M&A takes centre stage with Netflix bid for Warner Bros ahead of next week’s Fed decision

Michael Hewson (00:00)

Hello, welcome to this week’s podcast brought to you by the Good Money Guide and our sponsors Pepperstone who are a multi-regulated CFD broker providing trading services in Forex stocks and commodities in multiple destinations. I’m Michael Heathen. Joining me once again is Pepperstone Senior Market Strategist Michael Brown. Good morning, Michael. And how you feeling this morning, Because you were out and about yesterday, weren’t you?

Michael Brown (00:23)
Yes I was, very good morning to you mate and a happy Friday. We are recording on a Friday morning because I was out for what we could term a proper lunch yesterday. I have, well that’s one way of putting it. I have felt fresher when my 4am alarm went this morning. Let’s put it that way and leave it there.

Michael Hewson (00:33)
Out on the lash.

You

I can honestly say mate, even when I was at CMC, I very rarely set my alarm for 4am. The only time I did was when I was actually having to do the BBC at 5.30. Otherwise it’s usually about a 5.15, 5.30 alarm call. So that’s dedication, that’s dedication mate.

Michael Brown (00:55)
⁓ just drop that in.

Yeah, well, either way, I am.

And I’m here and we’re to get through the podcast and hopefully provide some value and then I’m going to go for a long lie down afterwards.

Michael Hewson (01:14)
Well, that’s fair enough. In that case, I will jump straight to the risk warning and then we can get into the topics of the week. ⁓ The information provided here, whether from a third party or not, isn’t to be considered as a recommendation or an offer to buy or sell or the solicitation of an offer to buy or sell any security financial product or instrument or to participate in any particular trading strategy. We advise any readers, viewers or listeners of this content to seek their own advice.

Michael Brown (01:18)
Indeed.

Michael Hewson (01:40)
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 72 % of retail investor accounts lose money when trading spread bets and CFDs with this provider. Okay, so topics. We’ll look at what’s driving markets this week. And to be fair, I think we’re pretty much drifting into year end. We’re gonna be looking ahead to next week’s Fed meeting. And I think that’s what markets are sort of hanging their hats on.

not only in terms of a Fed rate cut, but obviously we’ve got the Bank of England and the ECB the week after that. Bit of M &A, dominating proceedings at the moment. We’ve got Netflix is in talks with Warner Brothers, so we’ll talk about that. Unilever looking to finalise the spin-off of its Magnum ice cream company over the weekend with a view to starting trading in Amsterdam on Monday.

Michael Brown (02:34)
Yes.

Michael Hewson (02:36)
Looking at UK markets, the mixed PMI numbers that we’ve seen this week are think reflective of the uncertainty in the lead up to ⁓ Rachel Reeves budget. ⁓ We’ve also got

Michael Brown (02:51)
That wasn’t quite as as you were hoping, I don’t think.

Michael Hewson (02:51)
No, it wasn’t.

Have a quick look at Mitchell and Butler’s full year numbers, which came out last Friday. They deferred them by a day and we found out they deferred them by a day simply on the basis of they wanted to see what was in the budget. Belfort Beatty’s third quarter numbers, another decent set of quarterly numbers. Fraser’s group, first half numbers, bit of a mixed result to them or a mixed reaction to them.

Michael Brown (03:07)
Yes.

Michael Hewson (03:20)
and then we’ll look ahead to next week, the Fed rate meeting, UK GDP, and not much in the way of earnings to speak of really, maybe Broadcom, that’s of note if he’s into the AI story, but otherwise we’ve only got British American Tobacco and Chem Rings for year numbers. Okay, so Michael, drifting into year end.

Michael Brown (03:41)
Yeah, absolutely. I think that’s a really good way to frame it. I mean, we spoke in mid-November and we were talking about how sort of Thanksgiving will probably mark the end of the year for a lot of market participants. And I think that very much has proved to be the case. Not only if you look at how markets have traded this week, which has been in very lackluster fashion, if we’re being completely honest, but also just speaking to market participants. I think there’s very much a view that actually we’ve got, well, as we stand here now, effectively 10

proper trading sessions to go before everyone really does shut down for Christmas. You’re certainly not going to make your year in those 10 sessions, but you very well could lose your years. So think a lot of people are taking on a bit more of a defensive tone and frankly just sitting back and watching the days go by at this point.

Michael Hewson (04:30)
and the S &P is drifting up back towards the highs that we saw end of October, beginning of November. There doesn’t appear to be anything that is likely to derail any of the gains that we’ve seen thus far this year. Essentially, I think I’m looking at the markets at the moment and I think they’re just drifting higher. There’s no real catalyst.

Michael Brown (04:36)
Yeah.

Yeah, and…

No, there is no real catalyst. And I think we’re still in the equity space, not just on Wall Street, but globally, we’re in a market where the path of least resistance does lead higher. And unless and until a catalyst comes along to derail us from that path, which hasn’t happened yet, then I think the market is just going to continue on that sort of upwards drift, probably into year end. And you’d expect that in the start of 2026 as well.

Michael Hewson (05:20)
The dollar looks pretty weak though. ⁓ It’s continued to weaken. Yeah. Yeah, I mean it’s not had a great year anyway, but looking at where euro dollar is looking at where cable is Even euro sterling ⁓ You know, we’ve had a bit of sterling weakness ⁓ But certainly not being reflective in the pounds performance

Michael Brown (05:23)
Yeah, rolled over quite a lot this week.

