P&L: Apple Could Bundle New Original Content Business

on iTunes, SoundCloud and at Bloomberg dot com. Here to tell us what's going to happen in seventeen, or at least what might happen is liz Ane Saunders, chief investment strategist for Charles Schwab and Company, joining us from San Francisco. Lizen always a pleasure tell us your outlook for the SMP five harder. Let's start with earnings and then we can talk about valuations. So um well, both in earnings and in terms of market performance, we don't publish targets.

I actually think that that's a bit of a silly exercise. But if you look at the consensus right now for corporate earnings, it's about growth every year for calendar year seventeen. What's interesting about that number is most analysts that do publish forecasts have it yet incorporated in the potential benefit either from regulatory reform or tax reform, infrastructure spending, or maybe the combin combination of all of those. So I

think there's potentially upside um. There's also some downside because analysts naturally get a little bit too too optimistic, But I think the net is going to be fairly positive in terms of economic growth. Clearly, we saw a lift up and economic activity in the second half of ten, so I actually think the rally that we got in the stock market had as much to do with that, and much of that predated the election, so I don't think it's pure election related, and I think we are

looking at a pro growth administration. My concern, and I think it was exacerbated by the press conference yesterday, is that the protectionist part of the policy platform is starting to move up the spectrum in terms of likely action in seen, and I think that would be an offset to some of the more positive components of the of the plan. You know, we hear a lot about the

rotation out of bonds and into stocks. Do you believe that this is happening and what are you looking for to sort of indicate whether there is sort of more upside in stocks at the behest or at the detriment to the detriment of bonds. I think it's it's too soon to suggest that a new trend is in place. I e. The great rotation has kicked in. Uh you shaw about three weeks of pretty steady and flows into the US equity market, combining both neutral funds and exchange

traded funds. But in the last week that's actually falter and you've gone back into negative territory. So it's a you know, it's a nascent shift, and I think too soon to suggest that this is going to be a big story in two seen. The good news is is that if you look further back, if you look through that this entireble market, not a single net new dollar of money has come into the US equity market, even if you include e t f s into the funds category. So there's still a lot of runway ahead of us

for that to be a lift for the market. I I. You know, the fact we got three weeks of infloz is a good thing, but it also shows you how quickly sentiment can shift. Given that in just the last week, during this period of consolidation for equities, kind of investors turntail again. So it has the potential to be a positive story. It's I think it's a little early. Well, how attractive do equities have to be in order to

attract that money. I was just taking a look at the price to earnings ratio for the SMP five D. If you bought it today, you're paying a twenty one multiple. Well, that's on trailing earnings. And nothing wrong with looking at trailing yeah, because you don't know what's going to happen

in the future. But when you are at an inflection point in earnings and your trailing earnings incorporates a couple of quarters of an earnings recession, I think that artificially deflates the E and the PE equation, and I think it is important to look in conjunction with trailing valuations, look at forward valuations, and on a forward PE basis, you're more like seventeen. That's a little bit north of

the long term median. But in the current inflation environment we're in, assuming it doesn't really kick in from here, multiples have actually typically traded above where we are right now. So I also think valuation is the eye of the beholder. We're talking about traditional PE ratios. You can look at price to book. You can look at inflation adjusted measures

like the rule of twenty two FED model. You can look at even further trailing numbers like Schiller Cape, and I promise you that no matter what your view is on the market, I can find you a valuation metric that perfectly supports that view. And that view could be anything from extreme embarishness to extreme abolishness. Liz, you know the flip side of where what's a good entry point for stocks is at what point is it does it make sense to get back into bonds. I'm looking at

a ten ure yield at two point uh. Some asset managers have called for three ten yurared yields by the end of this year. I mean at that level, do you think that that would be a buy? I don't think it should ever be a level. I don't think investing should ever be about get in and get out. That those are those are gambling on a moment in time, and investing should always be a process over time. So I would use the tried and true rules around rebalancing.

