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The Military Industrial Complex: A High Flying Opportunity?


 
By Joshua Enomoto, Founder of ContangoDown.com and CrushTheStreet.com Contributor

Though competition is increasing fiercely from its global partners, if there is one thing that the United States government excels at, money printing and calling it “wealth creation” would be top of the list. Since much of this so called “wealth” is directed towards government spending, particularly ear-marked for the military industrial complex, it stands to reason that investors may want to devote their funds towards companies that actively participate in this sector. However, as I wrote about in my article, Gun Sales: Pitfalls of Fear Trade Speculation, one must always be careful of making slam-dunk assumptions that a fundamental driver will positively impact the technicals. For gun companies, I was right to be bearish: both Smith & Wesson and Ruger took some hits in the market and will likely continue doing so in the near future. Therefore, it is better to take a conservative approach when considering investment in more “questionable” industries, no matter how bullish the fundamentals may appear.

 
A great example is General Dynamics, perhaps most well-known for introducing us to the F-16 Fighting Falcon. For over 30 years, the Falcon has been the backbone of the United States Air Force and it also serves in squadrons from 25 other nations. In 1993, General Dynamics sold its aircraft manufacturing division to Lockheed but it still remains a viable competitor within the aerospace and defense industries. Given such a compelling resume and with the backing of the most powerful military force in the world, it’s no surprise that General Dynamics shares (GD) are on the up and up: 
 

GD (01122013)

The question is, will it stay that way? For GD, I believe the risks outweigh the rewards and a pullback is more likely than not. First, since late December of last year, the volume has been declining while the price has been rising, which is usually a sign of non-sustainability towards further bullishness. Second, technical signals, such as the Relative Strength Indicator (RSI) and the Moving Average: Convergence – Divergence (MAC-D) are showing weakness in the current trend. Third, recent price action has failed to penetrate long-term resistance at $72. Continued failures at this level suggest that a technical consolidation could occur, potentially sending GD back to $68 and possibly more.

 

Looking at the monthly chart, we do know that a HUGE move is likely to occur, based on the near-perfectly symmetrical wedge formation: 
 

GD long (01092013)

As stated above, there is a lack of confidence at the $70 level, so a correction to $62 would not only be possible but it would keep the wedge formation intact. If you wanted to buy GD shares, this is the price target you should be waiting for. Remember, when it comes to long-side investing, it pays to aim low!

 

Whether the big move in GD will ultimately be bullish or bearish will depend on several other factors. Nevertheless, I would be hesitant towards leveraging too heavily in this sector, especially when considering  the competition. Boeing, for example, is a company that nearly everyone is familiar with, and the fact that they produce aircraft for civilian and military purposes gives them a sort-of “duality” within the aerospace industry. That being said, Boeing would be subject to both the rewards and the risks of being aligned with government contracts and free market enterprise. 
 
 

BA (01122013)

Boeing shares’ (BA) are also languishing near long-term resistance levels, in this case at the $78 mark. The fact that BA could not exceed the high for the week beginning January 7th is a sign of no confidence. The technical indicators represented by the RSI and MAC-D clearly point this out. Perhaps most disconcerting is the overall correlation between BA and the Dow Jones index. The Dow (and the entire US equities sector) is currently experiencing choppiness and volatility due to the upcoming debt ceiling and sequestration debates. With the nation being more divided than ever, it is likely that these debates would be more intensely contested than last year’s fiscal cliff talks. If so, we could see significant declines in the market as investors pull out, driving the US dollar higher and shares like BA lower.

 

Given the fact that the military industrial complex controls the discourse of the nation’s opinion towards the defense industry, it would seem like a no-brainer to invest in this sector. After all, cultural hegemony would nearly guarantee that any proposal to reduce military spending would be immediately dismissed as “un-American,” thereby providing an indefinite cash flow to arms manufacturers. However, even government backed companies still have to trade within the free market system: by the end of February, when the debt ceiling issue must be resolved, we will see just how untouchable the military really is.

 

In the meantime, you have been forewarned!

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