“Only the dead have seen the end of war.” Plato
“War is simply economic entropy played out to its final and logical conclusion.” The Impartial Lens 2013
“In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. ”
Dwight D. Eisenhower
The entire region of the Middle East is in turmoil and tensions have escalated dramatically. We have not seen this since the 1970s. Syria, Iraq, Iran, Jordan, Israel, Saudi Arabia, Yemen, Lebanon, Turkey, the US, Europe, Russia, and China are all involved directly or by proxy. The paramilitary groups of Hams, Hezbollollah, the Kurdish separatists and countless “radical Islamic groups” are all involved in the violence of the Middle East. The entire North African Continent is engaged in wars, conflicts, coups, assassinations, revolutions, rebellions and African springs. Egypt, Libya, Algeria, Mauritania, Niger, Mali, Chad, Sudan, Ethiopia, Democratic Republic of Congo, Burundi and Nigeria are all involved in domestic and regional conflicts. We have tensions rising in the East and South China Seas as regional competitors all jockey and jostle for territorial claims. China, Japan, South Korea, North Korea, Taiwan, Philippines, Vietnam, Malaysia, Indonesia, and the US are all posturing for conflict.
Afghanistan, America’s longest military conflict is now in its 16th year. We have the India-Pakistan conflict ongoing since 1949. We have countless small regional and domestic conflicts going on all over the globe that get very little attention. Tension is rising between the US and Russia on multiple fronts ie. Ukraine, Georgia, Crimea, The Black Sea and recently in the conflicts in the Middle East, primarily in Syria. The U.S. is pressurizing it’s NATO allies to increase military budgets to 2% of domestic GDP. The Economist reported Feb 16th, 2017 that: “America’s defense secretary, James Mattis, warned allies that they must adopt plans to raise their military spending or risk seeing its most powerful member “moderate its commitment to the alliance”. Trumps addressed Congress Feb 28th, 2017: ”I am sending Congress a budget that rebuilds the military, eliminates the defense sequester and calls for one of the largest increases in national defense spending”.
We have noticed a massive NATO Military deployment to the borders of Eastern Europe, Ukraine, and Russia along with “the pivot” to Asia and the escalation of U.S. rhetoric. The mass media in the U.S. is clearly stirring up anti-Russian and anti- Chinese sentiment, not seen since the McCarthy era and the Cold War. The drums of war are beating again …..In March 2013 we said, “War is simply economic entropy played out to its final and logical conclusion”. Our contention at the time was “is that this ends through war, economic wars, currency wars, trade wars and finally physical war. If you had bought the defense contractors mentioned below at that time you would have had a capital gain of 356%, 181%, 203%, and 270%. Our current portfolio which we established in Feb 2016 has a capital gain of 10%, 27%, 29% and 35% in the defense contractors mentioned below.
War and military tensions are a boon for the Defense sector. Most armed conflicts are rooted in economic trade wars. Trump has clearly indicated that he will increase military spending and with the Republican Party controlling both the House and Senate, his wish will be granted. As geopolitical tensions rise across the world and new threats including cyber-attacks become more of a threat, we believe defense companies stand to benefit from increased investment from the military budget. Defense contractors are likely to outperform the market going forward. We have positioned ourselves accordingly beginning last February with three acquisitions in the sector.
Northrop Grumman (NOC) is one of the largest U.S. defense contractors and has a strong presence in the U.S. Air Force, Space, and Cyber Security programs. The company’s product line is well-positioned in high-priority categories, such as defense electronics, unmanned aircraft, and missile defense. We bought NOC on 10 February 2016 and the stock has risen 34%. The short-term, intermediate and long-term trends remain in an upward trajectory and we receive a dividend yield of 1.49%. We purchased Raytheon Company (RTN) on the same day and we have enjoyed a 29% rise in the stock price. Raytheon is the market leader in air-defense systems and guided missiles and develops technology for the U.S. Department of Defense, the U.S. Armed Forces, the Federal Aviation Administration, the National Oceanic and Atmospheric Administration, Department of Homeland Security, the National Aeronautics and Space Administration among other international customers. The company was recently awarded a contract to develop a first-ever automated assessment system for 21st Century wargames scenarios. The technicals look good on the chart and we will continue to hold. Raytheon offers investors a 1.9% dividend yield.
We added Lockheed Martin (LMT) to our portfolio on 15 February 2016. LMT is the world’s largest defense contractor and operates in the aerospace, defense, security and technology industries. The majority of Lockheed’s revenue comes from the U.S. Department of Defense Military sales. Lockheed was only last week awarded a $166 million U.S. Navy contract for the full-rate production of its Avionics test system (eCASS). The company was also granted a $540 million contract to develop its Trident II missile production and deployed systems support. The stock price has roughly trebled in the past three years and we expect more gains to follow. We have seen a 28% move in the right direction since last February and LMT pays a 2.76% yield for holding the stock. LMT’s technicals look good on all time-frames and we will continue to hold.
Huntington Ingalls Industries (HII) completes our Defense sector investments. HII was only recently added to the portfolio on 10 February this year and is the largest military shipbuilder in the U.S. President Trump talked about increasing the number of navy ships from 270 to 350 during his election campaign. The stock has risen 10% already since it joined our portfolio. We expect HII to go much higher and we earn a 1.17% yield from the dividend. We are confident that the above defense picks will outperform the market throughout 2017. Following is a link to our current portfolio: portfolio-5-march-2017