Shares of US Defense Contractors not amused.
Something funny happened on the way to the bank for investors who were trying to cash in on President Trump’s trip to Saudi Arabia and the $110 billion for US defense contractors that White House Press Secretary Spicer had touted on May 20 as the “largest single arms deal in US history.”
The stocks of defense contractors had already soared over the past two years, with Lockheed Martin (LMT), Northrop Grumman (NOC), General Dynamics (GD), and Raytheon (RTN) up between 52% and 72%. But from Friday, May 19, through the end of the month, they got a big extra push of 5% to 6%.
But since then, they lost ground. The magic is gone. What happened?
Friday, May 19, President Trump departed for Saudi Arabia. And it appears a list of the “deals” to be announced that weekend was already being circulated, and folks got busy buying up those stocks even before Trump stepped on the plane that afternoon.
Then on May 20, in Riyadh, a laundry list of deals was announced, including that “largest single arms deal in US history.” The following Monday and over the next days, the shares of defense contractors rose further, powered by visions of $110 billion in deals raining down on them.
But those deals were “fake news,” according to Bruce Riedel, at Brookings:
I’ve spoken to contacts in the defense business and on the Hill, and all of them say the same thing: There is no $110 billion deal. Instead, there are a bunch of letters of interest or intent, but not contracts. Many are offers that the defense industry thinks the Saudis will be interested in someday. So far nothing has been notified to the Senate for review. The Defense Security Cooperation Agency, the arms sales wing of the Pentagon, calls them “intended sales.” None of the deals identified so far are new, all began in the Obama administration.
It seems investors too have figured this out: these stocks have given up about half of their fake-news arms-deal gains since the end of May. Riedel goes on to list some examples:
- The four “multi-mission surface combatant vessels” to the Royal Saudi navy. The proposal for sale of the frigates was first reported by the State Department in 2015, but “no contract has followed,” he says. “The type of frigate is a derivative of a vessel that the U.S. Navy uses but the derivative doesn’t actually exist yet.”
- The Terminal High Altitude Air Defense system (THAAD), which made headlines recently by being deployed in South Korea. The system has been on the Saudi wish-list for several years. In 2015, President Obama approved the sale in principle. But to this day, “no contracts have been finalized,” Riedel says.
- 150 Black Hawk helicopters, which the Saudi also had on their wish list for years. “Again, this is old news repackaged,” he says.
So nothing even close to $110 billion in real deals, with contracts and all, despite the interminable contract-signing ceremony in Riyadh. Riedel:
What the Saudis and the administration did is put together a notional package of the Saudi wish list of possible deals and portray that as a deal. Even then the numbers don’t add up.
And then there’s what everyone wants to know: How would the Saudis even pay for this $110 billion, after having slashed their budget due to the collapse of their oil revenues while also having to fund their war in Yemen. Saudi Arabia’s foreign exchange reserves have plunged 33% from their peak in late 2014 to $506 billion in April. This chart shows the move in millions of Saudi Riyal (via Trading Economics):
And times are tough. Riedel:
President Obama sold the kingdom $112 billion in weapons over eight years, most of which was a single, huge deal in 2012 negotiated by then-Secretary of Defense Bob Gates. To get that deal through Congressional approval, Gates also negotiated a deal with Israel to compensate the Israelis and preserve their qualitative edge over their Arab neighbors. With the fall in oil prices, the Saudis have struggled to meet their payments since.
So what are the Saudis really buying? “The Royal Saudi Air Force needs more munitions to continue the air bombardment of the Arab world’s poorest country,” Riedel says. And so what is in the pipeline is a deal of about $1 billion for “more munitions for the war in Yemen.”
But as far as the stock market is concerned, reality shouldn’t be allowed to cloud the scenery. Whether those deals – or any deals – are real of fake doesn’t matter. The companies involved didn’t even try to shed light on what was hidden underneath the hoopla though they’re intimately familiar with it. All that matters is that shares rise. And should they dip as tidbits of reality emerge, well surely, it’s going to be another buying opportunity.
What might be the worst-case scenario ahead? Read… Why I think Stocks Won’t Crash Spectacularly but May Zigzag Lower in Agonizing Ups-and-Downs, Possibly for Decades
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Nobody asked for details. They just bought the news. Buy munitions … just buy! The media says its a big deal.
New kind of stupid or new normal?
Good for a sales pitch. Time to get in NOW! (If it goes south we can blame Trump)
What has happened to investors and the general public in that common sense and the ability to read through the “BS” tea leaves has disappeared.
Given the top line revenue challenges the Saudis face, there was no way possible for them to make this kind of financial commitment. As it is with everything the Trump administration has done, there is “no there there” and substantiation of claims of deals etc. Our entire/global financial structure and integrity has been compromised for years, and yet, the absence of common sense has enabled the investment community to turn a blind eye to the real dangers that exist broadly across the landscape.
