In Defense of Obama

How will President-elect Obama affect your portfolio? Keep reading our special series for the lowdown.

America awoke Wednesday to a new president-elect -- a Democrat, no less. Given conventional wisdom, which suggests that Republicans would be more favorable to defense-industry companies, what might the effects be from Obama's administration?

Without further ado, here it is, Fools, straight from the donkey's mouth ...

(Which is to say, straight from the Obama-Biden website)
"Barack Obama and Joe Biden support plans to increase the size of the Army by 65,000 soldiers and the Marines by 27,000 troops ... We cannot repeat ... delays in deployment of armored vehicles, body armor and Unmanned Aerial Vehicles that save lives on the frontlines."

Continuing a trend we've seen in the U.S. military as far back as the Kosovo conflict, an Obama-Biden administration declares its primary goal to be safeguarding the lives of our war fighters. As investors, you want to identify the firms that make these products. For MRAPs, that means Force Protection and General Dynamics (NYSE: GD  ) , Navistar (NYSE: NAV  ) and London Stock Exchange-listed BAE Systems. Those are the biggies.

Moving on to ceramic body armor, your choices are even simpler. One of the leading publicly traded suppliers of the stuff is Ceradyne (Nasdaq: CRDN  ) . Another one, once again, BAE Systems.

As for UAVs -- that's a bit trickier. Everybody who's anybody in aeronautics has a hand in the UAV game. To my mind, Northrop Grumman has the pole position, with UAV products to fit any theater, and in almost any configuration imaginable. But it's really hard to go wrong here: Lockheed Martin (NYSE: LMT  ) , Honeywell (NYSE: HON  ) , Textron, and even tiny AeroVironment (Nasdaq: AVAV  ) , a Motley Fool Rule Breakers recommendation and arguably the leader in small-unit UAV deployment, are all making UAVs and enjoying considerable success selling them to militaries both at home and abroad.

"We must preserve our unparalleled airpower capabilities ... We need ... Unmanned Aerial Vehicles and electronic warfare capabilities ... essential systems like the C-17 cargo and KC-X air refueling aircraft."

There's those UAVs again. Seems you can't find a theater of operations where they're not winging overhead. The clearest beneficiary of this portion of the Obama-Biden defense plan, though, has to be Boeing (NYSE: BA  ) . Not only does it manufacture UAVs, but it's also the maker of the C-17 and the odds-on favorite to build the Air Force's KC-X tanker.

That said, Northrop Grumman (NYSE: NOC  ) places a close second in this race. We've already noted its dominance in unmanned aircraft. And in the event Boeing does not win the KC-X contract, as of this date, Northrop offers the only alternative.

"We must recapitalize our naval forces ... Obama and Biden will add to the Maritime Pre-Positioning Force Squadrons to support operations ashore and invest in smaller, more capable ships, providing the agility to operate close to shore ..."

A couple of America’s important warship builders include General Dynamics and Northrop Grumman. If your aim is to invest in the prospect of a larger U.S. Navy, period, these are your two best "big-picture" plays.

Smaller-picture, so to speak, I prefer General Dynamics for the sheer number of "irons in the fire" it's got for naval work. First, there's the Littoral Combat Ship program -- the "close to shore" bit from the excerpt above. Second, the "smaller, more capable ships" verbiage seems to refer to the new Joint High Speed Vessel the Navy is working up. General D holds a place on two of the three firms bidding on this work, making it the odds-on favorite here.

Caveat investor
Note that I've not said a word on the crucial subjects of valuation, management integrity, or growth prospects anywhere above, and kindly take this column for what it is: a brief survey of who does what in defense, and how what they do might fit into the professed plans of an Obama-Biden administration -- no more, no less.

But don't worry. We've got four more years -- and a few extra weeks to spare -- to fill in the details on these investing theses. Patience, grasshopper. We'll get there.

Meanwhile, make the Fool your source for all things investing in general, and defense investing in particular. Read:

Fool contributor Rich Smith owns shares of Ceradyne, Force Protection, AeroVironment, and Boeing. AeroVironment is a Motley Fool Rule Breakers recommendation.

The Motley Fool has a disclosure policy.


Read/Post Comments (14) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 07, 2008, at 11:55 AM, Slavtrader wrote:

    It seems to me that someone else has been drinking Kool-Aid from the ObamaNation punch bowl. As an engineer having nearly 30 years experience in aerospace, I can convey that none of us are expecting the size of the military to go up - selective programs like drones perhaps, but overall no. This includes its budget.

