Trump’s Tremendous Tax Plan

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What's going on here?

A senior figure in the Trump administration said on Thursday that the White House expects to pass a “very significant” tax reform (tweet this) for companies and households into law by the end of this summer. You’ve got our attention.

What does this mean?

In his first televised interview as head of the US Treasury, Steven Mnuchin highlighted plans to overhaul the US tax code through simpler rules and lower taxes for companies. This could especially benefit small and medium enterprises, which make up over 95% of all businesses in the US. He also said that the White House was looking for ways to get US companies to bring some of their profits made overseas back into the country by lowering taxes on those profits.

Why should I care?

For markets: Companies stand to benefit if Trump’s tax reform goes according to plan.

If things pan out as expected, the corporate tax rate for US companies could drop from about 35% to around 20%, which would give a big boost to companies’ bottom lines. In theory, higher profits should also pass through to better economic growth, as companies would have more money to hire workers and pay for new investments. Similarly, profits brought back from overseas could be spent on the same initiatives, thus boosting the economy even further.


The bigger picture: Whether or not the US economy picks up meaningfully is a key question for Trump’s economic agenda.

The Trump administration aims to hit an annual economic growth rate of at least 3% – a rate that the US hasn’t experienced since before the 2008 financial crisis. The stock market, which hit another record high on Thursday, is almost certainly reflecting some of this optimism that tax cuts, regulation, and (maybe) higher government spending will give the economy a serious boost. To what extent those plans pan out, however, is still very much up in the air (e.g. it’s not clear what Congress will agree to).

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Barclays’ Burgeoning Turnaround?

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What's going on here?

Despite signalling the end of its recent restructuring, British bank Barclays saw its stock fall almost 3% on Thursday after it reported profits that fell short of expectations.

What does this mean?

According to Barclays’ CEO, Britain’s second largest bank is emerging from a turnaround plan that started last year, which re-focused its efforts on investment banking (e.g. trading stocks and bonds and advising big corporations). The good news is that those parts of the business saw revenues jump 21% versus a year ago, and its CEO has said the bank is ready to expand by hiring more employees. However, Barclays still has a ways to go to convince markets of its turnaround.

Why should I care?

For the stock: Markets will be looking to see if Barclays can sustainably boost its profits.

Investors were likely concerned by the bank’s higher-than-expected spending in the fourth quarter, since higher costs typically translate into lower profits (all else being equal). The key for Barclays is whether those costs will come down in the future (as some of them were reportedly “one-offs”), and if it can grow its revenue at the same time. In short, investors want it to become more profitable than it is right now.


The bigger picture: Investment banks benefited from the market volatility associated with Donald Trump last quarter.

As middlemen, investment banks’ profits tend to increase when more trades occur – and Trump’s election sparked huge waves in the market that led to an increase in customer trading. Barclays benefited more than many other European banks since it recently shifted more resources to its investment banking arm (while others, like Deutsche Bank, have pulled back). Most of the big US banks, like Goldman Sachs, also benefited.

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Investors Await Tesla’s Next Hit

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What's going on here?

Tesla’s profits fell back into the red in its most recent quarter, but the stock didn’t move much. Investors appear much more focused on the expected launch of the Model 3 later this year.

What does this mean?

In the third quarter of 2016, Tesla helped its founder Elon Musk “throw a pie in Wall Street’s face” by recording a rare profitable quarter. However, last quarter it once again lost money, which was expected partly because of increased costs associated with its new Model 3. It’s the first Tesla car designed for the mass market (the Model S and X are targeted at the more expensive end of the market). Perhaps most importantly, the company affirmed its previous guidance for the Model 3’s production timeline, i.e. no delays are expected.

Why should I care?

For the stock: The time for Tesla to deliver is approaching. (tweet this)

Tesla’s stock has jumped about 50% over the past year and is hovering near its all-time high. The company says it will begin producing its Model 3 in July and shipping to customers by September. Initially, it will lose money on every car it sells, but the idea is that as production increases, its costs per car will decrease, and it will become very profitable. Tesla has to get a lot of things right for that to happen, but investors seem to be betting that it will.