A Faithful Reader
“What has happened to investors and the general public in that common sense and the ability to read through the “BS” tea leaves has disappeared.”
The general public hasn’t been gulled, IMO; Gallup continuously reports the public’s negative opinion of media, politicians and their assertions, while investing (and investors) are scarce, in our fast-changing world.
How often do we read about dividends being paid on the common stock of a company which existed in the 20th century?
Speculators are seeking winnings, betting on stock prices, that’s all.
The Shah of Iran purchased tens of billions of dollars worth of highly sophisticated US arms such as F-14 Tomcats in the final years of his regime, then got overthrown by his own people angered over his grandiose spending while the rural areas went hungry. That vast arsenal then ended up in the hands of the Ayatollah Khomeni and his radical anti-US regime.
The corrupt, debauched Saudi royal family appears headed down the same road.
Glad to see I’m not the only person wondering of the possible backfire to this marvelous deal..
Not to worry much. KSA gets “export” versions of the weapons. True US allies get the “real” version. The Saudi weapon purchases have always been thinly veiled protection bribes. Ammunition yes, THAAD no.
You are trying to tell me that instead of selling the Saudis a REAL “Kia Armoured Tank” like the You-Ess-Eh? uses, we are selling them a cheap “Kia Knock-Off Armoured Tank”?
That’s not nice.
Trump not only made this deal but is allowing the Saudis to manufacture US designs. The day after Trump announced this big deal Raytheon announced their new Arabian division.
Those jobs Trump talked about? They’ll be in SA, not in the USA.
Raytheon and saudi?????
Either their are some BIG political changes going on or there will be problems with that.
The Shah of Iran was put into power in 1953 by the USA and UK after a coup d’etat that took out the democratically elected Prime Minister Mohammad Mosaddegh. Of course, it was done because of oil contracts with the Anglo-Iranian Oil Company (now part of BP).
In 1957 the CIA and Israel’s Mossad set up and trained the Shah’s SAVAK to repress and torture any dissenters.
I do agree that the Saudi royal family is corrupt and debauched, and it saddens me that my nation is happy to do a deal of about $1billion for “more munitions for the war on Yemen.”
My friends the Talebi brothers are Persian, and they run the Crave restaurant franchise for what it’s worth.
It blows my mind that people think Iran is a bigger enemy of the US (or the world, in general) than Saudi Arabia.
It blows my mind that people think Iran, a pre-dominantly Shia nation, is a major backer of ISIS, a Wahhabi group… who consider Shia to be apostates and possibly even worse than Jews or Christians. They’re literally mortal enemies. A few days after Trump gets touchy-feely with the House of Saud and lambasts Qatar (while apparently also ignorant to the fact that Qatar hosts the largest US military base in the ME– yes, our President is literally that ignorant) and Iran for being sponsors of ISIS, ISIS strikes at Iran.
Wahhabism, which is generally speaking the most extreme form of Islam– and most affiliated with jihad and global terrorism– is the official state religion of Saudi Arabia. 9/11 was perpetrated by Saudi Arabians. Not Iraqis. Not Iranians. The Bin Laden family is Saudi.
More than half of Iran’s college students are women. In Saudi Arabia, women aren’t allowed to drive.
American foreign policy over the last 50 years is, without a doubt, the single largest source or factor behind the growth of Islamic terrorism. Sad.
The master of hot air strikes again. :)
Arms deals and wars. Whether you like them or not, the only way to get some of your tax money back that ends up in the MIC black hole, is to invest in MIC machine. It does not seem to matter which party is in the White House, the MIC grows. Should true global peace break out, I’ll happily take my loss.
“Should true global peace break out, I’ll happily take my loss.”
That could rather depend on how such a ‘global peace’ is achieved, now doesn’t it?
The American people can always choose to be at peace. The rest of globe can be on fire and we can be perfectly at peace. If we chose to elect the right people.
Maybe you are ok investing in the suffering and death of innocent civilian women and children, but my moral code forbids me to make ? on the misery of others. Your investment in weapon systems creates terrorists out of the Chaos.
You pay taxes, don’t you? If so, you are directly supporting the war machine.
There is a vast difference morally between paying taxes which is a responsibility and mandatory which supports the war machine indirectly , not by ( your ) choice ….. versus intentionally investing in the war machine thereby volitionally supporting it in order to make a profit .
TJ Martin: Ethics 201.
Saudi Arabia now controls America’s largest oil refinery. https://www.wsj.com/articles/aramco-deals-face-uncertainty-under-trump-administration-1481917544
What does that mean for energy stocks?
I don’t know what weapons Saudi Arabia will ultimately buy but to say they only have $500 billion on hand is a bit misleading. They have Aramco and the talk is they will sell a stake in it. Depending on the size of the IPO that should be worth a few hundred billion.
Given the tensions and fighting in the region its a fair bet KSA will be buying weaponry in size over the coming years and the US will get most of the orders if the Saudis are allowed to buy what they need.
