More record highs for the FTSE100, as central bank easing bets increase

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 and multiple destinations. I’m Michael Huston and joining me once again is Pepperstone Senior Market Strategist, Michael Brown. Good afternoon, Michael. And before I get into the weeds, I have a small announcement to make. This will be the last podcast between Michael and myself.

in its current incarnation. We plan to be back a month from now, 19th of March, which is timely given the fact that we’ve got Super Thursday.

Michael Brown (00:43)

Indeed. Yeah, very good afternoon, Jimane. For those of you who thought you might be getting rid of us, sadly, you’re not. You’re going to wipe that smile off your face. But yeah, 19th of March is when we hope to be back with you. yeah, day after the Fed, day of the next BOE meeting, day of the next ECB meeting. And I think after the rumours and the reporting that we had this week about Christine Lagarde potentially leaving the ECB early, that confab in Frankfurt could be a little bit spicy. Let’s put it that way.

Michael Hewson (01:11)

It’s an interesting one and it’s something that I really got to be in my bonnet about and we’ll talk about after we get the wrist corning out of the way because yeah.

Michael Brown (01:18)

I was going to say for both of our sakes we need a risk warning before that one because

that will get a bit spicy here and now.

Michael Hewson (01:26)

Indeed, because I have strong feelings about that as Michael and I were discussing just before we hit the record button. let’s get cracking. 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.

Michael Brown (01:35)

Yeah.

Michael Hewson (01:53)

We advise any readers, viewers or listeners of this content to seek their own advice. Spread bets and CFDs are complex instruments and come with a high degree of risk of losing money rapidly due to leverage. 71.9 % of retail investor accounts lose money when trading with this provider. Okay, so I mean, before we get onto that, let’s quickly look back at how markets have done this week. More record highs for the FTSE. ⁓

Michael Brown (02:18)

Yes.

Thank you, Rachel.

Michael Hewson (02:21)

What are you intribute? Yeah, thank you, right

Michael Brown (02:24)

⁓

I definitely don’t bloody well attribute it to that. can be sure of that.

Michael Hewson (02:30)

No, I think there’s an

element of central bank anticipation of central bank easing. We’ve had weeks, well I say week, we had a week US CPI reading last Friday. Obviously, that’s been partially undone by Fed minutes last night. Obviously, we’ve had UK inflation numbers this week and we’ve had some fairly decent company earnings this week. But it’s the Fed minutes that I think that I want to talk about first and foremost.

Michael Brown (02:42)

Mm.

Michael Hewson (02:59)

And I think perhaps, and I think you touched upon it on a podcast this morning, people are reading way too much into that than is actually the case.

Michael Brown (03:07)

⁓ massively. mean for those who are unaware, know, the release of minutes from a Fed meeting is usually probably one of the most boring things in financial markets. They’re three weeks old and they don’t typically tell us much.

by way of new information. There was a line in the minutes from the January meeting that said something along the lines of several policymakers would have favored more two-sided policy guidance, ⁓ essentially along the lines of, ⁓ if inflation were to remain stubbornly above target, we would be prepared to tighten policy again. And of course, all the usual suspects have kind of run with that and gone, ⁓ that means the Fed’s next move is going to be a hike.

Michael Hewson (03:38)

Big If.

Michael Brown (03:43)

Absolutely not. I actually wrote up a note on this this morning and you you’ve got to look at the totality of the data. Inflation, yes, it is still above target, but it is moving in the right direction. And of course, the Fed have a dual mandate. It’s not only the price side of the equation, but also the labor market. And the U.S. labor market is still looking a little bit fragile under the surface. So I think it’s essentially jumping to conclusions to go that line has been in the minutes, which means the Fed are going to tighten policy again. It absolutely does.

not and the data does not suggest any need for a rate hike from the Fed at this moment in time and I doubt it will throughout the year to be completely honest especially when Kevin Walsh is coming in and is likely to adopt a much more dovish stance anyway.

Michael Hewson (04:26)

Yeah,

indeed. Nothing what you’re seeing today, I think is just a little bit of a rebound from the sliding yields that we’ve seen over the course of the past few days. And as a consequence, I think it’s just merely mechanical. Anyway, putting that to one side, let’s go through the topics that we’re going to talk about today, sort of lay out what’s on the agenda. So.

Michael Brown (04:35)

Mm.

Yep.

Michael Hewson (04:52)

Obviously, we’re going to look at what’s driving markets this week, of which the Fed minutes was one. There was an interesting line in the Fed minutes about the Fed rate checking dollar yen. So going to talk going to going to talk about that. Obviously, we’ve got a big day tomorrow for the UK data. We’ve got UK retail sales and UK public finances. Talk about that. Got fourth quarter GDP out of the US tomorrow as well. We’ll cover that and obviously we’ll cover the

Michael Brown (05:02)

Yes, that’s a point.

Michael Hewson (05:19)

the data that we saw out of the UK this week, which has made, think, more likely that we will see a rate cut from the Bank of England when we reconvene on the 19th of March. So we’ll go through the weeds on that. And I’ve got plenty to say on that with respect to unemployment wages as well as CPI. We had fourth quarter numbers and foliar numbers from NatWest last week, and they were fairly decent.

Michael Brown (05:23)

Hmm.

Indeed.

Michael Hewson (05:49)

Yeah, someone forgot to tell the share price. And then we’ve got numbers from Intercontinental Hotels, BAE Systems and Walmart before we look ahead to next week. And not much on the macro front, but plenty on the company front. We’ve got US Consumer Confidence for February. And then we’ve got four year numbers from the likes of IAG, International Consolidated Airlines or British Airways to you and me.

Michael Brown (05:51)

No

Mm-hmm.

Michael Hewson (06:18)

HSBC, Rolls Royce, and first half numbers from Diageo. Have we seen the bottom when it comes to the recent declines in the Diageo share price? We’ve certainly seen a much better performance so far year to date. ⁓ And we’ll also talk a little bit obviously about Walmart’s numbers because a bit of a mixed reaction to that, a bit of a sell-off in the pre-market, but the shares are now up.

Michael Brown (06:38)

Yes.

Yeah, they’ve rebounded since the open about 10 minutes ago.

Michael Hewson (06:47)

Anyway, so before

we talk about tomorrow’s numbers ⁓ UK numbers US numbers Let’s talk about Madame Lagarde announcing Her early depart. Well, we actually has she announced it or is it speculation? She hasn’t announced it has she the speculation?

Michael Brown (06:53)

Hmm.

No, it is speculation.

