Read past the global conflict strategic overview, right into the extraordinary comments:
Not so visible, however, is the impact beyond commodities — defense-related companies poised to make some serious profits and see their share prices move higher.
In fact, even as the broad markets have declined, the share prices of defense-industry heavy hitters have risen nicely.
What can you do about it? My answer: The best defense is a good offense. And a good offense for any investor is to buy the stocks of companies that will be called to action in the coming conflicts.
Of course, to be fair, there is the comment:
Above all, let’s hope this morning’s ceasefire in Lebanon is a lasting one. And let’s pray that each and every time bomb I’ve told you about is defused. At the same time, however, be sure to prepare your portfolio for the worst.
Some nice conflicts should help boost profits. And for only $39, you too can purchase the Report “The Rising Tide of War: Five Defense Stocks Set To Soar” (see details below)
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Article Title: No Truce from Wars! Your Defense … (By John Burke)
Money and Markets 14 August 2006
Martin is busy preparing for his Wednesday online seminar. So he’s asked me to fill in for him this morning.
My name is John Burke. I’m the investment analyst at Money and Markets specialized in tracking global conflicts and the defense industry. I’m also a former Marine intelligence specialist.
Later this week, I’m releasing a special report for investors with five defense stocks I’m recommending. But before it’s available to the general public, I want to give you the highlights right here …
No Peace Despite UN Resolution
At exactly midnight last night (8 a.m. local time), a UN ceasefire resolution was supposed to go into effect between Hezbollah and Israeli forces in Lebanon.
But Hezbollah has not agreed to disarm. Nor has Israel agreed to refrain from retaliation against attacks on its citizens or on its troops in Lebanon, now in excess of 30,000.
Therefore, truly ending this conflict will be tough; and quelling the raging lust for revenge in the region, even tougher.
Moreover, there’s nothing in the UN resolution to address the war in Gaza and the West Bank … nothing about Hamas, which is continuing to battle Israeli forces … and no solution to the explosive issue, which sparked the crisis in the first place — Israeli soldiers kidnapped by Hamas and Hezbollah plus prisoners in Israeli jails.
Separately, virtually nothing has been done — at the UN or elsewhere — to deal with the other conflicts raging or looming around the globe …
Defense Stocks Already Rising
As these and other battles rage around the globe, the effects on global markets are clearly visible: Oil near all-time highs; gold, the ultimate safe-haven investment in uncertain times, well above $600 an ounce.
Not so visible, however, is the impact beyond commodities — defense-related companies poised to make some serious profits and see their share prices move higher.
In fact, even as the broad markets have declined, the share prices of defense-industry heavy hitters have risen nicely. Year-to-date, for example, we have:
What can you do about it?
My answer: The best defense is a good offense. And a good offense for any investor is to buy the stocks of companies that will be called to action in the coming conflicts. (More on this in a moment.)
Global Military Spending Is a $1 Trillion Industry
Military budgets topped $1 trillion in 2005, with United States defense spending exceeding the total defense spending by the rest of the world combined, according to the Center for Defense Information.
But most nations feel it’s in their best interest not to reveal exact figures. So the actual defense spending is likely to be much higher. Two prime examples:
1. China’s military spending is estimated to be anywhere from 40% to 70% higher than Beijing acknowledges, according to a 2005 study by RAND Corp. In 2005, China reportedly committed $41 billion to military spending. But the real amount is more than likely between $57 billion and $69 billion.
(Continued below …)
2. The U.S. invasions of Iraq and Afghanistan are paid for outside of the federal budget (through supplementary spending bills). This implies there could be significant spending that doesn’t get included in many official tallies.
Now, as global conflicts intensify and the U.S. continues to wage its global war on terror, military spending is almost guaranteed to grow — both for conventional and anti-terror hardware.
Take a look at how each major conflict is directly impacting the demand for military spending and you’ll see exactly what I mean:
Conflict #1
War in Lebanon, Despite Any Truce, Will
Stimulate Continuing Demand for U.S. Hardware
The military build-up by Israel’s prime enemy in the region — Hezbollah — is massive in scope.
During the 1980s and 1990s, the U.S. government estimated Iran gave Hezbollah up to $100 million a year in financial assistance.
Hezbollah recently had an estimated 12,000 rockets in its inventory, according to official estimates. Supplied by Iran and Syria, the majority are modified Katyusha-type, unguided missiles with a range between 20-45 miles.
Hezbollah also used a Chinese-made C-802 sea-skimming cruise missile to strike an Israeli warship on July 14. And just this weekend, Hezbollah shot down the first Israeli helicopter to fall in the conflict.
But remember: As I stated at the outset, the truce that supposedly went into effect eight hours ago does nothing to remove this big weapons build-up from the battlefield.
Meanwhile, Israel is the largest annual recipient of U.S. military funding — more than $2 billion a year.
Seventy-five percent of the military financing support is used to buy defense equipment made in the United States. That’s $1.7 billion in 2006 alone. Moreover, Israel deals directly with U.S. companies for 99% of its military purchases.
A key point: If the U.S. defense industry gets this much business based on the military build-up to help sponsor Israel, without direct involvement in the Middle East conflict, imagine the spending that is likely if the U.S. and other nations are dragged into the conflict!
Until very recently, this may have been an unlikely prospect and projections for the defense industry excluded the possibility. Now, however, as Iran and the United States have fought a war of proxy through Hezbollah and Israel, those projections have to be adjusted sharply to the upside.
Conflict #2
Nuclear Standoff Rooted In Iran’s Regional Ambitions
Iran has two major goals, both of which go far beyond the current conflict: (1) To develop nuclear weapons as the ultimate deterrent against attack and (2) to become a leader in Middle East politics.
