P&L: Trump Can't Micromanage a Manufacturing Revival

on iTunes, SoundCloud and at Bloomberg dot com. I want to bring in my colleague Brook Sutherland, a Bloomberg Gadfly columnist who wrote a piece that was really terrific yesterday about President elect Donald trumps celebration of a decision that he says he reached with Carrier UH to keep with Carriers Heating and air Conditioning unit to save about one thousand Indiana jobs. Brooke, thank you so much for being

with us. So can you just talk first a little bit about what this agreement was and what this really does with respect to saving jobs in the US. Sure, you know, I think we're still waiting for all of the details. But United Technologies announced the decision earlier this year to shut down to Indiana plants actually and move the jobs to Mexico. So the agreement that Trump is talking about has to do with the facility in Indianapolis, um and they are planning on saving about a thousand

jobs there. We don't know yet what's going to happen to the other Indiana factory, which was in Huntington's uh So, you know, at best, this is sort of a stop gap, half measure that maybe save some jobs, but not all of them. And it's just not really clear if it does much more beyond that. Um So, just real quick, what what exactly what kinds of jobs are we talking about that? Uh? United Technology was going to move to Mexico and you know, how long will they actually stay here?

Why were they thinking of moving to Mexico? Sure? You know, so these are manufacturing jobs that typically play pay pretty all. I mean, you're talking about about twenty five dollars an hour, which is a lot more than somebody can make working in the service industry. But you can have those same jobs done in Mexico for a lot less, and so

that's part of the appeal. The other part is that, you know, there have been significant regulations in the air conditioning and h VAC industry in terms of making the products more efficient, living up to sort of environmental standards, and those have a cost, and so to be competitive. What United Technologies has said is they need to lower labor costs, and a lot of its competitors have already

made these moves to Mexico. And so that's really where it's coming from, not you know, we don't want to support America. Is it also the case that while these jobs may be saved, other factory jobs in Indiana in the geographical location where this United Technologies carrier plant is located, those layoffs and those moves to Mexico they're continuing exactly. I mean, it's not even that all of the United Technologies jobs are going to be saved, they're only saving

some of them. So but there are you know, other manufacturers who have had to make these same decisions. And I don't think that manufacturers like making these decisions, but a lot of times it's just sort of the reality of the economic situation they find themselves in. And to your point, Rex Nerd, which is another industrial manufacturer, is also in Indiana, not too far from where the United Technologies plant is actually, and they are looking at shutting

down that facility and moving those jobs to Mexico. And we haven't really heard as much about rex Nerd, and I have to wonder if that's because there's no viral video about the rex nerd layoffs the way that there was with Carrier. It hasn't gotten as much public attention, It hasn't drawn as much pushback, it hasn't really been talked about about by President Trump. Um So I just sort of wonder if we're going to see anything there, if he's just sort of picking and choosing the ones

that might bring good publicity. I love the lead Donald Trump can't micromanage his way to a man manufacturing revival in America. Perhaps he can't micromanage his way to a manufacturing revival. But is there something on a policy level that he could do to keep manufacturing jobs in the US or these jobs just going away because of automation. Well,

I think that's sort of a tough question. You know, he's talked about leveling hefty tariffs at these companies that manufacture products in Mexico and then bring them back to the US. He's talked about doing this on an individual basis, which I think would be very hard to implement without looking like you're picking and choosing who wins in this country. And you know which businesses do well and if they don't do exactly what you tell them to do, you're

going to punish them. That's a very dangerous precedent to set. I don't know if you want to have a mass tariff because that could spark trade war. So I don't really know what you do on a national scale to stop this from happening. And even if you put those types of policies in place, you're not going to change sort of the broader trends that are driving this momentum.

A lot of it is technology. You know, these jobs are being replaced by machines because they don't need people to do them, or there's excess manufacturing capacity because these companies have merged, or their products just aren't into and anymore. If you're Caterpillar or Joy Global. People just aren't buying mining equipment right now because commodity prices have eroded so much. I just want to note that another new store. You

mentioned technology, but something called the Internet Archive. They preserve the digital records of billions of web pages, indeed, even cash pages of websites that no longer exist. They are moving their backup data to Canada because they fear potential changes in legislation due to a Trump administration could maybe put the archives at at risk. All different a lot of moving pieces there is, and you know, I think that's what makes it hard to tackle these sort of

job decisions on a national level. And that's one of the points I was trying to make is that typically this is a conversation that happens on the state level, where you have state governors or legislators talking to companies about specific facilities within their state and what they can do to preserve jobs. But it's hard to translate that on the national level. I want to bring in Eric Marshall, portfolio manager with Hodges Funds, to talk a little bit