Although so the FFT reported on Wednesday, I believe it was that Lagarde was considering leaving the ECB early or was likely to leave the ECB early. Her term expires in October of next year. That was the eight year term that she was appointed to. And essentially the reasoning that the FT gave, according to their sources, that Lagarde is considering leaving early is to enable French President Macron to play a role in picking her successor. And of course, Macron is ineligible to run in the French

presidential election that takes place in April of next year. And it is likely based on current polling that the national rally are going to win that election, whether that be Marine Le Pen or potentially Jordan Bardella, depending on whether Le Pen is actually able to stand. It should be noted at this point that the ECB have issued a statement along the lines of Lagarde is completely committed to doing her job, but it didn’t exactly deny the story, nor did it actually say ⁓ previously when

this was rumored that Lagarde was going to run, leave the ECB to go and run the World Economic Forum in Davos, the ECB came out and said no, you know, she’s going to serve the whole term and Lagarde came out and denied it flatly herself. The fact that that hasn’t happened this time says to me that this probably has legs and it’s one of those sort of no smoke without fire situations, but I think we are both very much on the same page here, that this is ultimately a disgraceful politicisation of the central bank from the person who’s running it and supposed

Michael Hewson (08:25)

Hmm.

This stinks.

Michael Brown (08:35)

to keep it independent.

Michael Hewson (08:37)

And

I’ve been struck actually by the lack of media outcry as a result of this, because how is what she’s doing, potentially, allegedly could be doing any different to what Trump has been doing with Kevin Walsh at the Fed interfering with the day-to-day running of the central bank by trying to appoint his own successor and yet Lagarde is basically paving the way.

for Mertz and Macron to do exactly the same thing. Where’s the outcry from the media? This stinks to high heaven from me. And I can tell you why Trump’s batting for the wrong side. I’m no fan of Trump and I think what he’s doing with the Federal Reserve is a disgrace. Where is the equivalent outrage for what potentially could be happening as regards to the ECB? I don’t hear it and I certainly don’t read it.

Michael Brown (09:17)

Mm.

Yeah.

Well, no, there hasn’t been, well, I wrote a note outraged about it, but that’s about it, I think. And, you know, I think it’s hypocritical for Lagarde, who I’ll admit I’m no fan of. However, I think it’s incredibly hypocritical for almost exactly a month ago, Lagarde to be signing and rightly signing this open letter that all the central banks put together along the lines of, you know, we support J-PAL policy independence is pivotal, et cetera, et cetera, et cetera. You know, read the statement if it’s online somewhere. But then a month later,

Michael Hewson (09:32)

Yeah.

Hmm.

Michael Brown (09:59)

to try and engineer your succession for basically reasons of political expediency, it’s a downright disgrace, to be completely honest with you. You’ve got an eight-year term, serve the eight years, let’s do this by the book, the summer before your term expires, EU leaders will meet, and whoever those leaders are, whoever those democratically elected leaders are at the time, will have a conversation and they will appoint your successor. I think it’s an absolutely terrible look for an unelected central bank.

to be trying to sort of force her will upon effectively the European people in terms of trying to dictate who her successor is going to be. It’s a disgraceful situation.

Michael Hewson (10:39)

Particularly

when that successor is obviously not going to be Emmanuel Macron.

Michael Brown (10:47)

No, and also the successor is not going be French either because France have had two of the four ECB presidents to date, but there we go. I think that’s a story that is going to bubble away and then rather helpfully I think it’s guaranteed question number one at the 19th of March press conference, Madame Lagarde, are you staying? And we can digest what she says when we come back.

Michael Hewson (11:08)

Well, assuming that she says she’s not, then I think she should be prepared for questions about her hypocrisy in basically calling out Trump with his interference when it comes to Powell and then doing exactly the same thing when it comes to her own potential replacement at the ECB. Honestly, I think the lack of media scrutiny over this, you know, it makes me totally understand why people mistrust.

Michael Brown (11:15)

Yes.

Hmm.

Yeah.

Michael Hewson (11:35)

mainstream media because ultimately unless you bat for the right side what’s good for your side is definitely not good for the other side and it should be an equal playing field i don’t care whatever your political persuasion is ultimately you need to play by the same set of rules and the fact that this doesn’t happen really boils my i was about to say something else boils my head

Michael Brown (11:45)

Yeah.

Yeah, no.

I’m glad you said head. But yeah, no, I completely agree with you, mate. It’s utterly farcical to be completely honest, but we’ll see what happens on that front. I’ll tell you what else is farcical. Some of the UK data we’ve had this week. God help us.

Michael Hewson (12:09)

Yeah, mean, yeah, UK youth unemployment is now above EU youth unemployment. And I must admit, I’ve got an awful lot of blowback for basically tweeting that piece that was posted by The Telegraph. But it was also posted by the FT and it was also posted by Bloomberg, you know, by people saying, oh, Spanish youth unemployment is higher, Italy youth unemployment. I said, that’s not in dispute. This is EU youth unemployment. That was the headline. You know, stop throwing up straw men.

Michael Brown (12:30)

Yeah, yeah, look at the data that’s on the chart. exactly.

Yeah, and…

It comes back to, just to run through the figures very briefly, headline unemployment was 5.2 % in the three months to December, which is another five-year high, as you rightly say. Youth unemployment, which is 16 to 24, is now at 16.1%. And if you then step up a group, as you’ve written here, between 25 and 34, the unemployment rate is 4.7%, which is basically its highest level in a decade. And frankly, I think there’s

Michael Hewson (12:48)

Another five year high.

Michael Brown (13:09)

There’s two obvious things to say here. One is those figures are pretty damn shocking and the direction of travel is very, very worrying because if you look at more timely indicators, PAYE payrolls fell by another 11,000 in January, which is a fifth straight monthly decline. But while they’re shocking in terms of the story that they tell, they should not be surprising. You’ve got to remember at the end of the day, everything is a policy choice. The policy choices that have been made in Westminster

are to increase the cost of hiring via higher national insurance contributions for employers and a higher minimum wage. The minimum wage in the UK is now two thirds of the median salary. 20 years ago, it was 50 % of the median salary. That is…

Michael Hewson (13:55)

And it’s the same

whether you’re 18 or whether you’re 25. So I would hire a 25 year old with experience over an 18 year old with none. No.

Michael Brown (13:59)

exactly that.

Yeah, because there’s no benefit to the

company in doing that. ⁓ And you’ve got to remember, it’s not only the cost of hiring that’s increased, it’s also the risk associated with hiring that’s increased after the passage of this Employment Rights Act. I don’t think anyone can be particularly surprised that the labor market is now weakening at a very rapid rate, because this is a direct result of the policy choices that have been made over the last 24 months or so. The one…

saving grace. don’t even really want to frame it like that, but one sort of potentially positive implication of all of this is it does massively reduce the risk of inflation persistence simply because the labour market is so slack. Employees have very little bargaining power at this moment in time. Earnings growth is continuing to cool, but it’s cooling for the wrong reasons, ultimately.

Michael Hewson (14:54)

penny does appear to be dropping though, if recent narratives. Yeah, but I mean, this and this is something that we’ve talked about over the course of past 12 months since the October 2024 budget. You know, we said this would happen. We warned this would happen. And it’s not as not just us. You know, a whole host of very eminent economists warned this would happen. But the Labour Party plowed on regardless. But but but but

Michael Brown (14:57)

Well, it’s taken bloody long enough.

