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Summary

  • The Cold War has lessons to teach us about the war on terrorism.
  • Unfairly, America bore most of the financial burden in the Cold War.
  • Unfortunately, we probably will bear most of the burden in the war against terrorism as well.
  • Given reluctance to put "boots on the ground," drones will be a major tactical choice.
  • Elbit Systems will be a primary beneficiary of this choice.

Numerous analogies have been drawn between the Cold War and the war on terrorism. While any comparison is likely to have strong and weak points, there are valuable lessons America's victory in the former can teach us about the latter.

  1. First and foremost, victory in the cold war was an American victory; not a victory for the "west" or a coalition of our "European Allies." Quite the contrast: Europeans then (and now) were quite willing to sit behind American troops on one hand, use the defense savings to support their welfare states as a second, and strike a pacifist pose as a third by trumpeting their minimal military budgets.
  2. Second, we should expect the war on terrorism to be a decades long commitment. Republicans (Eisenhower, Nixon) and Democrats (Kennedy, Johnson) exemplified the bipartisan and sustained effort it took to win the cold war.
  3. Third, as we are seeing now with Iraq, Syria, and Egypt, we must expect setbacks on the road to progress. The Korean War, the Hungarian uprising in 1956, the draw in Vietnam, the Cuban Missile Crisis, the capture of Gary Powers - all were crises and upsets at the time, but did not alter the general march toward liberty, openness and market-based representative governments. More important for investors, they had only transient impact on the upward trend in share prices. Long term investors should expect the same: in the greater scheme of things, ISIS's recent show of strength in Iraq is likely to be soon forgotten.
  4. Fourth, the best policy is containment, not confrontation. American citizens made this clear twice in the last twelve months. President Obama's plan to intervene in Syria was stopped dead in its tracks. Nor does Congress cotton to the idea of putting boots back on the ground in Iraq, either. In the cold war, Russia was hedged in, militarily and economically, by a ring of hostile countries. Much the same now: Israel to the west, India to the east and Russia to the north have neither desire to emulate the Middle Eastern kingdom style of politics, nor their petroleum-based welfare states. The latter model will collapse under its own weight, if we give it enough time to do so. The cold war required some direct conflict (Korea, Vietnam); the war in terrorism perhaps the same (Iraq, Afghanistan). But containment can be a successful strategy as well, and this strategy is neither expensive nor disruptive to markets and long term investors.

In fact it can be lucrative for those investors who understand how current geopolitics determine our response to the greater wars on terrorism. If we tell our President no boots on the ground, then as we say here it means (among other things) drones in the air.

And what better way to play the "drone game," than with Israeli based Elbit Systems (NASDAQ:ESLT). Since I suggested purchasing the shares around $53 last November, the stock has climbed almost 20%, twice the gain in the S&P500 eponymous ETF (NYSEARCA:SPY) over this span. SA author and analyst Arie Goren makes an excellent case for buying these shares, so I will not rehash his arguments here. I stick to my original target of $83 a share, even though investors have not been chasing the stock in recent months: notice on-balance volume has been negative in 2014.

source: bigcharts.com

Investors may need to be patient as the stock works its way thru some resistance in the upper 60s. While earnings estimates have been trimmed in the past few months, recent success in procuring contracts bodes well for the future.

Source: Drones In The Air, Not Boots On The Ground: Buy Elbit Systems