Yeah, actually, know, cable trading just shy of 134 yesterday and today, that is very much a dollar led move. you know, the greenback has been trying to recover some of that lost ground with down about 10 % on the year, if you look at the dollar index. And we have been working to try and recover some of that lost ground. And it seems over the last week or so that that rebound has just run out of steam. And some people are saying that it’s participants reacting to the increasing likelihood that Kevin Hassett becomes the next Fed chair.

think that’s a little bit wider than mark to be honest. I don’t think that’s a reason to sell the dollar on its own. Again, it’s just a sort of continuation of the momentum that we’ve already seen for a majority of the year so far.

Michael Hewson (06:19)
Hmm.

think there’s a sense that obviously as we head into the twilight weeks of Powell’s ⁓ chairmanship, there’s an expectation that somehow ⁓ any new Fed chair is likely to be a bit of a poodle when it comes to obviously implementing the US government’s wishes with respect to lower rates. But as we’ve said on a number of occasions on this podcast, the chairman is one person. He’s not going to be able to sway the whole committee.

And I think markets perhaps are reading too much into the appointment of a ⁓ Trump positive Fed chair in the context of actual Fed policy.

Michael Brown (07:09)
Yeah, absolutely. I mean, we’ve actually already seen what happens when Trump appoints a puppet to the Fed and they try and push, frankly, economically illiterate policies because Governor Stephen Myron is doing that right now, running around saying that, you know, neutral is below 2 % and they should cut at least 50 basis points every meeting. The reason they’re not doing that is because the other 11 members of the FOMC do not believe that there’s a coherent or comprehensive economic argument to do that.

So Kevin Hassett, even when he is named as Fed Chair, is going to face exactly the same issues that Governor Myron is currently facing. The only difference of course will be he is the chair and it would be very unusual for the chair to be in the minority. But you could well end up with a situation where that turns out to be the case.

Michael Hewson (07:58)
What does that say about the feds credibility?

Michael Brown (08:01)
I think that’s a problem. I think that does then become a problem. And the policy messaging becomes a big problem because you’ve got, know, chair has it as he may be standing up at a post-meeting press conference, trying to explain a decision that he hasn’t voted for. that then becomes very, very messy in terms of signaling, in terms of credibility. ⁓ But, you know, I think the market is overreacting to that right now. We are still six months away from whoever it is getting that Fed chair job.

⁓ And it does just, it does feel a bit like people are just trying to pin a bit of a narrative on the price action and that’s an easy one to reach for, to be honest.

Michael Hewson (08:39)
putting the cart before the horse, so to speak. I think that’s an interesting dynamic and I think it’s something that will develop as we head into 2026 and it’ll be interesting to see how markets react to that. But we’ve seen in the past how I think mixed messaging at a press conference can introduce an awful lot of volatility in the stock market and the bond market in general. We’ve seen that with Powell when he’s deviated off message.

Michael Brown (08:41)
Hmm. Absolutely.

Michael Hewson (09:07)
so to speak, away from the dot plots and what have you. And it’s required weeks of clarifications from various fed speakers. ⁓ That is going to be an interesting dynamic going forward if you’ve got that push-pull between the chair and the rest of the committee. But obviously that’s for another discussion. And it does assume that obviously HASSIT does get the nomination. But more importantly, whoever gets the nomination, there’s still going to be that push-pull.

Michael Brown (09:14)
Yeah.

Yes.

Yeah, absolutely. But yeah, that’s very much a 2026 story.

Michael Hewson (09:36)
Yeah, okay. ⁓ &A, bit of a comeback today. There’s story on Bloomberg that Netflix is in talks with Warner Brothers Discovery ⁓ for its studios and streaming business. Now that is an interesting one. Looking at Netflix’s share price in the pre-market, it’s only down 0.7%, despite the markets assigning a $60 billion valuation.

Michael Brown (09:48)
Mm.

Michael Hewson (10:03)
to the studios and streaming business. That’s an interesting one, isn’t it? Antitrust.

Michael Brown (10:09)
It really is an

interesting one. Yeah, I just bringing up the Netflix price. Yeah, we’re down about 1 % pre-market. Yeah, as you say, it’s going to be an interesting one. I mean, we know that Warner Brothers Discovery has sort of been up for sale for quite some time now and Paramount were trying to get involved with it as well. But yeah, I think there are going to be quite considerable competition and antitrust concerns around that deal because, you know, it is getting to the point where are you looking at monopolies in the media space in the United States?

But as we know, this is the Trump administration, so it’s effectively going to be, you know, who has carried the most favour with the Justice Department will ⁓ get their own way.

Michael Hewson (10:49)
I think it’s an interesting one though because I think it speaks to the saturation in streamers and the fact that there are so many different streaming options now available. mean not only do you have Netflix obviously got Amazon Prime, you’ve got Disney Plus, you’ve got Paramount Plus. I mean even YouTube now is starting to become a streaming destination of choice when it comes to content and ultimately there will need to be some sort of rationalization.

Michael Brown (10:54)
Mm.

Michael Hewson (11:18)
because ultimately there’s absolutely no way that all of these streaming services are going to be generating a profit. And Netflix is by far and away the biggest, and it’s actually amazing for me to say that. And I haven’t even mentioned Apple, Apple TV. So there will need to be some sort of consolidation. And I do notice that there will be, mean Warner Brothers are already getting ahead of this.

Michael Brown (11:35)
Yeah. Yeah.

Michael Hewson (11:46)
when they say they’re going to spin off the cable channels including CNN, TBS and TNT. So unlucky you guys if you’re thinking you’re going to get TNT sports through Netflix, you ain’t. Yeah.