Brilliant catch Wolf !
And aint it just grand ! Fake news conferences and announcements .. sham all show – no go contract signings as worthless as the paper they’re written on shored up by a whole lotta hype , hoopla and all around fertilizer .
And yet despite it all looking at the market today … the DOW NASDAQ and NYSE are again on the ascendancy
Its official .. reality is dead .
When I heard the figure, 350Bn, I just laughed. As if….
Hasn’t it always been the mission of the CIA/cronies to ensure other countries are battling between themselves? This gives them a competitive advantage or at least a revenue stream, while reducing competition.
Selling weapons to SA is imperative then and I’m sure a line of credit will be given to them to keep the battle going…
This kind of event us commonplace. It’s posturing, both for domestic and international consumption. Saudi Arabia and Iran both have to sell the idea of a need for a strong central government with powerful militaries, lest the ordinary people start to think about things like employment and freedom, freedom being the biggest threat to either regime.
Well maybe if the Saudi’s are spending what little they have left on weapons to kill their neighbours they won’t have enough left over to spend on supporting radicals that kill others in the West..
The Qatar ‘play’ looks like to me a repeat play of Saddam’s hostile takeover of Kuwait, but being done on the sly and so far without any gun play.
The Saudi bank is getting empty – why not gang up and take over a rich competitor with a couple of hundred billion in the bank……………..
perhaps the media should self examine their need to publish any gossip as ‘real news'(the latest claim).
If you watch them, you have no life. If you read them, the fish have nothing to be wrapped in.
I must say that I am sorry to have voted for the ‘peace president’ twice. Guess I wasn’t paying attention to all those arms deals and drones.
I’m surprised how many of the comments either miss the point or perhaps prefer to talk about broader issues ( the waste inherent in weapons, war, etc.)
As the title of the piece says, it is about fake news. The news does not originate with the arms makers, or even the Saudis, it originates with the Trump White House.
The WH strategists knew that the first foreign trip was a do- or- die for a President with unprecedented domestic problems so early. It was in keeping with the old maxim: ‘when the going gets tough, get outa town’
Announcing a large sale (jobs!) would create the illusion of a desperately needed successful week. And as it turned out it was pretty much the best the magicians could do. The visit with the Pope was strained- the visit to NATO was a disaster that Mattis is trying to mend. His reassurance to the other NATO members almost literally told them not to pay too much attention to Trump.
The arms deal announcement resembles Trump’s statement a few days ago that his tax reform bill is making ‘good progress through Congress’.
There has been no bill presented to Congress to either make progress or not. There is a only a short internal WH working paper.
But if showing a client an arms catalog can be a sale, a working paper can be a bill.
You are over blowing Trump’s problems.. he is no less or no more than other POTUS
Everything is awesome… People are spending money like crazy.. stock market up… housing price going thru the roof…
I try to fact check everything , but it is time consuming . This narrative diminishes the credibility of the new administration.
The swamp drain must be plugged . Anyways many nations did not plan for the large drop in oil prices forcing them to deplete their foreign exchange reserves. Look at Venezuela , perhaps Norway and Canada. But the Saudi’s will be back in the saddle when they IPO ARAMCO . By then the Chinese will have a THAAD clone at half the price .
The Saudis’ valuation of ARAMCO is being widely assessed as excessive, by at least 30 percent.
And they had better get the deal done before the tide recedes.
– Right. I also was wondering where the Saudis would get the money to pay for those weapons. The war in Yemen already costs A LOT OF money.
– Remember the shock saudi & Bahreini car drivers felt when they learned that gasoline prices went up by some 50% (!!!!!!!!!) in early januay 2016. Those gasoline prices were/are still heavily subsidized. It was for a(n) (additional) sign that “all was not well” (financially) in Saudi Arabia & Bahrein.
– This article mentions that Saudi Arabia has cut a bunch of subsidies among other the subsidies for “petrol”.
(Readers from the US should translate the word “petrol” with “gasoline”)
Maybe they can get Qatar to buy a bunch of the ARAMCO IPO…………..
Maybe the Saudi’s don’t got the money ?
Maybe the Saudi’s don’t gunna got the money any time soon.
They is – Just wishin’ & hopin’ & dreamin’ & prayin’ – Dusty Springfield.
By their own admission – the oil of Dubai ran out several years ago – since the skyscraper fires & the bad write up by prominent US & UK media labeling their buildings “an inferno waiting to happen” the property investment of Dubai & further UAE is nothing less than a booby trap.
Indeed the sky scraper fires are said to be – The Burning Mountains of End Time Prophecy – The Book of Revelations St John.
When it rains it pours.
Saudies do not have enough funds to pay for anything like this. They have been bleeding their reserves at a fairly high rate even with the oil at 50 USD/b. What they really need is some fresh ammo to fight Houti insurgents who fire old Soviet missiles on them.