I read in the Wall Street Journal last week that peak spending in the Vietnam War was $470 billion in today’s money. And even during the Reagan years, that high-water mark was never passed.
Well, imagine my surprise when I found out that Congress was working on a record Pentagon budget that — once you account for the smoke-and-mirrors of separately-passed military appropriations — amounts to $464 billion! On top of that, Congress will eventually get around to passing $58.9 billion more in military construction and other spending.
Add in a few million here and there for porky pet projects, and the 2007 defense appropriation will likely be close to $546 billion. And that’s still not taking into account all the money going into the war in Iraq!
Could this money be better spent? Of course … but it won’t be. So, as an investor, you can either rage against the tide or you can let it lift your financial boat.
In a minute, I’ll tell you how to start participating in this booming market segment. But first, let’s look a little closer at just how big defense spending is …
Billions And Billions Spent
No Matter Who Is in Charge
Here are just a few of the military items that American tax dollars are buying right now …
- $119.8 billion on operations and maintenance, including training and spare parts.
- $19.8 billion on aircraft, vehicles, and related weapons – helicopters, armored vehicles, aircraft-and-vehicle-fired missiles, and communication equipment.
- $9.3 billion for the “Star Wars†missile defense system.
- $3.5 billion on the Future Combat System, which will serve as the centerpiece of the Army’s ground forces by 2015.
The list goes on and on, but you get the idea. In short, there’s a groundswell of money surging into a number of companies involved in designing and manufacturing defense-related equipment.
Now, will things change if the Democrats take control of Congress after the November elections? Sure, we might take steps to get out of Iraq.
However, that will just mean more money to spend on next-generation weapons. As one defense insider recently told the Washington D.C.-based publication The Hill,
“War is not good for business. The industry wants to produce the new stuff rather than see the money go to [paying for] the war.â€
The defense industry sees real opportunity in Democrats like Representative John Murtha, who called for the withdrawal of U.S. troops from Iraq.
Murtha never met a defense appropriations bill he didn’t like. He’s a staunch supporter of a military and defense industry fed on big-ticket programs. No wonder he’s the top recipient of defense industry money in Congress. What, you thought it was just Republicans taking all that money from lobbyists?
A recent congressional analysis shows the Iraq war is now costing taxpayers almost $2 billion a week — nearly twice as much as in the first year of the conflict and 20% more than last year. If the Democrats are able to force a troop withdrawal, I’d say it could be an early Christmas for defense contractors.
Plus …
Global Military Defense
Spending Keeps Increasing
The U.S. defense budget exceeds total military spending by the rest of the world combined. However, our allies aren’t exactly peaceniks, either. Last year, more than a trillion dollars was spent on defense worldwide.
And this year, a lot of foreign countries have been beefing up their defenses. Take a look at the chart to see just how much spending has been jumping.
Foreign countries regularly ask the U.S. for clearance to buy American-made military equipment. This year through September, they asked to purchase $33.2 billion worth of goods and services. That’s 169% higher than all of last year!
What has our allies so worried? Here are just three things:
First, North Korean President Kim Jong Il is practically a caricature of a James Bond villain and a nuclear nightmare for his neighbors.
Kim’s nuclear ambitions have Japan ready to cast off its post-war peacefulness. Japanese politician Shinzo Abe, will likely run for prime minister on a platform of revising Japan’s pacifist constitution, boosting intelligence gathering, and putting patriotism back into school curriculums.
Japan could use its technological edge to become a military superpower again. Japan arguably has the second-best navy in the Pacific, bristling with destroyers, submarines and modern aircraft. And it has the money to buy more … a lot more … plus a missile defense system to protect against North Korean aggression.
Second, Israel is fighting a bitter war against Hezbollah and other insurgents in which technology can tip the scales. During the recent Israeli face-off with Hezbollah in Lebanon, Hezbollah fired as many as 4,228 rockets. Do you think Israel might be in the market for an anti-missile system?
For its part, Israel’s air force flew more than 12,000 combat missions. Its navy fired 2,500 shells, and the Israeli army let off over 100,000 artillery shells. Those will all need to be replaced … another payday for defense contractors.
Israel also has a conflict ready to boil over in the Gaza Strip, where a senior Israeli defense officer recently said terror groups were arming at an “unprecedented†pace. They’re loading up on sophisticated hardware, including the latest anti-tank missiles.
Both sides in this conflict believe God is on their side, and they could punctuate their arguments with missiles. Don’t forget, things could easily boil over to the rest of the Middle East.
Third, Saudi Arabia is threatened by a rising tide of militants at home. Plus, it has a bitter enemy across the Persian Gulf in Iran. That country’s quest for atomic weapons scares the hummus out of Saudis, so they’re spending appropriately to try to counter Iran’s mix of domestically-designed missiles and imported weapons.
Recently, Russia pledged to sell Iran a range of surface-to-air missiles to protect the Bushehr nuclear reactor that Iran is building. And North Korea has also transferred missile technology to Iran.
The end result: A global arms race. That’s bad news for world peace, but it certainly means solid business conditions for a bunch of defense companies …
I’m Buying Defense Stocks –
Consider Doing the Same
All this defense spending is affecting my investing choices for my Red-Hot Canadian Small-Caps portfolio. For example, I just added a nice little Canadian company that is landing defense contracts all over the world.
The firm’s revenue and earnings jumped in the first quarter. And with governments lining up to throw cash at defense contractors, I’d say its earnings are likely to continue accelerating.
And yet this great little Canadian stock still trades at a discount to the industry on important metrics such as price-to-earnings.
If you’re looking for a diversified piece of this action, consider buying the iShares Dow Jones Aerospace & Defense (ITA). It holds big-name defense companies like Boeing General Dynamics and Goodrich.
Or, if you’re interested in buying individual stocks on your own, you might want to take a peek at my colleague John Burke’s special report, “The Rising Tide of War: Five Defense Stocks Set to Soar.â€
John is our resident Intelligence and Global Security analyst. He also served as an intelligence specialist in the U.S. Marine Corps.
In his report, John names his five hottest defense stock picks, as well as his own favorite aerospace and defense ETF. His picks are good: In the two months since his original report came out, one of his recommendations is up 14% … another gained 15% … and a third soared 17%! The other two stocks are still on the launch pad, but probably not for much longer. And John tells me that all of his picks should have much further to run.
You can still pick up John’s 17-page report, with all-new charts and his update on the latest developments, for the original low price of just $39. The report includes all of his picks, price targets and recommended stop-loss levels.
There’s a famous military adage: “He who hesitates is lost.†If you’re ready to seize the day, click here.
Good luck and good trades,
Sean
P.S. If you already bought my just-released uranium report, congratulations! The white-hot uranium sector seems to be leading the rebound in commodities, and my picks are riding that wave. But I think we’ve only scratched the surface of this sector’s potential.
If you’re not onboard yet, now’s your chance! CLICK HERE to find out more about my report. Or contact us at 1-800-400-6916 and we’ll send you a PDF copy IMMEDIATELY so you can jump on these red-hot recommendations right away.
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MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Monica Lewman-Garcia, Wendy Montes de Oca, Kristen Adams, Jennifer Moran, Red Morgan, and Julie Trudeau.
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