Compare US Cyber Threat Incidents To Mitigation

Two major cyber threat reports should keep security professionals busy for a while.  The Verizon Data Breach Investigations Report (DBIR) for 2014 includes data from US government cybersecurity organizations.  The US government's closest equivalent of this report is probably the OMB's annual FISMA report for 2014.  Let's compare and contrast.

The Verizon report revealed that accidents and insider misuse account for a significant percentage of the threat.  The OMB report revealed that cyber incidents are concentrated at six agencies, with the VA, HHS, and NASA as the top three impacted agencies.  The Defense Department experienced less than 10% of the federal government's cyber incidents but spends almost 90% of the government's cyber budget.  The remarkable part of that DOD spending is the 50% devoted to shaping the cyber security environment.  Note that HHS and the VA devote most of their cyber spending to detecting and mitigating intrusions, presumably from external threats.  If the majority of incidents are internal accidents and malice, as the Verizon report indicates, those agencies' cyber efforts are misdirected.

Consider the implications.  Uncle Sam is devoting the bulk of his cyber effort to what is very likely DOD's offensive capability in US Cyber Command and other special agencies.  He is also absorbing internal accidents and malice at three relatively less protected agencies, drawing from both reports.  The imbalance between targeting malicious foreign hackers and tolerating internal sloppiness is clear.  Consider that HHS and the VA are involved in managing a significant part of the US health care system.  The government's underattention to accidents and insider fraud in its health care cyber security places a significant portion of the US economy at risk.  There's a lot of very valuable data in the health care sector worth protecting.

The Alfidi Capital investment thesis does not account for the federal government's IT competence.  My analysis of several IT and telecom conferences in the past two years reveals that the mobile computing sector pays serious attention to app security.  Go back and read my stuff tagged "conference" to see how closely I've tracked this trend.  I've also tracked articles in Federal Computer Week that chronicle the government's immaturity toward IT policy.  Many FCW articles read more like tabloid coverage of whose career is hot as a federal procurement manager.  That Beltway culture is handicapping the federal government's approach to cyber security.

The big takeaway from these reports is that the federal government should think more like the private sector in mitigating cyber threats.  Vulnerability analysis precedes the response strategy and economic impact is always a major factor.  If the threats with the biggest economic impacts for the US are generated internally, then direct the response to human training and device management.  All of the federal agency CIOs need to have a copy of Cloudonomics open when they compute the budget lines they will request for cyber threat mitigation.  That may be too much to expect.  I'll wait for someone from the GSA's 18F digital innovation team to troubleshoot a comprehensive solution to this IT malaise.  In the meantime, I will mention the market opportunity in federal contracting to enterprise and mobile entrepreneurs I meet in the San Francisco Bay Area.  That's how I do my part for the nation.  

Veteran Startup Incubators And Accelerators

I met with an entrepreneurial colleague earlier this week to brainstorm some concepts for helping veterans start businesses that leverage their backgrounds.  I mentioned NaVOBA and its franchisee population but we were looking for venues specifically focused on veteran-owned high-tech startups.  Fortunately, we don't have to reinvent the wheel.

Startup America Partnership has a veterans working group.  They are growing startup ecosystems across the country, and I believe they are part of the White House's "Startup America" initiative.  The working group has support from the VA Center for Innovation so they must be the real deal.  

Vet-Tech is a Silicon Valley startup accelerator specifically for veterans.  I should probably contact them to see what's up because my connections and insights may be useful.  I totally respect their partnerships with the Angel Capital Association and Plug and Play.  

The Founder Institute's "Startup Our Veterans Fellowship" waives the typical applicant and course fees for their accelerator programs.  I get this group's emails all the time and they're full of growth hacking wisdom.  

Vetransfer is a Wisconsin-based accelerator doing something that more organizations should do.  They want their participants to use the free tools available from MOOCs and venture investing best practices.  Military veterans are quite familiar with doctrinal templates refined in military branch schoolhouses that dictate baseline references for unit operations.  The emergence of Lean Startup, CustDev, and the business model canvas serve the same doctrinal role among entrepreneurs.  

VetBizAccelerator isn't an accelerator for startups despite its name.  It's more of a vocational how-to guide for veterans exploring self-employment.  It builds on material from the VA's VetSuccess and IMHO more vetrepreneurs should point themselves toward SBA programs and loans specifically for veterans.  The SBA's Office of Veterans Business Development should be of particular interest for veterans wanting to do business with the federal government.  