Mm.

Yeah.

No.

Yeah.

Well, it’s sort of the basic laws of economics

and taxation. If you charge a higher price, you generally get less of something.

Michael Hewson (15:27)

The penny does appear to be dropping because there has been chatter out of the Treasury and I think that they could be U-turning on some of these national living wage changes. I mean this just cracks me up. Apparently Angela Rayner, who used to be Deputy Prime Minister and who signed off on all of this, along with Andy Burnham, recently criticised the very policies that are causing these burdens on business.

Michael Brown (15:34)

Hmm.

Michael Hewson (15:55)

and causing businesses to retrench that she actually voted for, supported and implemented. I think the sheer breathtaking brass neck and hypocrisy of this really takes them beating. It really, really does. I mean, what planet are these people on?

Michael Brown (16:07)

Yeah.

Yeah, exactly. Well, I mean, we all know why. It’s because it’s now, going back to what we were saying about the card, it’s now politically convenient to complain about those policies because it means that you’re trying to sort of further your standing within the Labour Party and within the membership for an inevitable leadership challenge later this year.

Michael Hewson (16:32)

but the membership are in support of these measures. So actually she’s going against what the membership want, not.

Michael Brown (16:38)

She’s going for business, isn’t she? She’s trying to make sure businesses aren’t scared of PM Rainer.

Michael Hewson (16:43)

that’s not going

to win her any votes and any potential leadership con.

Michael Brown (16:47)

No, it’s not, but we’ll see what happens on that front. think, ultimately, the hypocrisy of it is what annoys me the most. Because, you know, as you say, you can’t sign off on a policy, receive oodles of advice that this is terrible policy, it’s going to cause a significant weakening in the labour market. That significant weakening then happens, and then you complain about your own policy. That’s not how this thing works. Well.

Michael Hewson (17:13)

Apparently it is if you’re a Labour Party

politician.

Michael Brown (17:17)

Apparently so, but anyway, I think as I said the the one sort of glimmer of good news is earnings growth has cooled and inflation came in Coolish this week ⁓ So you are looking at the Bank of England delivering another 25-bit cut at the ⁓ at the March meeting I think

Michael Hewson (17:19)

Honestly.

Mm-hmm. Yeah.

Yeah,

mean services inflation still looks sticky though. 4.4 well above the Bank of England’s expected 4.1. you know, businesses are still having to pass on an awful lot of these higher costs. I mean, there was good news in that food inflation actually slowed quite significantly from 4.5 to 3.6 percent. But, you know, again, I think while we could well see a rate cut in March.

Michael Brown (17:49)

Hmm.

Yeah.

Michael Hewson (18:05)

And I think there’s a potential that Catherine Mann is suddenly starting to realize that the labor market is struggling. She could actually switch. And it could be 6-3, not 5-4.

Michael Brown (18:10)

Yeah.

Yeah. ⁓

Yeah, because you would expect Governor Bailey to switch over. mean, just in terms of the numbers, headline CPI was at 3 % on an annual basis in Jan. That’s down 40 basis points from where we were in December. Core inflation at three spot one. That was its lowest level since, I think, 2021. So yeah, services was a little bit sticky. The drop in food price or the disinflation in food was welcomed. And I think that’s unsurprising because we’ve seen food disinflation in Europe for quite some time now. And we’ve been sort of questioning why we haven’t had that here.

just still struggle to build them. Well.

Michael Hewson (18:51)

Well, would say energy costs an eye call.

Michael Brown (18:54)

Yeah, 100%. I think I just still struggle to build a reasonable case for there being a risk of price pressures proving persistent when you’ve got the labor market literally falling off a cliff. Private sector earnings are already back pretty much at target consistent levels at 3.4%. Public sector earnings are outrageous at 7, 7.2%, whatever it is. There is a base effect in there that we do need to see fall out of the number. ⁓

Michael Hewson (19:04)

Mm.

The double, double private sector.

Michael Brown (19:24)

key question for the BOE in March is what do they do in terms of their policy guidance? How much more are they going to signal in terms of rate cuts and where do they think that neutral is? Because there are some on the MPC who arguably think we’re below neutral already. Hugh Peele, for example, last week saying that he believes rates are too low. Frankly, I think that’s utterly mental. But at the same time, you’ve got people like external member Alan Taylor who have explicitly

Michael Hewson (19:43)

Yeah.

Michael Brown (19:54)

said that he thinks neutral is at 3%. So I think the question for the bank now is not only are you going to cut or are you not going to cut, but where does the cycle actually come to an end? ⁓ And obviously, their updated forecasts in April are going to be pivotal on that front. But I think that’s really the question that participants are starting to ask themselves now. Market’s still priced to 25 basis point cuts for this year. If the labor market continues to weaken as it does, I’d argue the market’s probably still a little bit too hawkish.

Michael Hewson (20:24)

Yeah I think they just brought forward the first cut to March. I think that’s the only change in terms of pricing. think originally the first cut was in May wasn’t it?

Michael Brown (20:28)

Mm.

It was, yeah, so that’s

now been pulled forward to March. I think the next one’s for November, but we’ll see what happens on that front.

Michael Hewson (20:43)

There should be good news tomorrow for the Labour government.

Michael Brown (20:48)

Oh, no,

don’t get me started on this, please.

Michael Hewson (20:51)

public sector borrowing or repayments, shall we say. We know we’re going to get a surplus. The big question is, in terms of January tax receipts, is whether or not they’re going to be a record. Certainly the expectation is for a record 24 billion in credits when it comes in for January, which is 50 % higher than the previous record, which I think was in 2022 or 2023.

Michael Brown (21:03)

Yes.

Hmm.

Yeah, I think it will. One of those years.

Michael Hewson (21:18)

was one of those years.

the the the late you just expect a story of tweets, a torrent of tweets saying, know, our policies are working. We’re raising record numbers of record amounts of tax, yada, yada, yada. Just just ignore the other 11 months we’re borrowing is actually spiraling out of control.

Michael Brown (21:30)

Yeah.

What?

Yeah, quite. mean, just to, you know, the numbers will probably be out by the time you listen to this, but the UK always, always, always, always, always, always records a budget surplus in the month of January. And that is for the simple reason that there is a ⁓ massive surge in tax receipts for the self-assessment deadline, which is at the end of that month. It’s nothing to do with the government of the day, whatever colour that government may be, whatever party they may come from. It’s nothing to do with policies in the economy or the performance

of the economy at large. It is simply a mechanical function of how the tax year works out here in the UK. So yeah, you are going to get people trying to sort of bang the drum and claim that this is some sort of sign of fiscal responsibility. It’s not. It’s just maths, to be completely honest with you. And we’ll go back to a deficit in February as sure as night follows day.

Michael Hewson (22:29)

thing

that the number you need to focus on is the annual borrowing number, not the January surplus. And in the annual borrowing number, we’re still borrowing record levels outside of COVID.

Michael Brown (22:33)

Yes.

Yeah, and how that compares.