Michael Brown (11:56)
Yeah, yeah. Well, I mean, that’s a completely separate issue because

TNT seem to be losing their rights catalog more and more every day. But yeah, I mean, we’ve spoken before about how saturated the streaming market is. You know, everyone’s got 15 streaming services that they’re paying a tenner a month for, or they’ve got them on rolling trials or whatever. And I do actually just wonder, obviously, there are other aspects to the deal. But, you know, is that the draw?

for Netflix to effectively just be buying out and eliminating one of their main competitors.

Michael Hewson (12:26)
Well also, think it’ll allow them to enhance their own studios content because they’re making an awful lot more of their own content now. And obviously if they’re able to leverage the Warner Brothers studios on top of the stuff that they’re already producing. ⁓ you know, indeed, I mean, and obviously taking over HBO as well. So home box office. So it’s a big deal and it is cutthroat. I mean, you’ve got Apple TV at the moment, they’re discounting.

Michael Brown (12:42)
Yeah, sort best of both worlds for them almost.

Michael Hewson (12:55)
499 for six weeks and then 999 thereafter so Even Apple which isn’t generally renowned for discounting its services is going the discounting route When it comes to Apple TV to try and get their hooks into people To deliver that content and their content to be fair to Apple TV is getting better But it’s not quite tempting me yet, but it’s getting to that point where it might

Michael Brown (13:05)
is.

Yeah, well, there we go. Tim Cook, if you’re listening, you’ve got a customer on his way, potentially. ⁓ He’s a hard man to please.

Michael Hewson (13:25)
Potentially, the price, but

when the price point is key, I think it’s a price point and at the moment.

Michael Brown (13:31)
And I think that’s

actually, sorry, gonna say, I think that’s gonna become common for all of the streaming companies. is effectively now a battle over price, not necessarily as much a battle over content. yeah, I think it’s gonna be interesting to see how that deal evolves because it is clearly not going to be an easy path from today announced to completion at some date in the future.

Michael Hewson (13:56)
But certainly I think if Netflix does get Warner Brothers’ discovery, it’s going to get access to a whole host of new content. And that will obviously enhance its offering even further and make it pull further ahead of its peers who have much deeper pockets, Disney, Apple and Amazon. And yet they’re still number one by distance.

Michael Brown (14:12)
Yeah.

Yeah.

Yeah, and you’d expect them to be consolidating that position.

Michael Hewson (14:21)
You would think so. would think so. Moving on. Unilever. It’s finally getting around to spinning off Magnum Ice Cream Company. Putting the finishing touches to it over the weekend. ⁓ Ben and Jerry management have once again, ⁓ I think, been doing their best to throw a little bit of a fly in the eye. I very polarizing with some of their political stances, shall we say. But I think it’s a case of what might have been, I think, for London on Monday.

Michael Brown (14:45)
Yes.

Michael Hewson (14:50)
Magnum Ice Cream Company will launch in Amsterdam and valuation 15 billion euros what might have been

Michael Brown (15:00)
Well, absolutely. mean, that would have been one of the biggest listings in London in quite some time. And as you say, it is very much a case of what we could have had. Yes, there will be a secondary listing in London, but that’s not exactly the same thing by any stretch of the imagination. But I think it’s going to be interesting to see how this one goes down, what the market reception is. I think they’re going to be priced at 3.50 when those shares float next week. So it’s going to be very interesting to see how the market takes that.

Michael Hewson (15:08)
Hmm.

Michael Brown (15:30)
and where we go from there. Because of course this is from a Unilever perspective, this is actually quite a long running effort that the firm has been doing, not only in terms of the ice cream business, but they are really trying to and actually are considerably slimming down their portfolio of products and of brands. And that’s something that’s been ongoing for a while.

Michael Hewson (15:38)
Hmm.

Yeah, it’s just a shame that, you know, this would have been a great advert for London, but unfortunately London’s attractions are slowly melting away.

Michael Brown (16:01)
Yeah, absolutely. And that’s terrible. And I’m going to move on from, don’t even want to acknowledge how utterly appalling that was.

Michael Hewson (16:10)
Sorry mate, couldn’t resist.

Michael Brown (16:13)
Dearie Mae. Moving on, shall we scoop up something else?

Michael Hewson (16:15)
Anyway.

⁓ yeah, so anyway.

Michael Brown (16:20)
So can

play that game.

Michael Hewson (16:24)
dude, pull it together Michael, pull it together.

Michael Brown (16:27)
It’s not me that went off the rails. That was yesterday.

Michael Hewson (16:29)
No, I know. Yeah, indeed.

So yeah, mean, basically markets, you know, pretty positive heading into year end yields, little bit lower. What do you make of the fact that UK yields are at the bottom end of their recent ranges?

Michael Brown (16:42)
Mm.

Yeah, I mean, thankfully, the Chancellor has not come out and tried to claim credit for this. think there are two. Yeah, yeah, to give it time. I think there’s two drivers just for a bit of context, the 10 year gilk trading below four and a half percent this morning for the first time in a while, the 30 year trading down at 5.15 percent at this moment in time. I think there’s two drivers. One is, as we discussed last week, very much a kind of mindset of the budget could have been worse. Yes, it clearly was not great.

Michael Hewson (16:53)
yet.

Michael Brown (17:17)
Yes, there are no measures in there to boost economic growth, but also Rachel Reeve did build on her fiscal headroom to the market, taking that positively, of course. The other thing is actually more of a technical one, which is that the DMO have significantly cut the amount of supply at the long end of the curve. And I would argue that is actually playing a bigger role in this move.

than anything else. Lower supply of long-term gilts, naturally all else being equal, you’d expect the price to increase and the yield to come lower as a result. I don’t think it’s something we should be thinking is going to continue. Political risks are still clearly very, very prevalent. Fiscal risks are prevalent as well with those tax hikes being backloaded in 2028, 2029 and 2030. I think this is more of a relief. Well, this is the problem. This is exactly the problem.