    The last I ready is Barney Frank is looking to reduce the budget by $200B. If I was a betting man, I'd believe that outcome way before the one that you just presented. When it comes to military spending, I believe it's back to the Clinton years. The ObamaNation will be looking for places that they can cut to cover their socialist programs. The military will be at the top of that list.

  • Report this Comment On November 07, 2008, at 12:32 PM, BrodyBorder wrote:

    Ditto. Last I heard from Barney Frank was proposing a 25% cut in defense spending.

  • Report this Comment On November 07, 2008, at 1:28 PM, kuav wrote:

    CORRECTION NEEDED: Boeing has NEVER manufactured UAVs, only built a long line of unsuccessful prototypes. They have lost every significant competition in the last decade. And, they have never proven an UAV operationally.

    Only exception, arguably would be related to their very recent acquisition of a small UAV manufacturer (Insitu). Big deal. Look at what Insitu builds and compare to what NOC builds.

    My point is that they have never been able to use organic talent to be successful in the UAV world. They'll need a good welfare hand out from Congress to recover now. That's where the Boeing talent lies, just look at THE TANKER PROGRAM they lost twice before.

  • Report this Comment On November 07, 2008, at 1:40 PM, worldlovesusnow wrote:

    Yeah,

    I'm amazed at all the Obami zombies. All I heard them saying was McCain doesn't have a plan. Well I'm afraid all the youngsters and Latinos who voted for Obami are in for a rude awakening (sp). They didn't care about Obami policies because they don't have a 401k. Guess where young people go to when they need money. Yep....you guessed it, their parents. Daddy's 401k will be taxed to death all because they wanted CHANGE. Then when your parents die it will get taxed at a bigger rate.

    It used to be youngsters didn't vote because they didn't know the issues (I was one of them). But now they vote and still don't know the issues. That makes for a very dangerous scenerio.

    When my kid asks me for money I'll point him in the "One's" direction.

    Good luck all you 401k holders.

    Oh yeah....I agree with the first comment. The Fool must be doing drugs to think that defense spending will continue anywhere near the same levels.

  • Report this Comment On November 07, 2008, at 6:05 PM, MCvest wrote:

    Yes, I can't disagree with anyone else in this forum regarding Obama and the democrats typically cut defense spending despite what the website says. My job will no doubt and many others at my business will be looking for work elsewhere when defense spending gets cut.

    The people who wanted "change" are going to get exactly what they asked for. Higher taxes, the government telling you how often, where, by what doctor, and how much you will pay for health care, death taxes, repeal of the capital gains tax, and a tax on your stock transactions. Isn't this just going to be a great country to live in?

    Don't believe me? That's fine I'm fine with being able to say I told you so it just is going to be really expensive.

  • Report this Comment On November 07, 2008, at 6:06 PM, asterzaster wrote:

    Ha ha- Guess it must have been Obama to blame for my 401k just losing everything it had gained since 2003.

    God- he's such a f**in socialist for raising the upper tax bracket 4 percentage points!

    33% = Real Americanism

    37% = Marxism

    We Real Americanists know that you gotta just let the market regulate itself- income redistribution is a Socialism thing.

    Except when we need to round up a little $700Billion or so from the proletariat to patch up the um slight accounting errors and whatnot...

  • Report this Comment On November 07, 2008, at 8:21 PM, november18 wrote:

    I can't believe an whole article could be written about UAVs without mentioned General Atomics. Although its a private company, so not much help from a stock picking perspective, much of the market, for smaller UAVs at least, is taken up by the Predator and Reaper UAVs manufactured in San Diego by GA.

    From the Air Force Times:

    When Defense Secretary Robert Gates talks about the importance of UAVs to the fight in Iraq and Afghanistan, he is speaking first and foremost about General Atomics’ MQ-1 Predator and MQ-9 Reaper.

    From Aviation Week:

    U.S. companies will be the leading providers of UAVs to the world, controlling more than 50% of this market's total value and producing far more aircraft than any of their competitors. Market leaders include Northrop Grumman (with the Global Hawk and Fire Scout) and General Atomics (with the Predator).

  • Report this Comment On November 08, 2008, at 7:24 AM, worldlovesusnow wrote:

    No Aster it's not Bush's/Obama's fault....it's yours for leaving it in a fund that lost money. You should have been responsible and moved it to a safer position.

    Geez these people kill me!!!!!!! Quit trying to blame other people for your screw ups!!!!!

