June 16, 2017

On Friday, the S&P 500 was about unchanged while Toronto was up 0.2%.

Amazon was up 2.4% on the announcement that it would acquire Whole Foods.

Whole Foods increased 29% on the news to $42.68. But it remains below its peak of about $54 reached in early 2015 and about $60 reached in late 2013.

It was interesting to hear that the purchase will be financed by debt. Amazon has not issued many shares in recent years. It’s share count is up only 12% in the last ten years and that probably is the result of executive and employee stock options being exercised. Amazon has also not issued all that much debt. Debt was not large compared to its assets or equity. It had the capacity to issue significantly more debt if it wished to.

Costco was down 7.25% on the news and at one point on Friday morning was down to $165. I was tempted to buy some Costco on the dip but decided not too since Costco is still expensive in relations to earnings. But Costco is a powerful company and it may continue to have a very high P/E ratio. I have difficulty picturing how it would be cost effective for people to have their Costco-type purchases shipped to their house. costco seems to do what they do in an extremely efficient manner.  The danger with Amazon is that it might be willing to make only a tiny profit on groceries and so could put some price pressure on all grocery sellers. Walmart was down 4.7% to $75.24 on the news and it does seem more likely to be potentially hurt if Whole Foods adopts a lower price strategy. Walmart is also very efficient but it operates at a higher mark-up than does Costco. Based on my most recent updates, I would not be a buyer of Walmart or Costco but of the two I would pick Costco.

Regarding Alberta, part of its recovery from the recent oil-related recession will depend on population growth. Recent data indicates that Alberta lost a net 2400 people to other provinces in Q1. That might sound a bit ominous. However, Alberta actually gained a net 4700 people when immigration from outside Canada is considered. That’s down from recent net migration as high as 28,500 in a single quarter and around 80,000 per year. But significant growth still comes from “organic” growth. Last year there were 55,000 babies born in Alberta. That’s a 1.3% increase in the population. This would seem to be good news for the likes of Melcor and AutoCanada since more people and especially more young families means more homes and more vehicles, all else equal. Alberta’s population growth has indeed slowed significantly in the past couple of years. But there is still significant positive growth.

Once of the realities of recessions is that they surely don’t hit people equally. A jump in the unemployment rate from say 5% to 8% is somewhere between very painful and absolutely devastating for the 3% of the labour force that is now unemployed. But some 97% of the workforce is largely unaffected. And all of the retired people are basically unaffected. I don’t mean to trivialize the recession but its impacts on the economy should also not be exaggerated.

Some businesses such as grocery stores are probably very little affected by higher unemployment since the people did not leave and still have to eat. The home building industry was hard hit due to lower in-migration and a general decline in confidence about the future.

And there are other impacts on the economy such as a sharp decline in capital spending in the oil patch.

I have said before that it is corporate profits and government revenues that were the hardest hit by the oil recession in Alberta. Eventually that could lead to significant tax increases on individuals, but that has not happened to date.