Ford’s Big Gamble On Self-Driving Cars

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What's going on here?

American automaker Ford warned on Thursday that its profits in the current quarter would be lower than it had previously forecasted, partly because of its big new investments in self-driving cars.

What does this mean?

Ford said on Thursday that “investments in emerging opportunities” are a big reason for its lower profit guidance. It also noted that its earnings in 2017 would be slightly dented by lower sales and higher commodity prices, but Thursday’s big news was largely about the size of those “investments” – which relate to Ford’s efforts to develop autonomous cars.

Why should I care?

The bigger picture: Big corporates are on the hunt to buy startups.

Large companies in America have been looking to cash in on the growing appetite for self-driving cars, a dream from the Jetsons era that now seems just within reach. Even Intel, which has never been a major player in the auto industry, purchased Mobileye for $15.3 billion earlier this month so it could get its hands on the chips needed to build self-driving cars. For its part, Ford has spent $1 billion to essentially found its own startup focused on self-driving cars (headed up by former employees from Uber and Google).


For the stock: Ford wants to tackle autonomous driving itself – and that’s expensive. (tweet this)

Other automakers are partnering with Silicon Valley to co-develop autonomous driving (e.g. Fiat and Google), but Ford’s got a mind to do all the heavy lifting itself. Of course, that’s a pretty expensive proposition. If it works, it could pay off in a big way (since Ford would essentially own its own technology). But the risk is that Ford will end up spending a lot more money without seeing the same success as its competitors, who by partnering up are benefitting from the shared expertise of two different industries (tech and auto).

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Investors Get Excited About Clothes

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What's going on here?

Next, one of the UK’s largest clothing retailers, reported on Thursday that its profits had dropped for the first time in eight years. But, given that its stock price shot up 8%, investors appeared relieved that the news wasn’t worse!

What does this mean?

Next put out a gloomy report to investors on Thursday: it said that its sales had declined in 2016 and that sales would remain weak through the start of this year (before, hopefully, picking up somewhat later this year). It also didn’t have much good to say about the UK economy, which accounts for over 80% of its customer base. Next’s CEO said he was worried that British consumers will continue spending less on clothes this year, and that the trend might get even worse if inflation keeps going up in the UK.

Why should I care?

The bigger picture: A weaker currency is typically bad for importers.

Thanks to the pound’s big drop in value in 2016, Next reported that it’s been increasingly expensive to import garments from abroad, which caused the price of its clothes to spike by 4%. Virtually any company that imports goods (or supplies) and sells its products domestically is hurt when the value of its home currency falls – which is one reason why changes in the values of currencies have such a significant impact on stock prices.


For markets: Despite the tough environment, Next has some redeeming qualities.

For one, most of Next’s stores are on relatively short-term leases, which means it can close stores more quickly than its rivals if it needs to cut costs. Also, Next’s stock was down about 50% over the past 18 months prior to Thursday’s results: investors are well aware of the challenges it faces. Finally, it did not cut its profit forecast this year, suggesting that Next’s future prospects aren’t as bad as some investors had feared. All of that probably helped the stock jump more than 8% on Thursday.

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Nike Just Ain’t Doin’ It

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What's going on here?

Air ball…! Nike’s stock price fell more than 6% on Wednesday after forecasting that its sales for the rest of the year won’t grow as much as expected.

What does this mean?

Nike is facing battles on various fronts. For one, growth in the North American athletic market has softened overall in recent years – this may be simply because it grew so quickly in the years leading up to 2016. Also, Adidas has ramped up its US game big time, partly with its sales of the casual sneaker brand Stan Smith, which has squeezed Nike’s market share.


Meanwhile, Nike’s traditional sales model is bearing the brunt of a general shift to ecommerce, partly because it still sells a lot of its clothes and shoes via third-party brick-and-mortar retailers (like Foot Locker). All of this has conspired to slow Nike’s sales growth, reduce its profitability (i.e. margins) and hit its revenue harder than Wall Street expected.