Michael Hewson (18:02)
They’re not going to happen.

Michael Brown (18:07)
I know it’s not going to happen. You know it’s not going to happen. The government probably knows it’s not going to happen. When the guilt market wakes up to that not happening, all of this is going to reverse in very short order.

Michael Hewson (18:16)
I I would argue that they’re setting a trap for the next government.

Michael Brown (18:20)
Yeah, because whoever comes in, those tax hikes will be penciled into the plans and then they effectively have a black hole, just like the one Rachel Reeves claimed she inherited.

Michael Hewson (18:34)
think there’s another factor involved, I think, in the decline in yields. And I think the factor is this. The markets are pricing in the prospect of the Bank of England will have to cut rates, perhaps more than is originally being priced because of the weak economic outlook. I mean, let’s move on to what those PMIs, yeah, the data this week. I mean, that construction PMI, lowest level since COVID, 39.

Michael Brown (18:55)
Well, the data this week has been…

Yeah.

Michael Hewson (19:04)
0.4, yeah. Awful. mean, exactly. mean, it’s… Yeah.

Michael Brown (19:04)
39 spot four. Yeah. mean, disastrous. Absolutely disastrous. There is, I was gonna say that there is no good way to cut that data. ⁓ Yes, construction is now only 5 % of the UK economy, but it’s still a very, very important sector of the UK economy, particularly when the government are running around going, want to build one and a half million houses.

Well, you’re not going be doing that if your construction sector has fallen off a cliff, which is exactly what it has done. You know, the weakest number since Covid, utterly, utterly dire. The details of the report were pretty miserable as well. Yes, pre-budget uncertainty would have played a role in this, but frankly, you really can’t see any prospect of a ⁓ major recovery there.

Michael Hewson (19:52)
New orders of employment showed steep falls with housing activity and civil engineering particularly weak at 35.4 and 30 respectively. Well, if the government’s ambition is to embark on a building spree, there’s little evidence of it here. And I think rather than fixing the foundations, they basically dynamited them.

Michael Brown (20:09)
Yeah.

Well, yeah, effectively, that is exactly what they’ve done. And that’s what I mean in terms of you look at the leading indicators, a big fall in new orders, well, that’s not going to help demand in the next three to six months. A big fall in employment, well, that’s not going to help the sector in the next three to six months. It’s pretty miserable, to be honest with you. And actually, even the services PMI, yes, it came in at 51 spot three, but that’s a whole point lower than where we were in October.

Again, we’re just looking at an economy that is stumbling along at best and stalling at worst.

Michael Hewson (20:51)
Yeah, I mean, obviously, fact that services is still expanding is a good thing. But, you know, as you rightly said, ⁓ there is pockets of weakness there that ultimately, I think, don’t augur well for 2026. You know, and I think that that’s the key here. If the government wants to look at growth and invest in growth, the budget didn’t offer any clues with respect to that, which makes you question.

where it’s going to come from. And I think that’s why we’ve seen the weakness in yields. And to my mind, that’s not a good thing because essentially what the market is pricing is a much more pronounced and extended slowdown in economic activity. ⁓ Fiscal risks aside.

Michael Brown (21:40)
Yeah, no, I think you’re absolutely right. The one interesting thing though, and this is why I’m looking up here because I’ve got my Bloomberg in front of me, actually the market hasn’t really moved its estimate for what we would call the terminal rate, i.e. how low bank rate is going to get. A couple of weeks ago, the market was pricing that bank rate falling to 3.35 % in 12 months time. This morning it’s 3.32%.

So I agree with you. think there is an element of economic weakness play at play in driving that moving guilds. But we are still looking at an economy next year that’s going to have inflation running certainly for H1 of 2026 north of 3%, probably in the high 2 % towards the back half of the year. Is there actually the room for the BOE to ride to the rescue, so to speak?

Michael Hewson (22:31)
Well, that’s obviously a concern. ⁓ think, and certainly I think that’s something that policymakers will have to wrestle with, ⁓ you know, in a couple of weeks time. ⁓

Michael Brown (22:42)
But what

is concerning is, and we heard from a few Bank of England policymakers this week, we heard from Megan Green recently, one of the external members of the MPC. One of the lines she said was she sees green shoots in the labour market. I mean, where is she looking to find that? The PMI numbers pointed to steep declines in employment in all sectors. The ONS data has shown payroll employment falling for 11 of the last 12 months.

Where are these green shoots? I mean, is she looking at a different economy to the rest of us?

Michael Hewson (23:14)
Well, obviously Bank of England have their own regional surveys. So perhaps they’re telling her something different. I don’t know. mean, only she can tell us. I’d love to know where those green shoots are though, Megan. If you’re watching this, please enlighten us. Okay, well, let’s move away from the UK economy. Mitchell & Butler’s, obviously the owners of all, yeah, straight back to it. All Bar One and Toby Carvery.

Michael Brown (23:24)
Yeah.

If you’re listening, please let us know.

Straight back to it.

Michael Hewson (23:42)
really strong set of numbers on Friday. 5.8 % increase in operating profit of 330 million. 4.3 % increase in like for like sales total revenue 2.7 billion and increase of 100 million on the previous year. prices popped or did pop but since that it’s just lost half of it. I think I know why but care to comment? Well.

Michael Brown (23:45)
Yeah.

It’s started to tear about half of that now, hasn’t it? Yeah.

Gone far away. Enlighten

us.

