P&G Rides The Tide

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What's going on here?

Procter & Gamble (P&G), the maker of popular consumer products like Gillette razors and Pampers diapers, saw its stock jump 3% on Friday after it reported its financial results and said its sales would grow more than expected this year.

What does this mean?

Over the last several years, P&G hasn’t been able to grow revenues very quickly (in fact, revenues often declined), and has focused mainly on cutting costs in order to protect its profits. Part of the problem has been sluggish overall economic growth which inevitably impacts such a massive consumer company. But as economic activity picked up in the latter half of 2016 (in most major markets), it appears to have fed through to P&G’s sales.

Why should I care?

For the stock: P&G has slimmed down to speed up.

In 2015, P&G agreed to sell most of its beauty business (e.g. CoverGirl makeup) in a deal that was valued at almost $13 billion. It’s also recently made other sales, shedding a total of about 100 brands. The idea has been to lose underperforming brands and focus on the ones where it sees better growth potential. The combination of the new strategy and an improving global economy appears to be helping its sales – and stock price – pick up.


The bigger picture: A rising US dollar is a threat to multinational companies based in America.

P&G grew its total sales by about 2% versus a year ago, but when the value of its international sales is translated back into US dollars, its overall revenue actually declined (because most other currencies have gone down versus the US dollar). The US dollar could move significantly higher this year, especially if new laws encourage more production to take place in America, which would probably cause companies to shift money into the US (thus pushing up the dollar). The result would create a headwind for some US companies’ profits – and stock prices.

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A Wobble For The British Economy?

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What's going on here?

Sales of goods at British stores fell more than expected in December, which could be an early warning that Brexit is beginning to bite!

What does this mean?

Price increases have been accelerating in Britain in recent months (inflation is at its highest level in two years). The fear is that this will lead to people buying fewer things, which could be exactly what drove December’s retail sales down more than expected. Another possibility is that the data was skewed by the increasing popularity of American-style “Black Friday” discounts at the end of November, which brought forward consumers’ spending and consequently weakened December’s sales (positive results from some of the UK’s biggest retailers leading up to Christmas support this interpretation). So, Friday’s data is far from conclusive, but it could be an early sign of a weakening UK consumer.

Why should I care?

The bigger picture: This is a bit of bad news in an otherwise (relatively) strong fourth quarter for the UK economy.

Most data in the fourth quarter of 2016 suggested that the UK economy was growing at least as quickly as it was earlier in the year: at an annualized rate of just over 2%. That’s pretty good by relative standards (slightly better than both the eurozone and the US). The question is whether the economic environment is getting tougher now – and whether that will stall the economy’s momentum in 2017.


For markets: UK-focused companies are at risk of an economic slowdown.

Many of the largest companies listed on the London Stock Exchange do the vast majority of their business outside of the UK (e.g. big pharmaceutical firms and miners), and as a result are insulated from the UK economy. However, other big companies like banks (e.g. Barclays), retailers (e.g. Tesco) and homebuilders (e.g. Persimmon) are highly exposed to the domestic environment – and their stocks are likely to come under pressure if the UK economy turns sour.

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Apple’s Billion Dollar Chip Battle

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What's going on here?

On Friday, Apple filed a $1 billion lawsuit against Qualcomm (tweet this), one of the world’s biggest makers of the chips that power smartphones and a major Apple supplier, for allegedly abusing its market dominance by unfairly overcharging Apple.

What does this mean?

Qualcomm owns a bunch of patents for the chips that power smartphones. It licenses that technology to companies like Apple, and charges them a fee. Apple says that Qualcomm charged an unfairly high price and essentially forced Apple to pay it because there were no alternative providers of the technology. This is not the first time that investors have heard of this controversy. Last month, South Korea’s government fined Qualcomm over $800 million for anti-competitive practices, and earlier last week the US government also sued Qualcomm for a similar reason. Qualcomm disputes all the allegations and says it will fight against them.

Why should I care?

The bigger picture: This is a potential example of illegal, anti-competitive actions in practice.

We often write about the risk of governments blocking mergers or acquisitions due to concerns that the combined company would become too powerful within an industry. The fear is that companies do exactly what Qualcomm is accused of: use their dominant position to demand unfair prices for their products. Competition authorities (an arm of the government) aim to get ahead of the problem by ensuring industries have enough companies to be truly competitive – but when that’s not the case, and a company employs an unfair pricing strategy, the government can levy huge fines.


For the stock: Qualcomm’s stock got hit.

Billions of dollars of potential legal costs are, of course, a negative for Qualcomm’s stock price – as well as the possibility that a ruling against Qualcomm could limit the price it could charge for its technology in the future. Both factors likely contributed to the stock dropping about 2.5% as the news broke late on Friday.

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