And what rebalancing does is it let your portfolio tell you when it's time to do something. If your bond allocation has gotten out of whack relative to what your normal targets should be. And that's a function of your risk tolerance and time arizing a need for income, etcetera, etcetera. Then your portfolio tells you want to make that adjustment to pick some arbitrary level on the yield to say

time to get back in and bonds. Again, that's gambling on a moment in time, and investing should never be about that. Where is this money going to come from central banks or from actual investors? Oh? I think from from actual investors. Keep in mind that if you look over this entire Bowl market, retail investors have not been very active. We talked about that as it relates to fund flows. Hedge funds net long exposure never got much above the low fifties in this entire Bowl market and

pass Bowl markets. You would expect that to get up into the mid sixties. Pension funds have not Traditional pension funds have not been big buyers. So really the only game in town has been come. He's buying back their own stock. In an environment where you haven't had a robust I p O market, it's a simple supply demand. So I think there's a lot of room for investors of every variety of different cohorts of investors two up their equity exposure. I wouldn't expect in a straight line,

nor what I wanted to be. I think, you know, we started to get a sense of a melt up until this recent consolidation phase, and is as lovely as melt ups feel while they're happening, assuming you're long, they don't tend to end well. So this kind of two steps forward half a step back is actually a pattern I would love to see continue in As you mentioned

petch funds and what they may do. Yesterday, Cowper's c I O. Is on Bloomberg Television and he was talking about how he was hoping to rotate about thirty billion dollars of money that's currently managed by external managers private equity firms, hedge funds, and make it internally managed. Do you think that that's a good idea or and also do you think that that's going to be a trend that takes hold? Well, Yeah, I think it's a trend

that that has already occurred. I think you already hit the inflection point for endowments, foundations, institutions, pension funds, that um shifted uh for for many years over the past decade or so, shifted significantly away from the public markets towards the private markets, whether it was you know, hedge funds or venture capito a private equity or or real estate funds. But that pendulum has already started to swing back.

And in the case of hedge funds. The interesting thing about hedge funds, there is a lot of people put them in a category of alternative investments. Yet if if you have an investment in a hedge fund and that hedge fund is buying equities either on the longer short side, that's your exposure. That's not an alternative asset. It's a an alternative way to get exposure to the equity asset class.

So I think there's also a rethinking of how we categorize hedge funds, and if they're purely equity, that's how you you have to incorporate that into your equity exposure. I think it's the fee problem, limited performance, higher fees. That's been the real rub. Thank you so much, We're gonna have to leave it there, unfortunately. Liz Ane Saunders, chief investment strategies strategist at Charles Schwab and Company talking about her outlook for this year. Well, another sort of

sad stories in the biotech industry. There's a story on the Bloomber terminal this morning talking about the mood of shock and disbelief at the JP Morgan Healthcare conference in San Francisco as they listened to President elect Trump talk about how he's going to take a hard line with his negotiations with the pharmaceutical companies. I want to bring in Max Neeson bloombergad Fly columnists to sort of shed some light on why perhaps this shouldn't have come as

a surprise to these pharmaceutical executives. Max, I mean, this is not unexpected, right, I mean you're to calumn about this, uh, several of them in fact, Uh, it really it does bewilder me the extent of the surprise. During the campaign, Trump repeatedly mentioned that he wanted Medicare to be able to negotiate drug prices and push them down. Back in December, he made another comment about how he didn't like the way that drug prices were going. What's really worrying for

the sector. I think I think that kind of explained some of the extent of the reaction is the fact that he really seems to be escalating both his rhetoric and um to some degree, the specificity going from just I don't like drug prices to we're gonna change the bidding process a policy than in fact many fear that Hillary Clinton would actually try to bring about it if she had been elected. We're just looking at some of the stocks today other than Mark, and we're gonna get

to that in a in a second. But Fires are down one percent, Bristol Maris Squib down about three quarters of a percent, Abvy is down about a quarter of although yesterday the clients were much more severe with so much deed, I would just like to see whether anyone said, oh,

these are bargains. Johnson and Johnson down about half, right, of course, the Nazac Biotechnology and that's which I'm looking at right now, down six tents of repercent, which considering how much stocks are down today and basically in line with the market. And that's after a three percent decline yesterday. Although Max, how much does that due to Mark? Because