Michael Hewson (24:12)
Obviously, as with any budget, the fine print is sort of the key element to it. And since obviously the headlines have subsided and people have started to read through the budget, they’ve started to look at business rates and pubs. Yeah, absolutely kill them. And reading through that fine print, even though Mitchell and Butler’s did say,

Michael Brown (24:29)
Yes, which are going to kill pubs.

Michael Hewson (24:40)
that they expected cost headwinds of 130 million after analysing the recent budget. Obviously they only had 24 hours to do that. Over the weekend more detail has come to light and I think people have realised perhaps that 130 million is a conservative estimate.

Michael Brown (24:55)
Yeah, and I think it probably is. And for those who are unaware with what’s going on with business rates, I think there’s actually two issues. One is that we’ve had effectively relief or a holiday on a proportion of business rates. I think it’s about 40 % that’s been in place since the pandemic and that’s coming to an end next year. The Chancellor’s not rolled that on. They are also looking to revalue and re-rate.

the levies that businesses pay based on the premises that they’re in. And as you say, know, funnily enough, Rachel Reeves didn’t make a big thing of this at the dispatch box on Wednesday, two weeks ago or a week ago, because they are very, very onerous costs that are going to be levied. And of course, they’re going to hit businesses very, very hard indeed. And setting Mitchell and Butler aside for a moment, because obviously as a larger firm, they are likely to be able to weather this a little bit better, even though it will impact the bottom line.

It’s the independent pubs and restaurants and cafes that are going to be absolutely battered if not sent to the wall by this.

Michael Hewson (25:52)
Yeah, I mean, I was looking at the numbers and actually Tesco’s, know, the big retailers actually come out of it pretty okay. The problem is in the middle. And UK is stacked full of small and medium sized businesses who are going to be absolutely battered by these business threats. mean, who drew, who drew, you know, who drew these plans up?

Michael Brown (26:00)
Mm.

Well, I have no idea. What I can tell you is if anyone checks my Twitter, I’m not saying I’m a podcast, but Labour MPs have come up with a nickname for the people who came up with the budget. Very much not a safe podcast word.

Michael Hewson (26:26)
no, I’ve said…

No, but I mean, I think I’ve made that parallel as well, by costing a certain Mr. Bell and then using another word on the end. Yeah, and then you use something else at the end of his name.

Michael Brown (26:34)
Yes.

Something else. exactly.

Yeah, but you’re right. mean, yeah, this has been thought up by people who’ve clearly got no idea or experience of how the real world of business actually works. It does feel as if some sort of U-turn will have to happen on this front because otherwise it is going to absolutely decimate the hospitality sector when it comes into play. Especially when you’ve got

Michael Hewson (27:02)
Well you’d like to think so wouldn’t you, but I’m not holding my breath.

Michael Brown (27:05)
especially when you’ve got minimum wage and living wage hikes in the mix as well. How many more costs do want to put onto these businesses?

Michael Hewson (27:13)
I mean so obviously since that update on Friday Mitchell and butlers haven’t actually commented on what these business rate changes might mean for them So it’s hard to conclude they won’t be adversely affected by them And I think that’s been reflected in the share price movements that we’ve seen this week since those Friday peaks ⁓

Michael Brown (27:29)
Yeah, well

I think the logical assumption is they will be affected by it and I think the assumption is almost every business will be affected.

Michael Hewson (27:37)
Good, so let’s have a good news story. Balfour BT, third quarter numbers. Share price, again, up for the pretty much fourth day in a row now. There’s nothing in those numbers that would appear to suggest that the business is going anywhere but higher. ⁓ Four-year guidance on its order book, 20 % increase on its order book.

Michael Brown (27:41)
Yes.

Mm-hmm.

Yeah, which is really, really impressive, as you say. And again, just a really strong set of numbers. They’re on track to meet their guidance, meet their expectations. Profit’s going to be up year on year. And it is a company that is moving in the right direction and moving in the right direction in relatively rapid fashion, which frankly, we don’t have enough of here in the UK.

Michael Hewson (28:20)
I mean, it’s strange, isn’t it, Michael? You’ve got a UK construction sector that’s flat on its back, yeah, smashing it out of the park. But obviously, they get an awful lot of government contracts. obviously HS2, all that work that’s going on around the M6 in Birmingham, which I sort of regularly drive past on my trips up to Scotland. But also the power grid upgrades that they’re bidding for.

Michael Brown (28:26)
about for the easier smashing it. Yeah.

Hmm.

Hahaha

Michael Hewson (28:47)
The electricity grid upgrades so obviously they’re in front of the queue for that so in the context of that You know big is better Which is great, but we all know that these projects usually end up costing a hell of a lot more than they should

Michael Brown (29:02)
Yes, exactly that, exactly that. But in the meantime, anyway, it’s a boon for the stock because I’m pretty sure we’re trading at record highs.

Michael Hewson (29:09)
We are, and actually I was looking at the move since the April lows, and they’ve gone from 369p, and they’re now currently at 724. So, pretty, almost doubled in six months indeed. And looking to do further buybacks heading into 2026.

Michael Brown (29:15)
Mm.

They’ve basically doubled in six months. Yeah.

Yeah, which is naturally going to provide further support to the price.

Michael Hewson (29:37)
Yeah.

So a very good success story and new CEO Philip Hoare appears to be taking on the reins in the same way as his predecessor Leo Quinn. Anyway, ⁓ Fraser’s Group first half numbers. Again, nothing really to shout about there. Those peaks at around about 775 have held for the last three months, drifting back towards the lower end of the range. ⁓

Michael Brown (29:48)
Yes.

Yeah.

