On The Perils Of Trading In A 140-Character World

Judging from some of the mail I get and from some of the conversations I’ve had with traders and investors, there are still quite a few people out there who refuse to accept what I contend is a largely unassailable assertion: markets and geopolitics are inextricably linked.

You can see this quite clearly in oil markets, where the line between economics and political wrangling is perpetually blurred. Indeed, over the past two years we’ve witnessed several instances of producers working against their own economic self-interest in order to further their political agendas.

Some readers have also expressed their incredulity with regard to my contention that there’s no such thing as market equilibrium. A related complaint is that I pretend to be able to predict tail events, a skill they say is impossible to possess let alone hone because tail events are by their very nature unpredictable.

What’s truly amusing about the above is that these seemingly disparate complaints and misgivings can actually be addressed all at once by pointing to the fact that in Donald Trump we can find definitive evidence of i) the link between political posturing and market behavior and ii) the existence of an ever-present, walking tail event.

With the exception of a last minute reversal tied to month end rebalancing, we’ve seen stocks rally and bonds sell off in the wake of the election. Why? Simple. Investors are betting that Trump’s policy proposals will ignite the elusive “reflation trade.” Although I mocked the President-elect after he took credit (on Twitter no less) for the rally in stocks, the hope that fiscal stimulus will extend the cycle and give our aging economic expansion a new lease on life is almost unquestionably behind the moves we’ve since November 8. In short, if you need evidence to support my contention that you can’t understand markets if you don’t understand politics, then look no further than what’s unfolded over the past six or so weeks.

As for Trump being the living, breathing, embodiment of a tail event, note that the commander-in-chief in waiting fits the definition of a “grey swan” quite nicely and nowhere is this more apparent than in his tweets about publicly traded companies. These tweets are “rare” (as a percentage of the total number of Trump tweets we get in any given timeframe) but “expected” (we know that sooner or later, he’s going to tweet something that moves markets). That matches Nassim Nicholas Taleb’s definition of a “grey swan” perfectly.

How, as investors and traders, are we supposed to deal with this? How can we be confident that we haven’t just made a trade that will move against us thanks to a couple of deft taps from Trump’s (small-ish) thumbs? How frustrated will we be when we lose money not because an analyst downgrades one of our holdings (and if you’re connected at all, you’ll probably know ahead of time if the axe is about to drop on a name you own) but because the leader of the free world fired off 140 characters at 3:16 in the morning?

Recall what happened to Lockheed Martin this month:


How does one trade in a world where 140-character black swans can land at any given time without any kind of warning?

Each investor will have to answer that question for themselves, but just to give you an idea of how seriously the issue is being taken by the “pros”, I’ll leave you with a small sample of the tweet-related commentary from sellside desks:

Deutsche Bank: Last night, President-elect Trump turned up the heat on Lockheed Martin’s F- 35 program with a tweet indicating that he has asked Boeing to price out a “comparable” version of the F-18 to the F-35. Apparently Trump’s meet and greet with LMT mgmt and F-35 program management didn’t make enough of an impact to avoid additional future tweeting. In the words of Trump following the F-35 meeting, the negotiation was just beginning and that it would be a “dance’. Despite the dancing on the F-35, we remain a buyer of LMT given solid positive earnings revision into ‘17/’18, which puts valuation in-line with the market combined with a positive turning defense budget and still plenty of self-help in the earnings trajectory from the nearly break-even Sikorsky results, which is over 10% of the company’s revenue.

JPMorgan: Meanwhile, the conciliatory and anodyne nature of Trump’s initial post-victory rhetoric has shifted back to the pre-11/8 tone and the tweeting is actually growing more frequent.

Citi: President-elect Donald Trump tweeted, “Masa (SoftBank) of Japan has agreed to invest $50 billion in the U.S. toward businesses and 50,000 new jobs …” and then followed “Masa said he would never do this had we (Trump) not won the election!” We believe this is positive for SoftBank shares. The tweets suggest the potential for fresh developments on the merger between Sprint and T-Mobile, which failed to gain approval under the current Democratic administration.

Wells Fargo: We believe the general sell-off in defense stocks following tweets by @realDonaldTrump – which were critical of the costs of the F-35 (LMT/NOC) and Air Force One replacement programs – is overdone and creates a buying opportunity.

Credit Suisse: Trump on Air Force One: On Tuesday, President Elect Trump ‘tweeted’ that the new 747 Air Force One $4B order should be cancelled. The figure in the tweet was somewhat exaggerated and requires clarification. First, BA is not yet under contract for construction. Instead, they are working under a $170M development contract to study the aircraft. The preliminary total cost is ~$2.7B as of the last DOD estimate (not $4B). Since the tweet, Trump met with Boeing CEO Dennis Muilenburg, who stated Boeing will work to control costs.


2 comments on “On The Perils Of Trading In A 140-Character World

  1. Curt Tyner

    Probably the real reason for Trump’s tweets is just to f–k with someone or to put someone on edge because I can. Or someone needed to make some quick cash!!!!!

  2. If I’d had any LMT stock, I’d seriously be considering to get a class-action lawsuit together before this idiot ascends to the throne.

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