Why should I care?

The bigger picture: Nike’s problem isn’t just as simple as the shift to online shopping.

Traditional stores that sell other companies’ products (think: Macy’s) are clearly threatened by online retailers like Amazon. But Nike is a brand that, arguably, can benefit more from consumers’ loyalty and can sell its products directly to them quite easily (e.g. via its own Nike stores). Nike’s troubles, according to its CEO, stem from consumers’ rising expectations: they’re demanding things like personalized service (e.g. personal shopping – yes, Nike does that now), faster product innovation and a better in-store experience.


For the markets: Nike’s down, but it’s far from out. (tweet this)

Nike is stepping up its efforts to develop more technologically advanced products and to sell more products directly to consumers. Unlike some traditional retailers, like department stores, Nike’s model might not be fundamentally endangered; it may just need to do a better job of meeting customers’ changing demands.

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Heavy-Going For Metal Miners

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What's going on here?

The price of iron ore, the key component in steel, has dropped 20% over the past week. The big fall is sending the stock prices of miners sharply lower – and, if it continues, will likely have an impact on the rest of us.

What does this mean?

The prices of iron ore and other industrial metals, like copper, ripped higher earlier this year, which continued a rebound that began about 15 months ago after demand from within China increased. Previously prices had been languishing at their lowest level in more than a decade. But it seems that China is now oversupplied, which is helping send prices sharply lower. News on Wednesday that China’s government is taking action to slow housing construction, which requires a whole load of copper and steel, contributed to the drop.

Why should I care?

For the markets: Lower metals prices have brought down miners’ stocks.

Big mining companies like Rio Tinto, BHP Billiton and Glencore have seen their stock prices fall about 5% this week. Part of the pressure comes from the wider stock market selloff, but mining stocks are also clearly reacting to the price of their products falling. The good news for (most) miners is that both their share prices and the price of the metals they mine are still higher than at any time last year.


For you personally: The price of raw materials has a big impact on inflation.

While the higher price of oil is often discussed as one of the main drivers of the recent increase in inflation, price rises for industrial metals have also had a big impact. As the cost of raw materials rises, so too does the cost of producing goods – as it has over the past year. This means a continued drop in metals prices would likely put a damper on inflation globally in the coming months.

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China Gets A Warning

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What's going on here?

An influential global economic organization, the OECD, reiterated a warning on Tuesday that investors have heard before: China has too much debt and that could threaten global markets.

What does this mean?

Partly in response to slowing economic growth, the Chinese government enacted a number of measures last year to boost its economy, including encouraging its banks to lend more money to companies (to foster their operations). This wasn’t the first time: the Chinese government’s response in the years following the 2008 financial crisis was to combine increased government spending (e.g. building more railways) with more lending within the economy.


The increased lending has led to debt levels in China hitting a historically high level. The OECD is worried that, if companies are unable to pay back all this debt, then it will imperil the Chinese banking system (e.g. banks that aren’t repaid could go bankrupt, disrupting new lending and hurting anyone that had lent the banks themselves money, like regular investors).

Why should I care?

For the markets: There are certainly risks for global markets stemming from China.

China is important on many levels: it buys a huge amount of products from other countries (e.g. German machinery), large multinationals have a big presence in the country (e.g. Apple) and, among other things, it’s a big importer of commodities (which is hugely important to the economies of Australia, Canada and other countries). Any major problems with China’s economy would be felt around the world.


The bigger picture: Warnings about China are not new.

Other international organizations and famous investors have been issuing similar warnings for years. Predicting when debt within China becomes a major problem is extremely difficult. It may not even become a problem; some investors point out that the Chinese state has lots of money and could bail out its banks if needed (much like the US government bailed out US banks in 2008). For now, this is a risk on investors’ radar, but it’s not consuming much attention.

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Worst Day For Stocks This Year

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What's going on here?

