This bull thesis went out the window weeks later when Amazon.com reported Q4-2012 sales growth of only 22% y/y missing the average sell-side sales estimate by $1 billion with an epic 700bps ex-FX y/y sales deceleration from Q3-2012. The Morgan Stanley analyst quietly lower his sales estimate by 1/3 to around 20% y/y annual sales growth over the next 3 years after the report.

Yesterday the same Morgan Stanley analyst came up with a new bull thesis. In a new sell-side note citing a U.S. consumer survey they did of 1108 owners of eReaders and tablets, Scott Devitt concluded the 2012 eBook market is 50% larger than they previous estimated.

Using his assumptions of EBooks sold per hardware device tie-ratios, e-Reader/tablet hardware market growth, and market-share, his Amazon.com’s eBook operating profit estimate ballooned higher 3 years out.

Investors giddily bid up Amazon.com shares by +4.16% on Morgan Stanley’s revised higher EBook market analysis. The problem is his methodology is seriously flawed.

Morgan Stanley asked e-reader and tablet owners how many EBooks they bought per month. Then they multiplied the number by 12 and took a "finger in the air" 40% discount due to "annualizing" it and also guessing there probably is a lower International tie ratio.

The end calculated results were 13.3 EBooks purchased per e-reader device and 6.4 EBooks purchased per tablet in the year of 2012. He then used these same ball-park tie ratios as a base case along with device growth to extrapolate EBook market-size and Amazon EBook revenue & profit over the next few years.

If Morgan Stanley was going to annualize the EBook purchased per device number, why didn’t they just ask how many EBooks each consumer bought in whole year of 2012 instead of per month? Wouldn’t a consumer who actually bought 0.25 EBooks per month likely to say 1 instead of 0? Doesn’t this introduce large rounding error issues? Isn’t this a serious flaw?

What’s with the made-up 40% discount number which comes arbitrarily out of thin air?

Why would tie ratios stay in the same range 13-14 Ebooks a year per e-reader device and 6-7 Ebooks a year per tablet device over the next 3 years? Wouldn’t the tie ratio change as the market matures?

Also the final tie ratios of 13.3 and 6.4 EBooks sold annually per each and every hardware device didn’t pass the smell test to me either, so I did a survey of my readership.

I actually asked the right question of how many EBooks they bought in the entire 2012 year instead of the errant per month method Morgan Stanley used. I got 85 responses for my survey. The 2012 EBooks bought per eReader device tie ratio came out to 4.8. The 2012 EBooks bought per tablet device tie ratio came out to 1.4.

My reader base demographic is probably more affluent and more educated than the average American and E-reader/tablet owner. The tie ratios are LESS THAN HALF AND A FRACTION of Morgan Stanley’s number, who used less accurate survey methodology.

Morgan Stanley’s assumptions and methodology garbage in = garbage out, just like Scott Devitt’s original Amazon.com 30% annual sales growth bull thesis. Investors beware.

“I think I was great at making money, somehow I’m not too good at much else”

-went to Princeton University from Far Rockaway High School
-mother a school teacher wanted Carl to be a doctor, so he went to medical school
-quit medical school because he was hypochondriac couldn’t handle having sick people around him
-joined the Army. Won $10,000 from Army buddies playing poker. Quit after 6 months
-joined Dreyfus in 1961, started investing the $10,000
-made money buying convertible bonds on margin. Jack Dreyfus told him you’re going to lose it all
-1962 market cleaned him out, lost everything. Had to sell his car to eat. Making $100 a week at Dreyfus
-Decided “no more trading the market” “there is nobody who can tell you what the market’s going to do” “in long run there’s no question that we’re going to see a big drop, a big blowup”
-Learned options “always a workaholic” “really am obsessive in nature” “back then no computers” wrote options newsletter pricing options. Made $500,000 a year for a few years
-Bought a seat on the exchange and learned arbitrage. Buy convertible bond and short the stock on 90% margin. Made tremendous amount of money for 7-8 years
-What I do today is same kind of arbitrage. “What I do is buy stocks out there that are cheaper than what the underlying values of the assets” “You have to know what you’re doing; you have to do some analysis”
-Reason you have disconnect is management. “management is screwing up the company”
-CEO of most companies are the social guys, not the smartest or brightest, but likeable and reliable. “He makes very few waves.. just moves up (the ladder)” One skill “he’s a good survivor”
-CEO doesn’t want anyone under him who is smarter than him, why should he feel threatened? So he puts a likeable person little dumber than him under him, who becomes the next CEO
-I buy stock in these companies and I threaten them, hopefully they do something to narrow the value gap

