Amazon's Surprising Loss: Taking Stock (07/25)

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July 25 (Bloomberg) -- On today's "Taking Stock," Pimm Fox helps you to think like a professional investor and discover the next "big thing." (Source: Bloomberg)

This is "taking stock" for july 7, 2013. i am pimm fox.

Over the next hour, it is all about comfort.

Everyone loves a good book.

Amazon.com is the dominant e- book seller.

We're going to examine the relationship with authors and with the company's latest financial results.

Maybe you would like some coffee with your books?

I will talk to the chief executive of dunkin' brands about it sales report.

The ultimate starbucks enthusiasts.

All that and more over the next hour.

Let's take stock of today's market action.

Dow jones industrial average adding 13 points.

The s&p 500 higher by four on the close.

The nasdaq at 25. the 2.57% for the tenure pretty 30 year six point four percent.

For a closer look at individual companies making headlines today, let's go to olivia sterns.

Likes you mentioned it.

Amazon.

The online retailer reported a surprise net loss.

Analysts had projected a profit of six cents.

Moving to starbucks, the coffee shop operator posted fiscal third-quarter office that exley did -- exceeded estimates.

Zynga shares are falling in after-hours trading.

The maker of the social networking games fell short of analyst estimates.

Those are the top headlines this hour.

Olivia sterns.

For more on the amazon results, and to make sense of what makes a successful retail business, we have the cofounder -- and the author of the forthcoming book, "the everything store." joining us from los angeles, bloomberg west senior west coast correspondent, jon erlichman.

I to start with you.

What started -- what jumped out at you?

His company had a loss.

People were expecting a profit.

As a forecast ahead, they were -- they could lose a lot more money.

Some were looking for a profit.

This is the same old story from amazon.

The company that muscles its way toward really impressive sales, they suggest they could be north of $17 billion in the third quarter.

Doing so at the expense of profit pretty debate with a amazon is whether and not doing that, building a moat around its business, doing the spending on infrastructure, building distribution centers so they can get stuff to you faster, if it is ultimately going to be a much more profitable story.

That depends on how profitable those e-books and movies they are investing in our for the business.

I am sure that is where i love the questions are going to come from going forward.

Do you consider amazon.com a successful online retailer?

They certainly have made life difficult for many other written mortar retailers.

I virtue of that, they are tremendous.

Look at the volume of what they do.

Every retailer i look at has to figure out how to better make himself somewhat protected by the threat they pose to all of them.

Brad stone, how do companies compete against them, when amazon does nothing to worry that much about making a profit?

It is a conundrum.

The worst thing is the amazon shareholders do not seem to care.

The stock is down today.

They have tremendous resilience.

Amazon has done a good job of broadcasting the fact that they are in the investment cycle.

They're going to spend a lot of money.

They figure but they are best at, they double down on that pretty the figure out what amazon can copy.

Can you give us examples of retailers are doing well online?

I think norstrom's has done a fantastic job.

They were the first one out there with free shipping and free returns.

They took out of the equation.

Something they can offer that amazon cannot is pick it up at the store premier able to fight back with with that.

I seek the -- he company for carbon outfitters -- i see companies like urban outfitters.

Other retailers look at the lens of just what can they fit inside the store predicted at a lot more when it is just in our online inventory.

Amazon does more than just retail.

It offers cloud services to other companies.

How important is that to the company?

It is small right now.

It is probably not important to the bottom line.

He continued to lower prices on all of their services.

They are the industry leader.

They created the enterprise cloud services space.

They are growing.

It is estimated to be $2 billion this year.

A lot of momentum.

They can fight off ibm.

It is one of those reasons why shareholders have a lot fate.

Investors do not seem to mind that amazon doesn't make a profit in the quarter that just ended.

How long can it go on?

It has been going on a long time.

Just to follow-up, with web services, here is a business that in this quarter generated -- nine percent of the total north american revenue.

Who knows how much amazon web services is at that amount brady given how much revenue the company generates, there is a lot of money.

I think that the point, you can't look at amazon as a traditional retailer.

That might be why people are curious about in a big way.

They don't position google as just a company focus on search.

Amazon is doing what netflix is doing.

A little bit of what apple is doing.

I think they look at them in a different light.

I want to thank you very much.

Jon erlichman, and our thanks to brad stone, and that lori wax.

Our the big headline today come the government filed criminal charges against as they see capital -- sac capital.

They say they never and courage tolerated insider trading.

With more the details, we have the su keenan.

