Trump Strategy Emerged: Take Responsibility

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by: Henry Miles

Summary

During his overseas trip, President Trump challenged Saudi Arabia and the European Union to take more direct control over their interests.

As if to drive home the point that you're on your own, back in the US, Trump's first action was to withdraw from the Paris Climate Accord.

Near term, this strategy will result in continuing buoyancy for US military defense contractors and possible uplift for infrastructure and engineering companies.

Longer term, Trump is likely to get his wish as partners reduce their reliance on the US and take their business elsewhere. Investors prepare.

I was ready to write this article after President Trump completed the Saudi leg of his first overseas trip. The deals he cut there fascinated me. But, I decided to hold back to see what the rest of his travels would bring. I'm glad I did so I could see the juxtaposition of the south and north legs of his trip and, on its heels, Trump's decision to withdraw from the Paris Climate Accord.

Warmer South, Chillier North

President Trump's reception in Riyadh was friendly, as he challenged the Saudis to step up as a regional policeman and then sold them the means to do so. The purported $350 billion in trade deals over 10 years represents about 5% of the country's GDP. This is an impressive number but, of course, we don't know how much of it is incremental above "business as usual." Nevertheless, here are the makings of a list of corporate beneficiaries of Trump's visit with Salman bin Abdulaziz Al Saud:

  • Lockheed Martin (NYSE:LMT) - Missiles, radar defense systems, and Blackhawk helicopters.
  • Boeing (NYSE:BA), General Dynamics (NYSE:GD), Northrop Grumman (NYSE:NOC), Raytheon (NYSE:RTN), United Technologies (NYSE:UTX) - Terms of deals not disclosed/available.
  • McDermott (NYSE:MDR) - A new shipbuilding facility.
  • Halliburton (NYSE:HAL), Baker Hughes (BHI), Nabors Industries (NYSE:NBR), National Oilwell Varco (NYSE:NOV), Rowan (NYSE:RDC), Schlumberger (NYSE:SLB), Weatherford (NYSE:WFT) - Oilfield services.
  • General Electric (NYSE:GE) - Power, healthcare, oil, gas turbine, and mining solutions.
  • Dow Chemical (DOW) - Facilities to produce water treatment applications, polymers for coatings, and performance silicones.
  • Jacobs Engineering (NYSE:JEC) - Project management services.

After another congenial stop in Israel, Trump flew north to see European leaders on a variety of matters, including the payment of NATO bills (no mention of Article 5) and the Paris Accord on climate change. With no intent of turning this into a political op-ed or trafficking in "fake news", I encourage readers to assess for themselves the second leg of Trump's trip. Angela Merkel summarized it this way:

The era in which we could rely completely on others [the United States] is gone, at least partially.

President Trump was soon back stateside delivering his decision to withdraw from the Paris Climate Accord. Immediately, many governors, mayors, CEOs, and others blunted Trump's message by announcing that they will continue to stand with their/our international partners. Former Democrat, then Republican, now Independent, Michael Bloomberg pledged $15 million to "support the operations" of the United Nation's Framework Convention on Climate Change, the arm of the UN that coordinates the Paris pact.

Investment Lights Flashing

For SA readers, the question becomes, "How will this affect us as investors?" A reasonable analogy for thinking about this is found in board games, wherein luck has been completely removed from the competition. As with chess, the board takes time to develop. Players make many choices reflected in multiple moves and "checks" before things become clear and checkmate declared or stalemate agreed. Therefore, now more than ever, investors should:

  1. Work both sides of the table. Invest in transnational companies that have material presences in potentially adversarial countries. Companies like Daimler (DDAIY), which, in response to Trump's comment two weeks ago that "Germany exports too many cars to the US", was quick to counter that most of those cars are manufactured in the USA.
  2. Recognize that timing will be important. As with Saudi Arabia, US defense contractors may do more business with the European Union as it "gears up" to take on additional military duties. At the same time Saudi, the EU, and others may begin to increase their mix of defense purchases from more reliable partners.
  3. Consider "switching sides". Alpha, indeed beta-level, investors who have not traditionally held ADRs in non-US companies should investigate doing so. There are added considerations in owning these securities, including those associated with buying and selling the pinks, foreign withholding taxes on dividends, and ADR fees.
  4. Know there are more trips to come. What happened in Saudi Arabia and the European Union last month can happen with China, Japan, South Korea, India, the Philippines, and Oceania next month. President Trump might press countries of the Pacific to take on even more regional responsibility, while selling them more arms. He might push India away with a message that the US is not going to continue to outsource IT there.
  5. Stay alert as the board develops. The remix of geopolitical relationships will change the fortunes of business and investors. Assumptions, negative or positive, that underlie revenue and earnings forecasts must now be taken with an extra grain of salt, especially with businesses heavily reliant on the US or other government "consumers". Consider, for example, that climate alliances are already forming between the EU and China and Germany and India.

President Trump's strategy has also worked its way into his domestic agenda. Except for homeland security, basic social services, and some infrastructure, Trump appears ready to jettison other domestic programs, including non-Medicare healthcare, environmental protection, federally-sponsored research, and so forth. Movement on related legislation, revisions to the tax code, and privatization hold important implications for investors.

I'm Taking Responsibility

I, for one, fully intend to pay attention to President Trump (irrespective of whether I agree with him). On early news, I doubled my position in Lockheed Martin right before Air Force One landed in Riyadh, and I'm holding tight with the rest of my US military defense stocks including in most of the contractors listed above. Although I've made no decisions yet, I'm revisiting the non-US military defense space and will probably do more there.

Evidence out of Saudi also suggests that US infrastructure and engineering companies may benefit in the near term. Those sectors have not performed well recently, and investors may see an entry point with Jacobs Engineering that made the list above and Fluor (NYSE:FLR) that did not; I own the latter.

Against Trump's rejection of the Paris Climate Accord, the issue of what to do with carbon-based investments becomes more vexing; I offer no answers. I do plan to increase my non-US investments with leaders in addressing climate change - alternative energy, electric infrastructure, water management, etc. My instincts tell me that competitive countries will seize the opportunity to gain advantage over the US in these areas. (In a few weeks, I will submit to SA my six-month climate change investment update. In the meantime, here is my last article on the subject.)

Lest anyone be deluded, the tremors of Trump's strategy will be felt far and wide, including by businesses that outwardly have little to do with the federal government - packaging, transportation, retail, REITs, and many others. It is impossible to change "demand" without affecting "supply" and shifting important economic equilibriums. Consistent with President Trump's emerged strategy, investors are well advised to "take responsibility".

Disclosure: I am/we are long BA, FLR, GE, LMT, NOC, RTN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Always do your own due diligence in consultation with a competent financial adviser who puts your interests ahead of their own. (All my proceeds from contributing to SA go to charity.)

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.