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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Railways Pick Up Steam

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What's going on here?

It was a good day for US railway stocks on Thursday: investors celebrated the earnings of America’s largest railroad, Union Pacific, and a smaller rival might be getting a well-respected new CEO…

What does this mean?

First of all, Union Pacific made more profit in its most recent quarter than Wall Street was expecting and, perhaps more importantly, it said it expects its freight volumes to grow in 2017 after two years of declines – which should power its profits higher.


Separately, an “activist hedge fund” (a type of investor that proactively fights for changes at a company in which it invests) has teamed up with a well-regarded industry veteran with the aim of installing him as CEO of another railway, CSX Corp. Investors propelled CSX’s stock 23% higher on the possibility of him taking the helm.

Why should I care?

The bigger picture: “Activist investors” are sometimes criticized – but they can play a positive role.

In a world where “passive” investment management is becoming more common (e.g. investors that buy stocks simply to track the overall performance of the stock market), the catalyst for change that comes from activist investors is, arguably, even more important than it used to be. One counter-argument, however, is that activist funds sometimes create short-term gains for their own benefit at the expense of a better, long-term strategy for the company. Time will tell for CSX.


For markets: Union Pacific is a prime example of how better economic growth should feed through to company’s profits – and boost their stock prices.

Since lots of commodities and goods are still shipped via railways, railroad companies like Union Pacific are expected to benefit if US economic activity picks up in 2017. However, it’s worth noting that Union Pacific’s stock price (and many others) have already moved up on expectations of better growth in 2017 – which, of course, still needs to actually happen.

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ECB Preaches Patience

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What's going on here?

The European Central Bank did nothing at its meeting on Thursday – and its President suggested investors shouldn’t expect much of a change to its policies any time soon.

What does this mean?

The ECB has spent years trying to increase economic growth (and inflation) in the eurozone by keeping interest rates at historically low levels (click here for more background). But with growth having improved lately and overall inflation picking up, especially in Germany (the eurozone’s biggest economy), pressure is increasing on the ECB to support moderately higher interest rates. But the ECB is advocating patience, saying that there needs to be more evidence of growth throughout the eurozone first (e.g. in Italy as well as Germany).

Why should I care?

For the markets: Like other central banks, the ECB is trying to determine how much inflation is actually increasing.
Overall inflation is at multi-year highs in developed economies, but that’s partly because the oil price has doubled over the past year – and it’s feeding through to fuel prices. The “core” rate of inflation, which excludes the impact of commodity prices, is not (yet) accelerating much – although it may be on the brink of doing so, especially in the US. If core inflation increases, central banks are more likely to conclude that their ultra-low interest rate policies of recent years are having success – and start taking action that pushes interest rates up (partly because, one day, it may once want to lower them).


The bigger picture: The ECB’s President, once again, said European governments should implement big changes.
The ECB President argues that, in order to sustainably boost its economic growth, European governments must enact business-friendly reforms, like making labor laws more flexible so companies can hire new workers with less risk (and are, therefore, more likely to do so).

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Slick Road Ahead For Oil Price

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What's going on here?

The International Energy Agency (IEA) highlighted some of the risks to the oil price in a report on Thursday – but also suggested the price would be supported by increased demand for oil in 2017.

What does this mean?

On November 30th, after months of negotiation, OPEC (a group of mainly Arab oil producing states) and some other countries agreed to significantly decrease their collective output. The deal helped propel the oil price from its low below $30/barrel in February to above $50 at the beginning of this year (it more than doubled). However, as the IEA points out, oil producers that are not part of the deal (especially those in the US) will now be motivated by the higher price to increase their production.

Why should I care?

The bigger picture: The energy industry looks like it’s about to get more supportive of the US economy.
The number of oil rigs in operation in the US has increased every month since May – with more rigs added in December than in any month since early 2014! This gels with recent record-high prices for oil-rich land in Texas and surrounding states, including Exxon’s $6 billion purchase of a major oilfield this week. It all points to a big increase in US oil production, which would likely be good for the wider US economy. (tweet this)


For markets: The dynamics affecting the oil price have, arguably, become more complicated this year.
For much of last year, the oil price went up and down based on the perceived likelihood of an OPEC deal (the more likely a deal, the higher the price went). Now that a deal has been made, investors will be watching to see if countries stick to their promised production cuts. But they will also be watching to see how quickly US production picks up (which would be negative for the oil price), and whether the expected improvement in global economic growth raises overall demand for oil (which would be positive for its price).

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Boom, Netflix Won’t Chill

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What's going on here?

Netflix’s stock jumped about 8% to a new record high (tweet this) following the release of its financial results on Wednesday, which showed its subscriber growth beat expectations by a big margin.

What does this mean?

It was generally thought that Netflix had come close to fully penetrating the US market; however, it’s still managing to grow, adding almost 2 million new users in the most recent quarter. More importantly perhaps, it’s significantly ramping up international user growth – and doing so much more quickly than expected. It added about 5 million new international subscribers versus expectations of 3.7 million, which is a big beat. The popularity of original programs, like The Crown, helped drive growth.

Why should I care?

The bigger picture: Netflix shows the power of big data.

Netflix has a huge amount of data on people’s viewing habits because it knows exactly when you stop watching and, conversely, which shows you keep coming back to. Multiply those data points across its millions of users and it has a pretty good idea of what makes a good TV show. Add in billions of dollars in funding for new shows and you get a powerful potion of captivating original programming – which, in turn, drives more subscriber growth… and more data.


