Bloomberg’s Welch on GM: Already in the Works, Mostly Posturing

SoundCloud and at Bloomberg dot com. I want to learn more about General motors announcement today that it was investing one billion dollars in a US investment plan, spending on models and plants that have long been in the work. So I want to bring in David Welch, Detroit Bureau chief. My first question for you, David, is how much of this plan was already in the works and how much of this is new as a result of some of the cajoling from President elect Trump's team. It looks like

most of it, if not all of it. The only part that we didn't really know about that that wouldn't have been part of their initial capital expenditures plan might be the the axle jobs coming back from Mexico. But even there, uh GM shift things around all the time based on demand for vehicles. Uh and and that kind of thing you know that the White Coward jobs, which

is the bulk of this. UH. That's five thousand workers who will be doing R and D, who will be doing advanced development work on autonomous vehicles, and also some people who are working for GM Financial, which is the lending unit. UH. None of that would have been in Mexico anyway, of course, but you know those are areas that GM has been growing and adding more people. They had announced a while ago they were expanding their technical center north of Detroit, so a lot of that stuff

was already in the works. UM factories to UH down in Mexico. They do make a lot of small cars and things that are already well margin because the wages are cheaper, and that's the only way you can even have a hope of making money on compact cars. As the market ships away from that stuff and they're building more SUVs to meet demand, that stuff will naturally require

investment in the US. Well, David, you know, we got a chance to spend some time with you at the North American International Auto Show at Cobo Hall in Detroit, and I'm wondering if you could give us a little bit of a look into the detail of the auto industry right now, what with the emissions scandal that plagues not only VW's balance sheet but certainly Vexus. Sergio Marcione of Fiat Chrysler, what are the big themes right now

that you need that you recommend people watch well. Regulations a big part of it, and it's been a really busy a few weeks in the auto industry for a couple of reasons. You have the Obama administration leaving and on their way out, they're trying to really make sure that things like clean air regulations are are really adhered to. So they they both the Justice Department and the ep A really handled handed volks like and some really big fines and some in dipmonds. They really went after them.

And they're going after fid Kreisler to make sure that that the devices they had in their cars were not cheating. They haven't said their cheat devices yet. There there are eight devices that changed the emissions performance of the vehicle under certain conditions, all kind of have those those are legal. You have to tell the government they're there and they didn't do that, so that is uh that would warrant a penalty. Even if they are fine. They have to

be disclosed. Now, if it turns out that they were done to cheat emissions tests, which is something Sergio Marchioni, the CEO, has denied, then then the findes can get really big like they were with Volkswagen. But at the moment it's not really Uh, they haven't proven that. That's the situation, you know, David, Just a turning back to GM.

I'm wondering, you know, how much of this is a pup relations stunt or how much of this would have been done in the past with a company extolling it's it's upcoming expenditure plan, uh, in a release like this. Is it just the media? Is it us that is making a bigger deal about this because we're putting it into our our pattern of trying to respond to President elect Trump? Or has there been a material shift in approach to how some of these car companies communicate. I

think a lot of it is the former. The General Motors spends nine billion dollars a year in capital expenditures, and that's new cars that are coming to market the next few years, and that's tooling up the factories to make those new cars. Every time you have a new car, you've got a new chassis line, a new paint shop, a new line for the body panels, new stampings for those bodies, and all that requires a lot of capital investment, and they do it to the tune of nine billion

dollars a year. Some of the vehicles they're coming out within the next few years are support utility vehicles that they didn't previously have. So between for example, between now and Cadillac is supposed to get three new SUVs that they don't have now. Why because Cadillac is behind in luxury crossover issue use, which is the sweet spot of the luxury market. They have one auld E BMW and UH Mercedes have to three or four in their wind up,

so GM is just catching up. You're gonna need factories to make those, so that's gonna be a big part of the investment right there. So all that stuff was in the work. So you're talking nine billion a year between now and one billion dollars that they're announcing and the jobs that would assemble those and a lot of it has retained jobs, which means UH that had they not put a vehicle in that existing factory, they would have laid those people off, but instead they're giving them

something to do so they'll keep those jobs. A lot of it is stuff that would have already happened. The investment and autonomous vehicles and R and D would have already happened. And they have already stated that they want to grow their lending business to make more car woons that already would that would have happened as well. The only thing that might have happened is the four and fifty jobs. These are people making axles coming back from Mexico to the US, so that may have stayed down there.