about what to look for in small cap stocks. And we've just seen an amazing run in the Russell two thousand and other small small cap indexes, the Russell two thousand gaining almost eleven percent since the US election. Thank you for being with us, Eric. Do you think that this can continue? We think that there's a good case that we'll see the bull market and small caps continue, and there's a couple of things that make us encouraged in this space. You know, it's been a very bifurcated

market within small caps. This year where a lot of the things having to do with reads and utilities and a lot of the defensive areas have really carried very high multiples, while a lot of areas within consumer discretionary industrials have not. And you know, as we look at the prospects for higher interest rates, lower taxes, US regulation and it continued pick up in merger and acquisition activity, we think you could still see room to run in

this bull market for small cap stocks. All right, can you give us some specific industry groups or even names? I know, for example, we're looking at a potential infrastructure spending plan coming from President elect Donald Trump administration. Is

that going to help small cap stocks? Yeah, And that's one of the areas in the Hodges Small Cap Fund that we've really been focused on is companies that can benefit from that infrastructure spend and it leads us to own a lot of the materials, uh, including concrete and cement companies. One that we like is a relatively new I p o Ra and this is a company that makes large diameter concrete pipes and so forth that are used for water infrastructure, which is UH, there's a huge

upgrade cycle going on. The stock trades at a very reasonable valuation and very much still underneath the radar. They went public a couple of months ago, and uh, not exactly a great time for small cap I p o s, but we like things like that. We're seeing opportunities in some of the steel companies and a lot of these material companies that will benefit from a multi year spending cycle for infrastructure. Just tell us the name of the company. Again,

people may not have heard, uh, Fonterra Fontera indeed. And did you buy it at the IP or did you wait for it to come out? We bought some of the I p O and it broke that I p O price and actually traded off and we've added to it since. Um, you have a fund, the Pure Contrarian Fund. What's your most contrarian bet within that fund? Um Our founder of our firm, Craig Hodges, manages that fund, and

I would say one of the pure contrarian funds. UH biggest moves was in some of the steel and iron ore companies which were kind of left for dead, probably doably a year or two ago, and we found some very deep value opportunities and several companies there that have done very well so you know, when US Steel got down to eight dollars of share, that fund took a large position in that stock, as well as things like Cleveland Cliffs and some of the those more commodity type

companies that people had really just kind of thrown away with the bathwater. Do you think that, given the rally that we've seen recently, that there's still more room to run with the steel and metals companies. I think that there is. When you look at overall consumption of steel

in in the United States, Uh, it's relicatively good. The capacity utilization of a lot of domestic steel companies has been running in the sixty six percent area now for the past couple of years because of so much cheap imports of steel coming out of Southeast Asia and Turkey, places like this. And I think as you see some of the trade regulations tighten up a little bit, if you mean tariffs, I mean, because that's what's not the

steel industry, right. I mean, they put sanctions on imported steel, making it more expensive and or more competitive with US produced products. And you've seen US steel new core all move higher, absolutely and PIM A lot of people don't realize we don't have enough steel capacity in our country. We need to import of our steel just to meet

our needs. The problem is we've been importing thirty percent or thirty five percent of that steel and that's really caused pricing not to recover while demand has recovered for things like auto and infrastructure and construction. Let me just turn your attention Hodges small cap fund. Right, you're up more than thirteen and a half percent so far this year. Good on't you? U? J C. Penny is in the portfolio small cap? How does that end up being? What's

your definition of small cap? It seems to change no matter you know who portfolio manager. Well, believe it or not. J C. Penny's is down to about a three billion dollar market cap, and when we bought the stock, I think it was about two and a half billion dollar market cap, so well within the definition of the Russell

two thousand market cap range. But it's really a turnaround situation where we see, uh, some good underlying assets in the former real estate and so forth, and we think that the management's new plan to kind of reinvent the business through the house wares and Sephora brand, some of these new things that they're doing and kind of cater to a younger generation as well as gain back some of those core customers. We think that there's a very

good risk award there. What's your concern about the rise in benchmark borrowing costs and how that could affect some of these smaller companies which are going to need to borrow and might not be able to borrow at higher rates. Well, I think if you look at um, you know, corporate balance sheets in general roll uh, they're in really relatively

good good shape right now. And I do think that you definitely need to be more aware in a higher interest rate environment about the uh, you know, interest burden that smaller companies have with their balance sheets as the cost of capital goes up. But I think, you know, everybody's had a very long period of time of low interest rates to refinance get their balance sheets in order. And I think that the in general, um, you know, that a lot of the concerns there could be offset

by you know, a lower lower tax corporate tax rate. Transports, I noticed you got a Jet Blue holding in there. I mean Warren Buffett recently going in and buying shares of airline companies Delta United, you know, and that that's another one. You missed our Kntrian fund earlier. That's one of the big bets we made a couple of years ago,

and no one liked airlines. We were buying airlines, and we what we see going on in the airline industry is not that much different than what happened in the railroad industry ten years ago, where they had kind of come out of a decade's worth of consolidation and you started to see an environment where now I think the top four airlines control about seventy of the domestic capacity,

so you're getting a more rational pricing environment. People are being more careful about how they add capacity, how they manage that, and we think that we're in an environment now where airlines, for the first time in about thirty years, will actually generate respectable shareholder returns. So I want to thank you there. Eric Marshall, portfolio manager Hodges Funds. Two asset classes want to focus on right now our private equity and venture capital, and joining us is Greg Stento.