Yeah, which, I mean, that says it all, basically, about the state of the economy and the fiscal mismanagement of the economy.

Michael Hewson (22:49)

So we’ve got

retail sales tomorrow for January. ⁓ I think we could actually see a potential for a positive surprise if certain, you know, if recent retail updates have been any guides. So again, by the time you listen to this, those numbers could well be already out. So we’re expecting a gain of 0.2%. The surplus for public sector borrowing, we’re expecting a surplus, I think, of £24 billion.

Michael Brown (22:54)

Hmm.

Yeah.

Michael Hewson (23:16)

which is as say, it’s 50 % more from the record 16.2, which we saw, I think, a few years ago. So it’d be interesting to see whether or not they hit that amount or whether it comes in short.

Michael Brown (23:16)

That’s right.

Hmm.

Yep.

Michael Hewson (23:27)

⁓ Fourth quarter GDP out of the US. The Atlanta Fed was saying 4.2 % last week, weren’t they? I think the…

Michael Brown (23:34)

Yeah, they’ve chopped

that. I think it’s about 3.6 now, I believe. Let me bring it up in.

Michael Hewson (23:37)

Yeah, which we I must admit,

I, you and both and I, both you and I thought that was a little bit rich, didn’t we? And it’s and it has been revised lower. I think the consensus is for three.

Michael Brown (23:42)

Mmm. Yeah.

It is and the Atlanta Fed model is actually going to come even lower in about an hour’s time when they update it after the trade data that we got today because the trade deficit widened even further in December. I think it’s tough to interpret much from that fourth quarter GDP print because you’ve got seven weeks worth of a government shutdown in there that’s going to have taken a fair chunk of activity out of the economy. yeah, I think anywhere around the 3 % mark is probably kind of fine. The real thing markets are looking at now is before

in Q1. mean, we’re basically at the end of February already, so the Q4 numbers are pretty stale, they’re very noisy. I struggle to see it having a lasting impact.

Michael Hewson (24:30)

and the

labour market does look to be instilling fairly decent jobless claims have basically dropped back as we thought they might.

Michael Brown (24:39)

Yeah, we had that couple of weeks where they were boosted by the weather and then, or the bad weather I should say, and I think it was 206,000 on the initial claims print today. So yeah, the labour market’s doing okay. Yeah.

Michael Hewson (24:49)

20,000 20,000 lower than the previous

week. Okay, let’s move on to the earnings and we’re to start with NatWest last Friday and really strong set of numbers Yet that didn’t stop the share price dropping sharply testing its 200 day moving average. It’s held above that And we’ve seen a fairly positive rebound three days of gains We’ve seen a bit of a pullback today just shy of the 50 day moving average

Michael Brown (25:00)

Yeah, impressive.

Michael Hewson (25:18)

But again, it takes me back to what I was saying last week, that the purchase of Evelyn Partners, whatever your view on it and the price tag, ultimately the bank is still reasonably profitable. Well, reasonably very profitable. ⁓ the dividend is strong just because they’ve suspended the buyback doesn’t necessarily mean that this particular uptrend is over. And I think as long as we stay above the 200 day moving average.

Michael Brown (25:31)

Well, yeah, I was going to take issue with that.

Michael Hewson (25:49)

I got asked by a journo this week what my thoughts were on that Western. We’re pretty much still in the uptrend that we’ve been in pretty much over the course of the last three or four years from the lows that we posted back in October 2023. I think as long as we stay above the 200-day moving average, the bull case I think remains intact.

Michael Brown (26:03)

Yeah.

Yeah, absolutely. It was a solid bounce off that level in the aftermath of that earnings report. And actually the earnings themselves were kind of in keeping with what we’ve had from the banking sector at large. I think all UK banks seem to be doing very, very well at this moment in time without wanting to put the kiss of death on things. But what’s impressive, particularly for the sector at large, is that they’re managing to do this in an environment where interest rates are declining. And NatWest actually reported a wider net interest margin. I it was 20-odd basis points wider.

Michael Hewson (26:18)

Hmm.

careful.

Michael Brown (26:39)

despite interest rates having been reduced six times over the last 12 months, or 18 months I should say, which is, we all know why that’s happening. But I do think, very, very impressive set of results. They boosted the dividend a little bit as well compared to last year. And as we’ve spoken about previously, think diversifying those revenue streams with the Evelyn acquisition is another bullish catalyst for NatWest going forwards.

Michael Hewson (26:45)

can tell you why that’s up.

And if you’re wondering what that is, it’s basically they’re cutting their savings rate, but they’re not cutting the mortgages right anywhere near as much. So, ⁓ you know, if you’re a saver, shop around is my advice. Yeah, but I mean, I know we got HSBC next week, but we’ll cover that in a minute. So, yeah, decent set of numbers from NatWest. I think the bull case remains intact for that.

Michael Brown (27:13)

Yes, that is absolutely true.

Yeah, well you’re have to do a hell of a lot of shopping I think but ⁓

We’ll do that in a second, yeah.

Michael Hewson (27:32)

were above the 200 day moving average on the daily charts. So this week we’ve had numbers from BAE Systems and Intercontinental Hotels. ⁓ Defence, really strong set of four year results from the UK’s biggest defence contractor. ⁓

Michael Brown (27:32)

Mm-hmm.

Hmm.

Yeah, as

as you would have hoped for and as you would really have expected because, you know, defense is a real growth industry at this moment in time. We’ve spoken a number of times on the podcast about how we’re moving into this sort of era of secularly higher defense spending, particularly here in Europe and B.A.E. is trading at a record high.

Michael Hewson (28:10)

And BAE urging the government to get a move on with their latest defence ⁓ white paper or whatever it is. They’re the DIP. Yeah, exactly.

Michael Brown (28:17)

Yeah, the DIP or whatever it is. I was reading

about that today. That was meant to be published in November. We’re now in February, for goodness sake. I mean, what is going on?

Michael Hewson (28:25)

Apparently they’re struggling to

get treasury sign off on it, which is no surprise. But as I say, new record highs for BAE Systems. Those numbers also gave Rolls Royce share price a bit of a boost and we’ve got there four year numbers next week. 8 % rise in annual revenue to £28.3 billion. Operating profits up 6 % to £2.9 And the company’s order backlog rose to a new record of £83.6 billion, an increase of £5.8 billion.

Michael Brown (28:29)

⁓ why doesn’t that surprise me?

They report next week.

Michael Hewson (28:55)

What’s interesting to note is that all of the growth from BAE systems is coming from countries overseas, not the UK.

Michael Brown (28:55)

Yeah.

Yeah, that is rather worrying actually, to be completely honest with you. mean, it’s not surprising, but the government of the day sort of run around talking about the country being on a war footing. as we just said, your defense plan is four months late. I do think, that for BAE in particular, taking the UK aspect out of it little bit, a record high in terms of the order book, that is probably only going to grow in the quarters and in the years ahead. And I think looking at the way the company have set themselves up, I think they’re going

Michael Hewson (29:06)

It’s not surprising.