COH reports –2% U.S. comps vs. 3.1% est.
NFLX beats and raises subscription numbers
AAPL misses Mac 4.1M vs. 5.2M est., iPhone 47.8M vs. 48.3M est., and iPad 22.9M vs. 23.2M est. unit numbers. Tells investors they will no longer sand-bag guidance. Guides to $41-43B March quarter sales vs. $45.6B est. Gross margin guidance of 37.5-38.5% vs. 40.6% est.

Macro
Richmond Fed –12 vs. 5 est., 5 prior
Existing home sales 4.94M vs. 5.1M est., prior 4.99M. +12.8% y/y
Bank of Japan targets 2% inflation and new $145 billion a month QE starting 2014 Link

Market sold off on weak economic data, but then rallied after David Tepper repeatedly said “buy equities” during a Bloomberg TV interview mid-day.

TXN guided Q1 EPS to 28c mid-point vs. 34c est.
IBM sales 29.3B vs. 23.1B est., EPS 5.39 (lower tax rate) vs. 5.25 est. Services signings 17.9B (-12% y/y) vs. 20.16B est.
ISRG 4.25 EPS vs. 4.04 est. Sales $609M vs. $584M est.
GOOG paid clicks 24% vs. 33% prior quarter, CPC –6% vs. –15% prior quarter

Macro
University Michigan consumer sentiment 71.3 vs. 75.0 est, 72.9 prior
One year inflation expectations 3.4% vs. 3.2% prior month
China GDP 7.9% vs. 7.8% est., 7.4% prior

Market faded off the open in the morning on a weak sentiment number and a poor reaction to mixed INTC/COF earnings reports. Around mid-day news leaked out that the House Republicans would kick the debt ceiling can another 3 months with a vote next week, which rallied the market rest of the day.

Kyle Bass: long U.S. housing, still hates Japan

Key events next week: Bank of Japan decision January 22nd, EU manufacturing PMIs January 24th
Earnings: GOOG IBM ISRG TXN COH AAPL NFLX SNDK WDC

Investor sentiment: 9

Remember I’m a bigger fan of reacting to important fundamental inflection point news AFTER the fact rather than making decisions from far off in the future predictions. I do however find it useful to crystallize my current leanings and thoughts with this top 10 list. I reserve the right to change my mind at any time as new data-points are released. Here it goes:

1. Amazon will print poor results with decelerating revenue growth and horrible earnings due to greater price competition from Google/Apple/Best Buy/Walmart/Target, higher effective end-user pricing from new states sales tax collection, the secular shift in the media business from physical to digital, and the imploding Kindle business (Shhh, no-one talks about how Kindle hardware units were down around 50% y/y in 2012) as Apple’s iOS and Google’s Android full mobile OS eco-systems dominate tablets and smart-phones. Investors will also realize that the AWS cloud business is a commodity utility with no pricing power. The result of all this is the stock will finally go down a lot.

2. The current $85 billion-a-month QE infinity program by the Federal Reserve will stop by the end of 2013 as even Bernanke realizes the costs/benefits of QE at this stage aren’t worth it.

3. The secular shift from PCs to mobile computing (tablets and smart-phones) will even accelerate from here. ARMH/QCOM/SNDK/GOOG/AAPL/Samsung/Imagination will continue to benefit, while HPQ/DELL/INTC/MSFT/WDC/STX/LXK will continue to hurt.

4. RIMM’s Blackberry 10 launch will fail due to lack of app support just like the Microsoft Surface tablet.

5. Barnes & Noble’s Nook HD hardware business will continue to disappoint along with the Amazon Kindle Fire. Consumers will realize getting a full tablet operating system features/functionality with 16 times more apps, faster processor, and snappier user interface at around the same price with a Google Android tablet or iPad Mini is by far the smarter option.