So there's that. But a lot of this is just uh. And they told me this moving forward. The announcements they would have made basically under pressure from Trump and in order to play nice with them. Remember, the automakers have a lot of stuff they want out of the Trump administration, which is maybe a little bit more relaxation on a few economy standards, and also lower corporate tax rates are a lot of things they like that the Obama administration didn't want to do. We're going to leave that for

another time. I want to thank you very much. David Welch is our Detroit bureau chief for Bloomberg News. I'm trying to make sense of some of the moves in the Pound following Prime Minister Theresa May's comments to diplomats about how Britain plans to break away from the European Union. For somebody with a lot more insight than I can bring for this is Rob Hutton, UK Government and Polity six reporter for Bloomberg, who is joining us now. Rob, thank you so much. So what is the main takeaway

from the speech so far? Well, the main takeaway is that she does actually have a plan. And I think if you'd asked me this morning, is she going to say very much? I just said I'm not sure she is, you know, but we did get we got clarity on a number of things. We've got clarity. She wants to take Britain out of the European the European Union, single market, all the way out. Um, we got clarity before you

continue with that. So what's the significance of that. Well, that is the basis on which I in Britain can sell something to Germany on exactly the same rules that somebody in Germany can sell to somebody in Germany. She wants to break from that. And now that's fantastically important for manufactured so you can build a car in Britain and sell it all the way across Europe with with exactly the same regulations, and does she want to replace it with something else? Well, what she wants to do,

she wants to she says. She said she wants to keep access to the Stems Union. This is a slightly tricky language. She wants to take Britain out of the Customs Union which sort of underpins that, and but still but still continue trading within it. And at that point you then start to get into what she didn't say. There are interesting questions about well, let's say I build a car in Britain and then I want to sell it to Germany. But we have a regulatory dispute. Where

are we going to resolve that? And let's say that Germany changes its car regulations, or did the rather the European Union changes its car regulations. Britain is no longer bound by those, but effectively we kind of still are because if we want to sell cars here and there, so we already have that going on with Fiat and VW because of emissions. Well that's you know, and who who actually you know takes over as the regulator. But

in just the focus on Theresa May. For example, I'm trying to understand that it says that the Prime Minister has a twelve point brexit plan. Uh, is there any and anything other than putting it to a vote at Parliament? It is what else do we need? Else? Is the most important thing that we need? The most important thing is is leaving a single market. The second most important thing is is keeping some kind of customs union access. That's her compromise. The vote to Parliament, I think is

slightly a red herring. I've got to say, and if that's what people are buying the pound on the back of, then they should think about that because basically what that means is in two years time, members of Parliament are asked, do you want whatever deal it is I've got or do you want to leave the European Union with no deal at all? So so let's just undo all of this and not leave is unlikely to be on the table. The choice. The choice is going to be this deal

which you may not like, or no deal. I'm struggling to understand. I mean, people talk about hard brexit versus a soft brexit based on what you initially said. It seems like that would be a hard breath. This is a pretty hard brexit, yes, so so the soft that the people who wanted something softer are all slightly stunned today, I think because because there's there's there's no concessions to

them at all. There was an nice bit in the in the speech where the Prime Minister said that we all had to come together and sort of unite however we voted in the referendum. But to be honest, there's not very much for people who voted to stay to unite around in this speech. I guess it's difficult to figure out in some quarters whether there's a hard boiled egg or a soft boiled. This is quite a hard boil. But you say it's a hard boiled egg, and yet

