• European Aeronautic, Defence & Space Co. NV (PINK: EADSY), parent company of Airbus SAS, announced yesterday (Tuesday) that it would shift production operations to non-European Union countries such as Tunisia in an effort to cut costs, Bloomberg News reported. “We’re planning to produce basic parts in Tunisia, while research and production of more sophisticated parts and composites would be in Europe,” EADS spokeswoman Gaelle Pellerin said yesterday, confirming comments made by Chief Executive Officer Louis Gallois.

• McDonald’s Corp. (MCD) reported yesterday (Tuesday) that same-store sales increased 8.5% in the month of August as cash-strapped consumers took advantage of the fast food chain’s value menus. “McDonald’s does well in bad economies because people trade down,” John Kornitzer, who oversees $5 billion at Kornitzer Capital Management, told Bloomberg News.

• Reynolds American Inc. (RAI), parent of R.J. Reynolds Tobacco Co., announced yesterday (Tuesday) that it plans to reduce 10% of its staff as part of a restructuring program to realign its brands. The bulk of the cuts will come from the second-largest U.S. tobacco company’s Winston-Salem, North Carolina headquarters, The Associated Press reported.

• The U.S. Justice Department has hired Stanley Litvack, the department’s antitrust chief during the Carter Administration, to consult on a probe of an advertising deal between Google Inc. (GOOG) and Yahoo! Inc. (YHOO). “We have been informed that the Justice Department, as they sometimes do, is seeking advice from an outside consultant, but that we should read nothing into that fact,” Yahoo said in a statement, Reuters reported.

• Google Inc. (GOOG) and two other partners, cable television magnate John Malone and HSBC Holdings PLC (HBC), have announced plans to bring internet access to 3 billion people in Africa and other emerging markets around the world with the launch of at least 16 satellites. So far, each partner of the “O3b” (Other 3 billion) venture has contributed $20 million into the project. The satellites should be operational by 2010, Reuters reported.

• The National Association of Realtors said yesterday (Tuesday) that its seasonally adjusted index of pending U.S. home sales fell 3.2% to a reading of 86.5 in July from an upwardly revised June reading of 89.4. Home sales are considered pending when the seller has accepted an offer, but the deal has not yet closed.

• Staffing services company Manpower Inc. (MAN) said yesterday (Tuesday) that its seasonally adjusted net employment outlook fell for the fourth consecutive quarter, reaching a level of 9 – down from 12 last quarter and 18 a year ago. The index measures the difference between employers who plan to add jobs and those who expect to cut them.

• The federal government will run a near-record deficit of $407 billion this year Congressional Budget Office said yesterday (Tuesday). The deficit will probably reach a record $438 billion next year and could go substantially higher after the government’s seizure of Fannie Mae (FNM) and Freddie Mac (FRE).

Source: Global Investing Roundups Wednesday, September 10th, 2008

And since the situation in Georgia has effectively created a new Cold War status, it’s worth reviewing where the profit opportunities will be this time, and which countries the sensible, geo-strategically conscious investor will avoid – especially since Vladimir Putin looks a lot more dangerous than the sluggardly Leonid Brezhnev.

Danger on the Inside

You probably didn’t have much money in Georgia, Ukraine, or Kazakhstan, the three countries most immediately affected by this.

That’s good. And here’s why:

• Georgia, which had been well run economically, but was too small to be on most investors’ radar screens, has become a very dangerous investment location, indeed.
• Kazakhstan is likely to turn much more hostile to Western investors as it reorients itself towards a newly aggressive Russia. Companies like Italy’s Eni S.p.A. (ADR: E) that had appeared to do well out of their ability to invest in difficult environments like Kazakhstan will watch as that “difficult” mutates to “impossible,” perhaps even losing their proverbial shirts there.
• Only the Ukraine seems to be trying its best to remain pro-Western, with its president, Viktor Yushchenko, flying in to Tbilisi to express solidarity with Georgia. However Ukraine has a presidential election next year – and no prize for guessing who will be trying to influence that election in favor of a pro-Russian anti-Western candidate, by violent means if necessary.

Then there’s Russia itself. Investing in Russia has always been a bit like visiting Las Vegas – but now it’s like wagering large amounts of money in a casino you know to be controlled by the Mafia. You might win, but the downside potential is much greater than the upside.

What’s more, Russia’s tendency to take aggressive action without worrying about Western reactions is likely to cause sharp stock market crashes when it happens, as Wall Street panics and rushes for the exits. And it’s not as if Russia is economically well run; they have done very well since 2000, but entirely because of rising oil prices. At some stage, oil prices will reverse – at which point Russia, with its thuggish approach and expensive military machine, is likely to run out of money quite quickly. As with Venezuela, foreign investors will then be the most obvious people to loot.

Watching and Waiting to Feel the Pain

There are also implications for investors outside these most-deeply affected countries – but those implications are much-less extreme.