The immediate threat: Should the U.N. impose sanctions in response to Iran’s nuclear program, Tehran has openly vowed to play its oil card and shut down exports. That alone could take up to 3 million barrels a day off the market.
An even greater threat: Iran could block the Strait of Hormuz, strangling up to a third of the world’s oil supply.
Will it happen? No one knows. But the real question is: Does the Pentagon believe that the likelihood of a war with Iran is now real enough to warrant a further military build-up? Yes.
(For more on the impacts on the oil market, don’t miss Sean Brodrick’s current article, “The Oil Horror Show.”)
Conflict #3
Growing Fear of Shiite Crescent Pressuring Saudis to Spend More
For centuries, all governments of the Muslim world were dominated by Sunnis.
That changed with the Iranian Shiite revolution. And it has just changed again with the rise to power of Shiites in Iraq.
Now, the greater fear of many Sunni-dominated governments is not Israel. It’s the specter of a Shiite crescent in the Middle East — Iran, Iraq, Shiite Hezbollah plus more Shiite rebellions spreading throughout the Arab world.
That’s why the Saudis and other Arab states have openly criticized Hezbollah. And that’s also a key reason the Saudis have been such big buyers of military hardware.
Washington has recently approved Saudi requests to spend $9.7 billion on military equipment — $2.9 billion to buy and upgrade M1 Abrams tanks and equipment, $5.8 billion for equipment modernization for the Saudi Arabian National Guard, $400 million to remanufacture and upgrade AH-64 Apache helicopters, plus much more.
The Saudis are also set to buy 72 Eurofighter Typhoon aircraft in a deal with the UK that could run as high as $10 billion.
Huge! They’re on a shopping spree!
And all these deals were in the works long before the latest conflict with the Shiites in Lebanon, and even before the Iranian nuclear crisis burst onto the scene.
Result: Expect the new tensions to stimulate greater demand for military hardware from the Saudis and other Sunni Arab governments.
Conflict #4
Iraq’s Civil War Spiraling Out Of Control
In recent testimony before the Senate Armed Services Committee, Gen. John Abizaid, head of the U.S. Central Command stated, “I believe that the sectarian violence is probably as bad as I’ve seen it, in Baghdad in particular, and that if not stopped it is possible that Iraq could move toward civil war.”
At the same time, William Patey, Britain’s former ambassador to Iraq, recently warned in a leaked report that civil war in Iraq is more likely than a successful transition to democracy in Iraq.
And even before a full-scale civil war, the Department of Defense spends an estimated $6.4 billion a month on Operation Iraqi Freedom and another $1.3 billion a month on Operation Enduring Freedom (Afghanistan).
Will the U.S. and its allies pull out, thereby reducing military expenditures? Highly unlikely. The prolonged conflict in the region puts more than half of the world’s oil reserves at risk, and the West will do everything to protect its access. Result: More demand for military hardware by regional and world powers in an attempt to guarantee stability in the region.
Conflict #5
North Korea’s Missile Tests Stimulate Ongoing Military Build-Up in Region
East Asia is a region already rife with nationalistic rivalries, political disputes, and rabid economic competition, especially in China and Japan, which account for more than half of the region’s military spending.
Now, North Korea’s recent missile tests are fanning the fires of these disputes, encouraging an even stronger political mandate for military build-ups.
The details:
China has the largest military in the world — 2.3 million active-duty personnel. And China’s military budget is the world’s second largest — as high as $81 billion, with much of that budget going toward modernizing the People’s Liberation Army.
Moreover, a recent Department of Defense report concludes that Chinese military planners have set their sights beyond local conflicts, such as Taiwan, to broader world conflicts, focusing on modernization efforts in naval, air and missile technologies.
Japan, the world’s second-largest economy, spends an estimated $44 billion on defense, making it the fourth-largest military budget in the world.
Now, Japan’s cabinet has endorsed a bill that would upgrade the country’s Defense Agency to a full-fledged ministry, giving it more clout and a bigger piece of the budget.
The big shift: It’s now more likely that Japan will revise its pacifist constitution to give its Self-Defense Forces a larger role. And the prospect of a re-militarized Japan is already causing increased tensions throughout the region, especially with China, North Korea and South Korea.
(For a thorough review of these dangers, see Martin’s report, “World War III?”)
The Inescapable Conclusion
Each of these conflicts — now raging or looming — is driving governments around the world headlong into massive new military expenditures. Even if one or more of the conflicts is resolved, the die has already been cast.
Moreover, in each case, arms build-ups in one nation foster parallel build-ups in other nations. And whether the weapons systems are produced by U.S. companies or not, the worldwide demand for weaponry is likely to soar.
What do all these conflicts do to U.S. stocks? The broad market could suffer some significant losses. But defense-related stocks are poised to reap some serious gains.
As I’ve shown you, the world conflicts are driving the demand for both (a) conventional military hardware and (b) anti-terror technology. Therefore, a diversified portfolio of defense stocks should address both needs.
In my report, I recommend five. Or, if you prefer ETFs, take a look at PowerShares Aerospace & Defense (Amex: PPA), representing a broad basket of defense companies. After rising steadily to nearly $18 per share in April, it has come back down to a more reasonable $15.92 as of Friday night.
Above all, let’s hope this morning’s ceasefire in Lebanon is a lasting one. And let’s pray that each and every time bomb I’ve told you about is defused. At the same time, however, be sure to prepare your portfolio for the worst.
Best wishes,
John Burke
P.S. If you’d like to get my full 16-page report, “The Rising Tide of War: Five Defense Stocks Set To Soar,” click here. It includes my picks, my price targets and recommended stop-loss levels. It’s only $39, and Money and Markets readers can download it right now.
P.P.S. Martin’s online seminar is Wednesday at noon. So if you want to attend, you should sign up before it’s too late.
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