Michael Hewson (30:07)
Decent improvement in revenues. I’m interested to see where the growth was though Michael, and it wasn’t in the UK.

Michael Brown (30:14)
No, it wasn’t. And they were also flagging an improvement in the luxury space as well, which is certainly not going to find in the UK. But yeah, the rest of the world part of the business seems to be really starting to pick up. And I think, again, this speaks to the diversification that we’ve joked a number of times that Fraser’s Group has basically bought up half the high street. Well, actually, that’s starting to pay dividends because, you know, is that diversification which is allowing them?

to effectively shrug off the sort of woes that are impacting the wider retail sector at this point.

Michael Hewson (30:46)
Yeah,

mean retail profits were up 12.2 % but international retail saw income there rise by 42.8 % whereas obviously in the UK and the rest of the other businesses it’s continued to struggle and they have pointed to the fact that the budget meant that trading remains challenging. I think the big test and we’ve said this before in the lead up to Christmas I think is

Michael Brown (30:54)
Exactly that.

Michael Hewson (31:14)
in spending between now and Christmas Eve. Because when we look at the new year, we’ve got all the trading updates from the likes of Sainsbury’s, Tesco’s and all the other big retailers. And that should give us a flavour of what to expect heading into 2026. Next, next, next, next as well. think memory serves me correctly. Next, Marks & Spencer’s, Sainsbury’s and Tesco’s generally in the first 10 days of January give their

Michael Brown (31:33)
Yeah, exactly that.

Michael Hewson (31:43)
Christmas trading update so that will be very interesting.

Michael Brown (31:47)
Yeah, absolutely. And it is that pivotal time of the year for the retail sector, know, that run up to Christmas. And it will be interesting to see what spending looks like, particularly because obviously, you know, the sentiment among consumers has fallen off a cliff in the run up to, well, the budget, but also run up to Christmas, given the timings. So yeah, it’d be interesting to see whether people do tighten their belts a little bit.

Michael Hewson (32:10)
Anyway, yeah, with pretty much two weeks to go, obviously we’re moving on to next week now. ⁓ Unless there’s anything, yeah, go on.

Michael Brown (32:16)
one last thing actually.

Yeah, I was just going to mention something I wouldn’t usually mention on the podcast. We had the quarterly rebalancing for FTSE 100 this week. British land are coming back and they are replacing WPP who have been in the FTSE since 1998. good. hear that? course. But it’s almost a sort of changing of the guard moment. think that one shows how significantly the advertising space has declined and also how

Michael Hewson (32:26)
All right.

Michael Brown (32:45)
terribly WPP-affared in recent years.

Michael Hewson (32:48)
Well,

I think the problem with WPP, and we’ve talked about this before, is they haven’t adapted to the changing advertising environment where basically Google search has overtaken, essentially taken over the advertising space using various methods, online methods. I mean, I’m looking at WPP share price. And yeah, I mean, it’s a multi-year lows showing little.

Michael Brown (32:55)
Yeah.

and better rule the roost, yeah.

I was

going to say one look at that chart will tell you everything you need to know about why they’re coming out of the index.

Michael Hewson (33:18)
Yeah, pretty much. Pretty much. mean, the move below 450 early this year, I think was a death knell and it’s going to be very, very difficult to recover from that. The CEO has got a real mountain to climb when it comes to, I think, turning that business around. know, but perhaps a spell out of the limelight will be the tonic that it needs, because I think historically companies that have fallen out of the FTSE 100 generally have tended to perform better once the initial shock has worn off.

I can give you Royal Mail for an example when they dropped out of the FTSE 100 a while ago. They’re not back in it now are they? I can’t remember. they then quickly bounced back to go back into it and I can name any number of companies who’ve dropped out of the FTSE 100, spent some time in the FTSE 250 and come back.

Michael Brown (33:50)
Yeah, that’s a point.

don’t think so now.

Yeah, so maybe it might not be the worst move, but yeah, we’ll obviously keep an eye on that one. Anyway, next week.

Michael Hewson (34:21)
Fed. Okay, ⁓ I’ve written a note on my sub stack about my expectations for the Fed. ⁓ The expectation is we’ll get a rate cut 25 basis points. It’ll be very surprising if we don’t get one. And I don’t think the Fed will want to surprise the markets just before Christmas. So I think it’s quite likely we will get one. The big question for me is whether there will continue to be a three way split on the committee. ⁓

Michael Brown (34:33)
Mm-hmm.

Michael Hewson (34:50)
I think they will. ADP this week was weak. Jobless claims though were fairly low. So care to cast some light on this week’s US data. And obviously we’ve got PCE today.

Michael Brown (35:03)
Yes, we do, although the PC data is for September. So at this point, it’s not exactly worth the paper it’s written on. Yeah, the data was interesting. The jobless claim stats yesterday, obviously lowest initial claims numbers since September of 2022. I would caution though that it was referencing Thanksgiving week. So we do need to, I think, take that with a little bit of caution because there could be some seasonal skew in the numbers. The PMIs that we’ve had this week have been okay. The ISM services metrics was at a nine month high.

But I disagree with you. think we will still have a split on the FOMC. think obviously, well, so a three-way split depends on how many people vote for unchanged. Now, let me elaborate on what I mean with that one. So obviously back in October, Kansas City Fed President Jeffrey Schmid dissented in favor of keeping rates steady. I think he’ll probably be joined this time around by St. Louis Fed President Alberto Musilum and probably Boston Fed President Susan Collins as well.

Michael Hewson (35:38)
What, a three-way split?