I'm joined by ron geffner . let's begin with you.

Give us an update.

This is the first time in history that a multibillion- dollar hedge fund has criminally indicted for a grand jury.

Insider trading was pervasive, and they scale without precedent.

Today's indictment is not just a narrative of names and numbers.

It is more broadly an account of a firm with zero tolerance for low returns.

Seemingly tremendous tolerance for questionable conduct.

Sac became a veritable magnet for market cheaters.

The criminal charges filed today against the hedge fund are one count of fraud, security fraud, and the indictment details of insider trading at more than 20 companies.

Illegal trading was combing gold with assets -- combingingled with the government points to staffers let been convicted or charged with illegal trading to point out nowhere in the indictment is the name of the billionaire founder mentioned.

This is a stunning indictment on the firm that bears his initials.

Thank you very much.

Continuing the conversation, we have with us ron geffner.

He is a partner at goldberg llp.

What do you make of this indictment?

The stunning component here is that his name is not mentioned anywhere in the indictment.

With regard to the civil action filed by the court, they are not charging him with engaging in insider trading.

They are prosecuting him with failure to supervise.

To prove failure to service -- supervise, the government put forth their best case effort.

The answer is i do not know until we hear the evidence.

The response has been we have to wait to hear the entire story.

Will investors wait to hear?

There are two types of investors.

First investors invest on behalf of other people.

They do not have the luxury to stay within indictment place.

There are those that invest on their own behalf, high network individuals.

It is up to them to decide whether or not the team didn't focus on the investment strategy effectively.

The other riskier is whether there is a risk of callback to investors club departed, and whether their withdrawals will be a fraudulent.

That is deemed by state law.

It is a metric that people look at to determine whether an investor had any reason or knowledge of something going on.

What kind of counsel would you give anyone or institution that was or is an investor at sac capital question her everyone should retain legal counsel.

Determining whether or not you would be subject to a callback or not, investors have to contemplate that as as well.

The other component is whether sac will have other counterpoints.

They'll have their own analyses . they are at risk for being brought in for derivative loss.

If they had knowledge or conspired in the transactions.

Money of the people who used to work there -- will any of the people who reviews the work there, will anything be change for them?

It doesn't change anything for them.

The fact that his name isn't mentioned, the well it is encouraging for him personally, it doesn't mean that the jury is out on steve cohen.

It is a preclude them in the future from bringing in action against him.

Thank you very much.

Much appreciated.

Coming up, video killed the radio star.

Who will take the claim for the killer of the paperback book business?

E-book sales rose 44%, $3 billion in 2011. the market dominated by amazon, despite competition from barnes & noble and apple.

I am joined by the former director of the national endowment of the arts.

He runs a lever in los angeles.

That is where he joins us from.

And the former editorial director of american online.

I want to start with you.

Amazon posts a loss for the quarter.

It was two cents estimate for share of six cents.

You were saying it doesn't matter.

Does anyone really care if they make money?

It is not the business model.

He did not care about the quarter.

-- they do not care about the quarter.

Amazon can outlast everybody.

That is its purpose.

It is the purpose to be the last one standing.

To own american culture.

To own american culture?

Comment on this.

You think they are trying to take over american culture?

If he took over american culture, it wouldn't exactly be bad for their bottom line.

Capitalism, the free-market one allen the end.

I happen to think that the free- market forces represented by a mix of strong bookstores, used bookstores, and nonprofits like mine have room to compete in an environment against a tight like amazon, which has tremendous economies of scale.

Especially neighborhoods like no mi -- like mine, or i haven't seen the kindle.

What about the relation between authors and amazon?

My website is totally matt -- amazon.

I live on amazon commission.

People click through something on your site and they go to it on amazon.

They buy the book that i have reviewed, and i sell more copies of whatever that book is that anyone else in the world, including amazon.

I get commission on anything you buy during that session.

Want to buy refrigerator?

Please do.

It would be much better if amazon had more on petition.

If barnes & noble got serious about being in the book business, and figured out how to compete with them, instead of being a show room for them.

About independent bookstores, and how they rely on amazon for their lifeblood.

Absolutely.

Much has been made about show roaming, people going in to bookstores to comparison shop.

I think it works the other way.

I am on amazon all the time.

It is a great catalog.

It is a great way to find the book that i want, and then i call around , and i go to a shop that i know has what i'm looking for.

It has thousands of books i do not know i'm looking for.

I am show roaming amazon.

