A Great Income Investment

Featuring Lutts’ Logic:

Why Not Shoot Them?

The Growing Deterrent Force
 
A Great Income Investment

We’ve all seen the stories on the pirates of Somalia, who seize ships on the open ocean and hold them for ransoms of millions of dollars.  But for most of us, there’s no great interest in the matter; after all, Somalia is far away, and there’s no obvious impact on our lives from the piracy.  Still, part of me wonders, “Why are the armed forces of the developed world so reluctant to use force on these people?  Why don’t we just sink their boats … or even shoot them?”  Simple questions–and I know I’m not the first to ask them.

So I dug a bit and found some answers.

The root of the problem is the Somali Civil War.  The country hasn’t had a fully functioning central government since 1991, with the result that per capita GDP is just $600.  Of course, there’s a lot of black market activity; seaborne piracy is simply the most visible of that.

Most dangerous last year–for different reasons–were the following two cases.

On September 2008, a Ukrainian ship, the MV Faina, was seized.  On board, surprisingly, were tanks and other heavy weapons, supposedly heading for Kenya but apparently destined for an area of Somalia controlled by the Islamic Courts Union (ICU).  The ransom amount, reported as $35 million, was reduced to $20 million, $8 million and $5 million in the weeks following the capture … but the pirates still hold the ship, and 20 crew members, while surrounded by the U.S. Navy.

Then in November, pirates took over the MV Sirius Star, one of the world’s largest oil tankers, laden with more than two million barrels of crude oil worth over $100 million.  The potential for environmental damage was enormous, but the ship was released in January 9 for $3 million.

(Most ship-owners counsel their employees to offer no resistance to pirates out of fear that the seamen, and perhaps even the ship, would be hurt.)

These were the highlights, but there were perhaps 120 other attacks last year (some are not reported because owners want to keep insurance costs low) and 45 successful seizures.

The pirates are appreciated by some people in Somalia; after all, they bring money into the country and spend it.  Somali pirates received over $150 million in ransom money during the 12 months prior to November 2008.  Other people, however, decry the presence of their modern, high-tech arms, saying it contributes to the general instability and lawlessness of the country.

And the cost to the world is particularly high.  In addition to the $150 million in ransom, there are increased insurance premiums and increased time in transit due to ships that take circuitous routes.  In short, the pirates drive up the cost of shipping.

So what are the authorities doing?

In Somalia itself, the Transitional Federal Government, which is fighting an insurgency and controls just a few neighborhoods in the capital, Mogadishu, has approved foreign action against pirates.

In June, 2008, the United Nations Security Council passed a resolution enabling countries to enter Somalia’s territorial waters and use “all necessary means” to stop “piracy and armed robbery at sea, in a manner consistent with international law.”

In August 2008, Combined Task Force 150, a multinational coalition task force, took on the role of fighting Somali piracy by establishing a Maritime Security Patrol Area (MSPA) within the Gulf of Aden.

In October 2008, the United Nations Security Council adopted Resolution 1838 calling on nations with vessels in the area to apply military force to repress the acts of piracy.

In November 2008, the UN Security Council adopted a resolution to introduce tougher sanctions against Somalia over the country’s failure to prevent a surge in sea piracy.

At the same time, the U.S. circulated a draft resolution that called upon countries having naval capacities to deploy vessels and aircrafts to actively fight against piracy in the region and welcomed the initiatives of the European Union, NATO and other countries to counter piracy off the coast of Somalia.

On December 17, 2008, the UN Security Council unanimously adopted a tougher resolution, allowing for the first time international land and sea occupations in the pursuit of pirates.

As of December 18, 2008, naval ships from 11 NATO, 4 SCO (Shanghai Cooperation Organisation), and 3 other countries were deployed in the region in order to serve as escorts and to deter acts of piracy:

Canadian Forces Maritime Command
French Navy
German Navy
Greek Navy
Indian Navy
Islamic Republic of Iran Navy
Italian Navy
People’s Liberation Army Navy
Royal Navy
Royal Danish Navy
Royal Malaysian Navy
Royal Netherlands Navy
Royal Saudi Navy
Russian Navy
Spanish Navy
Swedish Navy
Turkish Navy
United States Navy

(Spain, South Korea and Japan will soon join the party.)

And the resistance is working.  On January 1, a busy day for pirates, a French warship thwarted an attack on a Panamanian-flagged cargo ship, arresting eight suspects to be handed over to the Somali authorities.   Also foiling an attack on the same day was the Malaysian Navy.  Pirates did succeed, however, in capturing an Egyptian cargo ship, the Blue Star and its 28-man crew.  Negotiations are now under way for its release.  The cargo is urea, used in fertilizer, and the ransom request is just $75,000.

