Last month in “On The Perils Of Trading In A 140-Character World,” I bemoaned the fact that market participants must now include Donald Trump’s Twitter feed in their list of daily required reading.
Trump’s tweets – for which there’s no early warning system – can and do move markets as anyone who owns shares of the major automakers is acutely aware.
It’s not clear to me that this is a positive development for longer-term investors. Trump very often tweets without knowing the facts and that’s partly because he’s making up the facts as he goes along. That is, this is the soon-to-be President of the United States we’re talking about, so when he tweets about border taxes (for instance), he’s effectively making policy on an ad hoc basis via social media.
Effectively then, Trump is changing the business landscape on a tweet-by-tweet basis, forcing corporate management teams to adjust their strategies on the fly. What was a viable business plan yesterday might cease to be a workable strategy today depending on what Trump decided to tweet about between then and now.
Here’s how I put it earlier this week:
To be sure, Trump isn’t the first President to adopt a bully pulpit approach to getting things done. Indeed, the White House itself is the greatest bully pulpit of them all. But Trump’s Twitter addiction generates a kind of bizarre verbal collage that commingles self-worship, personal vendettas, and Trump’s own brand of foreign policy. It’s an exercise in social media-assisted stream of consciousness and if the feed is a window into the new commander-in-chief’s mind, then we can’t say we weren’t warned when something goes terribly wrong.
If a CEO approached social media in the same manic fashion, investors would be storming the board room to have him/her removed immediately.
But while living under Trump’s thumb (in this case quite literally) may be distressing to long-term investors, it represents an opportunity for day traders. Consider the following from WSJ:
On StockTwits, a popular forum for day traders, the volume of messages about particular companies mentioned by Mr. Trump jumped nearly 10-fold on average in the day after he tweeted, according to the company’s analysis of eight tweets since the election.
Trigger, a mobile investing app with more than 20,000 users that uses alerts to notify investors of market moves and information, added a feature this month to alert users when Mr. Trump tweets about the stocks they own. Already, they’ve found it to be the most popular trigger.
Steve Patterson, an independent retail trader based in Toronto, saw Mr. Trump’s tweet on Jan. 3 about Ford Motor’s decision not to build a planned factory in Mexico, a news story that ended up sending the stock 3.8% higher that day.
He quickly took a short-term position betting against the stock, making more than $500 as it pared some gains in intraday trade. After some more research, he put on a bullish options trade that day, which he said he has since closed. He said he also plans to short the stock after the company reports earnings at the end of the month.
Mr. Patterson, who has been trading the U.S. equity markets for decades, said he rarely used his Twitter account until Mr. Trump began calling out specific companies last month. Now, the president-elect is one of 10 accounts Mr. Patterson follows, and he typically keeps his Twitter feed visible in the bottom-left corner of his six-screen trading setup to monitor for communications from the president-elect.
I don’t know about you, but I’m not entirely sure that’s a trend we want to perpetuate.
Furthermore, consider that the seismic shift from active to passive investing means that it may take the market longer to price in shifts in fundamentals for individual stocks. Here’s Goldman:
The growing reliance on ETFs is dampening equity turnover, with turnover in passive funds just a small fraction of that of active funds. Passive turnover has averaged just 3% per year since 2002, versus 32% for actively managed equity funds. Lower turnover, combined with a higher share of equity assets now held in rules-based investment vehicles, means that it is likely to take longer for share prices to reflect new company-specific information.
That would seem to beg the following question: if the definition of “company-specific information” has now come to include Donald Trump’s impromptu rants, and the rise of passive ETFs has now decreased the market’s ability to price that information efficiently, does that open up more opportunities for folks like Steve Patterson? Has Steve now become an arbitrageur of sorts? And if I’m in it for the long haul in a name like Lockheed Martin (for example), do I want to find myself constantly behind the curve thanks to Donald Trump, his Twitter account, and the Steve Pattersons of the world?
I don’t know the answers, but what I do know is that Steve isn’t among the 64% of Americans that believe Trump should delete his Twitter account…
“I think it’s going to be a fun year for trading,” said Mr. Patterson, citing the fact that all types of investors now have access to the same information. “It’s kind of leveling the playing field a little bit, especially if you’re a retail trader like I am.”