August 2001

Investing in difficult times – Missile Defence

Investing in difficult times

Introduction

Investments into one or more of the various stock markets of the world has been a rather disappointing and costly way of investing your money. The majority of the stock markets on the world have delivered a bad return on your investments. The markets did not continue to boom as in the previous years but were severely affected by the economical slow down and the depreciation of the stocks. To many bad reports, the slowing down of the U.S. economy and the world wide negative effects on the development of the U.S. stock market were the main reasons for the sell off.

Many sectors and stocks lost a large part of their value, even if they could occasionally show some signs of improvement, and the stocks will continue to do so, the trend will be flat to slightly negative on the short term. The stock market will most likely regain its strength if the economies, especially the U.S. economy and to a lesser extent the European economies, will show some better growth perspectives.

It will probably take another three to six months until the first signs of a rebounding economy wil become visible. Before the first signs become apparent it is now the opportunity to invest in the most promising stocks and to be ready if the market will take off again.

Market Situation

The stock markets are still without a clear direction, a number of companies are giving warnings, the sales, procurement, GDP numbers and the E/P ratio will be lower as in the previous year and some companies are performing better than expected. All these indecisive data do not give a clear direction for the future. To much can be read into the data, the bulls and the bears both claim the possess the right knowledge about what the market will do. But maybe there is to much interpretation of the data.

What is certain is that the economies of the world are growing at a much slower pace. Instead of a 3 to 5 percent growth for the developed countries the growth is limited to 1 to 2 percent.The performance of the companies is equally lower, south of the double digit growth instead of north of the double digit growth with the internet, communications and technology, ICT, sector receiving the biggest hits. The internet companies received the biggest hit with a decrease of over 80 percent in value, the communication companies because of the high debts and lower demand up to 40 percent of their value and the internet focused tech companies with equal high decreases.

The question is how far will this depreciation continue, when do we bottom, when will the stocks inprove again and when does the economy show better growth figures. The U.S. interest rates have become lower and will most probably get lower another 25 to 50 basispoints, the European rates will most likely also see some bigger movement with an approximate 50 to 100 basis points. The European inflation seems to be more under control so giving the ECB space to support the economic development. The effects of the rate cuts will take some time before the first effects will become visible.

An improvement of the economies can therefore be expected to start in the next three to six months. The first bigger improvements will first become visible if the quarter reports will be made public. The last quarter of 2001 or the first quarter of 2002 will see an increasing number of companies delivering better then expected results. The improved business figures will be boosted by the lowered interest rates which will in the first to second quarter of 2002 affect the growth of the economies.

A road for better stocks

The last two quarters of 2001 will be very likely difficult quarters, the market will lack any clear direction, the economies are still in a low growth scenario and to many companies delivering disappointing results. This market situation will be flat, with some up and down reactions on news but in the end no big changes, the Dow Industrials for example will be moving in the 10.200 – 10.600 range, other market indices will continue moving in the same kind of range 10 to 15 percent below their former highs.

This level will however deliver opportunities to get into some markets previously considered to expensive. The ICT is the most prominent example but also the most risky sector. It will take some time until they recover from their very big decrease in value but the ones which survive will be in two to three years back in the front line of the best performing stocks. It is therefore very profitable to invest into the most promising ICT stocks if you have some time to let them develop.

In the meantime it is safe and profitable to put your cards on the blue chips of the market. They will most likely not give in to much to the occasional bad news reactions and still should be able to deliver a little growth.

Which and where to invest

This period of indecisiveness and low stock prices is a very good opportunity to make some additional purchases. The market will remain depressed for some time but on the medium term, read 9 to 12 months many stocks will surge in value.

The sectors first to benefit from the improvement are the pharmaceutical, biotech, HMO, oil/energy, financial/insurance, automotive, food and beverage, retail sectors. The ICT sector, including the computer, processor and software and service companies, will follow the lead of the old blue chip companies. They will take some time to recover but if they recover it will be stronger and financial healthier. The better ICT companies will survive the carnage. These are the companies with a strong brand name, a number of proven and new products available, enough financial resources and even some profits achieved in the last couple of quarters. Investing in the ICT sector will need a longer time horizon as they will only be able to start their growth in 12 to 18 months. (For a full list of stocks of which we expect higher growth look at our May 2001 report Financial Assessment.)

Missile Defence

Introduction

The idea of missile defence is not a new option. It exists since the first missiles were developed and both, the U.S. had temporarily a missile defence system operational, and Russia has since many years a Missile Defence system operational around Moscow.

The idea of missile defence and the possible elimination of nuclear missiles exists since many years. Especially after it was seriously put on the agenda and put in development by U.S. president Ronald Reagan.

The socalled Star Wars programma, SDI, Strategic Defence Initiative, was aimed at the defence of the U.S.A. from every possible missile attack. The programme proved to be to difficult to implement with the current technological capabilities and has been continued in the mean time with lesser ambitions and without a pressing time scale.

The idea of missile defence was reactived/rejuvenated with the election of George Walker Bush as the new president of the U.S. Before Bush the missile defence program was more or less every year continued at the pressure of the U.S. Congress. The new missile defence system should not defend the world against a full scale missile attack as envisioned during the Cold War but as a defence against a limited strike of around 10 to 15 missiles. The rogue states, or the states of concern, were the main objective of the rejuvenated missile defence plan. Countries like North Korea, Iran, Libya and Syria were the ones at which the missile defence system was primairily aimed.

