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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The Battle For Toys & Games

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What's going on here?

Game on! American toymaker Hasbro reported better-than-expected profits in its most recent quarter thanks to sales in its digital games division – and its stock price hit an all-time high!

What does this mean?

Sales from Hasbro’s gaming division went up 24% compared in the first three months of 2017, which includes digital gaming along with well-known board game franchises like Monopoly. The company also said that it expected the bump in sales to continue through this year, in anticipation of toy sales related to upcoming Star Wars, Marvel, and Transformers movies. Altogether, profits from entertainment and licensing more than doubled versus a year ago — and investors were excited enough to send the stock up by over 5% on Monday.

Why should I care?

For the stock: Hasbro is winning the toy war with Mattel.

For the first time since 2000, the size of Hasbro’s quarterly revenues surpassed that of its chief rival, Mattel, another American toymaker producing brands like Barbie and Hot Wheels. While Mattel has historically outcompeted Hasbro, the tables started to turn last year when Hasbro won a big contract for the rights to manufacture dolls from the 3D Disney hit Frozen – the kind of deal with Disney that had long been reserved for Mattel. Mattel reported worse-than-expected earnings last Friday, and Monday’s results confirm that the tide is still moving in Hasbro’s direction, thanks to its growing advantage in franchising.


The bigger picture: Hasbro is trying to bring traditional games into the 21st century.

The rise of electronic gaming has been a competitive threat to traditional toymakers like Hasbro, but it’s responding with its own initiatives. For example, it is launching a subscription service that will deliver three new board games every three months to customers’ doorsteps. It’s also launched apps and digital interfaces for Dungeons & Dragons, one of its best-selling board games. Mattel, for its part, has hired a former Google executive to be its new CEO, and she’s promised to boost Mattel’s offerings in mobile games. One big question is whether these companies can use their existing brand power to drive success in a digital setting.

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Investors Cheer On Les Bleus!

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What's going on here?

It was only the first round of the French presidential election, but a victory for market-friendly candidate Emmanuel Macron led to a big rally for the euro and European stocks (tweet this) – and helped push stocks in other regions higher too.

What does this mean?

Sunday’s election narrowed the field down to two candidates. In two weeks, Macron will face off against Marine Le Pen, who is in favour of France leaving the euro. Investors were heartened that Le Pen did not perform better than polls predicted – after surprises with the Brexit vote and President Trump’s election, investors were more distrustful than usual of polls. Current polls give Macron a roughly 60/40 advantage heading into the final round, and investors appear confident in his victory.

Why should I care?

For the markets: Eurozone investments had a great day.

Investors moved into eurozone investments that, for international investors, involve buying the euro. That helped push the euro up versus other currencies. Eurozone stocks jumped about 4% (which is a lot for one day!), reflecting investors’ optimism that a major risk to the eurozone economy had abated. The optimism fed through to other markets, with almost all major stock markets higher on Monday; it was what traders call a classic “risk on” day (when riskier investments, like stocks, go up).


The bigger picture: France’s election could be seen as a vote of confidence in the euro.

The nine years since the financial crisis have been challenging for the eurozone, with relatively high unemployment and bailouts of over-indebted states. Anti-euro movements have gained ground in countries such as Italy, France and others. If Sunday’s electoral result in favor of Macron is repeated in two weeks it will be, effectively, an endorsement of the euro by its second largest economy – and a big pare back of a potential existential risk for the euro.

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Oil’s Roller Coaster Ride

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What's going on here?

The oil price dropped about 7% last week, to below $50 per barrel, as concerns over increasing US production, once again, weighed on the price.

What does this mean?

The oil price barely moved for the first three months of this year, enjoying a period of calm after OPEC, a group of oil-producing countries, agreed to limit their production – and thus boosted the oil price. But the past month or so has proved much more tumultuous, as the oil price has risen and fallen by more than 10% three times. The price appears to be driven primarily by the conflict between America’s increasing production and OPEC’s willingness to extend its supply cuts beyond the initial agreement (which is due to end in June).

Why should I care?

For the markets: It’s very difficult to predict how this will play out. (tweet this)

The acceleration of US oil output appears set to continue, as it’s profitable for US producers to ramp up drilling as long as the oil price remains in this general area. Whether or not OPEC will agree to extend its cuts remains unclear, although suggestions from Saudi Arabia indicate that it will. Another wild card is whether demand for oil will increase (many, including Goldman Sachs, think it will), which would be a positive factor for the oil price.


The bigger picture: The oil price tends to have an impact on overall stock prices.

It’s not always the case, but stock prices often move down when the oil price sells off and vice versa. For one, lots of companies are, of course, involved in drilling oil or servicing those that do – and their success creates more well-paid consumers for the wider economy to feed off of. In addition, if demand for oil falls (or doesn’t grow) it can be a sign of wider economic weakness (there are also other reasons too!).

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General Electric Gives Economy Thumbs Up

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What's going on here?

General Electric (GE), one of the world’s biggest industrial conglomerates, reported earnings on Friday that appeared to beat Wall Street’s expectations – but its stock still fell over 2%…

What does this mean?

The good news was that GE made both more revenue and profit than expected. And an important measure of its sales, which excludes things like changes in currency values, was up 7% – an encouraging number given relatively slow global economic growth.