Michael Brown (36:03)
Now, where it gets a little bit difficult in terms of going, is there going to be a three way split? And what we mean by that, of course, is basically will Governor Myron dissent for a 50 basis point cut? I think he’s been very clear, actually, for once in his pre-meeting remarks, which are basically along the lines of, I want rates to be much, much lower than where they are now. We all know that. I would vote for a 50 basis point cut is effectively the baseline for Stephen Myron. However, if

his vote is the marginal vote. it is his vote that determines whether rates are cut or held steady, then I think he’ll vote for a 25 basis point cut, essentially going, I want rates to be lower. This is the only magnitude of a rate cut that I can achieve at this point, similar to what Alan Taylor at the BOE did back in August. So I think fundamentally there will be a 25 basis point cut. As you said, markets price it as a 90 % chance. The Fed won’t disappoint on that.

Michael Hewson (36:50)
Mm.

Michael Brown (36:59)
because you’d have such an unwarranted tightening of financial conditions in reaction, it would be a complete mess. The question is, what do they say about next year? Because you’ve clearly got a very, very divided committee now. You’re getting the Fed funds rate closer and closer to a more neutral level. Every cut is going to become harder to deliver. What does the guidance look like as we move into next year? Remembering, of course, that Powell has after Wednesday, he’s got three meetings to go as chair, and then he’s out.

Michael Hewson (37:29)
So there’s a possibility we could get what I would euphemistically call a hawkish cut.

Michael Brown (37:35)
I think that’s probably the base case, yeah, would be they lower rates, but they don’t really give any sort of concrete guidance as to when the next cut is going to come.

Michael Hewson (37:45)
with space. All right, UK GDP for October.

Michael Brown (37:47)
Indeed.

That’s gonna be pretty, isn’t it? Let’s be honest.

Michael Hewson (37:57)
Well, these are monthly numbers. regular listeners will know that I don’t set a great set of stock by them. But as a general rule of thumb, they do give a decent guide as to how the economy is performing on a, you know, sort of a rolling quarterly basis. So you look at September and you look at August, there was no growth at all in August and September. It’s hard to imagine there’ll be any in.

Michael Brown (38:06)
Hmm.

Michael Hewson (38:26)
October, given obviously the uncertainty around the budget. ⁓ you could see, I think that could potentially rub a stamp a cut by the Bank of England.

Michael Brown (38:28)
Well, yeah.

Yeah, I I’d argue that a cut is probably rubber stamped already. The big risk to that view is the November inflation numbers, which we get not next week, but the week after. I think it’s the day before, although the MPC will have advanced sites, the data in terms of expectations for GDP, though, just look to the Bloomberg consensus. Consensus points to growth of zero spot one percent on a month on month basis. Decent chunk of that you might see is actually being mechanical effectively.

Michael Hewson (38:51)
which is the same leak as the decision. Yeah.

Michael Brown (39:11)
the JLR shutdown came to an end, so things might rebound a little bit. But on a rolling three month basis, we’re expecting growth to be completely flat and clearly risks of that outlook still tilt firmly to the downside because this is October data, which was clouded by pre-budget uncertainty. November will have been clouded by pre-budget uncertainty as well. And then we move into December and 2026 with the reality of that significantly tighter fiscal policy. yeah, not much cause for optimism.

things sadly.

Michael Hewson (39:41)
You might get a rebound in December as people go out and spend money ahead of Christmas perhaps, which might provide a small end of year boost, but I think certainly in the context of the overall wider economy, it doesn’t look promising aside from the fact that potentially we could see yields edge lower on the basis of expectations of future Bank of England rate cuts, but that’s not the positive story that you really think that it is.

Michael Brown (39:47)
Mm.

No, as we discussed earlier on and in any case it is of course monthly data so take that with a health warning as always.

Michael Hewson (40:16)
Yeah, because it gets revised constantly. Okay, so moving on to earnings and there’s not much on the slate really. We’ve got British American Tobacco. It’s fully in numbers. Again, new generation product revenue remains a small but growing part of the business. Like Imperial Brands, it’s done well this year. Shares up over 40 % year to date. I don’t really expect too much.

Michael Brown (40:20)
Yes, exactly.

Michael Hewson (40:45)
market reaction to it. ⁓ Revenues, first half revenues were down in June. As I say, they’re making cost savings, forecast for the full year. Be interested to see what they project or what they actually finally come out with. But again, it’s one of those boring companies that is a fairly decent income stock if you’re a dividend investor.

Michael Brown (41:09)
Yeah,

I was gonna say it’s got five and half percent dividend yield, which is probably the main attraction of that stock. But yeah, the tobacco names have done well this year, but like you, I don’t particularly see that earnings report being a massive catalyst for anything, which probably means they now move 10 % on the ninth that the market opens.

Michael Hewson (41:27)
Yeah, I doubt it. They’re not at £43 a share. Kemring, fully in numbers. back in November, this is a defense stock. Okay, so it was one of our tips, not one of our tips, but one of the companies we talked about back in March, April that we thought could do well. And it has done well. It’s still up on the year.

Michael Brown (41:29)
I doubt it as well. Yes, very true.

Michael Hewson (41:56)
⁓ It got a boost in May-June on the back of BidTalk from Bain. None of that’s materialised and as a consequence of that, the shares have slipped back. But the overall case for the business hasn’t changed. mean, it’s still seen an increase in its order book. ⁓ The prospects for the company still look promising, despite the fact that there could be an imminent cessation of hostilities between Russia and Ukraine, if you believe that.

Michael Brown (42:01)
Yes.

Michael Hewson (42:26)
I’m not convinced.