Techstars' Patriot Boot Camp is a three-day immersion program in Washington, DC.  I think it would be most useful for vetrepreneurs who have a serious business concept but need preparation before entering an accelerator.  

CADRE is an accelerator focused on veteran-owned businesses that specialize in cybersecurity solutions for the federal government.  Cyberwar is a growth industry in the federal government.  Even if the NSA changes its monitoring programs, big private corporations will still need computer network defense and intrusion forensics.  Vetrepreneurs trained to chase Uncle Sam's cyber contracts can easily pivot to private sector clients.  

I came across a San Diego veterans accelerator named VeteranWorks a few months ago but their website seems to be down; their LinkedIn profile remains live.  I read their info when it was up and now I wonder what happened to them.  

I do not have any relationships with any of these programs at this time.  Business leaders with strong relationships are welcome to graft onto these organizations.  They need corporate sponsorship.  I think big companies seeking government contracts would obtain a competitive advantage by hiring veterans, buying from veteran-owned small businesses in their supply chains, and sponsoring veterans' accelerators.  

Oh, BTW, none of these programs will tolerate Stolen Valor frauds who wore falsified decorations and want to rip off procurement programs with contract fraud.  Yes, "Mickey Ronin," that means you and anyone associated with you.  Don't even think about contacting any of these organizations, Michael.  It will be enough to finally put you in prison where you belong.  

Full disclosure:  I am a veteran.

Machinist Union Strike Bodes Poorly For Lockheed

The machinist union at Lockheed Martin has voted to strike.  The company's offer to line out the defined benefit pension for new hires was a red line the union couldn't cross.  That's too bad, because the future of defense companies like Lockheed depends very much on keeping pension liabilities down in the face of declining defense budgets.

This particular strike will very likely cause a work stoppage at the primary assembly facility for the F-35 fighter, Lockheed's bet-the-company cash cow for the next three decades.  This troubled program somehow survived a Nunn-McCurdy breach that should have caused dramatic changes to the platform.  The plane has already cost at least 50% more than originally planned and now work will be delayed for weeks by this strike.

Multirole fighters were affordable when their structural engineering and avionics were simpler.  Reconfiguring multiple systems several times for the same airframe, including for a VSTOL version, has not proven to be the cost-saving procurement method originally promised.  No one at DOD seems to care.  That's too bad, because the federal government's eventual budget cliff-dive will render it unable to pay for its most coveted legacy weapon systems or backstop the losses of its prime contractors.  The striking machinists need a plan B.

Full disclosure:  No position in LMT at this time.  

NASDAQ Boots Ener1 (HEVV.PK) And Taxpayer Loses Again

Energy companies that got federal loan guarantees are dropping like flies.  Why, just yesterday I blogged about the collapse of Beacon Power and the stimulus money it wasted.  BTW, I may have underestimated the total amount BCON actually borrowed under the loan guarantee.  Today we see another federally-backed company, Ener1 (HEVV.PK), getting delisted from NASDAQ because its financial statements aren't trustworthy.  Here are some highlights of this marvelous winner's recent operations. 

The Ener1 subsidiary that got the DOE grant, EnerDel, spent $53mm in taxpayer money to employ 253 people, costing $209,486 per stimulus job.  The company now employs 33 people, for a total program cost of $1,606,060 per job.  The stimulus jobs just keep getting more expensive.  That's what's funny about government procurement; a fixed-dollar contract drives up per-unit costs as the contractor discovers just how difficult it is to provide back-end support.  Just ask Lockheed Martin about their success with the F-35 . . . but I digress.

The news for taxpayers keeps getting worse with DOE's loan guarantees and grant programs.  At least Uncle Sam isn't the only institutional investor who's in the hole; Aspire Capital Fund threw $2mm down the tubes in August.  I hope this latest flop has the decency to change its name from Ener1 to something more appropriate, like Ener0 or EnerNothing. 

Full disclosure:  No position in HEVV, ever.

Rare Earth Alternatives Get DOE Tech Funding

America's dependence on Chinese rare earth production is the Achilles heel of its technology base, not to mention its defense establishment.  The U.S. government's studies of the situation have produced little popular alarm as America has yet to face a rare earth element "Sputnik moment" to capture its imagination.  The scientific community is moving ahead anyway with steps to ensure this country has some kind of technologically-enabled future in the event of a Chinese rare earth embargo. 

