Investment Implications of China's Satellite Killer

According to the U.S State Department, modern life as we know it depends on the security of space-based technology. “Modern life as we know it” – that’s no casual statement and it comes from a government agency practiced in the skills of understated diplomatic language.

It’s one thing for activists, such as Al Gore, to make passionate statements about how the climate may be changing and how that will change modern life as we know it. It’s entirely something else for the State Department to say something like that. This “event” is a big deal.

It effects everything from satellite TV and in-car navigation systems, to Air Force in-cockpit and munitions guidance systems, to advanced infantry technology allowing soldiers to position “good guys” and “bad guys” on the battlefield, to generals being able to monitor battles in real-time on a global scale.

A clear approach by the U.S. military in recent conflicts has been to rely on our “space-based assets” to create advantage over our adversaries, even when we are outnumbered by wide margins. Without that advantage, we would be far less successful militarily and would have to resort to much larger ground forces more like those of World War II. Wars would not be so quick and would result in more casualties and death on our side. The projection of U.S power would be greatly diminished without our space-based assets (jargon for military satellites), and we would have to be less militarily assertive globally.

While China is a trading partner, it is also a potential adversary. Their demonstration that they can knock out satellites changes the balance of things significantly. Even without a conflict, the relative power of China and the U.S has changed. We can no longer assume as much as we did about our relative military strength.

If China has the ability to take out our eyes and ears in space the way we took out Saddam’s eyes and ears in Iraq, that is a globally significant military power shift.

China may be more able to intimidate us than before and that will show up in subtle and not so subtle ways as time unfolds. China has been destined be a global power, and this move definitely takes them up a notch.

So what?

The U.S. will probably respond with stepped up research in counter-measure technology. That means more contracts and more profits for major defense contractors such as Boeing (BA), Lockheed Martin (LMT), Northrop Grumman (NOC), Raytheon (RTN), Rockwell Collins (COL) and others.

Both the U.S. and China are massively dependent on imported oil, and both are maneuvering in different ways for alliances that will assure them long-term supplies. China is cozy with countries with which the U.S. is not on good terms, such as Iran and Venezuela.

As China makes investments in those countries and forms oil supply relationships, they may step up more boldly in the future to resist potential U.S. threats to those countries. That may add a new dimension to divining the future of oil prices and the opportunities for tradable oil company stocks. Some investors might decide to hedge there bets by increasing holdings in non-US (perhaps even non-European) oil companies such as PetroChina (PTR).

We aren’t making any specific recommendations, but we are predicting that China’s successful satellite killer technology is an “event” that will subtly cause the flow of investment dollars to be redistributed in a variety of ways, most directly observable in the aerospace sector now and energy sector later.

(Disclosure: Author does not own any securities mentioned in this article)

Comments

[Chris Thomas]

I couldn't disagree more.

Over the next few years, the Democrats in Congress will no doubt attempt to limit or curtail military spending, perhaps more than usual as a sort of vote of no confidence in bush's middle east policy.

So any stock pick will be, no doubt, over a longer time horizon than two years. Yet I still think that China will never be the military adversary that many doomsayers think they are destined to become.

1. China's and the United States' international interests in the world are largely similar. Both countries are hurt by disruptions in the energy supply, both countries are despised by Islamic extremists, both are capitalist countries that want stability and economic growth throughout the world.
2. China's and the United States' economies are intricately entangled and both would suffer horribly from any kind of geopolitical strife. Any sort of Cold war between the two would lead to recession and thus political consequences - in China due to the fragility of its despotic regime and in the United States due to its Democratic institutions.
3. China most likely tested its anti-Satellite missile because of its burgeoning space program, not because of any kind of military ambitions. The Chinese have a fascination with science - so much so that Chinese children don't have favorite sports or movie stars, but rather have favorite scientists that are sort of pseudo celebrities. Another possibility is that China is desperately attempting to build a Star Wars-like anti missile system out of fear of North Korea's nuclear capabilities.
4. Speaking of nuclear capabilities, it's worth noting that the likelihood of a hot war between the United States and China is next to nil for just that reason - both countries are nuclear powers.
5. As China's economy has grown, so has its government's spending. Much has been said about China's increase in its military spending, growing at a clip of roughly 10% a year. And yet, that spending has lagged behind the growth of the CCP's spending in nearly every other department. In other words, the military <b>is not the Chinese government's top priority</b>.

I wouldn't touch any defense contractor for at least the next two years while the Democrats are in power, and even then I have the feeling that military technology is going to slowly shift away from big ticket items used in combat between great powers, and toward anti-terrorism measures. While its certainly a distant possibility, I get the feeling that anyone that invests in a sort of military buildup between the United States and China will likely be very disappointed.

[Richard Shaw]

As a citizen, I hope you are right.

[Richard Shaw]

SOME EXTRACTS FOR CBC WEBSITE AND INTERNATIONAL HERALD TRIBUNE

Japan, South Korea, Australia, Britain and the U.S. all expressed concern about the test, saying it could lead to increasing militarization of outer space. Japan and the U.S, in particular, asked Bejing to respond.

The Chinese satellite was about the same distance from Earth as U.S. spy satellites, prompting some analysts to suggest that the test represented a potential threat to America, the Associated Press reported.

The U.S. has been able to knock out satellites with missiles since the mid-1980s, the website of the Union of Concerned Scientists in the U.S. said.

The only U.S. test was conducted on Oct. 13, 1985. Later that year, the U.S. government implemented a ban on testing anti-satellite weapons.

ndependent experts on the Chinese military said that China has sought a workable antisatellite weapon since the 1980s. It has experimented with using lasers and kinetic force, such as missiles or other satellites, to disable or destroy satellites in orbit.

One reason is that the United States military depends heavily on satellites for missile guidance, navigation and communications, and any widespread damage to that infrastructure would hamper military action overseas.

China has long feared that the United States might intervene in the event of a military conflict with Taiwan, and it has invested heavily in new weapons that experts say are geared toward giving it the power to attack Taiwan while keeping American forces at bay.

But others said China's intentions in conducting this test may have been more diplomatic in nature, designed to pressure the United States to negotiate a treaty to ban weapons in space. Russia and China have pressed for such a treaty, but the Bush administration has declined to participate in such talks.

China has rapidly become the world's third major space power, after Russia and the United States. In 2003, a Chinese astronaut circled the earth in a space vehicle. China also plans to send a robot to the moon by 2017.

[Richard Shaw]

Extracts from Business Week today (Jan 23)

Until recently, only Russia was thought to have any meaningful capabilities in this arena, but China has made a concerted effort to build up its own anti-satellite technology since the early 1990s. The Chinese military has closely studied the U.S. military campaigns in the 1991 Gulf War, Kosovo, Afghanistan, and the Iraq War since 2003, and is investing heavily in anti-satellite weaponry, ground-based laser systems, and more elusive missile technology. Some think China will soon have the ability to attack critical juncture points in U.S. satellite-linked battlefield communications systems.

The Pentagon, in its 2006 annual report to Congress on China's military power, concludes, "China has the greatest potential to compete militarily with the U.S. and to field disruptive military technologies that could over time offset traditional U.S. military advantages."