Michael Brown (42:26)
Yeah,

no, I mean, obviously we all hope that there is a ceasefire or peace agreement there, but I agree with you. I don’t think it is imminent as certainly not judging by the reporting we see. But yeah, it’s an interesting one. I think the market probably got a little bit over excitable with all of the bid and takeover talk and Bain Capital. And then when that sort of all just fizzled out, obviously the stock came with it. But as you alluded to, the backdrop is still a very, very constructive one for the name. It’s a very constructive one.

Michael Hewson (42:29)
Yeah.

Michael Brown (42:54)
for the defense sector at large. Order books are ballooning in terms of both volume and value. The key question is, can these firms continue to actually keep up with demand? But even if you were to see ⁓ a peace deal in Ukraine, that does not mean that all of a sudden all of these defense spending pledges are going to come to an end. In fact, I think quite the opposite. Governments across Europe recognize that more needs to be spent on defense.

More will be spent on defense. So again, it looks to me as if the backdrop is still very, very favourable.

Michael Hewson (43:30)
I mean before the Bain talk the shares were around about 400p They went up to 600p. They’ve had three attempts at 600p. They’ve dropped back to just under 500p 483p so Yeah, yeah, but I think the big question is we know where do we go from here and certainly I think the fact that we’ve dropped from 600 below 500 perhaps suggests that some investors have lost their enthusiasm

Michael Brown (43:43)
Yeah, and we’re still nicely up on the Yip.

Michael Hewson (43:59)
But I can’t help thinking that at some point that may well return.

Michael Brown (44:04)
Yes.

Michael Hewson (44:05)
⁓ Last but not least, we’ve got Broadcom fourth quarter numbers. I mean, again, it’s ridden the AI boom, this one. Shares, record highs dropped back a little bit, a bit like Nvidia in recent weeks, as attention has shifted to Google or Alphabet.

Michael Brown (44:11)
Yes.

Yeah, and actually, I’m glad you mentioned, I know we’re going to talk about Broadcom in a second, but so the NASDAQ bottomed out on the 20th of November, the local low that we printed in the NASDAQ. Since then, we’re up about 8%, or at least we were, and I was looking at these numbers yesterday. Over the same time period, Nvidia is flat. It has not gone anywhere while the market is rallying, which again, you know, everyone’s been saying AI is all an Nvidia story. Well, that is, as you rightly allude to, starting to shift because obviously,

Google are now taking more of a market share, Gemini seems to be setting the world alight, et cetera, et cetera. But yeah, it’s going to be interesting to see what Broadcom come out with this week. I think not only for the stock in question, but also they will be seen as a barometer for the likes of Nvidia and a lot of the other semiconductor names, which will probably trade in in sympathy with what Broadcom report.

Michael Hewson (45:17)
mean Broadcom are expecting $17.4 billion in revenue for Q4. They showed $15.95 billion in revenue in Q3. AI revenue is expected to see a further acceleration to $6.2 billion for Q4. So, you know, there is growth there and the growth is very much in its AI semiconductor segment.

which rose 63 % in Q3.

Michael Brown (45:52)
Yeah, absolutely. And I think really what we said about Nvidia’s earnings a few weeks back applies to what you would say about Broadcom. The market’s looking for three things. It’s looking for a beat on those expectations you just outlined. It’s looking for guidance to be hiked going into the next quarter or next fiscal year in this case. ⁓ And it’s also looking for bullish commentary from the board that they see the AI theme continuing, that they see demand continuing to accelerate for a number of quarters to come.

If you get those three things, then you would expect the stock to bounce a little.

Michael Hewson (46:24)
Semiconductor solutions now accounts for 57 % of total revenue with VMware and other infrastructure software accounting for the remainder. again, it’s about expectations or beating expectations and beating forecasts, but also what’s their guidance gonna be for 2026.

Michael Brown (46:31)
Yeah.

Yes, absolutely.

Michael Hewson (46:47)
So certainly scope for another pickup towards the upside, but also cognizant of the fact that people aren’t going to load up too much ahead of Christmas. Yeah, exactly that. Don’t worry. no. Yeah, yeah, yeah, yeah. Just a bit. So that may not be reflective. Even if there were a good set of numbers, you may not get the pop that you think you get.

Michael Brown (46:58)
on the 11th of December. Yeah, exactly. Sorry, I’ve lost the date there, but yeah, you’re talking six days before Christmas. You’re absolutely right. Conviction might be lacking a bit.

Michael Hewson (47:18)
Alright, well, I think that is it. mean, we’ve got GameStop, but you know, whatever. MemeStop, GameStop. Yeah. I mean, if you’re interested in what I’ve said about GameStop, it’s on my sub stack, you can check it out on there. ⁓ Okay, well, that’s pretty much it for this week. So obviously, we will talk about the Fed when we reconvene next week, and obviously we’ll preview the Bank of England and the ECB. But, you know, as we head towards…

Michael Brown (47:18)
I think that’s it, isn’t it?

Someone will post on Reddit about it and it will go somewhere. There you go, there’s your GameStop preview.

Mm-hmm.

Michael Hewson (47:46)
sort of Christmas and the new year, may, in fact, we will be doing a little bit of a preview of 2025 and what to look out for in 2026. So I can’t imagine it’s going to be too much different to what we’ve already been discussing for the past few weeks. Still going to be, still.

Michael Brown (47:52)
Yes.

No, but we’ll

do it ⁓ as a Christmas present to our listeners anyway.

Michael Hewson (48:07)
Indeed. All right, Michael, well, I hope you enjoy the rest of the day and we’ll reconvene at same time, well, similar time, same place next week. Cheers,

Michael Brown (48:15)
Indeed. See you later.