It involves the use of innovative products that enable shippers to defend themselves from pirate attacks.

While it may not seem like a lucrative business, the uptick in high seas shenanagins over the past year or so threatens to become more prevalent if it’s not addressed. And with millions of dollars worth of cargo traveling by sea every day, both the shipping industry and the companies whose cargo they’re hauling hardly want to see the trend become a full-blown epidemic.

At the moment, however, only the Department of Defense and various small private companies are responsible for “mobility denial systems.” Described as an “oil slick in a can,” these weapons make it difficult for bandits to board (and remain on) a ship.

But there are a few major, publicly traded American companies that are combating this problem amid their other defense issues…

Take That, Jack Sparrow

First up, one of the world’s largest defense companies, Lockheed Martin (NYSE: LMT). The firm has partnered with BAE Systems PLC. (Pink Sheets: BAESY) and Israeli weapons systems developer Rafael Armament Development Authority to develop “The Protector.”

While it sounds like the hero of a 1980s action movie, The Protector Anti-Piracy Robot is an unmanned robot with a mounted 7.62mm machine gun. Originally designed to protect harbors, The Protector is capable of defending ships from attackers, while keeping the crew out of harm’s way.

A more widely used form of anti-pirate defense is Long Range Acoustic Device (LRAD) systems, designed by American Technology Corporation (Nasdaq: ATCO).

Equipped with high-powered speaker systems, these devices can be used to issue ear-splitting beams of sound directly at the bandits, or provide verbal warnings (no word, though, as to whether, “Back, ye scurvy dogs!” is on the list of available commands).

Despite the fact that these systems are more common, keep in mind that ATCO is a tiny stock and can be illiquid.

Here are three other ways to play the piracy protection trend…

Three Ways To Play High Seas Banditry

The Defense Angle: You can’t dip into many sectors or industries these days without finding the presence of General Electric (NYSE: GE).

The company’s defense subsidiary, GE Security, offers various communications systems that are used to enhance ocean security.

The Insurance Angle: In addition to direct defense sector plays, there are also several insurers and reinsurers, which have an important maritime business and could face exposure if a ship is lost at sea. These include CNA Financial Corp. (NYSE: CNA), Marsh & McLennan Companies (NYSE: MMC) and Willis Group Holdings (NYSE: WSH).

The Cargo Angle: Consider commodity plays on cargo like oil. If oil cannot be shipped directly for fear of it being intercepted by pirates, it could drive up the price. A straightforward, more diverse (and thus less risky), cheaper and safer way to play this would be to buy an ETF like the U.S. Oil Fund ETF (NYSE: USO).

You could also consider timber companies like Plum Creek Timber (Nasdaq: PLUM). It’s historically a solid market outperformer anyway, which isn’t a bad investment to have in your portfolio at times like these.

Move With The Waves As This Maritime Trend Grows

For pirates, the lure of capturing easy booty from an unsecured ship in the middle of an ocean is an attractive proposition.

And while the current US-Somali standoff will eventually end (hopefully in peace), companies are realizing that there’s a more pressing need to secure their cargo and crews while at sea.

In an economy where it’s mighty difficult to make money at the moment, the prospect of losing cargo to pirates will force companies to pay for the security products and services that can protect their haul.

While the majority of the companies in the maritime security space are small and privately owned, if the piracy trend increases, you’ll likely see more well established firms enter the market – especially those with long histories of securing government contracts, such as Lockheed and GE.

Hoping your longs go up and your shorts go down.

Source:  Ocean Piracy: Fill Your Trading Account With Booty From The “Pirate Portfolio”

But let’s start with the financial news first. Macquarie Group (ASX:MQG) told investors yesterday that its profit fell by 43%, thanks to write downs in assets. It was the first time since going public twelve years ago the “Millionaire Factory” has reported an earnings decline. Still, the $604 million profit number was higher than what analysts were expecting ($594 million) and the stock finished up over 16.5% on the day.

In the revenue results and write downs you can see how the decline and fall of the investment banking model has hit Australian shores. MQG reported a 13% decline in fee and commission income (to a paltry $2.2 billion). Trading income fell by 14% to $722 million. The big one was the 43% decline in income from asset and equity investments.

There were some strange assets in the back rooms of the Factory. The company took over a billion dollars in write downs on its Italian mortgages and fund management assets. It did not, however, take any write downs on Macquarie Airports or Macquarie Infrastructure Group. Hmmn.

Picture the good ship Macquarie Group as something like a Noah’s Ark/Pirate Ship full of a menagerie of debt-financed assets. Under Captain Allan Moss as CEO, Australia’s version of Goldman Sachs sailed the high-seas of global finance, buying assets with borrowed money, bundling them into funds, and then charging retail investors fees to invest in the funds. It’s the sort of business those Somali pirates who hijack oil tankers should look into. Far more lucrative.

Twelve years of collective booty and swag gave the Factory quite a collection of eccentric and fee-generating assets. Some of those assets are not ageing so well. But you’ll note the company chose not to mark down the value of its infrastructure or airport funds, the two big ones.

It claims the current market value of those assets isn’t what they are really worth. The book value is more accurate. In the meantime, it is throwing other less attractive assets overboard. Deck chairs…Italian mortgages…extra chickens…everything must go!

There’s no doubt that asset values are likely to fall more next year and that revenues will continue to fall too. Still, the company says it will sell $15 billion in assets and then set sail, on the lookout for more acquisitions again. Garn!

It’s looking to sell its margin lending book. And new CEO Nick Moore said it will securitise its motor vehicle loan book, move it off the balance sheet, and sell it off. Thus the liquidation continues in the financial world. Loss-making assets are written down or thrown overboard at…er…fire sale prices.

What’s really happening, mixed metaphors aside, is that the Millionaire Factory model is giving way to deleveraging reality. In a world with falling asset values and tighter bank credit, it’s harder (and much less profitable) to build a cleverly constructed portfolio of assets and generate fee income from operating them.

In the post-credit crunch world (or post-Deluvian, if you accept the nautical metaphor), you have to focus on cash, not debt. One example would be Cash Converters, a sort of Main Street Macquarie, without the debt, and substituting Italian loafers for Italian mortgages. Cash Converters buys low and sells high. It’s the perfect business for the first world depression.

Cash Converters helps people turn lazy assets (guitars, mobiles, stereos, old harmonicas) into cash. And what is that but the liquidation of the consumer spending boom? Of course, most stuff isn’t worth as much people think it is. When you own something, you tend to think it’s worth more than everyone else.

Then you try and auction it on eBay or take it to a pawn shop or Cash Converters. There, you find that it’s worth a lot less than you believed in your heart. Such is life, as Ben Cousins and Ned Kelly might say. Kris Sayce at the Australian Small Cap Investigator (whom we often call the Ned Kelly of the Old Hat Factory) has been looking at Cash Converters as an example of what he calls “Main Street Stocks.”

We’ll let you know what he’s up to…but we think it has something to do with companies that actually do more business in a recession and increase both revenues and earnings-without relying on debt. If you have your own suggestions for “Main Street Stocks,” let us know at dr@dailyreckoning.com.au

Dan Denning

Source: Macquarie Group (ASX:MQG) Profits Fall By 43%