  • Report this Comment On November 08, 2008, at 8:40 AM, redleg01 wrote:

    Boeing is also the prime contractor for the development of the Future Combat System (FCS). FCS is a system of network connected combat vehicles and UAVs/Robots/sensors. It is very expensive and controversial and is experiencing a great deal of cost overrun. There are two distinct camps when it comes to FCS; both in military and government circles. The first says that we absolutely need it to be prepared for the next war. The other camp says that we will never again face a peer military in a high intensity conflict. Therefore, FCS does not meet the cost benefit analysis.

    I could go on about this or a while, but the bottom line is that FCS is under the microscope. Were I a betting man, I'd say that it will not survive- at least not in its current form. If it does survive, it will be great for Boeing. If it does not survive, it could hurt.

  • Report this Comment On November 11, 2008, at 12:55 PM, TMFFischer wrote:

    I would not want to see anyone lose their livelihood, of course, but it would be nice if the government could spend a bit less of its annual budget on the military and a bit more on education, infrastructure, renewable energy. Hopefully there is a way to move some of the brilliant engineers and others in the defense industry directly into new endeavors. In the long run, the U.S. probably can't sustain this amount of spending on defense anyway (no other nation in history could), so better solutions need to be found.

  • Report this Comment On November 11, 2008, at 2:36 PM, JrRelic wrote:

    I mean no offence to TMFFischer but the Military is the only one of all the programs you listed that the Constitution allows the government to spend money on in the first place. Everything else is Congresses way of not doing its job and returning the surplus back to the American People.

    One thing on education quickly; a coworker of mine was on his local school board for one term (didn’t run for a second). And one of the things he found out was, that to keep up with the federal governments rules and regulations it cost the school more than they received from the fed’s. So if it costs the school system more money that they make who is really benefiting from this system? The bureaucrats in Washington who get to keep there cushy little jobs and tax the system even further. I’m sorry but I cannot and will not support anyone who would rather spend federal money on things they shouldn’t be spending it on in the first place over items that the Constitution mandates the money should be spent on or returned to the people, to enhance theirs and others lives.

  • Report this Comment On November 12, 2008, at 12:35 PM, PaulDF wrote:

    Anyone who thinks that military budgets will increase under an uber-Liberal administration is smoking crack! <yes, pun intended!>

    Doesn't anybody remember what Slick Willie and the Peanut Farmer did to our military? Hacked it off at the knees? Set us up for attack after attack.

    I'm nothing, if not an astute student of history. We've seen this happen before, and foolishly, we'll let it happen again.

  • Report this Comment On November 14, 2008, at 7:07 PM, crustyoldcrum wrote:

    ASTERZASTER - If you want to point fingers this is "How Mortgage Crisis Happened":

    1933-38

    President Franklin D. Roosevelt initiated "New Deal" reform programs designed to affect the mortgage market and homeownership. Fannie Mae, the Federal National Mortgage Association, was established to facilitate liquidity among lending institutions.

    1968

    As part of President Johnson's Great Society reform plan, much of Fannie Mae became a privately owned yet government-chartered company, a government-sponsored enterprise, or GSE. Fannie Mae bought home loans to preserve liquidity in the mortgage market. Though private, it remained backed by the federal government.

    1970

    President Nixon chartered Freddie Mac, the Federal Home Loan Mortgage Corporation, as a GSE to compete with Fannie Mae.

    1977

    President Carter, pressed by grass-roots organizations (though opposed by the banking industry) signed the Community Reinvestment Act to boost lending in poorer communities, regardless of the borrowers' ability to repay their home loans.

    August 1989

    Amid the savings and loan fallout, Congress enacted the Financial Institutions Reform Recovery and Enforcement Act. It mandated public release of lender evaluations and performance ratings, boosting pressure on the banking industry. Such oversight enabled bullying abuses of community organization groups such as ACORN to further influence lending practices.

    1990s

    Community organizer Barack Obama worked closely with ACORN activists. Employing the intimidation tactics of radical activist Saul Alinsky that Obama had learned and was teaching, activists crowded bank lobbies, blocked drive-up teller lanes and demonstrated at the homes of bankers to browbeat them into risky lending in poor and minority communities. Those who resisted were accused of racism.

    At first, the GSEs resisted purchasing risky mortgages. Eventually the Clinton administration instructed them to substantially increase the percentage of these mortgages in their portfolios.

    February 1990

    Madeline Talbott, a well-known radical ACORN leader and banking industry agitator, challenged the merger of a Chicago thrift, Bell Federal Savings and Loan Association, which responded that it was being bullied into irresponsible "affirmative-action lending policy."

    1992

    Enforcement of CRA was "sporadic," as the Washington Times notes, until a flawed Federal Reserve Bank of Boston study asserted that there were "substantially higher denial rates for black and Hispanic applicants than for white applicants."

