Market taking Trump promises seriously, threats not literally: James Saft

By James Saft

(Reuters) - (The opinions expressed here are those of the author, a columnist for Reuters.)

The stock market is taking U.S. President-elect Donald Trump’s promises of benefits like tax breaks seriously, but aren’t taking his Twitter threats and grandstanding literally.

Trump’s latest intervention, a Monday tweet slamming Lockheed Martin (NYSE:LMT) for costs on the Pentagon's F-35 fighter jet program wiped as much as $4 billion off of the value of the defense contractor’s stock and sent the iShares index of aerospace and defense contractors down 1.5 percent.

"The F-35 program and cost is out of control," Trump said on Twitter. "Billions of dollars can and will be saved on military (and other) purchases after January 20th."

Before concluding that Lockheed and its peers will actually be forced to pay for those savings once Trump is in the White House observe the pattern recently.

Trump tweets or sounds off about a company or sector, such as drug companies or Air Force One maker Boeing (NYSE:BA), hectoring about cost or value. The relevant stocks at first take Trump seriously and sell off. A day or two passes, sometimes not even that long. Then stocks go back up, confirming the upward trend they’ve mostly followed since the election.

Something is happening and it is not a straight discounting of having a hard-driving deal maker as U.S. procurement officer-in-chief.

Last Wednesday Trump said in a magazine article “I’m going to bring down drug prices. I don’t like what’s happened with drug prices,” repeating a theme of his campaign.

Shares of leading drug makers fell, taking the NYSE index of pharmaceutical shares down 2.0 percent. After hitting its post-election low at 11.15 AM New York time the day the interview was released, the drug sector has since rallied about 4.0 percent to stand now higher than it was before the election.

Aircraft maker Boeing came in for similar exemplary treatment last week after Trump tweeted that the Air Force One replacement project was “out of control” and that, “We want Boeing to make a lot of money, but not that much money.”

Boeing shares played their role in this kabuki theatre, falling sharply on the news, but rallying several percentage points from there to now be up 10.0 percent compared to the Monday before the election.

Whatever Trump will end up doing, and whatever impact this will have on companies doing business with the government, investors don’t seem especially scared.

PROMISES OVER THREATS

Or, if they are concerned, this is outweighed by other considerations, most likely Trump’s plan to cut corporate tax rates and allow for a one-off tax holiday for repatriated overseas profits. That flow of cash will likely largely wind up funding share buy backs, flattering earnings per share and more than outweighing any concessions.

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After all, Trump is one guy with a twitter account, and he has the entire Republican establishment on board for the tax cuts, but far fewer tools to use in employing sharp-elbowed practices with suppliers.

And Lockheed Martin is not some poor guy selling pianos in Atlantic City. ( http://www.philly.com/philly/news/politics/presidential/Donald-Trump-pianos-Atlantic-City-Taj-Mahal-casino-presidential.html )

So while it may introduce some volatility into stock prices once in a while, Twitter baiting is a relatively cheap way for Trump to give the impression he is acting as tribune on behalf of tax payers against corporate interests. The markets may be wrong, but they just don’t buy that story.

The market has got hold of a story it does buy though: Trump's proposed fiscal stimulus and tax cuts will help the market.

U.S. equity ETFs had their best ever month in November, attracting $50 billion, according to data from State Street Global Advisors.

“The lofty valuations and the vertical ascents in the major stock indexes strongly suggest that the mania phase of this bull market may be underway. It may have further to go once overseas cash actually does get repatriated and if retail investors start to pile into the market,” Ed Yardeni of Yardini Research wrote in a note to clients.

Behind that fund flow story, and the tax cuts and government spending story which touched it off, is the usual story in financial markets: people manage career risk.

Many fund managers are now badly lagging their benchmark indices. They usually do lag, but this year, a shock election followed by an unexpected and strong stock market rally, has left many managers especially far behind.

The momentum created by funds playing catch-up builds on itself, as funds buy in to try to avoid being left so far behind that their manager gets dumped.

Fund managers are the ones who Trump has truly frightened rather than corporate chiefs.