Trump Blames Canada!

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What's going on here?

The Trump administration announced late on Monday that it would be slapping a tax of about 20% on lumber imported from Canada (tweet this). The move might be an indication that the administration is serious about making changes to America’s trade relationships.

What does this mean?

The “softwood” lumber dispute with Canada, which involves the type of wood that is typically used to build homes, has been going on for decades. In the US, forests are usually privately owned, but in Canada they tend to be owned by provincial governments. The US lumber industry claims that Canadian producers are allowed to log the forests at a below-market rate, creating a subsidy and, therefore, an unfair advantage. In 2006, a temporary settlement was reached, but that expired in 2015 – and it appears that President Trump is reviving this long-running dispute to assert his administration’s trade policies.

Why should I care?

The bigger picture: The administration says it’s determined to put an end to “unfair” trading relationships.

A senior Trump administration official said on Tuesday that America’s major trading partners have “the rhetoric of free trade but the reality of protectionism”. His suggestion is that other countries have rules that protect their own producers at the expense of US exporters (e.g. restrictions by other countries on American dairy products), while the US doesn’t have the same rules. Assuming the Trump administration wants to combat this perceived unfairness, it will likely introduce new impediments to trade on other countries.


For the markets: Less trade is typically bad for companies’ profits.

Companies usually benefit when they can choose where they buy their supplies from and, therefore, higher barriers to trade are generally bad for stocks. International companies that export to the US and those within the US that import goods (like retailers) are particularly vulnerable. More barriers to trade could also affect US exporters, as other countries would likely retaliate with anti-trade measures of their own.

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Flat Whites Fall Flat

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What's going on here?

Whitbread, the owner of British companies such as Costa Coffee and Premier Inn, saw its shares fall 7% on Tuesday after it reported slowing sales growth.

What does this mean?

Whitbread’s earnings did not appear to be that bad: overall revenue grew 8% versus a year ago, in line with the company’s forecast. It also raised its dividend, which means investors will get a larger cash payout than last year. But its sales growth slowed versus the previous year and revenue per room at Premier Inn (an important performance measure for hotels) declined. Perhaps most worryingly for investors, Whitbread warned that slowing consumer spending in Britain could hurt its sales later this year.

Why should I care?

For the stock: Whitbread is expected to keep spending money on expansion.

While Whitbread has announced some cost cutting initiatives in recent months, it is expected to push ahead with a costly expansion of its hotel and coffee businesses, especially outside of Britain. This may prove to be an astute long-term strategy, but with the company’s sales and profit growth slowing, it also appears to be making investors nervous. A more defensive response to falling sales growth is usually to decrease overall costs.


The bigger picture: It’s getting tougher for companies that sell things to British consumers.

Apart from hotel rooms, Whitbread mainly sells things like flat whites and restaurant meals – largely to British consumers. With prices in Britain rising at their fastest pace in five years (partly due to the big Brexit-related selloff of the pound), people are finding themselves with less money left over in their pockets each month. Naturally, that puts pressure on sales of coffee and restaurant meals as well as clothing, electronics and pretty much anything else that Brits typically buy. It looks like this is, unsurprisingly, having an impact on the companies that sell these things.

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Caterpillar Picks Itself Up!

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What's going on here?

Caterpillar, the maker of heavy equipment such as bulldozers and cranes, saw its stock jump more than 7% on Tuesday after it said its sales this year will likely be much higher than it previously thought.

What does this mean?

Caterpillar is exposed to changes in old-school economic activity across the world (think: construction, mining, etc.) like few other companies. The recent global economic pickup appears to have buoyed Caterpillar’s sales, with a particularly strong performance from its mining division (higher commodity prices have driven more mining activity globally).

Why should I care?

For the stock: Caterpillar is benefiting from being leaner and meaner.

Caterpillar has spent much of the past year cutting its fixed costs, including laying off more than 5% of its workforce. At the same time, its sales have increased. Lower costs and higher sales are a potent combination for profits: excluding its restructuring costs (e.g. the upfront costs associated with laying off workers), Caterpillar’s profit almost doubled versus a year ago. While there are certainly risks to its future sales, including a slowdown in global economic growth, investors are clearly pleased by the company’s slimmer new profile.


The bigger picture: Multinational companies tend to benefit from a pickup in global growth.

Caterpillar wasn’t the only winner on Tuesday: Sweden-based Volvo saw its stock jump more than 7% after reporting sales in its truck and mining equipment divisions were much stronger than investors’ expectations. And McDonald’s, which makes about two-thirds of its sales outside of America, saw its stock jump 5% after reporting sales growth that was quadruple Wall Street’s expectations. All of these companies are heavily exposed to global economic growth, which is a big reason why we spend so much time writing about it!

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