    October 1992

    Rep. Jim Leach, R-Iowa, warned about the impending danger nonregulated GSEs posed. He worried that Fannie Mae and Freddie Mac were changing "from being agencies of the public at large to money machines for the stockholding few."

    Rep. Barney Frank, D-Mass., countered that "the companies served a public purpose. They were in the business of lowering the price of mortgage loans."

    November 1994

    President Clinton addressed the housing issue: "I am committed to a new and unprecedented partnership between industry leaders and community leaders and government to recommit our nation to the idea of homeownership and to create more homeowners than ever before."

    June 1995

    Republicans won control of Congress and planned CRA reforms. The Clinton administration, allied with Frank, Sen. Ted Kennedy, D-Mass., and Rep. Maxine Waters, D-Calif., did an end-around by directing HUD Secretary Andrew Cuomo to inject GSEs into the subprime mortgage market.

    1997

    Cuomo said, "GSE presence in the subprime market could be of significant benefit to lower-income families, minorities and families living in underserved areas."

    1998

    By falsifying signatures on Fannie Mae accounting transactions, $200 million in expenses was shifted from 1998 to later periods, thereby triggering $27.1 million in bonuses for top executives.

    April 1998

    HUD announced a $2.1 billion settlement with AccuBanc Mortgage Corp. for alleged discrimination against minority loan applicants. The funds would provide poor families with down payments and low-interest mortgages.

    Fall 1999

    Treasury Secretary Lawrence Summers issued a warning: "Debates about systemic risk should also now include government-sponsored enterprises, which are large and growing rapidly."

    September 1999

    With pressure from the Clinton administration, Fannie Mae eased credit requirements on loans it would purchase from lenders, making it easier for banks to lend to borrowers unqualified for conventional loans.

    2000

    The Senate Banking Committee estimated that, as a result of CRA, $9.5 billion had gone to pay for services and salaries of ACORN and other organizers.

    Winter 2000

    The City Journal warned that the Clinton administration had turned CRA into "a vast extortion scheme against the nation's banks," committing $1 trillion for mortgages and development projects, most of it funneled through the community organizers.

    March 2000

    Rep. Richard Baker, R-La., proposed a bill to reform Fannie and Freddie's oversight in a House subcommittee on capital markets. Rep. Frank dismissed the idea, saying concerns about the two were "overblown" and there was "no federal liability there whatsoever."

    June 2000

    Competitive Enterprise Institute President Fred L. Smith Jr. on the Treasury Department's $2 billion line of credit to Fannie and Freddie: "As long as the pipeline is there, it is like it is very expandable. . . . It is only $2 billion today. It could be $200 billion tomorrow." Because of Democrat obfuscation, Smith's "tomorrow" arrived in 2008, when Treasury Secretary Henry Paulson put Fannie and Freddie into conservatorship.

    April 2001

    The White House, releasing the 2002 budget, declared that the size of Fannie Mae and Freddie Mac is "a potential problem" because "financial trouble of a large GSE could cause strong repercussions in financial markets, affecting federally insured entities and economic activity."

    February 2003

    Fannie and Freddie's regulator warned that unexpected problems at a GSE could immediately spread into financial sectors beyond the housing market.

    June 2003

    Freddie Mac reported it had understated its profit by $6.9 billion.

    July 2003

    Sens. Chuck Hagel, R-Neb., Elizabeth Dole, R-N.C., and John Sununu, R-N.H., introduced legislation to address regulation of Fannie Mae and Freddie Mac. The bill was blocked by Democrats.

    September 2003

    Treasury Secretary John Snow testified that Congress should enact "legislation to create a new federal agency to regulate and supervise the financial activities of our housing-related government-sponsored enterprises" and set prudent and appropriate minimum capital adequacy requirements. But Rep. Frank replied: "I do not think we are facing any kind of a crisis."

    October 2003

    Fannie Mae disclosed a $1.2 billion accounting error.

    November 2003

    Greg Mankiw, chairman of the president's Council of Economic Advisers, warned: "The enormous size of the mortgage-backed securities market means that any problems at the GSEs matter for the financial system as a whole. "

    September 2004

    Regulators reported that Fannie Mae and CEO Franklin Raines had manipulated the agency's accounting to overstate its profit. Fannie Mae ran radio and TV ads ahead of a key Senate committee meeting, depicting a Latino couple who fretted that if the bill passed, mortgage rates would go up. Again, GSE pressure prevailed.