Michael Brown (29:33)

to

able to sustain that growth for the foreseeable future because that pace of investment is not going to slow down. I think the only potential issue with them is are they able to fulfill the orders that they get. It’s almost going to be a supply issue as opposed to a demand issue if we were to see any headwinds there. But for the time being, they certainly don’t seem to be worried about that. And you’d expect this double digit EBIT growth to continue for some time.

Michael Hewson (29:58)

Well,

that’s the thing. think plenty of jobs in the north of England and in Scotland rely on strong defence ⁓ contracts. And this government has really got to decide what its priorities are, whether it’s welfare or warfare or a combination of the two, because ultimately the amount of money they’re spending on welfare ⁓ is off the charts and not sustainable. It’s not sustainable.

Michael Brown (30:06)

Yeah, yeah, massively so.

Mm.

Yeah, absolutely.

Not sustainable in the slightest. the sooner that we realize and wake up to the trade-offs that need to be made, the better, I think. Yeah.

Michael Hewson (30:30)

and politics is about difficult choices and you can’t

please all of the people all the time.

Michael Brown (30:37)

No, you’re never going be able to do that and ultimately that’s why these people run for office because they want to make those difficult choices. Well, get on and make some.

Michael Hewson (30:43)

Well, yeah, but they don’t.

of them are ideological.

Unfortunately, those aren’t the type of people we need.

Michael Brown (30:50)

That is true. No. But regardless,

you would expect that BAE will continue to perform well. And actually, I think the defense sector at large should continue to trade pretty well.

Michael Hewson (31:00)

Yeah,

and that’ll obviously feed into Rolls-Royce next week. Anyway, let’s talk about Walmart’s numbers. Little bit of a mixed bag, strong Q4. Guidance was a little bit disappointing, but Walmart always does this. It always issues fairly low key guidance in the first quarter and then subsequently goes on to up that guidance over the course of the rest of the year. So, over deliver. Yeah. ⁓

Michael Brown (31:05)

Mmm.

Yeah.

Hmm.

Yes, that classic under promise and over deliver isn’t it? And

I think, you know, that may explain to a degree why we’ve had this relatively choppy reaction to the earnings numbers because I think when I looked pre-market they were down about 3 % just in the aftermath of those earnings crossing. ⁓ And you’re about to tell me where they’re trading now, I hope.

Michael Hewson (31:44)

They’re up 2%.

Michael Brown (31:46)

There we go. So we’ve had a fairly chunky turnaround and I think it’s as participants digest that actually Q4 was pretty strong. Same store sales were up by four spots, six percent. They beat on both top and bottom lines. There was a big ⁓ beat in terms of e-commerce. That was up 27 percent. The market was expecting 19. And also as participants have realized that actually the slightly softer guidance, they’ve done this before. They do this all the time. It’s not necessarily a negative in and of itself.

Michael Hewson (32:11)

Yeah, do it every year.

A $1 trillion retailer. And they’ve just gone into the nest egg.

Michael Brown (32:16)

you

Huge. Absolutely huge.

Yeah, they have, haven’t they?

Michael Hewson (32:25)

Yeah, I’m not sure how that works, a retailer being in a technology index, but hey ho.

Michael Brown (32:33)

Maybe they’re doing something with AI, wouldn’t rule it out. ⁓ don’t. As long as they don’t rename themselves walmart.com, then we’re fine.

Michael Hewson (32:34)

⁓ that’s it. It’s AI. Walmart AI incorporated. That’s what it is.

Anyway, Intercontinental hotels or Holiday Inn owner. Again, solid numbers. The weakest European region was the UK, but even so that was still up 1.1 % in terms of revenue per room. And Greater China does appear to be showing signs of recovery there as well. My only concern with this is that they’ve announced some of the buyback.

Michael Brown (32:55)

Mmm.

Michael Hewson (33:15)

and the debt levels are a little bit on the high side. ⁓ But they are opening new hotels, which suggests they have confidence ⁓ in the economic outlook.

Michael Brown (33:18)

Mm.

Yeah, exactly. mean, you wouldn’t be investing in new properties if you didn’t have confidence that they would be profitable and that they would be full as and when they are completed. So I think they do have a degree of confidence in the outlook. And of course, there are a few things on the horizon, particularly stateside, that could boost that because obviously you’ve got the World Cup ⁓ coming up this year. And actually, they expect that to see or to result in stronger demand stateside. But I did think it was interesting that trends at large

are pretty positive and even here in the UK where we’ve obviously been worried about the state of the consumer for some time, IHG don’t really seem to be.

Michael Hewson (34:06)

No, but it is interesting to note the UK is outside of China at the lowest growth mark.

Michael Brown (34:12)

That’s true, that is very true. And it’s not exactly a ringing endorsement, but at this point we’ll take anything we can get. Yes.

Michael Hewson (34:18)

Well, yeah, I mean, there’s growth there, you know, and I think

that’s the key.

Anyway, that’s this week. So broadly, I think broadly this week, you know, we’ve seen some fairly positive numbers from a broad range of companies. And obviously, we’ve also had a little bit of a meme stock in Raspberry Pi on the back of the AI thing, because apparently it’s a potential cheap way of augmenting AI solutions with their Raspberry Pi handheld, isn’t it? Or something like that.

Michael Brown (34:40)

Yeah, that went a bit mental, didn’t it?

Yeah, that’s right. think it’s basically a case of, well, you know, why are you asking me about technology for a start? That is basically the…

Michael Hewson (34:59)

DIY AI. Say that when you’ve had a few beers.

DIY AI. ⁓

Michael Brown (35:05)

sure I can say it’s sober. But yeah, that is basically the argument is, know, Raspberry Pi, obviously sell these tiny little computers and people are going to snap them up in their droves and make their own AI models that run on their desk is basically the argument there. But going back to what you just said in terms of earnings, you know, yeah, it was actually been a pretty decent week across a broad spectrum. It’s actually been a pretty decent earnings season. I was just looking for earlier on for the US specifically, I didn’t do the numbers for Europe, but blended earnings growth for the S &P is 13 % year on year.

Michael Hewson (35:06)

You

Michael Brown (35:35)

and that would be a fifth straight quarter of double digit earnings growth on Wall Street. So, you I know that we’ve had a bit of this churn in terms of sectors. I know that the market’s had a little bit of a wobble over the last few weeks, but earnings growth is still really, really strong. You know, the fundamentals underpinning the market are still very resilient and very robust in my view.

Michael Hewson (35:56)

It’ll be interesting to see whether that trend continues next week, because obviously we’ve got Nvidia.

Michael Brown (36:01)

Yeah, which is the biggie.