Most of the Eurozone is vulnerable to energy blackmail by Putin’s Russia, which has effectively put out of action the oil and gas pipelines that pumped non-Russian energy through Georgia. Moreover, if Russia’s belligerence continues, this new Cold War reality will force EU countries to reverse their current plans calling for minimal defense spending – they will want to protect both themselves and the particularly vulnerable EU members of Eastern Europe (notably Estonia, Latvia and Lithuania, which were part of the Soviet Union in 1940-1991) from sudden Russian assaults.

On one hand, that will put an immense strain on government finances and slow economic growth. On the other hand, such defense-oriented stocks as BAE Systems PLC (Pink Sheets ADR: BAESY) and EADS (Pink Sheets ADR: EADSY) can be expected to benefit.

The United States will also need to boost its defense spending – no matter which candidate wins November’s presidential election, putting a major strain on an already sagging U.S. federal budget, probably leading to higher interest rates and lower economic growth.

Defense industry favorites, especially those oriented towards high-tech conventional war such as The Boeing Co. (BA), B-2 Stealth Bomber maker Northrop Grumman Corp. (NOC) and Lockheed Martin Corp. (LMT) can be expected to benefit accordingly, as these firms did during the 1980s, in the last major military buildup of the Cold War.

“I’ve concluded the contract cannot be awarded at present” because of flaws found by the Government Accountability Office, Gates said at a press conference at the Pentagon yesterday, Bloomberg News reported. The new bidding process will reexamine eight of Boeing’s complaints that were upheld by the GAO, out of more than 100 concerns it had initially raised, by seeking “revised proposals from the industry,” he said.

Last month, the Government Accountability Office backed a petition brought by Boeing that the U.S. Air Force altered the auction for a $35 billion aerial-tanker contract – a bid that went to a joint-venture of rivals Northrop Grumman Corp. (NOC) and Europe’s EADS NV (PINK: EADSY), and in turn, helped push Boeing’s stock down more than 11% at the time.

Boeing filed the complaint in early March, claiming that the Air Force misled the company and modified its specifications to accommodate models made by Northrop and Airbus S.A.S.

The GAO found that there were discrepancies in the bidding process and recommended the Air Force re-conduct the bidding. However, GAO rulings are only advisory in nature, and the Air Force did not have to comply.

The Air Force was given 60 days to respond to the GAO’s ruling, and the speedy decision is seen as a good sign for Boeing.

With an initial contract value of $35 billion that could easily grow to $100 billion or more over time, both sides have fiercely contested the bidding process.

“EADs feels very raw over this,” Alexandra Ashbourne, who heads Ashbourne Strategic Consulting in London, an aerospace analysis firm, told The New York Times. “There was a lot of effort expended for no return. You cannot underestimate how raw and burnt they feel as a result of all this.”

But its partner, Northrop Grumman, remains confident of eventual success, despite the delays.

Northrop Grumman is “reviewing the decision to ensure the re-competition will provide both companies a fair opportunity,” company spokesman Randy Belote said in a statement, Bloomberg News reported.

“The United States Air Force has already picked the best tanker, and we are confident that it will do so again,” Belote added.

[Editors Note: To read a related story on Boeing’s recent prediction that aircraft sales will exceed $3.2 trillion over the next 20 years, click here.]

Source: Second Chance for Boeing as Defense Department Reopens Bidding on $35 Billion Contract

“During 40 years of producing the Current Market Outlook, we have learned that the resilience of air transport growth comes from its intrinsic importance to the livelihood of people around the world,” the report from Boeing reads.

Boeing’s annual Current Market Outlook estimates that passenger travel will grow at a 5% rate, and cargo will grow at a 5.8% over the next several years. Despite record fuel costs, air travel and shipping has become an integral part of daily life for many consumers and businesses. Boeing says that demand will only grow.

A lot of that growth is expected to come from the BRIC nations.

“Long-term, you have to assume that the emerging countries of Brazil, China, India and Russia are going to continue to grow as a larger percentage of the world’s fleet, and they’re growing at a faster rate,” Peter Arment, Greenwich, Connecticut- based analyst with American Technology Research, told Bloomberg News.

Over one-third of the projected $3.2 trillion market is set to come from the Asia-Pacific region, which is expected to have $1.19 trillion in future airplane deliveries, according to Boeing data. North America and Europe are both projected to have $740 billion, while the Middle East region clocks in at $260 billion. Latin American demand is forecast at $140 billion.

In order to meet the upsurge in demand, Boeing estimates that planemakers will deliver 29,400 planes during the period, up from the 28,600 predicted last year.

The effects of the high cost of jet fuel was made apparent in Boeing’s upward revision to 43% from 38% for replacement aircraft as older, less fuel-efficient planes are retired in the face of soaring oil prices.

“We assume that fuel over the near term will continue to be high and volatile and then at some point in the future supply and demand should align and fuel will be priced more at the marginal rate of production,” Boeing Commercial Airplanes Vice President, Marketing Randy Tinseth said at a London press conference.

European rival Airbus SAS, a subsidiary of European Aeronautic, Defence & Space Co. (PINK: EADSY), released its own forecast in February, which was slightly lower than Boeing’s. Airbus expects airlines to buy 24,300 planes worth $2.8 trillion during the next 20 years, Bloomberg reported.

Source: Boeing Projects Increased Demand Despite High Oil, Weak Economy