Traders have made a bundle over the past year following President Donald Trump as the US government pursues an unprecedented strategy of taking ownership stakes in publicly traded companies.\u00a0<\/p>\n
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But with the deeply polarized midterm elections approaching and polls suggesting the Democratic Party is likely to win a majority in at least one house of Congress, market strategists see rising risks of the administration\u2019s equity positions facing scrutiny in Washington and the courts. And that could reverse much of the momentum driving these stocks.<\/p>\n
\u201cThere is a sort of interventionist approach that is not fully litigated and mediated in the American system yet,\u201d said Matt Gertken, who leads geopolitical and US political analysis for BCA Research. \u201cSo there\u2019s going to be ups and downs in that process.\u201d<\/p>\n
There\u2019s no doubt that the government\u2019s involvement has lifted the stock prices of many of the companies in which it has taken stakes. The trend kicked off a rush among investors, particularly mom-and-pop traders, to\u00a0identify potential investments\u00a0before they were announced, as the correct pick all but guaranteed at least an initial surge and pointed to longer-term upside.\u00a0<\/p>\n
Intel Corp. shares have soared over 300% in the year since the\u00a0initial report\u00a0that the Trump administration was in talks to take an ownership stake in the chipmaker. MP Materials Corp. is up 87% since last July, when the Department of Defense made a\u00a0$400 million equity investment\u00a0in the rare earth minerals upstart. And Trilogy Metals Inc. has gained 73% since October, when the US government agreed to take a\u00a010% stake\u00a0in the Canadian minerals exploration company in a deal that included approval for an Alaska\u00a0road project\u00a0that was essential to accessing areas where it has mining claims.<\/p>\n
However, those numbers have largely come in bursts. Trilogy Metals\u2019 US shares jumped from $2.09 a share to a high of $10.60 within days of the deal announcement, then they quickly gave up those gains and are now trading for $3.62. MP Materials soared more than 150% within five weeks of the government taking a stake, but it\u2019s down nearly 27% in the year since then.<\/p>\n
Intel is a slightly different case because it\u2019s also caught up in the mania for chip stocks as spending on artificial intelligence creates extreme demand for semiconductors. The stock rose steadily as earnings improved, peaking in June after Trump said Apple Inc. will work with the company to design and produce semiconductors in the US. But it\u2019s down 37% since then, the fifth worst performance in the S&P 500 Index over that stretch. \u00a0<\/p>\n
Read More: Intel Rallies to Record After Trump Touts Apple Chip Deal<\/p>\n
Part of the skepticism surrounding Intel involves a shareholder lawsuit against the company\u2019s board, the US Department of Commerce and Commerce Secretary Howard Lutnick, seeking to unwind the government\u2019s ownership position. If it\u2019s successful, investors will have to assess the durability of the administration\u2019s entire portfolio.<\/p>\n
\u201cIt is really the government investment that really turned it around, and it\u2019s certainly what I think is a factor in keeping the stock where it is right now,\u201d said Mark Malek, chief investment officer of Siebert Financial, which owns Intel shares. \u201cIf you pull that away, the question is then what happens? That is why we haven\u2019t increased our investment at all.\u201d<\/p>\n
The more conventional concern about the stocks is the highly partisan environment in DC. If the Democrats gain control of the Senate or House of Representatives they can hold hearings and subpoena witnesses. Democratic Senator Elizabeth Warren, who\u2019s in line to chair the Senate Banking Committee if the party wins the chamber, has already\u00a0written Lutnick\u00a0questioning the Intel investment. And party leaders are laying the groundwork to investigate companies with ties to the Trump administration and the president\u2019s family.<\/p>\n
The Democrats are \u201cgoing to want to punch at the president as often as possible for as long as possible,\u201d said Henrietta Treyz, co-founder of the research firm Veda Partners.\u00a0<\/p>\n
She expects Democratic-run committees to summon corporate executives and administration officials to Capitol Hill, creating risks for the companies\u2019 brands and share prices. \u201cThat\u2019s one of the most important takeaways for investors right now,\u201d Treyz said.\u00a0<\/p>\n
Read More: Top House Democrat Probes 1789 Capital Over Trump Family Ties<\/p>\n
Intel, Trilogy Metals and another investment recipient USA Rare Earth Inc. declined to comment. Trilogy cited the process of closing its deal with the government. The Commerce Department and other companies mentioned in this story did not respond to requests for comment.<\/p>\n
The risks to investors from litigation may be even bigger than the elections. The Intel\u00a0shareholder suit\u00a0argues that the Chips Act doesn\u2019t give the government authority to demand an equity position as a condition of receiving a grant. It alleges that the deal was a breach of the board\u2019s fiduciary duties and amounts to an \u201cextortionary\u201d seizure.\u00a0<\/p>\n
Lutnick has asked the court to dismiss the case, saying that the arrangement was authorized under federal law and is important for the US defense industrial base.\u00a0<\/strong>Intel Chief Executive Officer Lip-Bu Tan and other board members have also moved to dismiss the case.\u00a0<\/p>\n\u201cIf the courts end up deciding that the Chips Act does not give the Commerce Department authority to do what they did with Intel, that has broad ramifications for a lot of these deals,\u201d said Josh Lipsky, senior director of the Atlantic Council\u2019s GeoEconomics Center.\u00a0<\/p>\n
Such a decision would call into question other equity investments made under the Chips Act, according to University of Colorado law professor Ann Lipton. The Commerce Department has used funding from the bill to invest in several other companies, including International Business Machines Corp. and GlobalFoundries Inc.\u00a0<\/p>\n
Read More: IBM Shares Soar on US Funding for $2 Billion Quantum Push<\/p>\n
The Trump administration\u2019s strategy has subverted the reason the government has typically gotten involved in private enterprise, and with it Wall Street\u2019s reaction to the moves. In the past, these deals were rare and usually done to rescue companies, as was the case with General Motors Co., which was forced into bankruptcy during the global financial crisis.<\/p>\n
In 2009, the US Treasury Department took a\u00a0roughly 60% stake\u00a0in the troubled automaker to help it emerge from Chapter 11, and by 2013 had\u00a0sold all of it. The Bush and Obama administrations were\u00a0heavily criticized by Republicans\u00a0for the bailout, spurring on the nascent Tea Party movement with complaints of government overreach into the free market.<\/p>\n
Now, the state is essentially picking winners, not rescuing big US companies that are deemed critical to the economy. The stock gains reflect the view \u201cthat you now have a customer and a spokesperson in the government that is going to make your company successful,\u201d said Aniket Shah, global head of Washington, sustainability, and transition strategy at Jefferies.<\/p>\n
Of course, the ultimate risk for owning these stocks is familiar to all investors, namely the vagaries of the market itself. If the government gains control over businesses\u2019 decisions and investment dollars chase political trends, that will erode shareholder value over the long term, according to Gina Martin Adams, chief market strategist at HB Wealth Management.\u00a0<\/p>\n
\u201cThe risks of government \u2018backing\u2019 have always been there,\u201d she said in a text message. \u201cIt may have positively influenced stock prices, but that is likely due (at least in part) to investors chasing politics, and that makes the stock price momentum quite vulnerable.\u201d<\/p>\n<\/div>\n
#Trump #backlash #adds #risks #stocks #government #owns<\/p>\n","protected":false},"excerpt":{"rendered":"
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