If you're talking about one of books, the price of an e-book is sometimes much more than the price of the actual hardcopy.

Does that benefit the copy or the author?

It benefits the author.

The real thing about e-books, you talk about the growth of the e-book.

Their sales are flat.

That is the big news.

People seem to be going -- because they bought the mini rush.

Suddenly, your candle was full of e-books.

It wasn't fun anymore.

You do not want to be sitting there holding the copy, but e- books are not the big thing without the going to be.

Thank you very much.

Our thanks to david, joining us from los angeles.

How american taxpayers can save billions of dollars a year on healthcare.

Details are had.

More americans are going to get health insurance coverage under the affordable care act.

The health insurance actually translate into better health for individuals?

More to tell us more, dr.

Celine gouder.

Always a pleasure.

This idea that more americans are going to be covered by health insurance as a part of the affordable care act, that would seem a good thing.

What i would say that health insurance is necessary, but not sufficient for good health.

Health insurance helps cover healthcare.

Your prescriptions, your lab test.

There are integrates -- indirect costs . it might be the transportation , or childcare they have to range.

The way our clinics are structured as we do not have flexible office hours.

You cannot go in the evening or the weekend when you could avoid those lost wages.

We do not offer low one-stop shopping.

You'll be sent to a lab for blood tests, and then a cost or logical's -- a specialist.

Emergency departments offer one stop shopping.

Does this mean that individuals are opting to go to emergency departments for what is really primary care that could be delivered at a lower price point?

Precisely.

People are going to be covered with medicaid, and as part of of what is happening under the affordable care act, these are still poor patients that have other barriers to care.

They go for primary care reasons to an emergency department, or admitted to the hospital.

They are losing out on the benefits of having a primary care provider.

They do not just treat the condition that your coming in with today.

They are thinking that how can we keep you healthy in the long run?

Just to give you a concrete example of how this plays out, in the journal of the american medical association, that was an article that was published about rest cancer survival in black and white women.

All had medicare.

Black women were found to live three years shorter than white women after the diagnosis.

Because they didn't have a long- term primary care provider.

I want to thank you for enlightening us.

It is 26 minutes past the our pre-time for on the market.

The s&p 500 adding -- the nasdaq has gained 25. facebook shares rallying after its earnings report beats analysts estimates.

More next.

? we're looking at the market moving headlines.

Fac capital, $14 billion hedge fund founded by stephen cohen was indicted in men had her.

Prosecutors accused sac of fraud.

Cohen was not charged.

Zynga shares are falling in after-hours trading.

Earnings fell short of analysts estimates.

Zynga announced its choice not to pursue a license for real money gaming in the united states.

Starbucks reported earnings after the bell.

Earnings jumped 28% to a record of $.55 per share.

Traditionally total net revenue for the coffee chain increased 13%, to three $.7 billion today.

Starbucks ended the session today up 2%. tonight we will look at the crackdown on wall street on "bottom line." that is tonight at 7:00 eastern on "bottom line." thanks very much.

Breaking news.

He used to be the world's eighth richest individual but now he has just lost his billionaire status.

Joining us is matt miller, heads the bloomberg billionaires rank.

Who is iq batista -- eike batista?

He is a commodities tycoon.

Everything is falling apart and he is now worth $200 million.

The state of his six commodities companies, he had mining interests, shipping interests -- all of them have plummeted and now he is mired in debt.

It has $1.5 billion more in debt.

So he used to be worth 34.5 billion dollars.

How much does he have left after all of this?

About $200 million.

Has he had to sell of his personal assets?

He sold off his jets.

He said, i'm going to man up and pay off my debts.

He is looking to sell off assets.

All the companies and their assets appear to be for sale.

Where is this empire based?

In brazil.

He was the face of the surge of brazilian capitalism.

How did he acquire these interests?

With help from the government and friends he was able to get oil resources and oil reserves.

They would always walk around proving to investors that they had all of these shipping or oil or gold reserves.

They would oversell to investors.

Every time they made a prediction about how much commodities assets they had, they would always fall short of that and eventually that caught up with them.

Why has the wealth decreased from $34.5 billion to $200 million?

It is all publicly traded companies.

He could increase his net worth and the value of shareholders by taking them public.

This $200 million he supposedly still has, is that liquid assets?

A little bit of cash, but you will have to use cash to pay down his debt.

And it is his stakes.

He has debt from brazilian banks . there is a sovereign wealth fund that infused $2 billion in what was originally an equity deal.