He is managing director at Harbor Vest Are based in Boston, home to Bloomberg. Greg, thanks very much for being here much. I appreciate it. Let me just give you a headline though that Brent crude is rising to the highest this year after the agreement in Vienna by OPEC to hold production levels flat. And one if you could speak a little bit about increases in the price of almost everything, including money, and what would that do to private equity

and venture capital markets. Sure well. Harbor Vest is a global private equity asset manager focused on providing solutions to investors around the globe seeking to access the private markets. Solutions being money like a lot of mezzanine financing, solutions being uh, ways in which investors can access the asset class, whether that be through a co mingle fund, through a dedicated account, or through some type of a specialized vehicle. Uh. And so that those are ways in which investors are

coming into the asset class. You know, with regards to the pricing environment that you speak about, uh, you know, we're focused on long term investing and so uh, no question, the valuations over the past year have been pretty full around the board, but you know, in all parts of the business, uh, And so investors have got to work hard to find those special opportunities where there's growth, where there's very strong secular long term trends to be able

to overcome the full prices that that folks have had to pay here in the short term. But again, this is all about long term investing, uh, And that's what you know, brings it back to our firms that we've been doing this for thirty five years and have the access to those types of opportunities where we can see long term value and long term creation of growth. You know, Greg, there's been a lot of discussion about how pensions and insurance companies have moved away from hedge funds um just

because of how high the fees are. I'm one ring whether that holds in the private equity world as well. I saw a story in the Boston Globe last night about the Massachusetts State pension fund paying one point five billion dollars to more than one hundred private equity firms of the past five years, and that that's sort of that's the headline, even though the returns were, uh, we're

remarkable eighteen percent annualized from two thousand elements. So no question, there's a focus on fees within the private markets that are being paid. But what we think is that the real focus needs to be on the net returns. As you just talked about. I mean that has been the

best performing part of the Massachusetts State portfolio. Um, the returns that you can earn in the private markets have consistently exceeded what you can earn in the private the public equity markets, or other other asset classes over a long period of time. Why can you demystify that for us? Sure?

So there's a number of reasons. UM. First of all, when you operate in the private markets, you haven't you operate out of the glare of the public investors, and you have an opportunity to really think long term about

building a business and growing a business. You know, in the venture capital space, for instance, UH, there's the creation of new business ideas, you know, something like an uber that never existed ten years ago, that when you have the right entrepreneur um, the right product market fit, in the right risk capital, you can bring that together to create solutions to to meet unmet needs and create very

scale businesses. As a company that's been you know, UH quoted in the press is being worth more than sixty billion dollars today, UH and UH I land up. So there are those opportunities to develop um UH solutions for unmet needs, whether they be in technology or in healthcare or other markets. Uh, and finding those right globally diversified ideas or what we what we're focused on at Harper Ust. You've got a lot of investments in Canada. I understand

also it's global, right. I wonder if you could just speak a little bit about how the change in the price of energy affects the decision making process for places is like Canada, Because if you've got an overall economy that is driven by commodity prices, what is that? How does that sort of inform your view? Sure? So we have a specialized fund that we put in place in Canada in conjunction with a Kittian government, and I think it was very much to diversify away from what you're discussing.

So the idea was to generate new business formation in Canada's focused on the venture capital market. So it's trying to find those Canadian venture capital firms and other other global investment firms investing in Canada that can help drive new business creation and new industries in Canada to to somewhat diversify away from an economy that has written its natural resource base. How has fundraising been so far this year and what do you expect it to be like

next year? Well, for Harvarvest, it's been a it's been a record year. For us, We've had a phenomenal year in terms of the reception that we've had from investors seeking UM commingle funds, UH, specialized funds like our Canadian fund or are messing income fund or also looking at you know, dedicated separate accounts that want a very specific and bespoke solution. So for US has been a record year.

It's been, it's been, it's been quite good at invest in the history UM Broadly across the industry, fundraising is up mildly over last year. Uh, it's something that we watch, you know, because those imbalances of capital in the market are are of concern in any market, but also in the private markets. Importantly, the reassuring thing has been that there hasn't been a proliferation of the number of new

funds and the new managers coming into the business. So while the capital is up slightly year over year, the number of market participants is relatively steady h and so that keeps the competitive dynamic and the competitive balance in place. And again those are the types of things that are investors seek from us to try to make sure that we're finding those opportunities that despite the market environment, we're going to have good, good potential for long term success.