Mark shares are up. Um. Yeah, Murk is kind of the soul out performer on the kind of a specific piece of drug data that was so good that it seemed to overweigh the kind of broader industry. Yeah, lung cancer, it's actually a really huge deal for them. Um. They have a so called immune oncology drug sort of unlawshed, unleaked, unleashes the immune system against lung cancer. And the news they got is that it might be approved in combination

with chemotherapy in a far broader subset of patients. Right now, it can only be used in about of them whose tumor as a specific mutation. If they get disapproval by May, which is well ahead of anything competitors can hope for, it'll be about a year ahead of expectations and massively increase their market size. Can I just ask you a little bit about this because you mentioned the approval process and we have yet to hear who is going to

be the head of the Food and Drug Administration? Does anybody that you talk to expect big changes in the way that drugs are approved now that there's going to be a new president. Um, there there can be a kind of a really big swing on that depending on who gets put in charge. There have been sort of

two names, two very different names put up. One of whom is a former kind of Peter Theeal associate who has some pretty I mean, I would describe them as just wacky ideas that he's dispoused in the past on drug development, that you should approve drugs just based on safety. If they're saying if they don't hurt people, if they don't hurt people, you know, is this um, you know,

we'll find that before the second who is also being concerned. Um, it's kind of a more doctrinaire x f DA official who just you know, he's he's a little bit more conservative, but he's not going to dramatically shake up the kind of way things are done. I'd imagine if he replaces Mr Califf. How much do you think that there are conversations going on in the back office is of pharmaceutical companies right now about how to take back the news

cycle from President elect Trump. I mean, it seems like all he has to say is we're going to negotiate really hard, and and their their share is just plummet. I mean, can they do anything to kind of take charge?

I think they absolutely can. I think you've already seen some of these moves from a couple of companies kind of advocating self policing self restriction on drug price increases, notably Novo nordisk Al organ and then just yesterday ABVY pledge to not take take only a single drug price set of drug price increase this year and limited to less than ten percent, which is kind of, you know, not exactly altruistic, but definitely a step down from what had become the industry, or of kind of bi annual

price increases in excess of ten percent. The name you're the name you're looking for was Jim O'Neill. Jim O'Neill, who is at the event at the capital management firm a Mithral Capital, which was founded by, as you said, Peter Tildy, once a founder of PayPal and one of the backers of Facebook. Yeah, that's the name. And and also another tick on his resumes he's a member of the board of the C Studying Institute, which are libertarians C platforms, which kind of dovetails with his view on

the approvability of drugs and liberty libertarian fashion. And just to close the loop on Murk and their lung cancer drug. Lung cancer is the leading cause of cancer death in both men and women in the United States and worldwide specifically China. China has got a very big problem well and in the United In the United States, lung cancer is responsible for thirty percent of cancer deaths. This is more than breast cancer, colon cancer, and prostact cancer combined.

About a hundred and fifty five thousand people die each year from lung cancer, So that would be a big breakthrough from Mark really well be huge market. Thanks very much, mcknean, gad Fly expert in pharma. We've been hearing a lot about how the Senate is currently talking about repealing and voting to repeal Obamacare, but what exactly is going to replace it? I want to bring in. Brian Ry, senior healthcare policy analyst for Bloomberg Intelligence, has been closely following

the proceedings in Congress. Brian, I hear a lot about the repeal of Obamacare. What exactly is Congress can replace it with. I guess that's the key question that everyone's grappling with, and the fact that they haven't come forward with a single plan that everyone supported underscores how difficult

the question that is. I think you know, broadly speaking, what Republicans want to do is what a lot of politicians want to do, and that's keep the parts of the plan that are popular and eliminate those that aren't. Of course, that's easier said than done. So what I think they want to replace it with is a system