For the stock: Netflix is steadily getting more profitable.

The company expects 2017 to show significant “margin expansion,” which means it is expecting to make more profit for every dollar it gets paid by subscribers. This is partly because of the scalability of its content: one show can appeal to a huge number of viewers in many different countries. Balanced against this positive factor is a stock price that is already factoring in investors’ high expectations. Netflix will probably have to improve its margins and continue its growth, lest it disappoint investors.

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Pearson’s “Textbook” Problem

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What's going on here?

Pearson, the world’s largest publisher of educational material, saw its share price fall 30% on Wednesday after the company once again told investors that it would make less profit than expected. That’s a huge selloff!

What does this mean?

Pearson is in the business of selling textbooks, but demand for textbooks has been hit hard by a shift to digital resources. Unsurprisingly, Pearson has already been trying to change its focus to digital products, but it’s failing to make up for the decline in its traditional print business. Falling enrolment in US colleges is not helping, hurting sales of both Pearson’s traditional and digital products. Increasing use of textbook sharing services are also eating into Pearson’s sales.

Why should I care?

The bigger picture: Investors do not like surprises – and they really don’t like surprising cuts to their cash payouts.

In another blow to investors, Pearson said that it would decrease its annual cash payment to shareholders (a.k.a. dividend). As Pearson’s dividend declines, it risks losing a dedicated investor base that targets companies that pay a high dividend (typically called “dividend funds”). Also, Pearson’s CEO had recently talked up the company’s prospects, so Wednesday’s announcement might have caught some investors off-guard, making them more likely to sell the stock.


For the stock: The turnaround plan is to double-down on selling digital products.

Last year, Pearson sold the Financial Times and its stake in The Economist in order to raise cash. On Wednesday, it said it also wants to sell its 47% stake in publisher Penguin Random House. The cash is meant to help the company weather the current storm while it tries to turn itself around by focusing even more on selling digital educational resources. Investors, however, appear to be sceptical of this strategy, as reflected in Wednesday’s stock selloff.

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Exxon Makes Big Pay In West Texas

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What's going on here?

Exxon Mobil, America’s biggest oil company, has agreed to pay more than $5 billion to buy a large swathe of drilling rights in Texas and New Mexico (tweet this). It’s the largest energy deal in the US since the oil price crashed in 2014 (note: the oil price is still almost 50% lower than its 2014 level).

What does this mean?

Exxon is making a huge purchase in an area called the Permian Basin, land where the cost of drilling is relatively low (due to its geological advantages). The Permian already accounts for a large proportion of US oil production, but with oil prices having rebounded 50% from their low of a year ago, a rush of large oil companies are now buying up acreage (there have been numerous multi-billion dollar deals there in recent months).

Why should I care?

The bigger picture: The US energy industry is recovering – which should benefit the economies of America’s oil-producing states.
It’s been a rough few years for parts of Texas (e.g. Houston) and surrounding states as the oil price fell sharply beginning in 2014. The low cost of production in the Permian and the recent rebound in the oil price have made drilling for oil much more profitable – and US oil production is now increasing after having declined for about two years.


For the stock: Building up its exposure to the Permian has been a strategic priority for Exxon – but this accelerates the pace of its buildup significantly.
During the oil price crash, Exxon built up its presence in the Permian, but they were all quite a bit smaller than the one announced on Tuesday. This purchase doubles Exxon’s footprint in the Permian, albeit at a high price. The big bet is that drilling technology will continue to improve, sending down the cost of drilling further and enabling drilling of reserves that are currently un-drillable (included in this purchase is a huge amount of currently unreachable reserves).

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More Clarity On Brexit Propels Pound Up

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What's going on here?

The pound had it best one-day gain in eight years (versus the US dollar) as Britain’s Prime Minister (PM) laid out a broad new vision for the country’s post-Brexit relationship with the European Union (EU).

What does this mean?

On Tuesday, PM Theresa May sought to provide some clarity on the upcoming Brexit negotiations. She said that Britain would be willing to pull the UK out of the EU’s free trade zone (also called “the single market”) in order to regain control over immigration and other policies. However, she also emphasized that Britain would seek “the greatest possible to access” to free trade with the EU.

Why should I care?

For the markets: The pound’s big jump might just be a rebound from its weakness in recent days.

Today’s move in the pound’s value has to be put in context: on Monday, it sold off significantly as some of the details of May’s speech were leaked (especially the bits about leaving the single market). To some degree, today’s move was a rebound from that drastic drop. There was, however, some new information: May announced that the UK Parliament would get to vote on the final deal with the EU. Arguably, that means the deal is less likely to be an extreme departure from current expectations (otherwise Parliament might vote against the Brexit deal) – and, as such, businesses could be more comfortable investing in Britain (thus boosting demand for the pound).


The bigger picture: May’s aims appear to be much less “protectionist” than Trump’s.

May reiterated her commitment to keeping taxes on imports from Europe (a.k.a. tariffs) as low as possible – which is a big concern for British companies that rely on these imports (which many of them do). This is in contrast to President-elect Trump’s avowed position on trade, which involves raising taxes on imports. The British approach appears to be more supportive of free trade which, typically, economists say is better for economic growth.

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