Amid signs of turbulence over President Trump’s agenda in Washington, US stocks had their worst day in six months on Tuesday!

What does this mean?

US stocks went 109 days without selling off by more than 1%… until Tuesday (tweet this). It’s always difficult to pinpoint what exactly causes the market to sell off, but stock prices accelerated their move lower as more and more comments came out of Washington suggesting that the Republican healthcare package, due for a Congressional vote on Thursday, may fail to get enough votes in its current form.


While the market doesn’t care a great deal about healthcare per se, it’s a sign that Trump and Republican allies in Congress are struggling to get their plans passed into law. More specifically, partly for procedural reasons, Congress is attempting to pass healthcare reform before passing laws aimed at cutting corporate taxes – an issue the market cares a lot about – and so a delay to healthcare could very conceivably mean a delay to tax reform.

Why should I care?

For the markets: We’re getting a test of how important Washington is to markets right now.

Optimism over Trump’s policies, like lower taxes, certainly helped drive the big move higher in stock prices in recent months. However, it hasn’t been the only tailwind for stocks. The US and global economy have seemingly been picking up steam and companies’ profits have been rising. Investors will be paying attention to these factors as well, as they try to figure out how much more, if at all, stocks should sell off.


The bigger picture: A pullback in stock prices is totally normal.

Markets never go up in a straight line: it has always been a case of two steps forward, one step back. The fact that the market has gone so long without this magnitude of a pullback is actually the surprising thing!

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British Prices Jump Fast

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What's going on here?

Swoosh….prices in Britain rose in February at their fastest pace since 2013 (i.e. inflation increased)! This has already made an impact on the market and will leave a dent in your wallet!

What does this mean?

The 2.3% increase in consumer prices (e.g. the cost of going to the movies) versus a year ago was higher than economists were expecting and exceeds the Bank of England’s (BoE) target of 2% (Why a 2% target? Click here). By comparison, inflation was 0.3% at this time last year.


The big fall in the value of the pound in the aftermath of June’s Brexit vote has a lot to do with the increase: as the pound loses value, it costs more (in pound terms) to import goods and services which thereby drives up prices (“imported services” include things like Salesforce software and foreign holidays).

Why should I care?

For the markets: The pound increased in value.

Some investors think that the BoE will raise its target interest rate in an effort to dampen inflation. Remember, higher interest rates make it more expensive for people to borrow, and thus spend, money – and less demand for things means less pressure on prices moving up. Higher interest rates would make the pound more attractive to international investors (Why? Click here) – which, in turn, was likely behind the pound jumping almost 1% versus other major currencies on Tuesday.


For you personally: Slowing economic growth and rising inflation aren’t nice – but it might be temporary.

Life could be getting more expensive if your wage isn’t growing, at least, at the same rate that prices are increasing. The question, as always, is how long this will last. If the pound does not fall significantly further versus other major currencies like the euro and the dollar, then inflation should begin to ease – meaning the effect could be relatively short-lived. So keep an eye on the value of the pound for a sense of how much your costs change over the coming months/years.

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Investors Flock To Iceland

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What's going on here?

Goldman Sachs is among a number of investors that have bought a stake in the Icelandic bank Arion – it’s a sign of how far Iceland has come since the 2008 global financial crisis hit the island nation hard.

What does this mean?

In the years leading up to 2008, Iceland’s banks swelled in size with investment from foreigners. The banks reinvested that money in lots of the risky investments that ultimately led to the 2008 financial crisis (like in the movie The Big Short).


When it all came crashing down, Icelandic banks, effectively, went bankrupt. In response, Iceland’s government took the rare step of blocking money from leaving and entering Iceland. While this angered foreign investors, it bought Iceland time to nurse its banks back to health and, ultimately, limited the damage to Iceland’s economy. After eight years, those restrictions were lifted last week, and global investment funds have wasted no time in re-entering the country.

Why should I care?

For the markets: Iceland is on a roll.