Michael Hewson (36:02)

That’s the

biggie. think, you know, going forward, that could be a very significant test of ⁓ market sentiment. ⁓

Michael Brown (36:11)

Yeah,

especially as it comes at a time when, you know, kind of enthusiasm around this AI frenzy has been waning a little bit. I must admit, I have found it amusing how, you know, we’ve on the one hand, we’ve got all of these people saying that, you know, the hyperscalers spending a trillion dollars worth of capital expenditure to build out AI, it’s a bubble, it’s going to crash. And then the same people are saying, well, actually, do you know what is it? What’s going to cause the crash is all of this AI is going to erode the business models of various sectors.

Michael Hewson (36:31)

Hmm.

Michael Brown (36:41)

a minute with a you can’t have both of those things being true at the same time it can’t be capex is the worst thing in the world but that capex is going to destroy business models like you know fine be bearish but pick one side of the bloody argument and stick to it please

Michael Hewson (36:56)

It’s

interesting, I was listening to Bloomberg earlier and John Furrer made that very same point to one of his guests. Yeah, how can both things be true?

Michael Brown (37:01)

did he?

Well, exactly. I mean, they can’t. And I wrote in a note earlier this week, as is so often the way, markets go to one extreme or the other, and the truth is probably somewhere in the middle. There are going to be a few people out there who are spending too much on AI. There’s going to be a few business models and industries out there that do get carved up by new technologies. Is it going to be the end of the world? Well, probably not.

And if the world does end, then you’ve got a fun video clip you can watch back and you can claim that I’m wrong. That’s true.

Michael Hewson (37:34)

⁓ If the world does it no one’s gonna be watching that video clip Michael

Anyway, ⁓ let’s talk booze

Michael Brown (37:44)

⁓ are you offering? ⁓ Sorry, I’ve got my hopes up then.

Michael Hewson (37:45)

Diageo Diageo, no you did

yeah Diageo You know, it’s been a bit of a basket case for a while now that does appear since the start of the year To be some signs of life in the share price We’ve seen a fairly decent rebound off the lows the multi-year lows in January And you’ve got to think that the shares were levels of over 40 pounds

Michael Brown (37:57)

Mm.

Michael Hewson (38:15)

in 2021. They’ve been as low as 16 pounds ⁓ earlier this year. ⁓ They’ve rebounded back to around about 1850 and the 200 day moving average they’ve rebounded off that. But there does appear to be some evidence of a bass coming in. We’ve got the new CEO, ex Tesco CEO Dave Lewis appointed. He knows what it takes to turn around a business. You’ve only got to look at what Tesco is doing now. ⁓

Michael Brown (38:15)

Yeah.

Yeah.

Yeah.

Michael Hewson (38:43)

Is he going to be the magic bullet that finally sees this serial underperformer suddenly rediscover its mojo? It was in one of my tips for this year to do well. So probably that’s the kiss of death.

Michael Brown (38:51)

Yeah.

Mm.

Thanks for that, mate. But I think you’re right. We have seen the share price start to stabilize. I mean, we’re up about 10 % since the turn of the year when Dave Lewis took over. And I think the bull case kind of speaks for itself where you’ve got the brands that Diageo ⁓ owns, not just Guinness, of course, which sort of attracts the lion’s share of the attention, but the entire stable of brands is very, very prestigious indeed. You’ve now got that combined with a chief executive who has a proven track record

of turning around struggling businesses and making them profitable, making them ⁓ generate revenue and turning them, turning the tide around. I think now this is going to be the sort of first litmus test of is that turnaround starting to show, starting to bear fruit. It’s probably a little bit early given that these are first half results and Dave Lewis only took over at the start of January. But I think, you know, participants are really going to be looking at the guidance because obviously previously Diageo said they expect net sales to be either flat

negative. I think that’s really going to be the focus for participants is you know we know you’ve been struggling for a long time what’s the plan to turn that around?

Michael Hewson (40:10)

Yeah, I mean, they cut the guidance in November anyway when they reported at the end of Q1. So I think I don’t think markets will look favorably on a further cut to guidance.

Michael Brown (40:21)

No, because they’ve

already delivered a dose of bad news on that front and yeah as you say the last thing that they need is even more bad news.

Michael Hewson (40:29)

Here’s a question for you. You’ve seen Unilever spin off brands. Nestle are now looking to spin off their ice cream business as well, like Unilever did. Is there a case for Diageo spinning off some of its brands to help ⁓ enhance value? Or is their diversity of brands a help or a hindrance?

Michael Brown (40:33)

Go on.

Hmm.

Well, I would argue that the diversity of their portfolio is a help, not a hindrance, because it means that they are spread across the whole host, whether it be beer, whether it be spirits, et cetera, et cetera. But having said that, there was a lot of talk last year before Dave Lewis took over that Guinness would be spun off. That was the rumor that they would divest the Guinness brand in some way, shape or form. My concern would be that that is not a way to generate value. That’s a way of actually stripping value.

out of the business because you’re taking, I think one of the big selling points of Diageo is the stable of brands that they’ve got. If you start then taking that apart, I think it becomes a little bit self-defeating if I’m being honest.

Michael Hewson (41:41)

It’s an interesting conversation and I would imagine it’s something that could well get revisited if these numbers disappoint when they come out.

Michael Brown (41:50)

Yeah, I think it would inevitably come up again if the numbers are soft, we will pay close attention to that one.

Michael Hewson (41:57)

Okay, we’ve got HSBC four year numbers on the 25th as well. Quite a busy day the 25th. ⁓ Again, we’ve seen some fairly decent more record highs for HSBC. ⁓ Investors shrugged off the sell off in the wake of the buyback. And we’ve seen a little bit of a pullback in the past few days, but that was broad based. It was across the banking sector, a little bit of profit taking. But again, when you look at how well they’re spread out, net interest income, net interest margin.

Michael Brown (42:19)

Mm.

Michael Hewson (42:28)

ECLs, ⁓ that’s underperforming loans. I would be particularly, I’d be paying particular interest, I think, to the Hong Kong real estate market, because I think the original concern in the wake of taking over Heng Seng Bank or the remaining, the remainder of the stake in Heng Seng Bank, so they fully owned it, was the Heng Seng Bank’s exposure to Hong Kong real estate and the sour loans there. So I would be looking in

Michael Brown (42:32)

Yep.

Yeah, you’re absolutely right.

Michael Hewson (42:55)

particular detail as to whether or not they set aside a higher provision for that in respect of this, you know, this complete takeover of Hang Seng.

Michael Brown (42:59)

Yes.

Yeah, I think that’s absolutely the thing to focus on. As you said, they did have a bit of a wobble when they suspended the buyback, but they were up by a third since the lows that we saw in October. So the stock price is performing well. And when you look at the UK bank in particular, well, we discussed earlier the strong earnings that we had from NatWest. We know Lloyd’s had a strong quarter as well, or strong recent performance. Everything points to HSBC’s UK unit at the very least following suit on that front, I think. So it is really that.

Michael Hewson (43:33)

Yank.

Michael Brown (43:34)

that real estate provision that’s the key thing to watch.