ARPA-E has selected a plethora of research projects for funding, including proposed alternatives to existing paradigms in energy and materials.  The $31.6mm for Rare Earth Alternatives in Critical Technologies (REACT) has quite a few irons in the fire.  The projects that look for crystal and nitrite alloys could potentially obviate the need for neodymium-based magnets in motors.  The price for neodymium, for example, has gone stratospheric because demand for 4G phones and other gadgets has proven to be price inelastic.  As an aside, Amazon's (AMZN) introduction of cheap Kindle Fire tablet computers will destroy Apple's (AAPL) pricing power and render that price inelasticity moot, which means alternatives to neodymium and tantalum are an imperative if consumer electronics makers expect to meet their sales targets over the long term. 

ARPA-E's other programs look as intriguing as REACT.  The Plants Engineered To Replace Oil (PETRO) umbrella would be a windfall for owners of unbuildable urban land if they could grow camelina as a cash crop for biofuel.  That unused lot or unpaved right-of-way on a piece of commercial property can be a source of cash with some camelina for an on-site bioreactor. 

The projects under the other three energy-related umbrellas would be a boon for solar thermal producers.  Covering the Great Southwest with concentrated solar towers and mirror arrays could exploit that technology's full potential with improved transmission links to national grids and better storage methods.  Molten salt, anyone?  Not if molten glass, phase change materials, and nanostructures work a whole lot better. 

Alternative technologies (if proven viable) are good news for high-value manufacturers who won't have to relocate large plants to China.  It should go without saying that REE alternatives would be the death knell for China's long-term strategy of attracting manufacturers to its rare earth monopoly.  DOE is firing a return volley in the ongoing U.S.-China contest for world technological supremacy.  The Anglo-West's elites may have finally awoken. 

Full disclosure:  No positions in AMZN or AAPL at this time.

Huntington Ingalls Scores Nuke Revenue

Here's a story about a government contractor that caught my eye.  Huntington Ingalls Industries (HII), which spun off from Northrop Grumman (NOC) this past March, just landed a decent-sized contract to maintain prototype nuclear reactors for a U.S. Navy research program.  The minimum they'll earn is about $40mm per year with the base contract and another $80mm per year with the option.  Based on gross revenue of about $3B per year (an estimate based on six months' of data from their 10-Qs), that will amount to a topline increase of 1.33% to 4% depending on whether they fully earn that option.  That's not bad, but any contribution to earnings will depend on the cost of servicing this contract.  HII's ROE is clocking in at a respectable 12.73% but ROA lags at 2.75%, indicating that HII is not efficient at using its existing assets to generate earnings. 

Here's another tiny feather in HII's cap.  Its Continental Maritime of San Diego subsidiary was awarded OSHA's star status.  Nice work, folks.  Now translate that into lower costs for the contracts you service and you'll really impress me. 

Full disclosure:  No position in HII or NOC at this time. 

The Limerick of Finance for 08/14/11

With big defense cuts on the way
Politicians will have lots to say
Some cheaper program
Launched by old Uncle Sam
Is enough to keep rogue states at bay

The Haiku of Finance for 03/11/11

Pentagon accounts
Impervious to audits
Spending in stealth mode

Pentagon's Plan For Rare Earth Shortages

The U.S. Department of Defense is preparing to release a study of rare earth metals and their importance to national security. This study comes in the wake of findings from the GAO and other sources highlighting the critical role that rare earths and other “technology metals” play in U.S. national security. Media reports indicate that the DOD report will downplay the impact of rare earth shortages on US military applications. 

On Oct. 8, 2010, the DLA Strategic Materials section released its implementation plan for the transformation of the National Defense Stockpile (NDS) into the Strategic Material Security Program (SMSP).  It discusses process, milestones, and program criteria but does not mention rare earth metals as an acquisition objective. The DLA Strategic and Critical Materials Report for FY 2009 lists the materials stockpiled in DLA’s inventory on page 57. The inventory does not contain any rare earth metals. 

The coming DOD study apparently contradicts the GAO study from April 2010, which clearly indicated that major defense contractors were canvassing their supply chains for assurances of rare earth metal supplies, and that the Hellfire missile in particular is dependent on a special chemical available only from China at present. The National Defense Stockpile has been shrinking since the mid-1990s as policymakers have authorized the sale of resources no longer deemed critical to national security. Washington allowed this to happen without considering how strategic competitors could affect the availability of resources. America's potential peer competitors are not so short-sighted.  China is considering the creation of its own strategic metals reserve. 