In the wake of its banking system collapsing, Iceland refocused on its traditional strengths, namely fishing and tourism (as well as some manufacturing). Tourism, in particular, helped the economy grow more than 10% in the most recent quarter.


The bigger picture: The flexibility of being a small and independent country can be very helpful in times of crisis.

Iceland had the benefit of total autonomy as it took actions to save itself. It’s a luxury that many other European countries didn’t have in the wake of the financial crisis. For example, it would be far more controversial if a country that uses the euro were to restrict money from leaving (a Greek euro is supposed to be worth the same as a German euro). While being the member of a large currency bloc, such as the euro, certainly has some benefits, it also comes at the cost of flexibility that can be useful.

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Disney Turns From Beast To Beauty

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What's going on here?

Belle may have got her Beast, but Disney got $170 million in weekend box office revenue following the opening of Beauty And The Beast (tweet this). The strong performance reminded investors of some of Disney’s traditional strengths.

What does this mean?

Good ol’ fashioned filmmaking is helping Disney ward off some of the concern associated with ESPN, its struggling televised sports division. In a sign of the value of its franchise, Disney is taking old animated classics, like Beauty and The Beast, and remaking them into “live action” films featuring real actors. Along with Pixar animations (e.g. Finding Dory), Marvel superhero movies (Captain America: Civil War) and the Stars Wars franchise (which it now owns), Disney is producing blockbuster movies that are making a material impact on its profits. Furthermore, Disney is able to use those movies to sell merchandise and entice more visitors to its theme parks.

Why should I care?

For the markets: Disney’s stock has enjoyed some magic recently.

Six months ago, Disney’s stock was languishing around $90 per share as investors fretted over declining subscribers at ESPN. While that division remains an issue, investors have clearly become more confident in the Disney story as the stock is now at $113. The strength of its diversified operating model, i.e. movies, merchandise and theme parks, probably has something to do with that.


The bigger picture: The power of (some) brands is eternal.

Disney’s movie strategy rests largely on resurrecting brands from the past, which is an indication of how difficult it is to create new brands that resonate with people. The huge recent proliferation of content may have something to do with that: with greater competition for our viewing attention, it is much harder to re-create the resonance of a movie like Beauty and The Beast now than it was when the animated film was first released in 1991. If true, that would benefit companies like Disney that have a portfolio of iconic brands from previous decades.

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Brazilian Steak Scandal

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What's going on here?

Shares of Brazilian meat companies are having a torrid few days after allegations of corruption and contaminated meat on Friday have created huge problems for one of Brazil’s biggest export industries.

What does this mean?

You may not know it, but Brazil is one of the world’s biggest exporters of meat. On Friday, Brazilian police alleged that politicians and public health officials received bribes to turn a blind eye to exports of contaminated meat. Shares of JBS and BRF, two Brazilian companies that are among the world’s biggest producers of processed meat and poultry, sold off sharply on Friday in response (both companies have strongly denied any wrongdoing). On Monday, stocks of those companies and others in the industry went down further as China and South Korea placed new restrictions on Brazilian meat imports. Other countries may also take action – obviously that wouldn’t be good for Brazil’s meat industry!

Why should I care?

For the markets: Food producers are constantly at risk of scandal.

While every industry is, of course, at risk of corruption, the food industry is particularly vulnerable to people’s perceptions of quality because it matters so much to our health. Tyson Foods in the US has recently struggled due to a bird flu outbreak, and the “horse meat” scandal isn’t too far back in the memories of British consumers. All these incidents knocked stock prices hard.


The bigger picture: This appears unlikely to derail the Brazilian recovery.

Brazil has had a rough few years as economic activity contracted significantly from 2014-2016, following a huge corruption scandal and related political upheaval (including the impeachment of its president). Its economy, while still struggling, appears to be turning a corner. While this scandal is certainly unwelcome and will likely hurt growth, it’s probably not enough to imperil Brazil’s overall recovery.

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