We're speaking with Greg Stento, he is managing director at Harbor Vest the topic of an equity and venture capital. I believe it early in November, right, you just closed on a on a fund. I believe this was, what about a four point seven seven billion dollar fund? Tell us a little bit about this. This is a secondaries fund, it is, and that's correct. Secondaries is something that we've been doing since so we celebrated over thirty years of

having been active in the market. Just to be clear, secondaries means people who want to sell their stake in a private equity fund can sell it to somebody else through this type of fund. Correct. That's right. It's an ill liquid market and it's it's done through private transactions,

whether it be a fund position or a position in companies. UH. And again we've been one of the pioneers in that space, having done it now for more than thirty years, and we closed a close to fund in early November that is focused on that market, dedicated to that market. UH. In particular, I think where we've carved out a niche in the secondary market and is what we call the complex transactions. So um these are doing things that UM again we that are a little bit off the beaten

half of the typical commodity like lp UM purchase. So these could be an end of fund life solution where a private equity fund has reached near the end of its life. The general partner still feels as though they've got assets that they like to manage and continue to grow for the next three to five years. But at the same point, their investors are tired and maybe want to some of them want to get out. So we

can provide a special vehicle to bridge that solution. Greg Stento, managing director at Harbor Fest, speaking to us about the outlook for private equity and venture capital. This is Bloomberg Americans just loving their trucks. General Motors, Ford and other major automakers beat analysts estimates for US sales y because

Americans just can't get enough pickups and SUVs. I want to bringing Kevin Tynan, senior auto analysts for Bloomberg Intelligence, talk a little bit about, uh, just how good these sales numbers really were, and whether they can last. So, Kevin, thanks so much for joining us, Hi Lisa. UM. Yeah, so very good numbers in the sense that UM, you know, consumer buying frenzy, end of the year, Black Friday through the end of the year, clearance sales UM incentives obviously

higher and and very aggressive. UM. But I think the concern there is if incentives don't work, which obviously they are UM, and then what happens come January February you have a little bit of a hangover? UM. You know, the automakers are not as aggressive on on the incentive and lease deals because there's no real demand left. UM. So very good here and now today. The question is what happens in If you care about what happens in

at this point for now, you'll take this. There's there's talk of an eighteen point three seasonally adjusted rate, which would be the best since UM employee pricing programs of two thousand five h So all all things are coming along here, Hey, Kevin, what about all things coming along in the auto loan business? Yeah, I think there would be. Uh. Delinquencies are rising, yeah, right, supprise right, I mean? And third quarter of subprime auto loan balances became at least

ninety days delinquent. That's up from one point six percent in the third quarter of four. And this is this a significant concern? Yeah, these are these are concerns. The length of the the average term getting longer, and the amount uh financed, you know, the loan to asset ratio, all those things are trending probably where where they would

cause concern. Um. The other issue is that as long as money is cheap and easy, what you get is that negative equity of those longer loans flowing into new loans and people get more and more upside down, and that's really what crashed in you know that two periods. So what happens is you get consumers are drivers basically having to hold onto those vehicles till the term until there's at least close to some equity because they can't roll that that negative equity anymore. And aren't they longer

term loans? Yeah, absolutely right, if not more so, the average is probably a little bit higher. But if you get people taken seventy two months loans, you don't have equity in that vehicle. Um, which is okay if there if if the finance company is gonna let you roll that negative equity into the next loan. Once they stop that,

then that's where the real trouble starts. You know. I do have to think that one thing that a number of analysts have told us is that, UM, the auto companies have captive finance companies, so they can afford to take a little bit of a bigger risk keep extending loans to even sub prime borrowers because they're earning so much from selling the cars. How much does it put the captive financing companies of these auto companies at risk

of making too many loans that are too speculative. Well, that's certainly a big risk lease to the Other thing you have to remember is um the leasing part of it, where the automakers rather than if you think about a cash or a finance deal with with cash incentive across the table, you're getting these sort of subsidized residual values that are being propped up. You know. And now those vehicles come back, which we've been leasing at record rates,

starting to come down a little bit. UM. But as those off lease vehicles come back in the market, there's gonna be downward pressure on new price uh, new vehicle prices because you're gonna have this flood of low mileage off lease vehicles coming back to the market. It's not an industry that really looks too far into the future to worry about these things. But it's out there and it's coming all right. Just gonna give you ten seconds.

The environmental protection age, see leaving in place those CEO two standards. Is that going to hurt the industry? You know what's going to happen PIM in ten seconds, is that they will produce the fuel efficient vehicles. Those will go into fleets, things like Lift Duber. There'll be really aggressive lease deals for those companies. They'll hit their marks and then they'll go ahead and turn around and sell what they want. Thanks for listening to the Bloomberg pen

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.