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Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm pim Fox.

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Speaker 1: Along with my co host Lisa Abramowitz. Each day we

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Speaker 1: bring you the most important, noteworthy, and useful interviews for

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Speaker 1: you and your money, whether at the grocery store or

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Speaker 1: the trading floor. Find the Bloomberg P L Podcast on iTunes,

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Speaker 1: SoundCloud and at Bloomberg dot com. Well in mid October,

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Speaker 1: David Coudla, the chief executive, the chief investment strategist for

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Speaker 1: Mainstay Capital Management, came on the program and said, pay

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Speaker 1: attention to regional banks. Let's find out. Was it a

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Speaker 1: profitable call? David Coudla, thanks very much for being with us.

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Speaker 1: All right, so go ahead tell us how that regional

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Speaker 1: bank call turned out. Well, depending on the index we use.

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Speaker 1: But if we look at kri E that index for

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Speaker 1: or that eat F for regional banks, we're actually up

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Speaker 1: about uh since that recommendation on your show a couple

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Speaker 1: of months ago. All right. So if you're up that much,

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Speaker 1: are you taking any profits? No? Uh? And actually we've

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Speaker 1: added to positions since then. You know, back in in

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Speaker 1: September October time frame, we liked regional banks on the

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Speaker 1: thesis that the FED was going to be raising rates, uh,

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Speaker 1: steepening the yield curve, improving nim that interest margin for

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Speaker 1: the banks. That benefits the regional banks even more than

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Speaker 1: money center banks, although all benefit. Since then with the election,

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Speaker 1: we now have the prospect of lower regulatory headwinds for

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Speaker 1: the banks. So that's actually been another catalyst to move

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Speaker 1: banks even higher. So you know, we we we like

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Speaker 1: the financials. We could get a pull back through here

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Speaker 1: obviously at any time, but like the financial specifically the

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Speaker 1: banks going into so good to go for banks in

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Speaker 1: How about we look at domestically oriented small cap stocks. Well,

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Speaker 1: you know, when we when we look at what's happened

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Speaker 1: since the election and what that means for the stock market,

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Speaker 1: and the election really was we believe a game changer

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Speaker 1: in terms of uh overall outlook and investment strategy. Uh.

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Speaker 1: You know, we're concerned about what tariffs, trade wars, immigration

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Speaker 1: policies those related. Uh you know, the rhetoric from President

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Speaker 1: elect Trump, what may become policy, how that impacts multinational conglomerates. Uh.

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Speaker 1: So that gives us an inward focused what we call

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Speaker 1: the America First trade small companies that that tend to

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Speaker 1: be more domestically oriented Uh, that will that look better

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Speaker 1: on a relative basis now to large caps. And certainly

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Speaker 1: saw that big pop in small caps after the election.

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Speaker 1: A little bit more muted returns over the past month,

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Speaker 1: up and down days like today, But we still think

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Speaker 1: we like small caps over We think small caps will

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Speaker 1: do well and like small caps over large caps. Going

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Speaker 1: in large caps, Uh, not so much. I Shares Russell

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Speaker 1: two thousand. ETF is that the best way to take

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Speaker 1: advantage of the strategy. Yeah, that's a that's a great

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Speaker 1: way to take advantage of the strategy for you know,

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Speaker 1: those investors that are et F buyers. I w M

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Speaker 1: is a good way to invest in small caps. For

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Speaker 1: mutual fund investors, UM, we like a mutual fund that

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Speaker 1: plays on two of our themes, which is financials and

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Speaker 1: small cap. Victory Integrity Discovery m M E a X.

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Speaker 1: It's a small cap fund with thirty of it allocated

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Speaker 1: to financials, so plays on both our themes. Fund we

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Speaker 1: get into right of the election. That's done well and

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Speaker 1: we think we'll continue to going into same question to

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Speaker 1: year to date, that Victory Integrity Discovery Fund is up

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Speaker 1: more than thirty per cent. No one ever went broke

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Speaker 1: taking a profit. No one ever went broke taken a profit,

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Speaker 1: and you could take profits here if you've only ended

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Speaker 1: for a couple of months or all year, and obviously

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Speaker 1: feel good about that. But you know, as we look

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Speaker 1: towards as tactical affid allocators, where do we think we

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Speaker 1: have opportunity? Where do we think we have risks? You know,

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Speaker 1: we've seen, uh, small caps trade more up and down

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Speaker 1: through here and again, you know, a lot of a

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Speaker 1: lot of the Trump themes depend on how much of

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Speaker 1: his campaign rhetoric or his campaign statements become policy. But

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Speaker 1: right now we think that you know that that hope

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Speaker 1: that investors have have played on, we think it's at

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Speaker 1: least six months before any of that can be disproved.

