Behind the Money

Defense May Be Too Important to Economy For Obama to Cut, Say Analysts

Cutting military spending, as President Obama has proposed, is the worst way to balance the budget while keeping the country growing, investors and analysts said, because the sector is the best creator of domestic jobs and crucial to driving innovation.

FILE PHOTO: UH-60A Black Hawk helicopters prepare to takeoff as the 82nd Aviation Brigade relocates in the desert during Operation Desert Shield. (photo by DOD)
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“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, who has covered the sector for 40 years, acknowledged that people have grown tired of the wars in Afghanistan and Iraq, but that with the rise in cyberterrorism, he sees no solution to this changing world “that doesn’t involve the defense sector.”

The analyst’s favorite names include General Electric , Raytheon , Northrop Grummanand Lockheed Martin , who all have growing cyber businesses, along with more traditional systems.

Lockheed Martin said last week that planned cuts to defense spending would force it to cut 1,500 jobs. Lockheed is currently maker of the F-35 Joint Strike Fighter, the most expensive weapons project ever, according to Reuters. China happens to be building its own stealth fighter jet, the J-20.

“With China having a fifth generation fighter, there’s no way we won’t buy the F-35,” said Von-Rumohr.

One of the ways the defense sector changed the world is the Internet, which grew out of a call from the government for a closed computer network for the military. Besides technological innovations, the sector is, for the most part, a pure play on domestic job growth since they can’t outsource weapons systems to China, said Von-Rumohr.

“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.”

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