Michael Hewson (43:37)

In Q3,

the UK bank did increase its ECL provision by £91 million, as well as higher operating costs, which basically cut the profits by £81 million. So it’ll be interesting to see whether or not they repeat that trend in Q4 and obviously the full year. But, you know, the shares continue to do very, very well.

Michael Brown (44:03)

Yes, absolutely.

Michael Hewson (44:04)

Right, Rolls Royce continues to go on from strength to strength.

Michael Brown (44:08)

I was going to say if we want to talk about shares

that doing very well, mean, what are they up now since the lows?

Michael Hewson (44:16)

about five, 600%.

Michael Brown (44:18)

Yeah, it’s a proper, proper UK success story.

Michael Hewson (44:23)

I full disclosure

here, I bought some Rolls Royce shares when they were 85p and I’ve still got them. And they’re now over £13. I just wish I’d bought more.

Michael Brown (44:31)

Yeah.

Yeah, and they have done very, very well indeed.

Well, hindsight is a wonderful thing, Mr. H, isn’t it? ⁓ If only we could all trade with the benefit of hindsight, Yeah.

Michael Hewson (44:45)

Yeah, old Harry Hindsight is the best trader I’ve never met.

We always used to say it when I was in my trading days. yeah, old Harry Hindsight. ⁓ best trader I’ve never met. Just shut it. Honestly.

Michael Brown (44:59)

Yeah. Yeah, but it

is true. ⁓ But, you know, as we said, in terms of the Rolls-Royce earnings that coming up, we had those strong figures from BAE Systems last week, and that should, you know, filter through, and you would expect a tailwind for the industry at large, which is obviously going to boost the Rolls-Royce defense operation. But there’s also some pretty strong demand coming through in the civilian side of things as well. So, you know, everything bodes pretty well, I think.

Michael Hewson (45:27)

Yeah, Rolls have just agreed to deal with Delta Airlines for 30 Trent XWB84s and 32 Trent 7000s. So, you know, the order book looks healthy. There was some chatter earlier this year about the fact that Rolls could move a jet engine project out of the UK to the US or Germany. And they were quibbling it, you basically they’re having discussions with the UK government about help with R &D costs of about three billion pounds.

And obviously it’s the high power costs as with anything that, you know, heavy engineering requires an awful lot of power and the UK still has the highest power electricity prices in the G7. And if we want to attract this type of business and we do, then this economically illiterate government and particularly energy secretary needs to get his arse in gear, sorry.

Michael Brown (46:00)

Yeah.

Yeah.

Mm-hmm.

Yeah, well, no, but you’re right. You’re absolutely right. And it’s not just Rolls-Royce. It’s any manufacturing, yeah, any power-intensive industry, if you’re operating globally, the UK is simply not a competitive environment in which to operate right now.

Michael Hewson (46:29)

It’s BIE Systems.

We’ve got

these globally first, we’ve got these global first class companies, BAE Systems, Rolls Royce, and we’re driving the business away. It’s a national scandal.

Michael Brown (46:46)

Yeah.

Yeah, and

it really is, because as I just said, Rolls Royce is proper UK success story. The fact that they are now sitting there going, actually, do you know what? There is no incentive to have these projects, I should say, in our home country. That’s a damning indictment of things.

Michael Hewson (47:07)

and CEO, he will do what’s best for Rolls Royce shareholders. And he’s proved it.

Michael Brown (47:13)

Yeah, as he should.

Yeah. And to be fair to him, he’s done a bloody good job of doing that over the last, what is it, almost four years now that he’s been there.

Michael Hewson (47:19)

Yeah. Yeah.

Yeah. I can remember when he called it a burning platform and I thought, cool, talk about trying to undermine your own share price. And but he was right, you know, and I said at the time I couldn’t understand what his thinking was because as a staff motivational talk, it’s not particularly it’s not a great one, is it? But, you know, the share price performance speaks for itself. So, you know, he obviously he got that right. And ⁓

Michael Brown (47:29)

Yeah.

Yeah.

Not a great one. No.

Yeah.

Michael Hewson (47:49)

you know, proof of the success is where the share price is right now. And it’s likely, looks as if it could well continue to go higher.

Michael Brown (47:55)

Yeah, and that speaks volumes, doesn’t it?

Well, mean, put it this way, I wouldn’t want to step in front of it and try and short the thing.

Michael Hewson (48:04)

No,

well, it’s only a hundred billion pound market cap, which, you know, for a comparatively, you know, if you compare that, say, a US company.

Michael Brown (48:07)

Yeah.

Yeah, plenty of room to run.

Michael Hewson (48:14)

That’s plenty

of room to run. Absolutely right. Okay, what else have we got? British Airways. ⁓ IAG, IAG. You know, I’ve got mixed views about this. ⁓

Michael Brown (48:22)

Whoa.

Hmm.

Michael Hewson (48:33)

Obviously Britain’s favourite airline, or it used to be, not so much anymore.

Michael Brown (48:37)

Yeah, I was gonna

say they might need to revise that slogan, I think.

Michael Hewson (48:41)

I mean,

the shares are almost back at levels that they were pre-COVID. Not quite there yet. 2018. We did see a really sharp drop.

2025 on back of liberation day but here’s the thing and I hate to keep banging on about this

Michael Brown (48:59)

Yes.

But go on, you’re gonna do it anyway. Yeah.

Michael Hewson (49:08)

Buybacks

Buybacks 1 billion euros share buyback ⁓ and The CEO Galago suggested that he could be doing further shareholder returns in terms of buybacks ⁓ When he reports next week now, I got a message for you and I know you know, he’s never gonna hear this Investing and invest in your aircraft your aircraft interiors are tatty They’re tatty

Michael Brown (49:24)

year.

Well, you never know who BP heard.

Yeah, they are shocking.

Michael Hewson (49:37)

They’re rubbish and the changing of your loyalty program has alienated an awful lot of your premium clients who are going elsewhere. So airlines like Emirates, Etihad ⁓ and the likes.

Michael Brown (49:51)

Yeah, and I think

that’s the issue for me with British Airways is no matter what the figures are, I think you’ve got to look at the broader context, which is.

there was almost an acceptance of the hard product in terms of the seat, et cetera, is not competitive in the broader market, we know that. However, the soft product, in of the cruise, is usually very, very good, and also the loyalty aspect, in terms of the loyalty scheme was pretty generous by industry standards. Now that you have made massive tweaks to the executive club and to that loyalty program, what you’ve actually done is effectively strip away a decent chunk of, if not all, of that

Michael Hewson (50:13)

Yeah, it is.

Michael Brown (50:31)

goodwill that you previously had with your premium client base. So I think that could be or probably will be quite a significant issue for them moving forwards and I’m not entirely sure how they’re going to navigate that one.

Michael Hewson (50:32)

Yeah.

I mean, I’ve got no complaints about I flew British Airways last year on a way to the States and the aircraft was first class. I mean, it was one of the newer new bowings. I think it was a 777 to ⁓ to Denver. And again, it’s a very good aircraft and the entertainment system was pretty decent and the crew very attentive. But you need you still need to treat your clients better. If you want to retain that loyalty and.

