October 29, 2019

A slice of the pie

When Dwight D. Eisenhower warned of the military industrial complex during his 1961 Presidential farewell address he probably could not imagine the amount of cash that would flow through it by today.

Like it or not, the reality of the post 9/11 world is that massive amounts of cash are funneled into defense related firms.  Further, the amount of influence military contracting firms influence on political officials means there is little chance things will change so long as they can tax, borrow, or inflate money for the purpose of feeding what’s been called the Iron Triangle: Congress, the bureaucracy, and special interest groups (like defense contractors).

There’s nothing new about this and the perverse incentives political leaders face compels them to look first to their own security, even if it means running a country into the ground.  Roman Emperor Septimius Severus famously admonished his heirs from his deathbed in 211 A.D. to “enrich the troops, ignore everyone else.”

Governments moving cash, as a priority, first into defense related industries crosses cultures and history.  The samurai warlords of feudal Japan would subsidize craftsmen to move into their domains so as to locally source advanced weaponry and armor.

So the military industrial congressional complex is a fact of the world we live in.  So long as politicians and bureaucrats control the purse strings, they’ll keep pumping cash from the public treasury into defense contractors no matter how wasteful it may be. 

Resisting the complex at this point is futile.  There’s little chance the United States will throttle back on defense spending even as the geopolitical chess board shifts focus.  The higher quality question to ask is: how can I profit from it? 

With all this cash flowing into the coffers of politically connected firms, how can I catch some of the windfall?

The Pentagon’s budget for 2020 is $716 Billion and an ever increasing portion of defense spending is falling under classified reporting, meaning less transparency and looser accounting standards.  With this reduction in oversight comes the greater potential for, corruption of course, yet also profit. 

Defense contractor Lockheed Martin’s chief financial officer disclosed to investors that the classified development programs divisions were growing faster than the rest of the corporation.

That secret programs are absorbing lots of cash should also come as no surprise.  Sun Tzu clearly advised in The Art of War, Chapter 13 that spooks should be treated with the utmost generosity and, in an age of constant warfare, all true strategists should be able to predict this economic hotspot even if it’s concealed from view.

Politically astute investment analysts, like Richard Maybury’s US & World Early Warning Report, have been profiting for years off of defense sector stocks.  US intervention in the ‘Chaostan’ region of the world, and the inevitably resultant blowback from it, has created a constant war footing that enabled the defense sector to cash in.  Why shouldn’t you?

Even if the US were to cease its interventionism tomorrow a new age of cyber-banditry is upon us.  Just as, in the past, castles were erected at choke points along trade routes to collect taxes, ransomware deployed at critical nodes on the world wide web will put hackers into competition with governments.  They will be, in effect, proto-governments insisting on a cut of everyone within their domain’s productivity. 

This competition will lead to ever more cash thrown at contractors to develop military-grade encryption as well as offensive cyber capabilities. 

So the military industrial congressional complex is here to stay and, even if you have to hold your nose to do so, owning a piece of the action will move money into your pocket.  The challenge then becomes choosing the right vehicle. 

Big defense contractor stocks are already out of range for most casual investors.  Consider the costs per share of:

  • Lockheed Martin (LMT) $374
  • Northrop Grumman (NOC) $356.63
  • Boeing (BA) $344
  • Huntington Ingalls Industries (HII) $220.65
  • CACI International (CACI) $217.25
  • Raytheon (RTN) $211
  • L3Harris Technologies (LHX) $204.08

Even premiere funds that bundle defense and aerospace stocks can have high priced entry points:


Beat The Market Analyzer

  • iShares US Aerospace & Defense ETF (ITA) $220.21
  • SPDR S&P Aerospace & Defense ETF (XAR) $103.97
  • Direxion Daily Aerspace & Defense Bull 3X (DFEN) $53.21
  • SPDR S&P Future Security ETF (FITE) $36.91

For those looking to cash in on the military industrial congressional complex at an attractive entry point, consider the Fidelity Select Defense and Aerospace Portfolio (FSDAX), currently trading in the $18 per share range.  With a 5 star rating from Morningstar, below average management fees, and all the big name stocks listed above in its portfolio FSDAX is a great way to profit from the warfare state follies.