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  10 Trades For A Trump Presidency
 
  2016-06-10
 

 

Summary

With Hillary Clinton now the Democratic nominee, we see the final matchup for the epic presidential battle of a lifetime: Trump vs. Clinton.

This is not a political article and will not discuss my opinions on who will win.

This is an investment article – advice for preparing your portfolio for a specific outcome, a Trump presidency in this case.

With Hillary Clinton now the Democratic nominee, we see the final matchup for the epic presidential battle of a lifetime: Trump vs. Clinton. This is not a political article and will not discuss my opinions on who will win. This is an investment article - advice for preparing your portfolio for a specific outcome, a Trump presidency in this case.

Because a Clinton presidency will essentially extend the current governmental influences on the stock market and because Trump's policies seem vague in many ways, I believe an article on preparing your investments for a Trump win is warranted. As we approach the election, the probability of a Trump POTUS will become more apparent, but for now we can keep in mind certain investments that will likely pay off if Trump wins - if you have free capital, consider adding these positions to your portfolio in the next few months while the trades are still less obvious and therefore cheap.

Immediate Reaction to a Trump Win

A trump win will most likely garner a positive reaction for economic and market sentiment. The first reason is that - if history can be trusted - the stock market will fall the three months prior to Trump being elected, as a downward-trending market is a catalyst for voters to boot the incumbent party. While Obama took office during a recession, Trump will likely take office in a stable (or apparently stable) market.

 

Positive sentiment from a changing of the party in power should be enough to give the market a slight boost without immediate fundamental changes. If it is not, Trump's implied plans for spending should give investors and money managers reasons to invest in the US economy. As a businessperson, Trump has a history of using debt to create profits - contrast this with many the politicians who take reducing the deficit as the primary economic goal.

Trump seems to understand that the deficit is the secondary goal; new projects are his primary goal. New projects - whether they be infrastructure, increased military spending, or a wall on the Mexican border - require spending, which is taken as bullish by Wall Street.

Much like Obama represented social change in 2008, Trump represents economic change in 2016. Being so, economic sentiment should increase, regardless of the justification for that increase. Sentiment plus increased spending plus sentiment on debt-spending should create temporary tailwinds for the general market.

The Associated Strategy

The strategy for profiting from the immediate reaction to Trump's presidency is to take a long position on the general market. But you should do so only near the election, after the market has fallen approaching the election. If you do not witness a fall, statistics state that Trump will lose and you should play the Clinton strategy instead.

Should you witness that fall, buy PowerShares QQQ Trust ETF (NASDAQ:QQQ), SPDR S&P 500 Trust ETF (NYSEARCA:SPY), or SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) prior to the election and sell on the spike after the election. Use technicals to find a point of resistance as your signal for an exit point. The profits should be taken quickly, as I will now explain.

Trump in the Long-term

Sentiment for Trump's economic policies should be short-lived. The issue of the deficit will justifiably emerge and spook investors. The US already has a deficit to GDP ratio that the IMF would consider dangerous:

 

International pressure will force the US to engage in deficit-reduction acts, which shift policies from those of economic growth to those of debt-repayment. In light of global trade falling, any setbacks to domestic-based economic stimulus will leave a void in demand:

This is the major trend that Trump must address in his economic policies. But he alone cannot stimulate global trade. Bullish sentiment on the economy during the afterglow of the Trump election will be dragged down by the global trade issue.

Worse yet, via his protectionist policies, Trump stands to exacerbate weak trade between many trade partners. US relations between China and Mexico will likely worsen, and this certainly will not help improve trade conditions between these large trade partners. This is where investors have opportunities.

The Associated Strategy

With the stock market near all-time highs, companies with large amounts of trade with China and Mexico are overpriced relative to a trump presidency. These are ideal short positions. Consider shorting the following:

WisdomTree China ex-State-Owned Enterprises ETF (NASDAQ:CXSE): Shorting this ETF will give you an indirect way of shorting free trade with China. In this ETF are companies that elude the hands of the government of China. This is the closest you can get to shorting the capitalistic side of China.

Citigroup (NYSE:C): This is a double-whammy. Citigroup is the major bank with the most exposure to China. The company also has nearly $30B in outstanding credit to Mexico.

 

Industry Focus

Not that I have an objective to make Trump into a war-mongerer, but the specific industries most likely to soar after a Trump win are military suppliers and gun stocks. Trump has declared to strengthen the US military, which means new equipment. He also aims to lighten the restrictions on concealed carry and equipment-related controls (e.g., magazine size).

The Associated Strategy

Two clear gun buys here are Smith and Wesson (NASDAQ:SWHC) and Sturm, Ruger, and Company (NYSE:RGR). These two companies will certainly benefit from increased sales, not that they are having a problem now. All things equal, FBI background checks - and therefore gun sales are up.

The recent drawdown on these two stocks is a result of a misunderstanding of background check seasonality. While May's background checks were lower than April's, this is a seasonal occurrence; year-over-year, background checks are up. This presents a strong opportunity for dip-buying on gun stocks before the election, in which whoever wins will likely be a bullish catalyst for gun stocks.

Not exactly my forte, defense stocks should fare well as a result of Trump's military building efforts. Three stocks to consider are Raytheon Company (NYSE:RTN), Northrop Grumman Corporation (NYSE:NOC), and Lockheed Martin (NYSE:LMT). These stocks all show stable growth, with or without Trump in office, implying that hesitation will only lead to higher prices when you decide to buy.

Conclusion

As I've learned from trading earnings predictions, it's hard to open a position too early, but it's easy to open a position too late. As anticipated events near, the possible outcomes begin to be priced into the market. If you believe a Trump presidency is likely, consider dedicating a portion of your portfolio to preparing for the likely changes in the market.

Gun stocks, such as SWHC and RGR are safe bets for investors who think the election is a toss-up - Clinton will likely drive gun stocks via panic buying. Shorts on China, such as via CXSE, are logical as Chinese growth and global trade is slowing even without Trump's protectionist policies. These are two areas that are safe trades now and will be intensified into high-ROI trades if and when Trump takes office.

 

Learn More about Earnings

My Exploiting Earnings premium subscription is now live, here on Seeking Alpha. In this newsletter, we employ both fundamental and pattern analyses to predict price movements of specific companies after specific earnings. I offer specific strategies for playing those earnings reports. To-date, we are 90% accurate on earnings report predictions.

Disclosure: I am/we are long SWHC.

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: I am also sideways SPY via a calendar spread.

 
 
 
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