DoD Buzz

Analysts: DoD budget may end up too important to cut


Doesn't it feel like lawmakers, DoD officials and reporters all have been talking about major DoD budget cuts for so long they must've happened by now? There was a period earlier this year when it seemed like every Beltway Bandit with an email account was putting out a white paper that recommended ever-deeper slashes through Pentagon spending: The F-35, the V-22, Virginia-class submarines, the Expeditionary Fighting Vehicle -- all of it had to go.

And yet, when you uncover your eyes and look around, here we are in July, with a new secretary of defense, and yet much of DoD's major programs and bureaucracy are more or less intact. That may not last very much longer. Then again, investment analysts told CNBC's "Fast Money," the defense industry represents one of the most consistent, most effective sources of jobs and money for local economies, and if the Obama administration's other attempts at "stimulus" fizzle, it'll be difficult for Washington to cut too much defense spending as Congress and the president both face an upcoming election.

Here's how "Fast Money" executive producer John Melloy put it:

“This may not sound politically correct, since fiscal stimulus in the United States somehow means temporary payroll tax cuts, temporary housing tax breaks and temporary cash-for-clunkers gimmicks, but the defense/aerospace sector contains huge positive multiplier effects for the domestic economy,” said David Rosenberg, chief economist and strategist for Toronto-based firm Gluskin-Sheff, in a note Tuesday. “And without the technology that was spawned by this area of the economy, Silicon Valley wouldn’t be in existence.”

President Obama wants a plan to cut defense spending by $400 billion in 12 years, but Rosenberg is betting that the President will have to adjust that statement. Along with China’s military ambitions and rising conflicts around the world driven by food inflation, the strategist believes the military sector will be in demand because the shares are flat-out cheap with a two percent-plus dividend yield.

“The reality is that the group tends to outperform in general election years,” said Cai Von-Rumohr, an analyst with Cowen Group. “Nobody talks about cutting any weapons systems during election years.”

Von-Rumohr goes on to say that he likes the investment prospects for GE, Raytheon, Lockheed Martin and Northrop Grumman in particular. One reason is that these and other defense firms believe cyber-security will continue to be a growth area even if they're selling less hardware going forward. And there's another reason these financial types believe the defense industry will continue to provide a good return on investment: China.

Continues Melloy:

“I completely agree with Rosenberg’s reasoning and would add that China is in the midst of a military build-up,” said Jim Iuorio, a trader with TJM Institutional Services, who is eyeing Raytheon as a potential buy. “Although I don’t believe it’s time to build a shelter and stock up on canned beans, I do think that defense stocks should do well.”
Show Full Article

Related Topics


Most Popular Military News