The private sector is not waiting to seize the opportunity posed by latent demand for rare earth metals. Goldman Sachs helped finance the reactivation of the Mountain Pass mine in California, formerly a leading producer of rare earth metals. It now forms part of Molycorp (MCP). Another company, Rare Earth Elements (REE) has seen a massive increase in its share price this year due to investor excitement (panic?). Most other rare earth miners and refiners, like Great Western Minerals Group (GWG.V), tend to be small and unpublicized. That may change very quickly if the U.S. government is serious about addressing its potential rare earth supply problems.

Full disclosure:  No positions in any stocks mentioned.

The Million-Dollar Job From The Recovery Act

The boondoggle that is the American Recovery and Reinvestment Act of 2009 continues to amuse the remaining independent thinkers in America, namely yours truly.  I wanted to see for myself how recovery dollars are spent in my neighborhood (hat tip to John Robb at Global Guerrillas for locating this tool).  I typed my home ZIP code - 94132 - into the handy box provided.  The result was a colorful map that looked a little like the SBA HUBZone's GIS tool.  I was mildly amused several years ago to discover that I live in one of San Francisco's HUBZones.  Maybe the same GIS mapping contractor got some extra work thanks to the Recovery.gov site.

Anyway, here's a screen capture of the resulting map.

Those numbers in the black box at the lower left may be difficult to read, so here they are in plain text.  A total of $4,769,713 in stimulus money has created 3.70 jobs in my San Francisco neighborhood.  All of those jobs are amalgamations of contract estimates from San Francisco State University, the recipient of pretty much all of the money.  Clicking on the blue dot at SFSU reveals the details of the contracts and grants, primarily for scientific studies.  What's left unmentioned (until now) is that those studies end when the money runs out.  There will be no permanent job growth from the stimulus in my locale.  Those 3.70 jobs created are the weighted averages of probably several dozen part-time graduate students' credited research hours. 

If my rhetoric leaves you underwhelmed, just do the math.  The stimulus spent $1,289,111 per "job" created.  By contrast, I spend about $150 per year on my website and business cards to maintain my own job as a freelance investment analyst and market commentator.  That makes me about 8500 times more effective as a job creation machine than the federal government.  The flip side is that I could probably create 8500 new jobs with the same amount of money Uncle Sam just spent.  Don't believe me?  Fine, just give me that money and I'll show you how it's done.  :-)

Lee Majors played Col. Steve Austin, the Six-Million Dollar Man, in the heyday of 1970s cheesy television long before "Stone Cold" Steve Austin brought a new kind of cheesiness to mass entertainment.  The fictional Col. Austin was the product of a government program designed to create a human being with enormous potential.  The federal stimulus has attempted something similar but with less spectacular results. 

Nota bene:  SFSU became my landlord several years ago when they bought the apartment complex where I reside.  They're a fine landlord but I don't plan to spend the rest of my life here.  I am neither emploed by nor a student at SFSU. 

Internet Kill Switch Should Be A Moneymaker For Somebody

Predicting the development of new industries is hard.  Predicting the direction of procurement dollars is not nearly as hard.  The U.S. government didn't go to all the trouble of creating a National Cybersecurity and Communications Integration Center just to let it sit idle.  It has to have something to do in order to justify its budget. 

The construction of an Internet kill switch gives the cybercommand a reason to live.  Granted, the wording of the proposed legislation (currently named the Protecting Cyberspace as a National Asset Act of 2010) would locate the authority to activate this kill switch in an Office of Cyberspace Policy in the White House.  Realism will require the enabling infrastructure to be somewhere else because managing the Internet from the Oval Office just isn't feasible.  The SCATANA order to ground all air traffic on 9/11 ultimately came from the FAA, not the White House.  Executive leadership should be allowed to paint in broad strokes.  Execution is for those agencies like the FAA and DHS that have their hands on the controls. 

Some lucky team of prime contractors will make a lot of money enabling the NCCIC with the necessary kill switch technology and protocols.  If the enabling legislation isn't passed, the program will simply move to some agency's black budget anyway.  My task as an investor and analyst is to figure out which companies are in the best position to line up this work. 

Cyberdefense Hawks Try To Scare Up Some Profits

The path to extraordinary profits for defense contractors follows some tried and true methods.  This template has been refined through decades of Cold War contracts, not to mention supplemental appropriations for Iraq and Afghanistan.  First, scare people into fearing something:

The US must prepare itself for a full-scale cyber attack which could cause death and destruction across the country in less than 15 minutes, the former anti-terrorism Tsar to Bill Clinton and George W Bush has warned.

Richard Clarke claims that America's lack of preparation for the annexing of its computer system by terrorists could lead to an "electronic Pearl Harbor".