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Speaker 1: So you know, we we think that you know, if

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Speaker 1: we talk about financials, talk about the banks that have

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Speaker 1: been um had a lot of pressure because the regulatory

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Speaker 1: head wins last eight years. Uh, we we just believe

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Speaker 1: they have a long runway head. So even though we

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Speaker 1: may get some sell all, we think financials have a

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Speaker 1: long runway in small caps still have a favorable environment

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Speaker 1: here in a Trump presidency. Tell me about energy and

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Speaker 1: what you expect to happen with energy prices, oil trading

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Speaker 1: around fifty three dollars a barrel, and maybe just also

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Speaker 1: tell us about domestic versus the multinational integrated oil companies.

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Speaker 1: So when we look at at energy that that's had

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Speaker 1: a good run here in the fourth quarter and people

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Speaker 1: are looking for, um, you know, a better energy sector

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Speaker 1: going into twenty seventies. Certainly in the first quarter we

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Speaker 1: have great year year comparables because oil is now trading

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Speaker 1: in the fifties where we hit our low of twenty

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Speaker 1: six dollars and change back on February eleven. So we

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Speaker 1: have good year year comps for a couple of quarters here.

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Speaker 1: But we also believe that there's there may be too

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Speaker 1: much hope in the energy sector on this OPEC deal

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Speaker 1: of opaque countries and autopack countries for two reasons. Um,

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Speaker 1: every time there's been an OPEC deal, there have been

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Speaker 1: countries that have cheated. We don't think this will be

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Speaker 1: indifferent any different. There's even more countries involved here. Also, uh,

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Speaker 1: you know, we believe that US frackers control energy prices

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Speaker 1: at the margin now rather than OPEC. You think that's

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Speaker 1: a swing producer, that's right, And when oil gets into

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Speaker 1: the fifties and we may on this deal get oil

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Speaker 1: up into the sixties. That makes a lot more of

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Speaker 1: those uh, the shale oil producers hyde dolic fracturing just

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Speaker 1: more profitable. They'll turn on this picket. So we've seen

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Speaker 1: the well count in the US going up since May steadily.

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Speaker 1: So you know, we are now a large producer of oil.

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Speaker 1: And really we believe the US controls prices at the

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Speaker 1: margin is much or more than OPEC at this point.

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Speaker 1: Tell me about index ers and the passive versus active

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Speaker 1: debate when it comes to selecting stocks. Well, you know,

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Speaker 1: we've seen actually passive investing do very well over the

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Speaker 1: several years. We're coming up in three months on the

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Speaker 1: or about two and a half months on the eighth

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Speaker 1: year anniversary of a stock market that's gone up every year,

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Speaker 1: and the bonds and bonds have been in a secular

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Speaker 1: bowl market for thirty five years, which we think ended

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Speaker 1: in July with the lows and yields in July. So

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Speaker 1: through that period, passive investing in a stock index or

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Speaker 1: bond deck index has worked very well for the past five, six,

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Speaker 1: seven years. UM. But we think as as we get

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Speaker 1: into you know, look at what's happened with small caps.

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Speaker 1: Some of the different sectors here, uh specifically bonds. The

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Speaker 1: route we had in bonds in November and into December,

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Speaker 1: we've seen a pause, but look, monetary policy and fiscal

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Speaker 1: policy are pointing towards higher interest rates going forward. So

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Speaker 1: bond indexes will have a problem that are very straight

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Speaker 1: sensitive bonds in those sectors in that index and the

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Speaker 1: stock you know, trees don't grow to the sky, so

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Speaker 1: this stock market will have trouble. And when we get

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Speaker 1: into those more turbulent times or maybe a protracted downturn,

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Speaker 1: that's where an active manager can can cannad real value.

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Speaker 1: Thank you very much for adding value to us. David

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Speaker 1: Kudla is the chief executive, chief investment strategist Mainstay Capital Management.

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Speaker 1: This is Bloomberg public health exchange enrollment in the United States.

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Speaker 1: It's on track to meet the federal government's target through

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Speaker 1: week seven, yes open enrollment period. Open enrollment is now

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Speaker 1: up six percent versus the same period a year ago.

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Speaker 1: But what does that mean for the stocks the companies

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Speaker 1: associated with healthcare services. Well, we want to find out,

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Speaker 1: so we have Jason mcgorman. He is our Bloomberg intelligence

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Speaker 1: expert and analyst on medical devices and healthcare services. Jason,

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Speaker 1: thanks very much for being with us. Thank you for

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Speaker 1: having me so, Um, Jason, we want to see what

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Speaker 1: the future brings for public public health care companies, what

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Speaker 1: the what of the how do they form into the

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Speaker 1: different groups based on what you're reading is of potential

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Speaker 1: changes to the Affordable Care Act. Sure, So there there

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Speaker 1: are two major groups here, and the one is hospitals

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Speaker 1: have gotten the biggest boost to their earnings from the

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Speaker 1: Affordable Care Act because, uh, about twenty million people have

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Speaker 1: gained insurance coverage, either through Medicare or through the what

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Speaker 1: are called the exchanges, uh, through the web. Um, So

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Speaker 1: if there's some sort of repeal, then hospitals stand to

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Speaker 1: lose some of their earnings because people will no longer

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Speaker 1: have insurance. So that's one group to being the health insurance.

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Speaker 1: Let's just give it an example, right, Um, Tenant health

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Speaker 1: as well as community and life point right, those are

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Speaker 1: that's in that group? Yes, okay, yeah, So the biggest

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Speaker 1: exposure there is really tenant in community, as you mentioned,

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Speaker 1: about twelve percent of their earnings from the Affordable Care Act.

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Speaker 1: All right, got it? So that's group one, go ahead, Yes,

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Speaker 1: a group to the health insurers. As you've probably heard,

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Speaker 1: United Health et Non Humanita has been losing a fair

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Speaker 1: amount of money, up to eight hundred fifty million dollars

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Speaker 1: this year. And that's because even though the exchanges are

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Speaker 1: are running on track with the government's target, a lot

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Speaker 1: of the young, healthy individuals have not been signing up.

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Speaker 1: Um so, in the near term, they've actually been very

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Speaker 1: costly for insurers. Um So, in the near term it

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Speaker 1: could actually be a positive for a lot of the

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Speaker 1: insurers if there's some sort of repeal, but in the

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Speaker 1: longer term, you know, it could take away an earnings

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Speaker 1: opportunity for them. And the companies there include Anthem, Signa

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Speaker 1: centeen and Molina Healthcare. Yes, so those are the companies

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Speaker 1: that are staying in the exchanges for or even expanding.

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Speaker 1: So depending on how enrollment shakes out this year, and

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Speaker 1: let's say fewer people sign up because they're worried about repeals,

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Speaker 1: and you know, there's some concern that maybe they'll continue

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Speaker 1: to lose money in well, I noted that in your

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Speaker 1: report you said that about sign ups where new consumers

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Speaker 1: versus two last year. This is for the public exchanges,

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Speaker 1: and that means that the risk pool may actually deteriorate.

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Speaker 1: Can you explain why. Yeah, so insured there's priced their

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Speaker 1: premiums based on members that they've seen before, and they

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Speaker 1: know how often they're going to the hospital and what

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Speaker 1: kind of treatment they're getting. So if they get a

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Speaker 1: brand new pool of patients they've never seen, it's very

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Speaker 1: difficult for them to know how much they should be charging.

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Speaker 1: So the more new consumers coming in, especially the number

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Speaker 1: that change, the harder it is for them to price

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Speaker 1: it appropriate really and hire us that they, you know,

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Speaker 1: could be losing money again next year. Are there particular

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Speaker 1: health insurance companies that are dealing with the Affordable Care

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Speaker 1: Act better than others? I keep thinking, for example of

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Speaker 1: your note on Sentine and there are conservative outlook on exchanges.

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Speaker 1: That's right. So Sentina Molina Healthcare the two insurers really

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Speaker 1: that have earned a profit on the exchanges, and I

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Speaker 1: think that's because they focus on the lower income population

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Speaker 1: that largely gets tax credits. In that population, they don't

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Speaker 1: have h the income level to really be going to

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Speaker 1: the hospital that often other than for called emergency situations.

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Speaker 1: So I think that they're probably doing a little bit better.

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Speaker 1: Is there because of the patients that they're focusing on

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Speaker 1: whereas Anthem and United they focus really on everybody. So

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Speaker 1: that's probably why they're kind of hitting the sweet spot there.

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Speaker 1: And just and just a note right, United Health has

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Speaker 1: already announced that it will not be participating in the

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Speaker 1: exchanges in Yeah, so they will be there, but they're

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Speaker 1: scaling back so much that it's going to be call it,

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Speaker 1: you know, one percent of their revenue and even less

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Speaker 1: of earning. So you know, for them and for Etna

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Speaker 1: and Himana, all three of those companies have announced significant

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Speaker 1: scaling back um, So you're right, for those companies, it's

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Speaker 1: it's an actress. For investors, it's really Anthem signa UM

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Speaker 1: and to lesser degree cent teen where the focus is.

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Speaker 1: I just want to take you back to hospitals for

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Speaker 1: just a second and get your thoughts on h c

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Speaker 1: A and what they are strategy is based on what

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Speaker 1: the current environment is for the Affordable Care Act and

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Speaker 1: what is likely to affect their strategy. Sure, so they

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Speaker 1: have the most exposure to the states where public exchange

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Speaker 1: enrollment has grown significantly, and so for them, uh, that's

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Speaker 1: about five or six percent of their their earnings. And

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Speaker 1: so if the exchanges are scaled back by Republicans, which

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Speaker 1: they can do. There's actually a bill going to the

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Speaker 1: Senate floor um in the first part of January that's

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Speaker 1: going to be voted on to which could take away

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Speaker 1: tax credits for the exchanges. So that's something that could

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Speaker 1: impact them significantly. But from there, you know, it's a

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Speaker 1: matter of do they start to adjust their business model

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Speaker 1: for the shift from you know, these longer term inpatient

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Speaker 1: admissions to out patient which some of their peers like

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Speaker 1: Tenant Health have done, which may be wiser in the

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Speaker 1: long term. Well, you know, I'm just taking a look

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Speaker 1: at h c A holdings. The shares are higher by

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Speaker 1: eight and a half percent this year. They're based in Nashville.

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Speaker 1: Merges and acquisitions, Jason, the Department of Justice, they've got

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Speaker 1: their hands full. What is the outcome, do you believe

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Speaker 1: of the two major mergers or merger attempts? Sure, so,

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Speaker 1: the health insurance industry has tried to really scale up

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Speaker 1: between and Humana as well as Anthem and Insignia, and

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Speaker 1: so the risk to hospitals there is that you know,

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Speaker 1: much larger insurers can push back on on reimbursement. So

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Speaker 1: you're right, I think it's it's going to be tough

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Speaker 1: for those insurers to get those deals through. We're expecting

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Speaker 1: resolution here within about a month or so. UM unlikely

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Speaker 1: that that both deals go through UM even low probability

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Speaker 1: that either go through. But if one does go through,

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Speaker 1: then hospitals really have to decide if they can scale

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Speaker 1: up as well. I want to thank you very much

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Speaker 1: for spending time with me, Um Jason mcgorman. He is

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Speaker 1: our health care services analyst for Bloomberg Intelligence. Great stuff

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Speaker 1: on the world of healthcare. Two decades ago, nuclear energy

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Speaker 1: provided the power for nearly one fifth of the world's electricity.

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Speaker 1: Now it generates only about half that share. Of course,

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Speaker 1: we've lived through the Fukushima disaster in Japan. Japanese once

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Speaker 1: accounted for about eleven nuclear power plants, they've taken those offline.

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Speaker 1: What's the future of nuclear power in the context of

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Speaker 1: our huge write down on the part of Toshiba's Westinghouse unit.

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Speaker 1: Here to tell us all about nuclear power is Kit

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Speaker 1: knell It. She is our senior Industrials and Utilities analyst

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Speaker 1: for Bloomberg Intelligence. Kit always a pleasure. You start off

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Speaker 1: by telling us the sort of state of affairs when

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Speaker 1: it comes to nuclear power in the United States and

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Speaker 1: around the world, and that half of that fits in

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Speaker 1: to the Westinghouse unit of Toshiba. Very good PIM, as

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Speaker 1: you say, Uh, the share of nuclear power has declined worldwide.

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Speaker 1: That's mainly because in countries like China, there's a lot

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Speaker 1: of coal being built. Now in the US nuclear state

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Speaker 1: about the same at about of of power output compared

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Speaker 1: to about thirty some percent for gas and thirty some

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Speaker 1: percent for coal and renewables gaining share. So the issue

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Speaker 1: now going forward is gonna be which of those technologies

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Speaker 1: fuels is most cost effective and which is most desirable

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Speaker 1: primarily for environmental reasons. Toshiba and Westinghouse, what happened there?

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Speaker 1: It looks like when Toshiba bought UH Chicago Bridge and

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Speaker 1: Iron CB and I UH their Westinghouse unit specifically bought

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Speaker 1: them a year ago. Westinghouse, n c B and I

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Speaker 1: are both working on the nuclear projects for Southern Company

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Speaker 1: and scan Out, which are the only two nuclear construction

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Speaker 1: projects going on in the US. And it looks like

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Speaker 1: Tashiba has just finally gotten through a lot of the

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Speaker 1: numbers about what their builder exposure is here and under

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Speaker 1: their contracts. It looks like they've concluded that it's going

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Speaker 1: to cost them a lot more to to build this

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Speaker 1: thing than they're allowed to recover from Southern and Scanna. Well,

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Speaker 1: it seems as though this is a very uh constant

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Speaker 1: refrain in the nuclear power industry or in the building

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Speaker 1: of any big infrastructure project. I was looking at some

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Speaker 1: details about a nuclear power plant. I believe it's being

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Speaker 1: built by the French company Arriva, and it's being built

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Speaker 1: in Finland. And this thing is nine years over uh budget,

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Speaker 1: nine years over budget, and the original budget I believe

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Speaker 1: was four billion dollars and even that is now doubled.

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Speaker 1: I mean, you can't even figure out when it's going

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Speaker 1: to open. Well, the two in the US now are

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Speaker 1: are currently projected at sixteen billion and fourteen billion, which

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Speaker 1: is really an order of magnitude higher per kill a

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Speaker 1: lot of of construction compared to a gas plant. So

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Speaker 1: that gives you an idea right away why nuclear has

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Speaker 1: has a cost issue, certainly in the US, because you

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Speaker 1: can't make that up on the production side, given how

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Speaker 1: cheap gases. So that's the issue for nuclear going forward,

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Speaker 1: and why currently I would say no US utility is

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Speaker 1: real likely to start a nuclear construction project. If you

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Speaker 1: have the other fuels available for any kind of reasonable price,

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Speaker 1: it makes it hard to to want to do it. Now.

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Speaker 1: If you're in China or India and your labor costs

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Speaker 1: are lower, and maybe your fuel costs are higher, uh,

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Speaker 1: and maybe you want to cut down on the pollution

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Speaker 1: from all all of of the call plants, then you

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Speaker 1: might say, and you have a government that's more capable

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Speaker 1: of enforcing uh, you know, the pass through of these

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Speaker 1: costs than in the US. All of those factors may

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Speaker 1: make a very different in say Asia, to build a

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Speaker 1: nuclear plant than in the US going forward, and the

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Speaker 1: state in the UH. In the US is that we

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Speaker 1: have a new technology to extract natural gas from the

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Speaker 1: ground fracturing, which has led to the really boom in

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Speaker 1: generating electricity from natural gas. Yeah, gas, as a lot

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Speaker 1: of people are aware now, is extremely low cost. I

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Speaker 1: think they're The CEO of of Dyna Gy, a big

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Speaker 1: power producer, was on Bloomberg TV this morning and he

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Speaker 1: was talking about how uh you know, I think for

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Speaker 1: less than a dollar he was buying gas recently. So, uh,

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Speaker 1: you know, by the time you work through those numbers,

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Speaker 1: the production costs from a gas plant are just prohibitive

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Speaker 1: compared really any of the other technologies, so that that's

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Speaker 1: really the issue there. I want you to be an

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Speaker 1: environmentalist for just a moment and explain how the environmental

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Speaker 1: movement and the effort to reduce greenhouse gases and the

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Speaker 1: build up of other gases in the atmosphere may align

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Speaker 1: with nuclear power. Nuclear has no emissions. And so when

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Speaker 1: when you say, okay, over the next ten twenty forty years,

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Speaker 1: should we shut down nuclear plants because some people don't,

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Speaker 1: you know, might fear them, or should we keep these

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Speaker 1: zero emissions plants in place and maybe add other zero

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Speaker 1: emission technologies like wind and solar and gradually at least

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Speaker 1: phase out the coal plants and even gas plants produce

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Speaker 1: c O two. I mean, they don't produce a whole

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Speaker 1: lot of particulates that cause real severe health problems near term. Uh,

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Speaker 1: you know, I think you have to include that. Haven't

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Speaker 1: nuclear is if you have it built already, the marginal

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Speaker 1: production costs is competitive, And that's really you know, it's

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Speaker 1: scary to think about building a new plant financially, but

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Speaker 1: when it's already in place and you're generating the power,

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Speaker 1: it's it can be very very competitive power and it

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Speaker 1: has no emissions. Thanks very much, Kit Connolledge, our senior

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Speaker 1: utilities analysts for Bloomberg Intelligence. Thanks for listening to the

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Speaker 1: Bloomberg pen L podcast. You can subscribe and listen to

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Speaker 1: interviews at iTunes, SoundCloud, or whatever podcast platform you prefer.

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Speaker 1: I'm pim Fox. I'm out there on Twitter at pim Fox.

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Speaker 1: I'm out there on Twitter at Lisa Abramo. It's one

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Speaker 1: before the podcast. You can always catch us worldwide on

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Speaker 1: Bloomberg Radio on