Weapons Makers on the Defensive


Igor Greenwald Image Igor Greenwald Chief Investment Strategist, MLP Profits

Worries about Pentagon cuts have hit defense stocks hard, but sentiment now appears to be turning, writes MoneyShow.com senior editor Igor Greenwald.

The country’s at war, the economy’s weak, and US weapons are in demand all over the world. You’d think these would be banner days for defense stocks.

Instead, they’ve been shredded like cannon fodder. The equal-weighted NYSEArca Defense Index, which represents the major Pentagon contractors, is down 17% in six weeks.

That’s still nearly triple its value at inception—ten days after 9/11—which shows what a good decade it’s been for the arms merchants. But all offensives must come to an end, and after some 35 years of purchasing guns and butter on ever-expanding credit, a thriftier nation is considering downsizing to bayonets and margarine, as it were.

Defense stocks have been caught in the fiscal crossfire, and are arguably the new budget-chopping Congressional supercommittee’s most important hostages.

That’s because the $553 billion fiscal 2012 defense “base” budget accounts for 41% of all non-discretionary US spending—which counts all outlays for agencies and programs other than mandatory entitlements, like Social Security and Medicare.

If the supercommittee (made up of six Democrats and six Republicans, drawn from both legislative chambers) fails to agree on cuts saving $1.5 trillion over a decade that would be acceptable to their colleagues by the end of this year, $1.2 trillion in across-the-board cuts would take effect starting in 2013.

And Pentagon’s share, based on that “base” budget (which doesn’t even include another $347 billion appropriated for the wars in Afghanistan and Iraq, as well as Homeland Security and Veterans Services) would be $500 billion over ten years, on top of the $350 billion in cuts already in the books under the deal to raise the debt ceiling.

So that’s why investors are running scared.

Now for the good news: both Congressional Republicans and the Obama administration have labeled the looming half-trillion in automatic defense cuts unacceptable.