Next, position yourself as the single most qualified provider of a solution:

Good Harbor is led by Richard A. Clarke, a contributor to ABC News (including World News Tonight and Good Morning America) who teaches at Harvard's Kennedy School of Government, and is a #1 best-selling author and frequent writer on terrorism and security issues. He leads consulting projects for Good Harbor in the areas of security risk management, cyber security, and counterterrorism.

Finally, establish a history of making consistent campaign contributions to federal elected officials.  Presto!  You're all set to win massive contracts from DOD and DHS.  While you're waiting for Uncle Sam to pay up, you can chase contracts from allied governments:

Abu Dhabi has also signed contracts with several U.S. firms, including Good Harbor Consulting. Good Harbor has been operated by former White House counter-insurgency adviser Richard Clarke.

 

Happy profiteering!  I'm getting in line myself. 

Full disclosure:  Alfidi Capital LLC is registered in the U.S. government's contractor database.  It has not performed any contract work for the U.S. government up to the time this post was published.  Alfidi Capital and its CEO have no business relationship with any firm mentioned in this post.

Missing the Moon

America's technological edge through much of the 20th century owed a lot to its manned space program. The future of America's presence in space is now in doubt:

When the White House releases his budget proposal Monday, there will be no money for the Constellation program that was supposed to return humans to the moon by 2020. The troubled and expensive Ares I rocket that was to replace the space shuttle to ferry humans to space will be gone, along with money for its bigger brother, the Ares V cargo rocket that was to launch the fuel and supplies needed to take humans back to the moon.

There will be no lunar landers, no moon bases, no Constellation program at all.

The torch will soon pass to rising powers in the BRIC bloc:

India will launch its first manned space mission in 2016 in a bid to match space pioneers such as Russia and the United States, a top official said Wednesday.

The government had already approved plans for a human space flight project by the Indian Space Research Organisation (ISRO), and last year gave the go-ahead for funding of around 2.8 billion dollars.

Spacefaring nations demonstrate confidence in their own futures. The end of the American empire is lost among daily news items like this. Such is the sweep of history. I keep tabs on the defense industry for just this reason. Many defense contractors - Lockheed Martin, General Dynamics, L3, and others - derive a healthy chunk of their revenues from NASA and DOD space spending. Constellation in particular is supposed to be a big winner for LMT. Perhaps I should say it "was" supposed to be a winner, until Uncle Sam spent himself into a corner.

See what happens when you blow a stimulus package on union shop overtime and fences to nowhere? Now I'll have to look for some good Indian aerospace companies to review.

Nota bene: Anthony J. Alfidi is long one put against LMT as a hedge against a decline in defense and space spending by the U.S. government.

Getting Ready to Crank Up Fiscal Stimulus

Uncle Sam is getting ready to swipe his ginormous credit card all across this great land of ours:

President-elect Barack Obama promised to make the “single largest new investment,” in America’s roads, require public buildings to be more energy-efficient, and to modernize health care with electronic medical records.
(snip)

In addition to investing in infrastructure, requiring energy standards on public buildings and updating health-care practices, Obama said that he will launch a “sweeping effort to modernize and upgrade school buildings,” and will boost broadband deployment across America.

I'm disappointed that the plan's transportation component addresses motor traffic (roads and bridges) rather than mass transit (bus stations, train tracks, ferry berths). Emphasizing the latter would be the greener solution, but perhaps that's coming later. Perhaps an elevated train trestle can be considered a "bridge" for spending purposes. I'm also worried about the "use it or lose it " provision for state governments. The housing crash has left many communities with unsustainable suburban sprawl. Rebuilding motorways that feed out to vacant subdivisions would be a repeat of Japan's wasteful infrastructure spending! Do you trust your state highway department not to waste money repaving a highway to a ghost town? That's what they'll do if they don't get advice from good urban planners.

Is there an investment play in this spending plan? Can I make money off of this? Let's think about it. All of this federal spending will be a gravy train of income for contractors who can deliver the desired services. Among the top corporate contributors to the victorious 2008 campaign were Microsoft, Google, and IBM. The broadband spending will certainly help their bottom lines, and they would not have contributed if they didn't expect some kind of payback. The pertinent question: Will there be lead contractors to manage each of the programs' components? For example, some big IT firm (IBM?) will have to do systems integration if the proposed networks for broadband and medical records will be built to universal standards. That's where the real money is always made in federal procurement.

If this plan plays out into mass transit or railroad spending, I may have some investing to do.

Nota bene: Anthony J. Alfidi does not hold positions in any of the companies mentioned at the time of this posting.