Trading a Possible U.S. Military Withdrawal

Includes: LMT, NOC, UDN, USO
by: Benzinga

By Paul Quintaro

Following the attacks of September 11th, the U.S. began a staggeringly large military campaign, the total cost of which could total nearly a third of the GDP of the United States.

Reuters cited a study by Brown University, alleging that—all things considered—the total cost of the war-on-terror could fall somewhere between $3.7 and $4.4 trillion dollars.

Perhaps most troubling: NPR reports that the military spends over $20 billion on air conditioning alone—more than the budget of NASA.

With a Federal Government moving to get its finances in order in lieu of the upcoming debt ceiling spending limit, the U.S. might have no choice but to remove its military forces from the Middle East.

The dialing down of such an enormous military presence could create shock waves across the global markets. The price of everything from oil to the U.S. dollar to equities could be affected.

Traders anticipating a shift in U.S. military policy might consider altering their positions based on expectations.

Action Items

Bullish: Traders who believe that the U.S. will withdraw from the Middle East might want to consider the following trades:

  • Short Lockheed Marin (NYSE:LMT) in a short play on military expenditures. Lockheed receives a significant percentage of the Department of Defense's contracts. Without those, the company may do poorly.
  • Buy United States Short Oil Fund (NYSEARCA:USO) in a short play on the price of oil. If the U.S. dials down its military operations, the price of oil may rise as the region becomes less stable.

Bearish: Traders who believe that extensive military activity will persist in the region may consider taking positions in the following:

  • Northrop Grumman (NYSE:NOC) is a long play on military spending. NOC is a major military contractor, and may benefit if the military continues to conduct operations in the region.
  • PowerShares DB US Dollar Bearish Index (NYSEARCA:UDN) is a short play on the dollar. If the U.S. government continues to run persistently high deficits with massive military budgets, the value of the dollar may decline.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.