Michael Brown (50:52)

Mm.

Yeah.

Yeah.

Michael Hewson (51:12)

The last two years have shown that while your passenger numbers, they’ve remained steady, but they haven’t improved. And certainly the revenue per seat is nothing to write home about. Because it fell 2.4 % in the North America.

Michael Brown (51:19)

Hmm.

Yeah, no, absolutely. Yeah.

And it’s probably going to fall more.

Michael Hewson (51:31)

Well, I mean, obviously the World Cup may actually help in that regard this summer. But going beyond that, think British Airways needs to do better and I would suggest they’ve got too many brands.

Michael Brown (51:35)

Yeah, potentially.

Yeah, IAG, they do, yeah. Far too many. Should we do the last, the big one to finish off with? Yeah.

Michael Hewson (51:50)

Nvidia Nvidia

Current shares currently flat at the moment been trading broadly sideways for the past six months

Michael Brown (52:00)

Well, I was going to say, yeah, I was looking at this earlier on and this is going to sound like I’m not on the ball, but I hadn’t quite realized that Nvidia has been in a $40 range since July. It was sort of $170 to $210, a couple of forays outside of that to the up and to the downside. you know…

Michael Hewson (52:15)

166 is the low.

Michael Brown (52:17)

Yeah, realistically, we just kind of haven’t really gone anywhere for quite some time. And of course, this is against a broader backdrop, as we were discussing earlier on, of the market just becoming a little bit more skeptical around the entire AI theme in terms of the return on this capital expenditure, when the payoff’s going to come, but also how all of this is being paid.

Michael Hewson (52:38)

Hmm.

Michael Brown (52:39)

paid for because of course we’ve spoken on numerous occasions about the debt issuance that we’re now seeing. I think in terms of the earnings themselves, if they’re going to be a bullish catalyst then the market’s looking for the same three things it’s always looking for which is a B in terms of the figures, higher an increase in terms of guidance for the next quarter and also bullish commentary from the CEO. The question that I’m kind of asking myself is is that going to unlock significant upside and actually see us break to the top of

that range or is that simply going to just see us stabilize at the levels where we currently trade? And I think in an environment where the market’s not necessarily taking a dim view of tech but it’s not exactly all in on tech like it was six months ago, I’d kind of favor the latter scenario at this point I think.

Michael Hewson (53:27)

I mean, three years ago, Nvidia shares for $14, $14 a share. They’re now $187 a share. The record high is $212. That was back in October. The low since then has been $166. And we’re currently just above the 200-day moving average. expectations for Q4 are $65 billion in sales, plus or minus 2%.

Michael Brown (53:31)

Yeah.

no.

Mm.

Michael Hewson (53:56)

and profits of $1.43 a share. Margin 73.4 % down from the same quarter last year which is 74.6. So yeah, it is.

Michael Brown (54:02)

Hmm.

It’s still north of 70 % for goodness sake.

let’s not see that as a slight against them.

Michael Hewson (54:17)

Have

they been allowed to sell chips to China?

Michael Brown (54:20)

Well, who knows? Because one…

Michael Hewson (54:23)

because I thought I read somewhere

that that had been given the green light and that surprised me.

Michael Brown (54:26)

Well… ⁓

I think there’s constantly these sort of stories that conflict with each other around, yes, it’s been given a green light, but China then tells their companies not to buy them. And then the US says, maybe we’re not going to send them anymore. I think the wise assumption that Nvidia have made in their guidance is our sales to China will be zero and less told otherwise. And I think they’re probably going to make that assumption once again. I mean, there’s absolutely no denying the rally that we’ve seen over the last three years, as you sort of alluded to, has been incredible.

capitalized on the AI arms race has been frankly amazing, I think the market just really needs to see more of the same from the company. Are we going to quibble about margins being slightly tighter year on year when they’re still running north of 70 %? Well, we definitely shouldn’t be.

That’s still a very, very impressive margin, particularly as competition in the sector continues to grow. So I think, as I said earlier, the market really just wants that beat and raise, and that could put a bit of a higher floor under the stock.

Michael Hewson (55:30)

big question is how much of a raise, because in Q3 they expected revenues to be 54 and they came in at 57.

Michael Brown (55:38)

Yeah, well, if you think the hyperscalers are spending a trillion bucks, it’s gotta go somewhere, and one of the big beneficiaries is gonna be Nvidia, all their competitors, Broadcom, et cetera, et cetera. So, you know, from that aspect, you’d actually say that the raise could be fairly substantial.

Michael Hewson (55:53)

So you’d be looking, think, if they’re expecting 65 billion in sales, then 70 wouldn’t be out of the question.

Michael Brown (56:02)

No, add another five on top. just a bit of context to the market reaction, options imply about 6 % in the after-hours session on next Wednesday, either side, yeah.

Michael Hewson (56:11)

Either side.

Alright, there is one more that’s Home Depot, ⁓ which is due out Q4. Don’t expect to be a particularly good quarter, particularly for DIY stocks in the middle of winter. So I’m not expecting a particularly good number out of Home Depot, but that’s a seasonal thing, it’s always the way. And particularly with cold weather, you’re not going to be going out knocking up sheds and basically hammering nails in.

Michael Brown (56:26)

Thank

Yeah.

No, do bear in mind though that they are the fourth biggest stock in the Dow. So if anyone’s got any Dow exposures then Home Depot earnings could move that around all over the place. ⁓

Michael Hewson (56:47)

quite likely to do that. I’m just looking at the share price for Home Depot now. ⁓ It’s well off its November lows, but it’s halfway between its September highs and its November lows. So it’s basically stuck pretty much midway in that trading range that we’ve been in for the past six months. Delicately poised to spin either way.

Michael Brown (57:08)

Delicately poised we could say. ⁓

god. Any more cliches?

Michael Hewson (57:16)

None whatsoever. Okay, well on that note, ⁓ yeah, I think that’s it.

Michael Brown (57:17)

You

You’re

gonna go and put your feet up and go and look at the Northern Lights for a few weeks.

Michael Hewson (57:25)

Well,

hopefully, weather permitting. Yeah.

Michael Brown (57:28)

Well, yeah, fingers crossed.

I’ll stay here, working away. Nose to the grindstone, as always.

Michael Hewson (57:34)

I’ll still be keeping one eye on the markets maybe once or twice, once or twice a week just to make sure that I don’t completely miss the loop, shall we say. Miss any exciting information. yeah, hopefully we’ll back in a month, obviously without, I don’t know, I don’t know whether it’ll be without sponsorship or not, we, I don’t know, still with you, mate.

Michael Brown (57:46)

Indeed. we’ll be back in a month. BOE day.

I thought you were going say without me. That’s a nice

way to get rid of me, isn’t it?

Michael Hewson (58:03)

But no, I mean, as I say hiatus for a month. Plan to be back 19th of March. See you then. Cheers.

Michael Brown (58:11)

Indeed, see you then.