that allows for more choice. I think they want to combine a combination of uh, some plans that are have lower premiums but higher deductible, sort of the catastrophic plans that right now don't meet a lot of the essential benefit requirements under the c A or under Obamacare, but are lower premium And they want to do that to try and draw in a lot of the younger, healthier people that right now are aren't enrolling in sufficient numbers

to make the risk pools profitable for insurers. You've seen a lot of insurers they're going to pull out of the exchanges. I think that's the trend that the Republicans are trying to reverse. Brian, I'm gonna ask you about something much more sort of day to day. You know those signs that are posted in restaurants showing the calorie count. I believe restaurants that have more than twenty locations they were required under the A c I to post this

nutritional information. Are things like that going to go away? Uh? If they are, it's probably not going to be as part of this process, um and uh. And so that that's something that again, you know, they may direct uh there the new administration under the FDA, for example, to either withdraw that guid insto issue updated guidance that that does that. But that's probably not going to be part

of what Congress is doing right now. And that's simply because to avoid a Senate filibuster, recognizing the math problem that Republicans have fifty two votes and not sixty. Um, they're using this budget reconciliation process, and that restricts the things that they can really target under this repeal effort, the things that are only budget related, so taxes, penalties,

and medicaid expansion, anything involving federal funding. But a lot of those regulations, such as the one you just referenced, uh with the menu menus and calories, that's something that would have to be addressed separately. Brian. Let's say this repeal of Obamacare does pass the Senate. What happens then, So where we are now is they've last night they Senate essentially passed UM. What would be a blueprint that would authorize various committees to then come up and craft

a repeal bill that has to go to the House. Now, they're going to probably address that either tomorrow or over the weekend, and then a couple of committees in each the sent it in the House would then go to work and craft language saying, Okay, we're going to repeal these taxes, were going to repeal these mandates, repeal the penalties for not buying A c A compliant insurance, those things, and then in a matter of weeks come back with that.

But back to the original question. At the same time, you know, President elect Trump and a growing number of Republicans said, what, we also want to have a bill specifying what we would replace it with in place at the same time to make this simultaneous. If they're going to try and do that, then this process will probably bog down and they'll have to delay the repeal effort while they wait for the replace effort to catch up.

This is maybe tangential to the issue of the A c A. But haven't the lawmakers in Washington taken aim at the use of human fetal tissue cells for scientific research? They have, and you know there there are a few different things and sort of tangential to that is part

of this repeal process. Speaker Paul Ryan has said that, UM, they'd like to include, you know, removing federal funding for planned parenthood for example, and UM and that could potentially complicates their efforts to pass the repeal BI Also, you know,

lots of moving parts. But you're right, and I think Republicans who have been targeting UH those type of provisions for a while feel like that would say Republican in the White House and Republicans retain a control of both chambers, that this is their best chance to advance provisions like that. And it'sn't one of the ideas with the repeal of Obamacare that states would get less federal funding for medicaid as part of this UH and would compel them to

negotiate take a harder line with drug companies. Is that sort of the idea? You know, it could, So there's two different things there. You know, they could repeal the medicaid expansion that was part of the A C A or you know, maybe have a compromise and leave it up to the states saying if you want to keep it, you can if not you don't necessarily have to, um,

but what they like to do. I think Paul Ryan's vision is to essentially convert medicaid in the block grant program, where we the federal government will give each state pool of money UM to do with as they see fit and uh and designed to own medicaid plans with that. That's a harder sell on the drug pricing front. UM. You know, we'll see what Trump's pick a for HHS Secretary Tom Prices next weekend. We gotta run. Thanks very much, Brian Ryan. Are you gonna be following this for us?