They have transferred that there was an option to make it debt.

He has paid off 500 million of that but still owes them $1.5 billion.

Will other people be heard by the decline in his wealth?

-- hurt by the decline in his wealth?

Absolutely.

Anyone part of his companies or owns a part of his companies has paid royally.

Eike batista, no longer a millionaire.

Let's continue with commodities.

Our next guest has been to more than 11,000 starbucks stores as part of his personal mission to visit every starbucks around the world.

His enthusiasm has coined the term, starbucking.

For 16 years he has gained a unique perspective about the brand and stores and what he would like to say to howard schultz.

I'm joined by winter winter.

He's a computer programmer.

He joins us from portland, oregon.

Why did you decide to go on this journey?

It's a pleasure being here with you.

In 1997, it was just an idea to see if it was even possible for one person to visit every single starbucks.

In the last 16 years it is become a great opportunity for adventure, travel, for meeting people and having experiences.

It is extremely challenging to try to keep up with growth, which continues to expand across the globe in leaps and bounds.

What are some of the more exotic places in which you have visited a starbucks?

I would say beirut in lebanon.

I can't really say i would ever have gone there had it not been for starbucks.

I'm really glad for the motivation to travel to places that are off the beaten path.

What about the consistency of the starbucks product from store to store?

They do use centralized roasting plants across the globe.

If you like plain old coffee, it will taste pretty much the same no matter where you go.

But they do have righty in their menu.

-- variety in their menu.

You can go to other countries and find products they do not have in america.

Do you have a favorite when it comes to the starbucks you would prefer to visit.

There is a pretty spectacular one.

I want to say it is in japan, fu kuoka.

It might take me quite a bit of time to get there.

What would you say to howard schultz, what you would like to see in the stores?

I would congratulate him on his spectacular growth and commitment to service but asked that they pay closer attention to their environmental responsibilities.

As a person who is in starbucks, i do see quite a large amount of waste that is not consistent with the green philosophy that they espouse.

How have people been able to follow you on your journey?

That you get a lot of followers as a result of your visits to all these starbucks -- have you gained a lot of followers as a result of your visits to all these starbucks?

Absolutely.

Starbuckseverywhere.net.

You can google, winter starbucks.

You will find everything you want to know about me.

What about in the united states, is there a particular starbucks you favor?

You have had more than 6000 cups of starbucks coffee.

Where would you like to be seen drinking your next cup of java?

Getting back to the environmental theme, starbucks has started opening stores built out of old shipping containers.

I have seen one of those stores in tukwila, washington and a suburb of denver, colorado.

They just open another one in salt lake city and they are about to open one in overland park, kansas.

I would like to see those.

Had he been contacted by anybody from the starbucks company itself?

About 10 years ago they sent me a copy of howard schultz's book, and some mugs.

I appreciated that greatly.

More or less it has been a hands-off project.

I do my thing, they do their thing.

We are both successful at it.

You put together a set of rules that guide your starbucking.

The number one rule is i have to drink a caffeinated coffee beverage.

It cannot be tea or chocolate.

It has to be caffeinated, at least a sample.

It has to be from a store that is already open.

And it has to be a real store , not a franchise or licensed store or run by another company.

It has to be run by starbucks or one of their joint venture partners and one of the challenges of starbucking is figuring out whether a store is real or not.

Sometimes you can't tell just by looking at it.

Do you have a favorite starbucks beverage?

I'm a drip coffee man.

Regular coffee, no cream.

Thank you very much, winter.

Continue your journal he by traveling to all the starbucks of the world.

-- journey by traveling to all the starbucks of the world.

? shares of and brands have been percolating this year, up nearly 25%. the company topped estimates for the second quarter.

Sales below what estimates were.

Joining us is the chief executive of dunkin' brands, nigel travis.

Give us a review of what is going on at dunkin' brands.

How are same-store sales doing in the united states?

Dunkin' donuts was up 4%. asking him and his was up 1.6%. -- baskin-robbins was up 1.6%. we opened 53 stores on the duncan side -- dunkin' side and five stores on the baskin side.

We feel very good about the u.s., both businesses.

Tell us about the expansion plans you have for dunkin' brands.

Even though everyone talks about california, and we have exciting news that we have signed four new franchisees to open 45 stores in california over time, that will not happen until 2015. we think our store growth plans are going very nicely.

We have given guidance this year on the duncan side between 330 and 360. most of that growth will come east of the mississippi, about 17% in core areas.