you see that big rise in the value. Well, that's what I wanted, That's what right, That's what I wanted to expand on because why it is, as you said, is this just a red red herring and someone's climbing at something, And because I wonder is uh is President elect Donald Trump in some way connected to well, I mean, you know, there may be, there may be other reasons and other things are going on. We had higher than expected to expect inflation this morning, so the pound was

already on its way up before the speech began. The pound, the pound did definitely rise when she she talked about a vote and on the past the pound has written on things that made Brexit look less likely. And I I mean, were trying very hard to to tell people don't don't count on that vote, don't sift the sand for a diamond. You know that that that that vote

is highly unlikely to reverse the decision. And in fact, when we tried, when when somebody asked the Prime Minister, and when we've asked her office, well, come on, what happens if the vote goes the other way? They just laugh and say the vote won't go the other way and they're right, who you know, how bad would a deal have to be for you to decide? That's what David Cameron said, didn't he? Yeah, well that's true. We got to leave it there. Robin Huddon, UK Government and

Politics reporter for Bloomberg joining us from London. I want to bring in Joe Carroll, who covers the oil industry for us at Bloomberg, to give a little bit more color around this. Excell and Mobile purchase of of shale land and they based they paid five point six billion dollars in shares for this premium basin land. And Joe, I want to start with, was this an expected acquisition of XS. Well, we've known Exon is looking around this this region in Texas and New Mexico called the Permian Basin.

It's the biggest US oil field UM for for for quite a while, we didn't expect a deal this gigantic for x On. This is the biggest deal since they bought Xto and that was their first for a into into North American shale, and that was back in UM. Not only are they paying five point six billion in shares. If the resources as rich as UM you know, as their geologists expected to turn out to be, they'll pay

another billion in cash over the next fifteen years. I got to imagine that somehow we're going to work in former chief executive of Exxon Mobile Rex Till listen into the conversation. Yeah, they haven't told us, but it sure appears almost certain that this was a transaction that began before he left January one. These things just don't come together that quickly. Well, do you think that it was expedited to come out before Rex Silerson took the role

of Secretary of State under President elect Tromp. No, I don't think the I think once once a company cut ties with him, Um, they cut ties with him. So um. Right now I'm looking at X and shares there up a bit. But what could this do for X? And? I mean, how much better of a position does this put them in? Potentially this is a pretty even though for X on five and a half billion dollars doesn't

sound like a lot of money. This gives them, yeah, for for you know, for a company with more annual sales that said, it's if at least twenty years of drilling, it's an enormous amount of oil. It's three something billion dollars worth of oil locked on the ground there. It's pretty low risk because because the superman folks have been drilling out there for for almost a century. Um. It's interesting to me because it strikes me that this is some of the consolidation that a lot of oil analysts

have been waiting for. People said that because of the drop in oil prices, that we have to see this consolidation by the biggest oil companies. Do you expect there to be more announcements like this from exces, rivals, from everybody. You know. Yesterday was was the Clayton Williams Noble deal. Um that that Dave Wilson just referenced, And that's in the same area that's in this uh Delaware basin, which is a subrecon region of the Permian there on the

Texas New Mexico border. It's the hottest m and A play in oil anywhere in the world. Um. I think it attracted the quarter of about of all the oil M and A dollars. That's that's from according to Wood mackenzie. Um. Yeah, of course this is just going to keep steam rolling on. At what point does the price just become too expensive, Because if you've got ample supply in a domestic market, then you face the prospect of having more supply than

your needs. You mean, you're talking about the price of oil. As far as x sun goes there, they're confident they'll they'll get double digit returns as low you know, with oil as low as forty up barrel. I believe Nobile said the same thing yesterday. So forty dollars is the breakpoint for when you flipped the switch to get the shale out. The shale oil out well forty dollars is the break point where you're making you return. It can certainly go lower than that. Joe, has it gotten cheaper

to extracate oil from shell drilling. What's happened is they've yeah on a per unit basis, sure, because what they've done is they just drill these sideways wells for for a mile for two miles. Now, it costs more to drill each one of those wells, but the amount of oil that comes gushing out is so much more massive