Options for missile defence

The SDI program evolved into the Ballistic Missile Defence Organisation, BMDO, with a less ambitious defence plan and with lesser but still considerable funding available. The BMDO was to be responsible for the development of a defence system for the country and forces deployed abroad against ballistic missile attack. The program was to be called initially the National Missile Defence system which should be able to defeat a small number of ballistic missiles, up to 15, fired by states of concern. The main goal was to protect the U.S.A. from black mail attempts from states of concern, at least this was the official description of it.

The NMD programme increased somewhat in scale as two sites were to become operational instead of one. The NMD program became more advanced as after the first territorial differences between a land based and naval based defence system, both were to be included in the NMD system. The NMD was to be organised into the Ground Based Midcourse system and the Navy Theater Wide system.

The Ground Based system is particularly developed for the protection of the U.S.A. and eventually its allies. The Navy Theater Wide system was designed to protect U.S. forces abroad and eventually allies under threat. As the navy system is based aboard of ships it is easy to relocate.

Even after that many years of research and development the BMDO has not yet one system available which could be fielded, with the exception of the Patriot PAC III but this has been operable over a decade and updated every couple of years. The PAC III version should be able to defeat an entering warhead/missile with a hit to kill shot. Another program close to be introduced is the Naval area anti ballistic missile system, the Standard SM 2 IVA missile with small modifications in the Aegis radar/FCS system.

All other programs are still in the development stage but they could be fielded within the next five to ten years if appropriate funding is available.

Ballistic missiles can be tracked and intercepted at three stages. In the boost phase, in the mid course phase and in the terminal phase. The boost phase is the easiest and safest phase as the missile will fall back on the launching territory.. The missile is in the boost phase easy to identify, relatively slow so better to intercept and still in one big part, so easier to hit. The mid course phase is the time of flight in space or in high atmosphere.. The speed has increased and the radar and/or infra red signature gets smaller. At this phase the missile is best attacked with space based weapons.

The terminal phase is when the missile/warheads re-enter the atmosphere and are moving towards their targets. The missile/warhead is at this stage very fast and only a hit to kill will eliminate the missile/warhead.

Most programmes of the NMD are aimed at the terminal phase and boost phase as it are the easiest, smallest and cheapest parts to realise.

The missile attack is to be identified by satallite, the now to be built Space Based Infra-Red Satallite, SBIRS, is the main radar to identify and track the missiles. This in support of some land based radars like the one in Alaska.

After the missile is identified and tracked it can be attacked. The main means to attack the ballistic missiles are the above mentioned Patriot PAC III and Standard SM2 IVA missiles which destroy the missile in the terminal phase.

Secondly, the missiles in development, the Theater High Altitude Area Defence System, THAAD, and the Standard SM3, Theater Wide defence system. Both missiles are targeting the ballistic missile at higher altitudes in the terminal phase and are capable to hit a missile in its boost phase, just before entering the mid course phase. Especially the SM3 is designed also to destroy a missile in this phase. The SM3 as a ship based missile can be placed on the coast of a country which intends to launch ballistic missiles.

The Patriot, THAAD and the SM2 IVA and SM3 missiles are either operational or close to be operational. They are very good fit to be used in a limited anti ballistic missile defence system as intended by the NMD plan.

The NMD programme also covers some more exotic weapons like the Airborne Laser System, ABL, which should be able to destroy ballistic missiles in their boost phase. The ABL is supposed to be demonstrated in 2003. Other laser systems are also under development which should destroy missiles in their terminal phase. And finally there are some plans to re-launch some kind of Brilliant Pebbles system. Brilliant Pebbles was a space based system which was aimed at destroying missiles in their mid course phase. It was a space based system, a kind of garage for missiles, ready to be launched at missiles entering and moving through space.

If the NMD system is to be deployed with the above mentioned missiles, the ABL, other laser systems and some kind of Brilliant Pebbles, NMD will become more than a limited defence against 10-15 ballistic missiles. It will be closer to a system for defeating a limited strike, e.g. over 100 missiles, And this is what Russia and China worry most about. If some kind of system is fielded it is relatively easy to make it bigger and make the Chinese and Russian missile inventories rather useless.

Thoughts about missile defence

The NMD missile defence system has some logic. It could protect the U.S.A. and its allies from missile attacks from the socalled states of concern. And ofcourse an incidental launched missile. It is better to have a defence system making the possession and development of ballistic missiles and Weapons of Mass Destruction useless. It would somewhat make the policy of Mutual Assured Destruction, MAD, irrelevant. The MAD policy may have worked well in the cold war but is something stupid if defences against attack/destruction are available.

A limited NMD system is technically feasible, a larger defence system with lasers and space based systems might be still be a bridge to far on the short to medium term, but certainly not impossible.

The NMD system will violate the ABM treaty but taking in mind the development and spread of ballistic missiles with WMD capabilities it should be questioned if the ABM treaty between the U.S.A. and Russia has outlived its usefullnes. The situation in the world has changed dramatically making to use of ballistic missile defence systems something very beneficial to the safety and security of the world.

The ABM treaty in itself is thereby not only under pressure by the U.S.A. with the development of THAAD, SM3 and the ABL but the Russians themselve possess and have developed anti ballistic missile systems with the operational Gazelle system around Moscow, the operational S-300 air defence system with ABM capabilities and with the development of the new S 400 missiles which boast even further improved ABM capabilities.

NMD is a positive development for the security in the world, it is there and can not be stopped by political pressure from Russia, China or even some of the allies of the U.S.A. It is more important to co-operate to develop and introduce a good NMD system with the best capabilities available, making the use of or threat with ballistic missiles impossible.