The bigger picture: Tesla is the ultimate startup – and it’s very likely going to raise another round soon.

Tesla is able to burn through so much money because it gets cash from investors. It’s expected to do another cash call sometime this year, and investors are very likely to, once again, pony up to own a piece of Elon Musk’s vision. His plans are ambitious, and there are a number of prominent investors who aren’t sold on them at all. We are, at least, getting closer to knowing if he, and Tesla’s shareholders, will be successful!

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Will The European Central Bank Back Off?

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What's going on here?

European inflation is rising (i.e. prices are increasing more quickly). As a result, the European Central Bank (ECB) may face some tough questions on whether to keep interest rates so low!

What does this mean?

Like most central banks, the ECB doesn’t like it when inflation goes too high or low, so it tries to keep it close to 2%. In recent years, inflation has been well below that target. The ECB has kept interest rates at a historically low level in an effort to try to revive inflation (lower interest rates make it easier to borrow money and buy things, and therefore pushes up prices). Its actions have included directly buying government bonds (a.k.a. quantitative easing), which lowered interest rates even further. But now that inflation is picking up substantially, some investors are wondering if the ECB will reverse course and take its foot off the gas.

Why should I care?

For markets: If the European economy keeps heating up, the ECB could back off.

The signs are that the European economy is heating up, so the question may turn to whether the ECB will become less supportive. That would mean higher interest rates… which is bad for bonds but also typically good for the euro, because currencies of countries that pay more interest tend to see greater demand (why? click here).


The bigger picture: It’s hard to pin inflation down to just one number.

The inflation rate increased to 1.8% from 1.1% last month – so, much closer to the 2% target. But this was mainly due to a big increase in energy prices, e.g. oil and gas. Stripping out this energy price increase (which is called “core inflation”), the figure didn’t change very much. And so the ECB could hold off from changing its policy significantly, unless other prices start picking up too. But the low interest rates have been making it tough for savers, e.g. for people saving toward a house deposit or those with retirement pots – so the ECB may face some difficult decisions ahead.

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The Eurozone Strikes Back

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What's going on here?

Rosy news from Europe: a survey of eurozone companies in February reported the strongest growth in business activity since 2011. It also showed employment is growing at its fastest rate in almost ten years. Both are signs that the eurozone’s economy is starting to look up!

What does this mean?

The survey indicates businesses have been increasing their output – the amount of goods and services they produce – at the highest rate in six years. Meanwhile, new orders of these goods and services grew at their fastest rate since 2011.


However, input prices (i.e. the costs for companies to make stuff) also hit a six-year high. So eurozone consumers are likely to see higher prices (i.e. inflation will go up), as companies usually feed their higher input costs through to the prices of their products (e.g. consumer goods).

Why should I care?

For you personally: The eurozone job market is heating up.

Even though companies hired new employees at the fastest rate since 2006 (i.e. since before the recession!), companies reported that their backlog of “outstanding work” still went up – which means that more jobs will likely need to be created in order to clear the deck. The eurozone unemployment rate is already at 9.6%, its lowest since 2009 – and the pickup in outstanding work means it could go down even further.


The bigger picture: Political uncertainty in the eurozone is hurting some investments.

There’s still some pretty major hurdles for the eurozone to overcome in 2017 – namely, political ones. Investors are particularly nervous about hotly contested elections in France, set to take place at the end of April, which have already caused French bonds to sell off markedly versus their German counterparts (click here for more background). Recent polls suggest far-right candidate Marine Le Pen is gaining ground (she has vowed to pull France out of the eurozone, which could cause some serious economic turmoil).

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Wal-Mart Continues to Deliver

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What's going on here?

Wal-Mart’s stock jumped 3% on Tuesday after it reported that its in-store and online sales increased in the fourth quarter of 2016.