However, GE posted a much lower “cash flow” measure than what the market was expecting. Investors often use cash flow, which is literally the amount of money (in cash) that the company took in (or gave out) during the quarter, as a clean measure of a company’s performance (e.g. it doesn’t include complicated things like writing down the value of ageing equipment, which typically affects “profit”). GE said its weak cash flow was due to one-off factors, like the timing of customers’ orders, and that it would even out later this year; but the big drop certainly gave investors pause for thought.

Why should I care?

For the markets: On the whole, it was a good day for industrial companies – and the economy.

Honeywell and Rockwell Collins, two other large manufacturers, both reported earnings that beat Wall Street’s expectations and saw their stock prices jump. Industrial companies are usually good bellwethers for economic growth as a whole, since, for one, they provide a lot of the equipment that other businesses use – and the signs from the first quarter appear to be, at the very least, decent.


The bigger picture: Global growth is accelerating, according to GE.

GE is active all over the world, and therefore has a worthwhile perspective on global economic growth. In the CEO’s view, the US continues to improve, and Asia, Latin America and Africa appear to be growing more strongly than last year – which is good news for the global economy.

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US Rail Steams Ahead

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What's going on here?

The freight railway industry is, in many ways, the circulatory system of an economy – which is why better-than-expected results on Thursday from one of America’s biggest railway operators are good news for the global economy too!

What does this mean?

CSX, which controls most of the railroads in the eastern United States, beat Wall Street’s expectations when it reported that its revenues in the most recent quarter jumped almost 10% versus last year – a big amount given the US economy is growing only around 2%.

Why should I care?

For the stock: Investors are bullish on the prospects of a turnaround under CSX’s new boss.

CSX recently hired an expert in reviving railway companies to be its new CEO. His track record of keeping the trains on time, cutting costs and raising profits has already boosted investors’ optimism – the stock is up almost 80% in the past year. He’s only just taken over, so he probably shouldn’t be credited with the most recent quarter’s strong financial performance. For investors, however, it’s good news that the so-called “turnaround artist” is inheriting a company that already seems to have regained some momentum.


The bigger picture: More railway activity can be a sign of an improving economy.

When economic growth improves, it makes sense that more stuff would get shipped by train: demand for raw materials such as coal and oil increases and more goods from container ships are transported from ports to stores. As such, CSX’s results could be a signal that the US economy is getting stronger, despite some suggestions to the contrary. It’s also good news, to some extent, for the global economy, since a sizeable chunk of CSX’s freight is destined for other countries (and more freight suggests greater global demand).

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German Automakers Earn Big, Spend Big

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What's going on here?

The three biggest German automakers – Daimler, Volkswagen and BMW – all published their earnings on Thursday. And while Daimler-owned Mercedes might keep on zooming past BMW, all three companies beat investors’ expectations!

What does this mean?

Mercedes has kept its spot at the top of luxury car sales among Germany’s biggest automakers, with sales growth three times that of BMW. But there were perhaps more similarities than differences in the results of the big three. All are spending heavily on new technology that’ll (hopefully) win them a place at the top of the industry as electric and self-driving cars go mainstream.

Why should I care?

For markets: German automakers are making big, expensive bets on the success of electric cars.

While BMW reported a drop in profitability versus last year, investors have chalked up those lower margins to the company’s investments in its electric car business. Daimler is also looking to make headway into that market: it’s investing €11 billion in electric cars over the next ten years, mostly for its Mercedes brand. Volkswagen is also making a huge push into electric cars as part of its “Strategy 2025”. The downside? The big increase in expenditures is hurting the profitability of all these companies in the near term.


The bigger picture: China remains a source of strength for German automakers.

China has been a nice place for German automakers to do business in the past few years – auto sales grew there by over 15% last year and German cars accounted for 19% of all car sales. Last year’s sales figures were pushed up by a temporary tax break on car purchases, which left some wondering if the demand for cars would stick around – however, strong quarterly sales from German automakers in that market suggested those alarm bells might have been premature.

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IBM Struggles To Keep Up

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What's going on here?

After reporting lower quarterly revenue and profit versus last year, IBM saw its stock slide by almost 5% on Wednesday!

What does this mean?

Over the last few years, IBM has begun to pivot away from its traditional products like computers and operating systems (where profits are low across the sector) towards newer sectors like cloud computing and artificial intelligence. IBM reported that revenue from these new initiatives bumped up by 12% over the past 12 months, which is a good sign for that turnaround plan. However, it still wasn’t enough growth to make up for declining revenues in the other parts of the company (like its legacy software business, which saw sales decline 22% versus last year).

Why should I care?

For the stock: IBM has previously said improving profitability is more important than declining revenue – but investors appear unimpressed.

IBM has been working to improve how much profit it earns (i.e. increase its margins) by shifting into newer businesses such as artificial intelligence (e.g. Watson) where it has, arguably, built a first-mover advantage. In theory, as an early entrant into the market, IBM can earn high margins before too many competitors enter the market and potentially push prices down. However, Wednesday’s results suggest that IBM still is not improving its profitability quickly enough to keep investors happy.


The bigger picture: Innovative competitors make it tough to stay on top in tech.

It wasn’t long ago that IBM was the world’s second most valuable tech company, but it’s been eclipsed by the likes of Amazon, Alphabet and Facebook. The nature of tech is inherently disruptive – far more so than relatively static industries like airlines or soft drinks. With each new competing innovation in the market, IBM has either had to innovate even more or take a hit as lower revenues from its existing products dragged down its overall revenues – and that’s a challenge today’s tech behemoths are already facing.

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