6. Amazon will launch a Kindle Fire smart-phone and lose hundreds of millions if not billions on it trying to compete with Apple and Google. Good thing they raised the $3 billion in debt recently.

7. Housing will improve. Zillow will benefit by becoming the predominant way house buyers access real estate information with its mobile tablet and smart-phone apps. The company will really hit its stride in the back half of 2013 as its business model shift to focus on B2B instead of consumer display ads bears fruit.

8. J.C. Penney will disappoint and become Borders Group Part 2 for Bill Ackman. The company will need to raise capital by the end of the year. If they can’t raise capital, bankruptcy will occur.

9. Green Mountain Coffee Roasters will miss its 15-20% sales growth target for 2013 as the company stuffed the channel, pulled forward both brewer and K-cup business through massive rebates/discounting in late 2012, and from rising competition on both K-cups (patent expiration) and brewer hardware.

10. The Dallas Cowboys will surprise everyone and make the playoffs next season on its way to the Super Bowl. The defense will be in the top 5 in the NFL led by Sean Lee and a lock-down secondary. Tony Romo will actually come through in the clutch and Dez Bryant will improve and become the best receiver in the league.

-$20,000 to $2 million 2007 to 2010

-retrain my mind, to identify game-changing things in real life that were having game-changing impacts on public companies

-see something in your life that Wall Street hasn’t picked up on yet, opportunity to make information arbitrage investment

-moment that Wall Street starts talking about that thing you picked up on, exit the investment

-what you notice around you, what people are adapting too

-LGF doubled on Hunger Games in 6 months

-20-40% position size into next trade. "invest with conviction" 1-2 investments a year. "material" "big game-changing event" for whatever reason Wall Street has missed

-8 or 9 investments in 3 years. 1 miss, 7-8 all hits triple digit returns 300-500% returns in short period of time

-no stocks at moment, may wait 8-9 months, all about patience

-continue to live my life, read lots of magazines, go to movies, go to restaurants, observe the world around me, "continue to hone my sense of critical observation"

-"when you see something game-changing if Wall Street hasn’t picked up on it, that’s your opportunity to make a game-changing big trade"

Other Past Chris’ “Game-Changing” Stock Ideas

DECK on Uggs
CROX on Crocs
AAPL on iPhone
TRLG on True Religion Jeans
JCG on Michelle Obama pumping J. Crew clothes
ATVI on Guitar Hero
IMAX on Avatar 3D movie 
TGT on Missoni launch

Sources: Bloomberg video, internet sites

Malone wants his land to generate at least enough revenue to support itself.

"People say to me, ‘Why don’t you own a bunch of gold because of how you feel about the government?’" says Malone, a libertarian who is not enamored of the federal government’s handling of debt or, really, the federal government as whole. "But I have a really hard time owning assets that aren’t productive."

Malone figures that his cropland will get a 5% operating return as an investment, while his forest investments in New Hampshire and Maine should get closer to a 2% to 3% real return. Ranching, he says, gets close to zero in terms of an operating return. But it does have potential for appreciation, especially in times of inflation.

"In the long view in real dollars," contends Malone, "cropland is probably best, because it’s producing a commodity that is consumed by a world market." One thing Malone likes is that the demand for farm and wood products (and, to a lesser extent, beef from ranching) is independent of domestic fiscal and monetary policies. "You’re not dealing in strictly the local currency," explains Malone, "so you get protection from the fact that the thing your asset produces is desired by a worldwide market. To me it looks like one of the safest places you can invest money is productive land."

"John Malone is as tough in his timber dealings and is as disciplined in his ranch acquisitions as he is in any transactions made on the Street." The 290,000-acre Bell Ranch — about 453 square miles of New Mexico — was originally listed for $110 million in 2006, then dropped to $85 million in 2010, when Malone entered the picture. Malone is believed to have paid between $60 million and $65 million for the ranch. "He’s very open-minded and thoughtful about the process it takes for a seller to sell," says Ron Morris of the Colorado-based Ranch Marketing Associates, who has represented Malone in several large Western land deals. "But John’s not foolish. In my experience with him, there’s no second chance. He’ll make one offer and moves on."