What does this mean?

As part of a turnaround plan announced in late 2015, Wal-Mart has invested billions in ecommerce, which it expects to be an engine of growth in the years to come. Its online sales went up by 29% last quarter, thanks to rising online grocery sales and its recent acquisition of Jet.com. Wal-Mart’s turnaround also involves sprucing up its stores, and the move seems to be paying off as in-store sales rose by 1.8% at the end of 2016 versus one year ago, the biggest increase since 2012!


But all these improvements come at a cost: while sales were up, higher costs from its new initiatives meant that profits were down 18% versus last year. But for now, investors’ attention is focused elsewhere (see below).

Why should I care?

For markets: Investors are more interested in Wal-Mart’s future growth than in its current profits.

Wal-Mart has been spending big and buying companies to solidify its future in the era of online shopping. While these costs have been eating into the company’s profits, investors seem to think that they’re a worthwhile investment in future sales growth. Besides, Wal-Mart can always decrease its costs (e.g. by scaling back investments), so lower profits don’t appear to be too big of a worry for now.


The bigger picture: Walmart is a bright spot on the map of US retail – for now. (tweet this)

While Wal-Mart might be doing nicely, things aren’t all that great for the rest of America’s big retailers. Macy’s, Kohl’s and Target all reported lackluster holiday sales, despite the boost in US consumer spending towards the end of 2016 (ecommerce seems to be winning this battle over traditional retail). Retailers are also preparing themselves for a potential Border Adjustment Tax, which is now being discussed in Congress – it’d mean a 20% tax on goods imported to America, which investors think will gnaw big time into US retailers’ profits.

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US Economy Shifts Down A Gear

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What's going on here?

According to an influential survey released on Tuesday, the pace of US business activity has pulled back from the highs it hit in the months immediately following the presidential election.

What does this mean?

The survey suggested that activity in January grew at the fastest pace in 14 months, but growth slowed coming into February. The slowdown was driven by the “service sector,” which includes businesses like accounting firms and restaurants and makes up about 80% of economic activity in the US. Manufacturing activity pulled back only very slightly from January and remains near its highest level in almost two years.


Businesses’ optimism about the outlook for the next 12 months fell quite sharply, which could bode poorly for future months. Nevertheless, the overall level of activity remained above the level where it’s been for most of the past two years – so this is only a moderate pullback.

Why should I care?

For markets: The strength of the US economy is an important question for investors right now.

US stock prices have hit numerous new record highs in recent months (stocks in other countries have done very well too). Part of the reason is that economic data has been positive. Of course, this is just one survey and more information is needed, but if investors see that economic growth is cooling, they will likely become more concerned.


The bigger picture: The eurozone was the star performer on Tuesday – compared to the US.

According to a similar survey in Europe, economic activity in the eurozone hit its highest level in almost six years. Also, job creation was at its fastest pace in almost 10 years. The data is further evidence that the eurozone’s economy has decisively picked up steam in recent months.

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Big African Deal Dies

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What's going on here?

We can add Africa to the list of regions where a mega-merger has fallen apart: Steinhoff and Shoprite, two African retail giants, announced on Monday that negotiations to merge had ended.

What does this mean?

Steinhoff, which started off by selling furniture, is the biggest retailer in South Africa. But it has been on a shopping spree of its own in recent years – both expanding and diversifying. The company acquired Conforama (which runs 200 home furnishing shops across Europe) in 2011; and bought the South African clothing retailer Pepkor in 2015 for close to $6 billion. And Steinhoff hasn’t slowed the pace of its expansion, with purchases outside of Africa, including Mattress Firm in the US and Poundland in the UK. This particular combination with Shoprite would have given it access to the South African grocery market. But this deal is now off, as the two companies could not reach an agreement.

Why should I care?

For markets: Both sets of shareholders seemed please.