Three days later, Somali pirates attempted to attack a Croatian ship and a Panamanian ship and French forces thwarted those attempts as well, seizing assault rifles, two rocket launchers, and more than 1,000 liters of oil.

And it’s not just the navies fighting back!  On December 17, 30 seamen of a Chinese merchant crew repulsed a pirate attack using Molotov cocktails and fire-hoses.  In gratitude, the shipping company rewarded the seaman with $10,000 each.

And in recent months, pirates trying to go ashore in any area controlled by the Islamists, who are gaining more control on the coast, have been threatened and chased.

Also getting into the act is Blackwater, the North Carolina-based private military contractor.  The company is currently finalizing plans to dispatch the MV MacArthur, a 183-foot vessel with a crew of 14 and a helicopter pad, to the Gulf of Aden to provide escort services for ships in need of security.  (The name of the company, by the way, is a nod to the peat-colored water of the swamps in the company’s 6,000-plus-acre training facility, part of the Great Dismal Swamp.)

Judging by their reputation, it seems likely the Blackwater will be the least averse to shooting pirates should the opportunity arise.

Which brings us to the legal side of things.  Or, as some people put it, “Why not just shoot them?”

When piracy takes place in Somali waters, the apprehenders are happy to turn the miscreants over to Somali authorities, confident that justice is likely to be swift.

But when piracy takes place in international waters, the prosecution quickly becomes a more complex legal situation.

You can’t just shoot a suspected pirate; he’s technically not a pirate until he actually boards a ship. And you can’t shoot after he’s boarded the ship–that’s the law.  You can, however, shoot if he’s shooting at you–that’s self-defense.  And best of all, you can shoot after he’s back in his own little boat speeding away . . . but navies seem not to do this.  Blackwater probably would.

And then there’s the matter of human rights.

In 2008 the British Foreign Office advised the Royal Navy not to detain pirates of certain nationalities, as they might be able to claim asylum in Britain under British human rights legislation, if their national laws included execution or mutilation as a judicial punishment for crimes committed as pirates.

On December 25, a German frigate off the coast of Somalia interrupted a pirate attack on an Egyptian merchant ship, which was carrying a cargo of wheat from Ukraine to South Korea.  The Germans captured and disarmed six pirates . . . and then set them free because German law only allows the prosecution of pirates who are attacking Germans (or German property).

Today, early in 2009, it appears that the growing cooperation and focus of the word’s navies on Somali piracy has had an effect; piracy events have slowed.

In the long run, however, the solution lies in solving the problems of Somalia on land; the country needs an effective government and the rule of law, and at this point that looks no more likely than peace between Israel and its neighbors.

But there is one bright spot, albeit in the distant future.  American and Chinese oil companies are excited about the prospect of oil and other natural resources in Somalia.  One rough estimate is that Puntland province in the north has the potential to produce five to 10 billion barrels of oil, and we all know that the oil business is much more lucrative–and safer–than piracy.

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And now an idea for investors looking for income.

Plummeting prices last year brought many stocks down 50% or more, so that their yields now look extraordinarily high.  My database now shows 63 stocks with annual yields of 20% or more.

Allied Irish Banks is yielding 88.7%.
Ashford Hospitality (a REIT) is yielding 54.9%.
Atlas Pipeline is yielding 68.9%.

And those are just a few of the A’s.

But there’s something wrong with these stocks–business at every one of these high-yielding firms is faltering.  The stocks’ plunges tell us that.  And while the yields may look high today, they’re based on the past 12 months.  If business shrinks, the dividend will shrink more.  And if the business shrinks, the stock price may fall further, too.  All in all, chasing these super-high yields is a dangerous game, suited only for professionals who can determine when the selling has been overdone and when the dividend is secure.

One professional I respect, who was quoted in the latest issue of Dick Davis Income Digest, suggests Ituran Location and Control (ITRN), writing this:

“Ituran has a guaranteed growth market.  This Israeli vehicle tracking company has $57 million in cash and little debt.  It’s a pure play on a new Brazilian law that says all newly registered cars must have some sort of GPS vehicle tracking technology by the summer of 2009.  This technology was created to save downed Israeli pilots, but it is now aimed at stopping carjackers in Brazil.  In difficult times, crime goes up, and this company protects drivers from criminals.  Earnings came out strong, but ITRN is a buy on dividend alone [16.2% annually].”  

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Publisher
Cabot Wealth Advisory

Editor’s Note: For the best income ideas on the face of the earth, you owe it to yourself to check out Dick Davis Income Digest, the monthly publication that brings you investment ideas from the best minds on Wall Street.”   Every issue brings readers just like you dozens of high quality investment recommendations, from stocks and bonds to REITS and ETFs, all selected by Editor Denise Saari from hundreds of investment advisories.  Sign up for a no-risk trial subscription and see for yourself.  Click below for details.

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