The Amazon Kindle Fire HD is slower, laggier, buggier, has a fraction of the number of apps (30,000 vs. 500,000), assaults you with ads, and is less functional vs. full tablet computers like the Google Nexus 7 and the Apple iPad Mini.

—

1) The most important reviewer of tech gadgets, Walt Mossberg of Wall Street Journal reviews Amazon Kindle Fire HD: http://dthin.gs/TIduyJ

"after testing the 7-inch Kindle Fire HD, I can’t agree with the sweeping claim that it is “the best tablet at any price.”

"Fire HD isn’t as polished, fluid or versatile as..iPad..offers..fraction… of 3rd-party apps available on either iPad or Nexus 7"

"after prolonged use..Fire HD showed signs of latency..apps & content displayed delays in launching..disappeared after a reboot"

"Fire HD also assaults users with ads occupying the entire screen every time they start or resume using it"

"Amazon claims..new Fire has advanced Wi-Fi tech..that is faster than the Wi-Fi on the iPad. But in my tests I couldn’t replicate that"

"Amazon’s app store has about 30,000 apps, versus more than 500,000 for the iPad or Nexus"

—

2) Engadget’s Review of Kindle Fire HD: http://engt.co/TIeD9r

"Chrome browser on the Nexus 7 rendered every page we threw at it faster than the Fire HD, all without relying on any fancy off-site rendering techniques"

"given the prevalence of advertising beating you over the head everywhere you look in this thing"

"we’d still take the Nexus 7. All that content can’t make up for the distinctly limited offerings in Amazon’s Appstore, most notably the first-party Google apps. Gmail and Google Maps alone add significant value to the Nexus 7, and then there’s Amazon’s heavy-handed Android customization. While the Fire HD is far more responsive than the Fire was before it, it doesn’t compare to the feeling of raw, uncompromised (Google Nexus 7 tablet operating system) Jelly Bean"

"for those looking to do more, and do more rapidly, the Nexus 7 is still the king of this diminutive hill”

—

3) Verge Review of Amazon Kindle Fire HD: http://vrge.co/OF1JUm

"In my testing, I noticed no real difference between the speed of the Wi-Fi on the Fire HD versus that of the new iPad."

"Fire’s more sluggish browser and less intuitive software made the device feel that is was reacting more slowly than the iPad"

"But, it’s also bad in many ways, because it puts a jerky, sluggish barrier between the OS as it was intended, and the OS as Amazon would like to see it work. Furthermore, I’m not entirely convinced that Amazon has such good ideas about functionality and workflow, which makes for some confusing moments when trying to get around."

"general feeling when using the Fire HD was that of a kind of light confusion, a low hum of ‘where am I now?’ Things were never where I expected them to be"

"other big issue I have with Amazon’s OS is that it can sometimes feel sluggish, laggy. The keyboard on the device feels downright delayed when you’re typing on it, pressed buttons sometimes seemed to momentarily stall, and moving in and out of applications could sometimes cause a slight freeze, where the content (or worse, nothing) will just sit onscreen, stuck.

If the iPad and the Nexus 7 feel snappy and "present," the Fire HD seems like it’s out to lunch sometimes. It’s not a deal-breaker, but it does create a sense that there’s a thin layer over everything you’re doing on the device — it means presses are unsure, typing is laborious."

"One other big point worth noting: the Amazon Appstore is simply not up to par with either Google’s Play Store or Apple’s App Store in terms of application offerings. In fact, I found it to be deeply lacking in some key areas, with well known apps like Rdio not even available for download"

Final score 7.5/10 "software can be buggy and sluggish" "app selection is still weak"

Verge gives Amazon Kindle Fire HD 7.5/10 score.
Google Nexus 7 got 8.8/10
Apple iPad got 9.3/10
HP Touchpad 7.5/10, last year’s Kindle Fire 7.5/10

—

4) New York Times David Pogue’s Amazon Kindle Fire HD Review: http://nyti.ms/UIE60B

Review titled: "More Soot Than Sparks From This Fire"

"Everything lags a bit; some apps take 7 or 8 seconds to open" "gasping processor a couple of seconds to catch up"

"Incidentally, despite the name “HD,” the screen can’t actually show you movies in hi-def. It may have the requisite number of pixels, but most of them are dedicated to black letterbox bars; the screen is the wrong shape for movies. And you can’t enlarge the playback to fill the screen, as you can on an iPad."