The stock prices of both companies went up when investors learnt the deal was off. This suggests, perhaps, a few things: that Shoprite investors were worried about the deal undervaluing their company; that Steinhoff investors might prefer to see it focus on continued expansion outside of Africa; and/or that the proposed deal was too complex for shareholders’ comfort.


The bigger picture: Not all “deals” end up being finalized.

This isn’t the first time that Steinhoff has looked at a deal and then walked away; for example, there was its aborted takeover of UK-based Argos last year. Or elsewhere, take the Kraft – Unilever deal that was ditched over a single weekend, or two recent big US health insurance takeovers that have been blocked by the courts. Just because a deal gets “announced,” doesn’t mean it will be completed.

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“Bad” Bank Gets A Boost

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What's going on here?

Shares in Royal Bank of Scotland (RBS), the large British bank that is now majority-owned by the UK government, rose 7% on Monday after it emerged that it might not be subject to a European Union rule requiring it to sell off part of its business.

What does this mean?

RBS was one of the biggest banks in the world, but that all changed when the value of the loans it had made plummeted during the 2008 financial crisis. The UK government gave the bank billions of pounds so that it could do things like pay back its own depositors. With its 81% shareholding, the UK government remains, by far, the bank’s biggest shareholder. The huge bailout broke European Union rules on state-aid (governments can’t give companies too much money, basically).


In an attempt to level the playing field, the EU said RBS had to sell off one of its subsidiaries, Williams & Glyn. However, nobody really wanted to buy it (partly because its IT systems are so outdated). It looks like, instead of selling Williams & Glyn, RBS will be required to spend £750 million on initiatives to support other banks in the UK. For RBS shareholders it means, at least, the bank is able to move on: it had already spent £1.8 billion trying to sell Williams & Glyn!

Why should I care?

For markets: This should help support changes within Britain’s banking industry.

Britain’s biggest lenders hold a fairly dominant position, but are being increasingly challenged by relatively new entrants like Virgin Money and Metro Bank. Part of RBS’s settlement involves spending money to support these new competitors, which should, at least somewhat, boost the competitive landscape in Britain.


The bigger picture: This is what the aftermath of a banking crisis looks like. (tweet this)

2008 wasn’t the first banking crisis and it, almost certainly, will not be the last. While the memories of such crisis periods can fade, the fact that RBS remains 81% owned by the government is a reminder that financial crises have costs – and the government (i.e. the taxpayer) often bears a significant burden.

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Ketchup + Deodorant = $143 billion? Nah…

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What's going on here?

Kraft Heinz, the American food giant that makes the eponymous ketchup, said on Friday that it had made a $143 billion attempt to take over Anglo-Dutch rival Unilever – but by Sunday things had changed…

What does this mean?

Unilever, which makes Marmite, Dove soap and many other products, quickly rejected the bid, claiming that it undervalued the company. It appeared initially that Kraft would be unwilling to quietly go away, as it said it was committed to reaching an agreement. However, on Sunday, Kraft said it was withdrawing its bid. The deal would have combined two of the world’s biggest players in packaged foods. (tweet this)

Why should I care?

The bigger picture: Deals often fall apart – but this seems like a strange case.

Most investors seemed to think that Friday’s news was the opening bid in what would be a negotiated takeover of Unilever. Sunday’s news that Kraft was walking away came as a surprise. Kraft, apparently, sought to engage in friendly negotiations with Unilever, but Unilever showed resistance to the idea. In other cases, a potential acquirer might make a higher bid or try to convince the target company’s shareholders of the merits of the deal. All in all, it’s a little odd that Kraft would simply walk away.


For markets: Shareholders of both companies loved the idea.

The share prices of both Unilever and Kraft jumped more than 10% on Friday. The jump in Unilever’s share price reflected Kraft’s plan to pay Unilever’s shareholders a premium (i.e. a price higher than its shares were trading at prior to the initial news breaking) to take it over. Kraft’s shareholders seemed to like the deal rationale as well. Both sets of shareholders look set to be disappointed when the shares open for trading on Monday…

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