Most of the rest will be split between are established and emerging areas, most of which is in the midwest and south.

Could you describe for people the difference between royalty payments as compared to the payments you receive from franchisees for rent and things like that?

Sure.

If i take the u.s., when we set up a franchise, the franchisees pay fees for opening the store.

There are opening fees.

Then the royalties are a percent of the sales.

We get a royalty , which in the u.s. are standard rate is 5.9%, a good royalty, a competitive royalty but on the higher end of the scale.

Internationally it is a little but lower.

-- bit lower.

We take real estate fees and that is on a percentage basis as well.

One thing people always struggle with, we have systemwide sales of about $9 billion annually.

But our royalties and fees come to somewhere around $700 million.

We are a large company on systemwide sales and a small company when it comes to royalties.

We are about driving franchise profitability.

If we do that well, we grow more stores and more royalties and fees.

What about new, seasonal products?

You introduced new products related to the birth of the baby boy to the duchess and duke of cambridge in england.

That is an exciting event.

This is the royal munchkin.

You can buy them at all dunkin' donuts in the u.s. it is a cake doughnut.

Pink, blue, and white spreckels.

On the baskin robbins aside we a special baby shower cake.

In the uk we bought out a cake with the same weight in price as the baby was, eight pounds, six.

One of the things we like to think about is, we have a great custom about -- they're usually people on the go, people on the move, and people who are down to earth.

The fact that we don't take ourselves too seriously is an important part of what makes us a great company.

Can you tell us about trends in hiring and whether you are looking for more part-time or fourth full-time help -- full- time help?

It differs.

We have franchisees that we do a great job supporting.

We had a board meeting today, talking about how the service has improved.

Our crunch is really focused on training full-time help.

They bring in seasonal and part- time workers.

I calculated recently that in the u.s. a year, given our current growth plans, we are bringing in 7000 employees and something like 20% to 30% of those will be full timers.

Thanks very much, nigel travis, chief executive of dunkin' brands.

Coming up next, taking advantage of municipal bond markets.

? this is "taking stock" on bloomberg.

Let's see what meredith whitney had to say about the tripos bankruptcy filing.

Anyone who says there is nothing to worry about should pull up a detroit story for their bond advisers.

The financial situation of so many municipalities is really underneath.

Taking advantage of bond prices when it comes to municipal bonds, here with me if the president of capital management based in springfield, mass.. always a pleasure.

To continue the conversation we were having earlier, this idea that sometimes people liquidate positions based on very specific uses of the news that don't necessarily have to do with an overall market.

What have you seen recently when it comes to municipal bonds?

Detroit has a problem.

But the municipal bond market is a 3.7 trillion and size.

Detroit has liabilities . why the big selloff in municipal bonds?

Detroit plus interest rates rising, so the price would fall.

Financial advisors are moving their customers out of municipal bonds.

We were talking about the stock market, the people chase what happened in the past.

Correct.

Are there opportunities in municipal bonds?

The closed-end market, 265 billion in size, closed in bonds 160 billion of that, are very attractive.

High-yield space is very similar to that.

What kind of yield would you be getting in a closed-end bond fund?

4% and 6%, free of state, local and federal taxes?

Correct.

And i would be after a tax yield of much more -- that would be after he tax yield of much more.

8% to 12%. does that make municipals more attractive than government bonds?

Exactly.

There is moderate leverage.

Nothing like you would see in clo's. collateralized loan obligations?

Correct.

Some of them borrow money to buy those municipal bonds.

Yes.

What about high-yield bonds?

Have you seen a selloff in high- yield debt?

High-yield has sold off but the closed end market is that a significant discount.

You can find yield earth 7, 8, 9% -- yields there of seven percent, eight percent, nine percent?

Should people recheck their portfolios?

Much other money is going into money markets.

Will that yield you anything?

There is no real there -- reel there.

Correct.

It is attractive to buy high- yield bond funds and municipal bond fund's with these yields today.

Thank you, cliff noreen, joining us as the president of babson capital.

It is 56 minutes past the hour and time for on the markets.

The s&p 500 adding four points today, a gain of a quarter of a percent.

1690 on the close.

Dow jones was higher by 13 points.

The nasdaq was up 25. general motors shares lower today, stock falling despite 4% increase in sales for the second quarter.

Thanks for "taking stock" coming up, "bloomberg west" -- a look at what is going on with amazon.com.

It lost two cents a share.

Thanks for "taking stock"." ?

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