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Mr. Trump's Personality And How It Will Affect Markets

|About: SPDR S&P 500 Trust ETF (SPY)


The market is so much invested in Trump.

Mr.Trump's personality will, at some point, cause the markets to decline significantly. .

Are fundementals catching up with reality? .

"I aim very high, and then just keep pushing and pushing to get what I'm after."-The Art of Deal- Donald J Trump

At the time of writing his book, President Trump was just a businessman. And yet, he managed to keep "pushing and pushing". Now, he serves in the most powerful position in the world, will his ego force him to "keep pushing and pushing" more?

After we took a close eye on how Mr.Trump act, how he talks, and what he says, the answer is clearly, yes.

Mr.Trump cares about "playing" tough, and about "showing" the public that he is active and will result in a dynamic change in the country. To prove our point, just take a look at this tweet.

This clearly shows to what extent Mr.Trump cares about his picture, even on the expense of others.

We all know about the different environments that two presidents inherited; President Obama inherited a financial crisis, while President Trump inherited the longest economic recovery.

People know that, even Mr. Trump knows that.

Micro-managing is that last thing a US President should do

Mr. Trump is micro-managing; he gives himself the credit of the stock market being at record highs, when he himself mentioned, before the election results, that the stock market is in a bubble.

The question is, will he take the responsibility when the markets fall? Definitely not.

Mr. Trump don't take responsibility for anything negative, he just throw it on others, Obama, fake news, or democrats.

Now, what that means for the markets?

This means, there will be times when there is a mess.

After finishing from domestic major issues like tax reform, Trump will turn his focus towards China. Trump has always showed his anger towards the Chinese devaluation of their currency, and the idea of how US goods are taxed in China while the Chinese goods are not taxed in the US.

There is no doubt that the negotiations with the Chinese will not pass smoothly. We believe that the president will "keep pushing and pushing" on the Chinese, provoking uncertainty around a possible trade war.

There will be threats by the president towards the Chinese, ones which include, but not limited to; cutting Chinese imports, suing China for currency manipulation, backing Taiwan, moving ships to the Yellow Sea, and many other strategic moves that will show the Chinese the US-or the Trump-muscles.

The phone call with the Taiwanese president shows how far Trump can go.

Even if the Chinese were willing to accept Trump's terms smoothly, Trump won't make it look like that.

Because, as we said, Trump loves "showing" people that he worked hard to achieve something, no matter how easy it is. This show of struggle and threats, will be taken seriously by the markets. After all, China is our largest trading partner, and any threat to the usual-trade between the two countries means that input goods for US companies will be more expensive, offsetting any benefits from tax cuts.

This huge levels of risks that Trump's personality possess is not yet priced in the markets. However, most of the benefits that Trump's policies will provide, are priced in. This means that downside risks are much higher than the upside rewards.

Add to that, the tax reform won't be passed smoothly. None of Trump's inner circle officials know how congress works. They don't have a history in negotiating with congress, and they don't know what Republican congressmen needs. These bumps will prolong the implementation of tax reform (one of these bumps is that congress needs border adjusted tax, while the White House doesn't), making markets nervous at the time of negotiations.

The market is so much invested in Trump, to the extent that his latest speech sparked a 1.3% rally in the S&P 500 (NYSEARCA:SPY).

We believe, this huge level of correlation with the President makes the market turn a blind eye towards the reality that things won't pass smoothly. With nearly a 10% increase in the SPY since Trump's election, the market is nearly pricing the full near-term benefits, and not pricing any risks.

Risks not yet priced in the markets:

  • EPS expectations for the S&P500 in 2017 were revised down by analysts.Even Goldman Sachs is cutting EPS forecasts for the next 3 years.
  • The S&P 500 is trading at 31x expected EPS for Q1 2018, and 35x expected EPS for Q3 2018.
  • Le Penn expected wining in the French elections will create further uncertainty around the future of the European Union, our second largest trading partner.

As a result, we believe, the spikes in the SPY and Dow are short-term, and the markets will correct once the effects o f Trump's uncertain personality starts showing up. We recommend buying long term put options, which are selling cheaply, for the S&P 500.

Cautious investing to all.

Disclosure: I am/we are short SPY.

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: We are long SPY January 2018 Strike 215 Put Options.