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The Middle East is embroiled in war again. That raises all kinds of painful moral, political, and ethical issues — issues that are being debated every day in plenty of venues. Martin himself recently discussed the exploding Sunni-Shia conflicts right here in Money and Markets.
But one unmistakable side effect of these conflicts is financial — billions of dollars are headed our country’s way. How so? As the New York Times noted over the weekend, “Sale of U.S. Arms Fuels the Wars of Arab States.”
The story goes on to say …
“As the Middle East descends into proxy wars, sectarian conflicts and battles against terrorist networks, countries in the region that have stockpiled American military hardware are now actually using it and wanting more. The result is a boom for American defense contractors looking for foreign business in an era of shrinking Pentagon budgets — but also the prospect of a dangerous new arms race in a region where the map of alliances has been sharply redrawn.”
We’re not talking about chump change, either. According to the Stockholm International Peace Research Institute, U.S. military spending dropped 6.5 percent in 2014. That leaves spending off by a fifth since 2010, in large part because of deficit-related defense budget cuts.
|Saudi Arabia is the fourth-biggest market for weapons, such as Boeing’s F-15 fighter jet.|
But in the Middle East, spending is surging. Saudi Arabia is the region’s richest country thanks to its vast oil wealth, and it’s putting those dollars to work. That country shelled out $80 billion on weapons last year, up 17 percent year-over-year. That made it the fourth-biggest market for missiles, bombs, electronics, airplanes, and other weapons systems on the planet.
Total military spending in the Middle East rose 5.2 percent from 2013 to $196 billion. For a longer-term perspective, that’s up 57 percent over the past decade. Iraq, the United Arab Emirates, and Bahrain have all been spending more, on products like the HIMARS rocket and missile launching system sold by Lockheed Martin (LMT, Weiss Ratings: B+) and Blackhawk helicopters made by Sikorsky Aircraft, a subsidiary of United Technologies (UTX, Weiss Ratings: A-).
Qatar is also on the move, recently announcing an $11 billion deal for Apache helicopters made by Boeing (BA, Weiss Ratings: B+), and Patriot and Javelin missile-defense systems, manufactured by Raytheon (RTN, Weiss Ratings: A) and Thales Air Defence of the U.K., respectively
It’s also looking to buy F-15 fighter jets, another Boeing product. And if instability continues to be a problem for the next few years, sales of Lockheed Martin’s advanced F-35 fighter jet might be approved for Arab allies. That jet is still in testing and development, but very far along in the process.
Again, regardless of your personal politics or your thoughts about the distastefulness of the arms industry, the reality is that the defense industry here is doing big business over there. That isn’t going to change unless widespread peace breaks out, and sadly, that doesn’t look like it’s going to happen any time soon.
|“Total military spending in the Middle East rose 5.2 percent from 2013 to $196 billion.”|
So keep your eye on the defense stocks that I mentioned already. Many of them suffered when sequestration and budget cuts threatened their bottom lines a few years ago. But they’ve been performing much better over the last year or two because the world is getting more uncertain and dangerous by the day.
The PowerShares Aerospace & Defense Portfolio (PPA) is one ETF that invests in the sector, and it’s up almost 13 percent in the past year. The iShares U.S. Aerospace & Defense ETF (ITA) is another; it’s up more than 14 percent.
What about your thoughts? Are you currently invested in the defense sector? Why or why not? Do you see an ethical problem buying shares of defense firms? Or do those issues not factor into your decision to buy or sell BA, LMT, and RTN? Lastly, do you think we will finally see some peace in the Middle East soon? Or is this part of a multi-year cycle of violence that won’t be ebbing?
The Money and Markets website is your outlet, so be sure to share your opinion when you have time.
|Our Readers Speak|
There were lots of thoughtful remarks left at the website over the weekend, and I appreciate you taking the time to add them.
Reader Billy said he’s pessimistic about the outlook for stocks here, and that a huge peak may be in the making. His view:
“What we continue to see is a major top forming in the equity markets. It appears the demarcation line is 18,000. From the March 2009 lows, this market is about as stretched as can be from a historical, technical, and cyclical and demographics standpoint.
“As people who study technicals as well as cycles know, once the ‘rubber band is stretched to the max,’ it does not matter what the exogenous ‘black swan’ event is that can really start the decline.”
With regards to the ongoing Greek drama, Reader John B. said it could be the straw that breaks the euro’s back. His comments: “I’m afraid that if Greece dumps the euro, it will be just one of many more stumbling blocks leading towards the demise of that currency.
Reader Nick also said he’s doubtful we’ll get another last-minute deal to “save” Greece for a few more months. His take:
“I believe it’s different this time, because assuming the Germans are calling the shots, if I was German I would be pretty upset at being asked to pay for war reparations again. If there is one way to upset Germans, it’s to mention the war. Not how to win friends, influence people and get them to roll over their loans. Definitely not!”
Finally, with regards to oil production and prices, Reader Chuck B. offered this take:
“Is oil production peaking? Of course. Production companies are not completing wells already drilled, in the face of today’s lower income figures. They need to save money somewhere, if they hope to stay in business, and numbers will fall.
“Still, there is a huge supply of oil in storage, and hanging over the market. Until that supply is largely drawn down, it will tend to modulate any large price increase. As I said in a comment the other day, we may yet see lower oil prices before there is a substantial break above the bottoming action. That is all in the nature of market bottoms.”
So what do you think? Is Chuck right when he says we could see one more thrust lower for oil before there’s a lasting bottom? Is Nick correct in saying the Greeks are torpedoing the negotiations by antagonizing their German creditors? Let me know over at the Money and Markets website when you have a minute.
|Other Developments of the Day|
China took another step to stimulate its economy over the weekend, with the central bank slashing its reserve requirement by a full percentage point to 18.5 percent. That was the deepest cut since 2008, and it’s designed to free up more lendable cash in China’s banking system. China is also considering financing assistance designed to help local governments deal with excessive debt loads.
On the earnings front, Wall Street-centric bank Morgan Stanley (MS, Weiss Ratings: B) turned in $2.31 billion, or $1.18 per share, in profit. That was up from $1.45 billion, or 74 cents per share, in the year-earlier period. Adjusted EPS topped estimates by 7 cents, and so did revenue of $9.78 billion.
But shares of cruise operator Royal Caribbean (RCL, Weiss Ratings: B) sank fast after the firm missed sales estimates in the most recent quarter, and cut its full-year earnings forecast. One factor behind the weakness was the strong U.S. dollar.
Europe has a major immigration crisis on its hands. Thousands of migrants from war-torn nations in the Middle East and Africa are trying to use any means necessary to reach European Union countries. But many of the overcrowded, dilapidated ships that smugglers use to get them there capsize or crash, causing hundreds of deaths. More than 700 are estimated to have drowned in the latest tragedy involving a ship from Libya.
The Keystone pipeline debate never seems to go away here in the U.S. But it turns out, Canada is facing its own problems coming up with a major oil shipping pipeline plan that satisfies everyone north of the border!
Canada wants to ship domestically produced oil to its west coast so eager customers in Asia can buy it. But the Northern Gateway pipeline, which would ship 525,000 barrels per day of crude, is facing staunch opposition from First Nations native populations worried about environmental damage.
What do you think about these stories? What should Europe do about the wave of illegal immigration in the Mediterranean? And what about China’s latest moves — will they help the markets over there, and here? Let me know over at the website!
Until next time,