Still loving defense plays amid geopolitics

Key Concepts

• Defense Stocks: Companies involved in military equipment, technology, and services (e.g., RCAT, NDS, L3 Harris).
• Geopolitical Trading: Attempting to profit from political and global events, particularly conflicts.
• High Bandwidth Memory (HBM): A type of computer memory crucial for AI applications (e.g., Micron - MU).
• MAG 7: The seven largest technology companies (not explicitly defined in the transcript, but referenced as a group experiencing rotation).
• Interest Rate Cap: Proposed government regulation limiting the interest rates banks can charge.
• Regional Banks (KRE): Banks operating within specific geographic areas, considered relatively stable in the discussion.
• ITA (iShares U.S. Aerospace & Defense ETF): An exchange-traded fund focused on the aerospace and defense industry.
• XLF (Financial Select Sector SPDR Fund): An exchange-traded fund focused on the financial sector.

Market Commentary & Geopolitical Plays

The discussion centers around current market conditions, with a strong emphasis on opportunities arising from geopolitical tensions and shifts in investment focus. John Ajarian highlights the strong performance of defense stocks, particularly RCAT (approximately doubled since mid-December), driven by increased military spending and global instability. He attributes this to the Department of Defense’s focus on these companies, citing L3 Harris receiving a $1 billion investment for rocket motor development as an example. He argues that while broad market indices may not be significantly impacted by geopolitical “hype,” specific companies benefiting directly from increased defense spending present viable investment opportunities.

Oliver emphasizes the potential pitfalls of directly “trading geopolitics” on an index level, as the overall market’s upward trend often overshadows geopolitical concerns. However, he agrees with John that stock-specific plays within the defense sector can be profitable. He notes a rotation out of high-profile tech stocks (the MAG 7) and into defense and technology supporting AI.

Technology & AI Focus

Beyond defense, the conversation shifts to the importance of technologies supporting Artificial Intelligence (AI). High Bandwidth Memory (HBM) is identified as a critical component, with Micron (MU) specifically mentioned as a key player in this space, producing DRAM, ND, and NOR memory. The discussion also highlights advancements in autonomous launch technology, citing Huntington’s successful testing of autonomous vehicle launch and capture from ships. Both defense and AI technologies are linked, with AMD and Micron being identified as essential components in modern military systems, exemplified by the use of advanced tech in operations like the shutdown of Venezuelan radar.

Regulatory Concerns & Banking Sector

A significant portion of the discussion revolves around potential government intervention in the banking sector, specifically a proposed cap on interest rates. The speakers debate the merits of such a cap, with John expressing strong disapproval of banks charging excessively high rates (up to 27% on credit cards) while benefiting from Federal Reserve funding. He argues that a cap of six points over the Fed funds rate would be more reasonable. Oliver acknowledges the ethical concerns but leans towards a free-market approach, believing lenders are incentivized to avoid overextending themselves.

Despite concerns about potential regulation, both speakers believe the banking sector is fundamentally sound. John dismisses the banks’ complaints about a potential rate cap, pointing to their substantial profits ($20 billion per quarter from interest rate spreads) and the historical precedent of similar proposals. Oliver notes the relative stability of regional banks (KRE), currently trading near their 50-day moving average.

Trading Strategies & Risk Management

The conversation touches on various trading strategies. John suggests building a “basket” of defense and technology stocks to diversify risk. He also mentions the possibility of using the ITA (iShares U.S. Aerospace & Defense ETF) as a less risky alternative to individual stock picks. Oliver cautions against relying solely on ETFs for maximum potential gains, highlighting the “convexity” offered by options trading. He emphasizes the importance of patience when investing in ETFs.

John’s perspective on geopolitical trading is nuanced. While he acknowledges the inherent risks, he believes that focusing on companies directly benefiting from geopolitical events can be a profitable strategy. He uses the analogy of being “dealt a full house” when investing in these stocks.

Recent Events & Market Sentiment

The discussion references recent global events, including protests in Iran and the US President’s statements regarding those events. John believes the Iranian protests, while tragic (12,000-20,000 deaths, according to CBS News), are unlikely to trigger a prolonged war, but could further fuel investment in defense stocks. He frames the situation as a need to “cut the head off the snake,” suggesting a desire for regime change in Iran.

Notable Quotes

• John Ajarian: “When Trump or in this case the Department of War says, 'I really like L3 Harris and I'm going to give them a billion dollars to spin out their rocket motors and so forth into a new stock,'… I pay attention.”
• Oliver: “Geopolitics basically trying to trade geopolitics is like the most reliable losing trade in my mind because the market generally goes up.”
• John Ajarian: “This ain't the first time somebody's proposed this [interest rate cap]. It probably won't pass. But I'm saying from my standpoint, I would be perfectly happy with like a six point o over the Fed funds rate.”

Logical Connections

The conversation flows logically from a general overview of market conditions to specific investment opportunities. The discussion of geopolitical tensions leads to the identification of defense stocks as potential beneficiaries. This then expands to include the broader technology sector, particularly companies involved in AI and high-performance computing. The regulatory concerns regarding banking are presented as a separate but related issue, potentially impacting market liquidity and investment strategies. The discussion consistently returns to the theme of identifying opportunities created by shifts in market sentiment and government policy.

Conclusion

The primary takeaway is that despite broader market trends, specific sectors – particularly defense and AI-related technologies – present compelling investment opportunities driven by geopolitical events and technological advancements. While regulatory concerns regarding the banking sector exist, the speakers remain optimistic about the overall health of the financial system. A diversified approach, potentially incorporating both individual stocks and ETFs, is recommended, with a focus on identifying companies directly benefiting from current global trends. The conversation underscores the importance of staying informed about both macroeconomic factors and specific company developments to navigate the evolving market landscape.