Our senior healthcare policy analyst for the Bloomberg Intelligence Government team. Will Apple become the next HBO? Well, it looks like they're gonna try. I want to bring in John Petreats, managing director and portfolio manager at Point View Wealth Management, to give some context to the news that we got uh this morning by the Wall Street Journal that Apple is planning to create new original television content for its

music subscribers. So John, Uh, first of all, what's your take on what their plan is to do as far as creating original content? Well, first of all, thanks for having me on. I gives my first point would be, well, it's about time. Um, when you're a six hundred and fifty billion dollar company, it's really hard to sell a lot of cool widgets to grow the top line, you have to move into some sort of subscription type of business model in order to grow, because it's just, you know,

you just can't. The margins on the hardware business just get compressed, and it's just it's very difficult to reinvent

and sell new items. So the fact that they're finally catching up or going after Amazon, Netflix, Hulu, understanding that through the Apple TV, which is a portal for them, they can create this original content or with the cash where they have buy content and set up some sort of scription subscription model where you and I pay Apple you know, ten nine a month and get all this content. So I think it's it's it's a great move for a huge company that needs to change their business model.

You know, it's interesting that you talked about, you highlighted that they might buy content, and I mean the content world right now is incredibly crowded. You've got you know, you mentioned yourself, Netflix, Hulu, Hbo, itself. I mean everyone is sort of focusing on content. Are you expecting some kind of consolidation and if so, who might Apple look to purchase. Yeah, it's a good idea, it's a it's a good question. I think they're going to go along

the route of building out their own original content. They may not acquire companies, but they may acquire a very creative smart people. Look what they did with Beats by bringing on Jimmy Iovine and Dr dre Um to build out on the music platform. So maybe they bring on board really smart people to who are very creative to do their original content. You know, a Viacom is a company out there that has a tremendous amount of content

that's being undervalued. They have paramount studios, they own MTV, Nickelodeon, and all the other sorts that that that the market is thinking traditional TV and a cable model is dead. So you know, maybe there's someone like that where they can go up and pick up on the cheap. But I think Apple's first route is going to be um doing it on their own and maybe hiring and spending a lot of money on really smart people that come

out and build it on their own. But John, isn't the Walk of Fame littered with those efforts to become a content producer, whether it is in the movie industry, television industry. Is there an example of a company that formally was not in the business that just flipped the switch and was successful at it. I mean Amazon is a perfect example, right. I mean, Amazon, who build this entire bread and butter off the e commerce distribution platform and then through the fire Stick, has decided to build

out its own content. And now as prime members, you get access to all that through the through the fire Stick, and you get X to all of Amazon's original content within But do we know about that Amazon actually makes a profit on all that content. If you take away

that prime subscriber, well that's a different story. Well, I mean the goal supposedly is to actually make money, right, Yeah, if there's ways to do it though, I mean Apple, if the Apple can bundle right a a content subscription with its music and then add in features of hey,

you know, we'll throw in extra storage on iCloud. I mean, there's a lot of other ways to bundle in content where a user, um, where maybe Apple is not maximizing each individual user of an iPhone or an eye watch effectively um to get more juice from the Lemon, so I think and again, this is not a very capital intensive type of build out. Think about the other projects that have been thrown out that Apple may get into it, such as cars, and I was never a believer into

the car model. But good luck in terms of building on manufacturing facilities dealing with unions for auto workers. I mean that was a capital intensive venture that people are trying to throw out there. If Apple would compete with Tesla, that I just didn't think make it any sense at all. What's the key audience do you think that they're going to try to target here? Well? I think clearly the millennials are changing the way the way they view TV.

I mean, my kids are nine and a half and six and a half and they probably watch more YouTube and Netflix than when they're allowed to watch TV than anything else. Um, they don't even know. They don't have any uh you know, they're not they're not tied to the traditional TV model that say you and I were all brought up with. So the idea of you can

watch what you want when you want. An Apple has the key here is Apple has the I t V platform, right, you have that portal where you could download apps and it could work seamlessly with all of your other Apple devices and have your pictures on there in your music. So by doing this, I think it's one of the key ingredients to capturing UM The entire UH end users UH media have Thanks very much for being with us.

John Patritis is a Managing director portfolio manager Point of View Wealth Management based in Summit, New Jersey, speaking about Apple and its potential to get into the content business. 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.