70X earnings, and if streaming content acquisition costs rise, shareholders may be biting off more than they can chew here.

GMCR -- Green Mountain Coffee has invented the ultimate automation model: who wants to pay a college kid to brew up a cup of coffee when a GMCR brewer can serve the same cup of Joe up at a better price right at home? Like the vending machine trends of the 1920s, GMCR is riding the trend of automating the hiring and labor process to a large degree. GMCR is having issues with its patents on K Cup brewers which are expiring soon, and at a price to earnings of well over 100X, the shares carry some risk. GMCR has clearly destroyed the jobs of more than a few Baristas over the years, acquiring businesses that serve up Joe and likely cutting head count. I feel these shares are overpriced at current valuations, however, I recognize the disruptive nature of this technology and overall growth trajectory.

Disclosure: I am short AMZN, GMCR, NFLX, CRM.

Additional disclosure: I am long a GS calendar spread (note I am short the above stocks mainly in the form of short call options)