that your per unit costs are a lot lower. Because that was one of the big obstacles right in the U s. It's a lot more expensive to extracate oil than it is, for example, in Saudi Arabia and Iran. Correct correct um. So going forward is could any regulations actually help Exxon access more of the land that they just purchased. Could that have played into this at all or not? Really? You know, unlike the rest of the world, in the United States, almost everything that gets drilled for

oil and gas is privately owned. Uh, you know, it's not like working in Canada or the UK or really anywhere else in the world where the government or the crown owns the resource, so so and and and given the fact that most of the regulation comes at the state level, I don't see a huge impact from from from the federal situation. Well, Joe tell us about potential price changes fifty three fifty two dollars a barrel. The OPEC meeting is in May. You've got this confluence of

shale oil plus a new president, President elect Donald Trump. Uh, what do you see in the next ninety days. In the next ninety days, I think you continue to see more deals in the Permian, more m and a UM as long as these companies can can lock in prices by by you know, with forward hedges. Uh, they're just gonna they're gonna drill as much as they can, you know,

and make their returns. UM. I think it was the Southeast was yesterday the day before said they don't expect expect the cuts, the open cuts to last through June. So so I think we really see see an impact there. All right. I have a feeling you're going to be

very busy, and we thank you for it. Joe Carroll is Energy America's reporter for Bloomberg, giving us some perspective and additional information about x On Mobile paying five point six billion dollars to expand it's acreage in uh Western Texas. Here to tell us about some innovation when it comes perhaps to your portfolio, but it might also include some healthcare stocks, is Mike Bailey. He is the chief of financial Officer I beg your pardon to see f A

and director of Research at FBB Capital Markets. Hey Mike Bailey, I'm sorry, I thought you got a new title there, but you didn't. Good morning morning at least thanks for having me. All right, I'm gonna get some kind of surprised news there, no no, no, no more surprise that we've got enough people doing surprise news. It's ok. You're you're managing almost a billion at FBV Capital. What are you telling your your client base right now to do or not do well? I think as we look at

the very short term and ideally we do next three months. Sure, so I think we are a bit concerned here. Um, you know, I think we're we've got the uh the Trump inauguration coming up here in a few days. I think will probably be a good year, maybe not quite as good as what what are you concerned about Yeah, I think so if we want to kind of create a new word here, people love Brexit and flash crash and such, so Trump's secution, uh doesn't quite roll off

the tongue. But I think we're getting to a phase where investors expect Trump to execute and we're getting you know, the rubbers about to hit the road here Friday, and I think our concerns are basically investors are hoping that Trump is going to act on some of his promises, you know, whether that's lower taxes, whether that's juicing up the economy, um. And if that doesn't happen, or if it happens later than investors expect, you're going to see

some downside. So I think for us, um, there's a little bit more hope in the market right now than what you might expect to see in the very short term.

So you know, also, we sort of haven't seen much volatility at all really since you know, the election actually, so I think putting some of those pieces together, we wouldn't be surprised to see a little bit of downside you know, later this week, early next week, and then I think investors will will catch their breath, you will see the new administrations start to roll out some policies, and I think that some of those expectations will get realized as we head towards the later latter part of

the year. Mike, I thought that it was interesting that you said that you think that there's roughly upside and five percent downside for the year, sort of to your point that the near term perhaps downside, but over the longer term upside. I thought it was also interesting that you mentioned industrials and healthcare as all whether sectors, particularly healthcare. This was interesting to me because we've seen a lot of volatility in biopharmaceutical stocks and as as well as

a hospital shares on the back of Trump's comments. So why is this such a stalwart industry? You know, I think when we look at healthcare, and I am a bit biased, used to be a healthcare analysts, I've spent a lot of time looking at it. Um, I do think I think there are a lot of spaces within healthcare where or you can do well over a number of years, and it may not necessarily be you know, the big farm of the big biotech that folks think

