President Trump has shown the type of leader he will be over the next 4 years in his recent actions as President elect. He has been shown to be what I am coining ‘the cost-cutter in chief.’ I have been skeptical of Trump’s campaign line that he would get rid of “waste, fraud, and abuse” when he was campaigning. It’s not that there isn’t wasn’t any waste in the system, but every politician campaigns against it. This is similar to when politicians claim to be against pork in Washington which is where politicians aim to have clean bills without giving benefits to select groups in order to get it passed. Pork and waste in Washington are a staple, so I didn’t think anything would be done to stop either.
I have previously shown charts of estimated spending growth under President Trump compared to the goals of the House GOP, baseline budgeting if no cuts are made, and what the budget would look like if Hillary Clinton would’ve won. The budget for Trump assumed big spending increases. This came from Trump’s rhetoric where he said he would build up the military, not cut entitlements, have a trillion-dollar infrastructure spending plan, and build a wall on the southern border. These policy pronouncements had implications on certain sectors in the stock market because they thought spending increases would mean more profits from government contracts.
It seems that Trump may be even more fiscally conservative than his predecessors in the GOP, if his recent tweets and statement are followed through upon. The first tweet was against Boeing where he objected to the cost of the 747 Air Force One planes which were ordered by President Obama in his second term. According to experts, much of the almost $4 billion in costs Trump complained about in the tweet are technological in nature which are made by firms Boeing subcontracts the projects to. According to Politifact, over the next 12 years, the project will only amount to 0.3% of Boeing’s total revenues. This is probably why the stock rebounded after the initial sell-off. This situation could give Boeing momentum towards pressing subcontractors to cut their prices. It could lower the cost of project and pass some of it down to the government which would be a win for Boeing’s margins and President Trump.
Bernie Sanders and Hillary Clinton caused headline risk for specific biotech companies and health care names when they tweeted about drug price increases. That would have been a worry for investors if they had won. Investors would have had to consider which companies had been raising prices without changing the drug to steer clear of potential landmines.
While this specific incident will not cost Boeing any money, it does put it front and center for more headline risk. Boeing had $16.5 billion in government contracts in fiscal year 2015, so the other projects are also on the table to be cut. Trump stated he wanted the buildup the military, but it may not imply spending increases.
The second tweet Trump sent out on this topic was posted today. He complained that the Lockheed Martin F-35 program had costs which were out of control. I consider this second tweet to be part of a lasting trend which investors need to be cognizant of. Trump will go after any government deal which has high costs. He will renegotiate the deals instead of having high level Pentagon officials doing the deals which is how it has traditionally been done. This tweet packs more of a punch because the F-35 program is the costliest Pentagon Program. It initially had design problems which have increased costs and delayed it. However, the costs have been declining since 2012.
A week before Trump was elected Lockheed Martin made a deal with the Defense Department to make 90 F-35 fighter jets for $7.18 billion. Unlike how the Boeing Air Force One deal is a small part of the firm’s revenues, the F-35 program is Lockheed Martin’s largest source of revenue. The Pentagon is on pace to buy 2,443 F-35 planes which would cost $391 billion. This tweet had a larger impact on Lockheed Martin stock than the Boeing one did. Lockheed Martin stock fell 2.5% on the day. The suppliers to the F-35 planes also saw impacts on their stocks. Bae Systems stock fell 2.5%. Northrop Grumman stock fell 2.7%. United Technologies stock initially fell, but it closed up on the day. The Dow Jones U.S. Aerospace and Defense ETF fell 1.14%.
Typically, Republicans don’t like to touch military spending because they feel government’s principal role should be to keep Americans safe. Trump is changing tradition which makes sense because he was never part of the establishment wing of the party. Going against the defense contractors is a winning political stagey for Trump, which means political risk needs to be factored into stocks which rely on government contracts.
Trump was politically adept enough to pick out a United Technologies company when showing his credibility on keeping manufacturing in America. He negotiated with Carrier Air Conditioning by giving them $700,000 per year in tax breaks if it promised not to outsource some production. Implicit in this deal was the fact that the government is a big customer of United Technologies, so Trump used this as leverage. United Technologies had $7.2 billion in deals with the government in fiscal year 2015.
Trump ignores traditional precedent in all his actions. While I wouldn’t call this capitalism, if Trump is using leverage he has to keep jobs in America, this isn’t a bad thing. What I am worried about is the 35% tax he is threatening to impose if a company wants to outsource production and sell the goods to American consumers. The way this plays out will depend on how many regulations are cut and how much taxes are cut. The cost of doing business in America will vary from company to company. The best scenario would be that most companies would choose to do production in America because of these changes. If many companies still would prefer outsource production, they may be forced by the tax to keep it in America. This would hurt corporate profitability and create inefficiencies in the system.
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