—

5)  Reuters: Amazon’s new $199 tablet gets tepid reviews: http://reut.rs/OrcRbV

“Amazon.com Inc’s latest $199 tablet computer got tepid reviews from some closely watched gadget reviewers, a potential hiccup for the world’s largest Internet retailer as it tries to grab a bigger share of one of the hottest technology sectors this holiday season.

David Pogue of The New York Times said the 7-inch Kindle Fire HD has no camera on the back, no GPS navigation, no speech recognition, and trails Apple Inc’s more expensive iPad in thickness, screen size, screen sharpness, Web speed, software polish and application availability.

Walt Mossberg of the Wall Street Journal said the 7-inch Kindle Fire HD is not as "polished, fluid or versatile" as the iPad. After prolonged use, some apps and content took longer to launch and web pages loaded more slowly through the new Wi-Fi technology, compared to the iPad, he added.

Ads "assault" users every time they start the device or resume using it, Mossberg also noted. Amazon said this weekend that customers can turn ads off for $15.

Consumer Reports highlighted the limited apps available for the device, while noting storage is bigger at 16GB but still limited. The tablet ships without a charger, which the magazine called "annoying."

"It may not be for everyone," said Paul Reynolds, electronics editor at Consumer Reports”

—

6) BusinessInsider’s Kindle Fire HD Review: http://read.bi/SKyWnz

"But not everything in the new OS is smooth. Whenever I navigated to a different section, tried to launch an app, started a video where I left off, or basically did anything to move to a new screen, the system would choke for a beat. At times, the lag would last up to a few seconds, making the overall experience insanely clunky and frustrating.

And the clunkiness gets worse with Silk, Amazon’s mobile web browser for the Fire HD. Amazon boasts that Silk can load pages faster because it stores popular sites on the company’s servers. While that’s true, scrolling around and zooming is extremely slow and jerky, making it nearly impossible to comfortably surf desktop web pages. Even worse: Silk is your only browser option on the Kindle Fire HD. Amazon’s Android Appstore doesn’t offer alternative ones like Chrome, Firefox, or Dolphin."

"The Fire HD shows you full-screen color ads for Amazon products and services (and some third-party ads for stuff like movie trailers) every time you switch the device on."

"But when it comes to getting stuff done: emailing, calendars, maps, and using the best apps as soon as they’re out, the Nexus 7 wins. Amazon designed the Kindle Fire HD to get more content in your hand, not help you do stuff. The Nexus 7 is a much better productivity tool.
And let’s not forget the elephant in the room. Apple has all but confirmed it will launch a 7.85-inch version of the iPad next month, and many think it’ll be within the Kindle Fire HD and Nexus 7′s price range. Apple still makes the best tablet on the market, and you can bet the so-called iPad Mini is going to be good."

—

7) Ars-Technica “When your best just isn’t good enough: the Kindle Fire HD”: Link

“some operations were even slower to respond than before. It’s not uncommon for the device to take a full second—or two, or three—to act on a button tap when doing something like opening a new application or tab. Silly though that first-world problem sounds, a full second feels like decades when you’re used to other iOS and Android devices reacting within a beat of your instruction.”

“browser on the Kindle Fire HD does work, but it’s one of the apps that takes the longest to open (usually a couple of seconds) and can be a little jumpy as we try to read websites. Page scrolling and zooming are quick, but can be a little choppy.”

”Unfortunately, good isn’t good enough when the Nexus 7 is out there winning hearts and minds without unusual design elements like the carousel or an ever-present row of Things To Buy on the home screen. The Nexus 7 is also faster, has better battery life and a more robust app store, and has access to most of the same content”

“Battery life, while decent, is not as promised. Browser is still slow, despite the ostensibly more mature Silk predictive loading system and MIMO hardware”

“The ads and content everywhere make us cosmically sad; it’s hard to be left alone with your own stuff”

—-

One common thread across all the Amazon Kindle Fire HD reviews is tons of bugs, lag, stutters, and crashes. You really want to be a paying beta-tester?