about is kind of the headlines. Uh you know, maybe it's uh services maybe it's a managed care insurance stock, maybe it's a MidCap medical device dock. But there are some companies that in our view are changing and growing pretty meaningfully over a number of years. Uh. And they've got you know, they're diversified, so if the US is down one year, you know, maybe they'll get helped uh internationally the next year. UM. So there are some spaces

we like. However, as you mentioned, there are certainly some areas that had a great bull run or two three, four years and that kind of came to a screeching hall. So we're we're awfully cautious of some of those spaces where you know, whether it's Trump's you know, drug pricing tweets, things like that, that where you can get in trouble with some of these companies. So we're trying to look look across the whole space and find some pretty interesting

the names that are growing nicely. Are you finding any opportunities outside of just the broadly traded shares just in terms of sort of the traditional US pharmaceutical stocks, are looking at other kinds of healthcare companies or just you know, other assets of the healthcare companies, I mean, our stocks the best way in yeah, good, good points. So I mean, as a sort of generalist investment firm, we do equities, we do fixed income, preferred things like that, so we

we look across the capital structure in general. For healthcare, I think we tend to favor more on the equity side, but we certainly owned plenty of corporate debt for for healthcare companies. Um. I think though, looking at at healthcare in particular, you do get some nice yields because I think that it is a space if you do own it, if you're overweight, you can certainly get some decent yield and maybe you don't have to be overweight bonds for example,

within healthcare. But there's some certainly some ways to play it on the preferred side. For example, not quite as many healthcare names available there, but certainly a handful to choose from. Hey, Mike, what's been the best and worst call that you've that you've made over let's say, the

last twelve months. So we can either talk about it within healthcare or just broad No, no, broadly, brother, I want to know, like, for example, you know, were you a bond bull when when everyone you know tried to get out of the gate and then you got head faked out of that one and got you know, bullish again. Yeah, I mean, and so if we look you know, across all markets, I think one of the areas we did maybe a bit better. This goes back a little bit

over a year. We were a bit cautious on high yield kind of heading into the UM energy junk bond meltdown in late uh kind of early sixteen, So we were so like a medium term call. Yeah, So I think that that was sort of the call there, and high yield, I think from a negative you know, I think we probably could have taken a look at our

treasury exposure a bit differently heading into the election. I think that's certainly in space where I think a lot of folks will were caught off guard, and we're probably

there as well. But UM in general, I think we try to be a bit more nimble on the equity side from the on the bond from bomb perspective, we tend to be a little bit more patient, I think, and and sort of realize that the bond market does move a bit more slowly compared to equities, but we do certainly take a look at each asset class out there well, I've just want to do you have to add another metric now and I'm serious here when it comes to tweet volume of a of a particular company

or a particular industry, because uh, we have a function on the Bloomberg that offers that. I'm sure there are many others, but you know, certainly not like this and integrated. But so we're able to see this as and then you correlated to you know, news articles read and uh so on. Do you think that that is a valid you know, a research criteria that's going to have to

be added into your perspective? Uh? You know, I think if we get the next four years looking like last suck couple of months, that that's certainly in a possibility. I think certainly a lot of smart investors are using every data set they can, and if it turns out that tweets become highly correlated with you know a lot of you know, blue chips or big companies out there, is that's certainly relevant. Um. I think another point that that we sort of think about is just volatility in general.

So if you've got a lot of presidential tweets out there driving market volatility, that's something we want to take advantage of a couple of things we're looking at is some of the for example, online brokers or some of the exchanges out there. I think our position pretty well to to to improve as you get more volatility. So that's one of the ways we're playing it without trying to to get as focused as you know, looking at individual companies that may or may not have a tweet

coming out that could drive it intra day. Well, thank you so much for joining us. Mike Bailey, CFA and Director of Research at FBB Capital Partners talking about why over the long term, healthcare shares as well as industrials will continue to do well. And Pam, I find that interesting because, particularly in the industrial sector, we saw such a rally last year at the end of the year in response to some of the potential President electro Trump policies.

UM will now see whether you can make good on that. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm out there on Twitter at pim Fox. I'm out there on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio