State of the Union Speech Falls Flat

 | Jan 29, 2014 | 4:00 PM EST
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President Obama's major themes in the State of the Union Address that involved issues most germane to investors were infrastructure and military spending.  On the military spending side, he stated, "America must move off a permanent war footing." Clear enough, that's a signal to sell the government contractors and investors have responded.

As I write this column, every major government contractor is down about 1%-1.5%; Science Applications International (SAIC), CACI International (CACI), Lockheed Martin (LMT), General Dynamics (GD), Northrop Grumman (NOC), and Raytheon (RTN). Boeing (BA) is down 5%. That's not a surprise and is a rational move.

Earlier in his speech, however, he discussed the need for infrastructure spending: "... we can take the money we save with this transition to tax reform to create jobs rebuilding our roads, upgrading our ports, unclogging our commutes -- because in today's global economy, first-class jobs gravitate to first-class infrastructure."

It would be natural to think then that the stocks of companies involved in infrastructure building would take a pop up today, but that's not happening. Every major infrastructure stock is also down. They are not down as much as the large military focused government contractors, but they have lost an average of about .5% today.

Caterpillar (CAT), General Electric (GE), Chicago Bridge & Iron Company N.V. (CBI), Jacobs Engineering Group (JEC), Fluor (FLR), and Granite Construction (GVA) are all down.

The largest banks and investment banks involved in financing or arranging financing for infrastructure projects are also all down by about 1% today; JPMorgan Chase (JPM), Citigroup (C), Goldman Sachs (GS), and Morgan Stanley (MS).

To review briefly, the stocks of all of the largest companies that would logically be the recipients of or participants in an infrastructure investment program are trading lower on the first trading day after the President Obama called for an infrastructure program as the second economic initiative in the State of the Union Address, following tax reform.

That's a no vote by investors with respect to their belief that anything is going to come out of this. More importantly, it's probably an indication that investors have now concluded that not only was the State of the Union hollow, but that the president is now a "lame duck."

What is most troubling about this, as I discussed two and half years ago, is that of all of the different ways a government can spend money, the one with the greatest consensus among economists as being able to provide a positive fiscal multiplier is infrastructure spending.

Even though it's also the fastest way for the government to directly impact domestic civilian employment, and there is general consensus among both political parties that jobs and infrastructure repairs are needed, nobody believes it will happen.  Although the president didn't draw a connection between reduced military spending and increased domestic infrastructure spending, the logical link was there.

As I wrote about a year and a half ago, the reduction in military spending a result of the wind down of the action in Iraq and Afghanistan caused federal expenditures to contract for the first time since the Korean War armistice of 1953.

But, there is still no political consensus that can be made between the governing political parties in the U.S. with respect to addressing the growing crisis of a lack of private sector created civilian jobs. It's reasonable for investors to assume at this juncture that there will be no action on infrastructure or job creation at the federal level for the remainder of this Obama's tenure.

Investing in the large dividend yielding infrastructure companies for income is probably safe however. They include GE, CAT, and JPM, which have with yields of 3.5%, 2.8% and 2.8% respectively.

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