    October 2004

    Rep. Baker again warned about the coming crisis: "Although their bonds bear the disclaimer 'not backed by the full faith and credit of the U.S. government,' the market does not believe it and looks right past the companies' risk strategies to the taxpayers' pockets."

    Rep. Waters said: "Through nearly a dozen hearings . . . we were trying to fix something that wasn't broke. . . . We do not have a crisis at Freddie Mac, and particularly at Fannie Mae, under the outstanding leadership of Mr. Frank Raines."

    Rep. Christopher Shays, R-Conn.: "And you have about 3% of your portfolio set aside. If a bank gets below 4%, they are in deep trouble. So I just want you to explain to me why I shouldn't be satisfied with 3%?"

    Fannie Mae CEO Raines: "Because . . . there aren't any banks who only have multifamily and single-family loans. These assets are so riskless that their capital for holding them should be under 2%."

    January 2005-July 2006

    Sen. Hagel, with Sens. Sununu and Dole and later Sen. John McCain, R-Ariz., reintroduced legislation to address GSE regulation.

    Fed Chairman Alan Greenspan testified that the size of GSE portfolios "poses a risk to the global financial system. It would be difficult, if not impossible, to bail out the lenders (GSEs) . . . should one get into financial trouble."

    January 2006

    Greenspan, in a letter to Sens. Sununu, Hagel and Dole, warned that the GSEs' practice of buying their own mortgage-based securities "creates substantial systemic risk while yielding negligible additional benefits for homeowners, renters or mortgage originators."

    March 2006

    Sens. Sununu and Hagel introduced an amendment to a Lobbying Reform Bill directing GAO to study GSE lobbying and requiring HUD to audit the GSEs annually.

    May 2006

    After years of Democrats blocking legislation, Sens. Hagel, Sununu, Dole and McCain wrote a letter to Majority Leader Bill Frist demanding that GSE regulatory reform be "enacted this year" to avoid "the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole."

    John McCain addressed the Senate: "Mr. President, this week Fannie Mae's regulator reported that the company's quarterly reports of profit growth over the past few years were 'illusions deliberately and systematically created' by the company's senior management.

    "Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator's examination of the company's accounting problems. . . . OFHEO's report solidifies my view that the GSEs need to be reformed without delay."

    April 2007

    Sens. Sununu, Hagel, Dole and Mel Martinez, R-Fla., reintroduced legislation to improve GSE oversight.

    The New York Times wrote that the "democratization of credit" is "turning the American dream of homeownership into a nightmare for many borrowers." The "newfangled mortgage loans" — called affordability loans — "represent 60% of foreclosures."

    September 2007

    President Bush: "These institutions provide liquidity in the mortgage market that benefits millions of homeowners, and it is vital they operate safely and operate soundly. So I've called on Congress to pass legislation that strengthens independent regulation of the GSEs. . . . The United States Senate needs to pass this legislation soon."

    2007-08

    The housing bubble began to burst, bad mortgages began to default, and finally the Fannie Mae and Freddie Mac portfolios were revealed to be in collapse. And the testimony is evident as to why.

    As Peter Wallison of the American Enterprise Institute put it, "Fannie and Freddie were . . . the poster children for corporate welfare."

    September 2008

    Rep. Arthur Davis, D-Ala., now admits Democrats were in error: "Like a lot of my Democratic colleagues, I was too slow to appreciate the recklessness of Fannie and Freddie. I defended their efforts to encourage affordable homeownership when in retrospect I should have heeded the concerns raised by their regulator in 2004. Frankly, I wish my Democratic colleagues would admit when it comes to Fannie and Freddie: We were wrong."

    Today 2008

    The narrative is of another failed socialist experiment, this time a massive federal effort imperiling the whole U.S. banking industry.

    Top recipients of contributions from Fannie Mae and Freddie Mac since 1989:

    • Sen. Christopher Dodd, D-Conn.: $165,400.

    • Sen. Barack Obama, D-Ill.: $126,349.

    • Rep. Barney Frank, D-Mass.: $42,350.

    .

  • Report this Comment On November 17, 2008, at 9:16 AM, BIFFSTERR wrote:

    This articles and others like it make me question The Motley Fool's intelligence and its agenda. I believe overall that MF is a left leaning organization but I've tried to overlook it because of their usually sound thought processes on investing. I find offensive that just because Obama and Biden "promise" something on their website or in some colorful speech that MF just buys it.

    What happened to studying history and critical thinking?????

Add your comment.

DocumentId: 771854, ~/Articles/ArticleHandler.aspx, 4/16/2014 9:37:39 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement