Marketwatch: “Which presidential candidate would shake up defense stocks the most?”
Many of the players in the sector are also weighing the impact of a new commander in chief, guided by the perception that a Democratic administration might add to the pressure.
“But there’s a difference between reality and perception,” said Jon B. Kutler, chief executive of Admiralty Partners, a Los Angeles-based defense and aerospace investment firm.
On Wall Street, many analysts say it’s the Republican nominee, John McCain, who could have the greater impact on military spending — though not in the ways that some might expect from the newly crowned leader of the party traditionally seen as the defense establishment’s most loyal sponsor. For more than 25 years as lawmaker, the oft-described “maverick” hasn’t been shy about taking on the Pentagon, its contractors and their patrons in Congress to squeeze out corruption and demand more favorable terms for the government.
And though both McCain and his Democratic rival, Barack Obama, have said they want to reduce the war budget, the Republican senator is seen as having the advantage of right-wing clout and military experience to help disarm his critics.
“McCain brings the Nixon-went-to-China approach,” said Winslow Wheeler, director of the Strauss Military Reform Project, a non-profit that analyzes the fiscal and strategic impact of military programs. “He has conservative, big-defense credentials and the political experience to take surprising actions” in the face of pressure from powerful military contractors and related interest groups.
“Obama obviously doesn’t have that, though he does have the sense that for such a gigantic defense budget, we have very little to show for it,” Winslow said, adding that U.S. budget is currently three times the size of military spending in Russia, China, and all the so-called “bad actors” in the world combined.
According to a research report this summer from UBS, McCain has been an aggressive proponent of reform in the military spending. He proposed the Defense Acquisition Reform Act of 2007, intended to impose cost controls on the Pentagon, and he chaired a subcommittee on Air Force acquisition reform following the Boeing 767 tanker scandal.
Here is how the McCain campaign sums up the candidate’s views on its Web site: “Too often, parochial interests, rather than the national interest, have guided our spending decisions.” Read McCain’s national security platform.
McCain, like Obama, has promised to reduce overall military costs through smarter spending, smaller supplemental budgets, and pulling combat troops out of Iraq. Both men also want increased troop strength, which would likely mean less money for large-weapon systems.
Nor does it matter that the Democratic-controlled Congress appears likely to remain intact under either administration. Democrats often are branded as being soft on defense, but its party’s lawmakers have endorsed heavy spending on a lot of weapons systems, according to Douglas Harned, a Bernstein Research analyst.
To illustrate the point, Harned noted that in late July the House Appropriations Subcommittee on Defense increased funding for the proposed fiscal 2009 appropriations bill to procure 20 more F-22 Raptor jet fighters built by Lockheed Martin.
It also provided additional funding for two T-AKE ships to be built by General Dynamics Corp.
Congress also added funding for one more LPD-17 amphibious transport dock to be built by Northrop Grumman and funded a fourth AEHF satellite, built by Lockheed.
On the campaign trail, Obama has said he would cut funding towards missile defense while supporting stronger air and naval power policies. He has also singled out the importance of cyber security.
“We must preserve our unparalleled airpower capabilities to deter and defeat any conventional competitors,” as the Obama campaign site puts it. “We must recapitalize our naval forces, replacing aging ships and modernizing existing platforms.” Read Obama’s war spending platform.
For its part, the Pentagon doesn’t seem worried about who gets the presidency. Military planners are looking to increase the Defense Department 2010 procurement budget by 10% over the current projection of $111 billion, according to a Citigroup research report, regardless of how many states on the map go red or blue in November.
‘Weak on defense’
“We don’t believe that Obama has the national-security credibility to reduce defense budgets, nor do we think that the Democratic Congress will want to be viewed as weak on defense,” Citi analyst George Shapiro wrote.
“Remember, with a Democratic Congress in 1976, Carter was unable to reduce the defense budget,” Shapiro added.
Checking into campaign contributions made by the industry in the current presidential cycle, it would seem military contractors also have doubts about how much either new president may get done.
Of all the industrial sectors, defense contractors gave less to presidential coffers than any other industry at less than $1 million total, according to the Center of Responsive Politics, which tracks campaign financing in U.S. politics.
Harned said he prefers stocks that aren’t overly tied to the supplemental budget, and rates Lockheed Martin , Boeing and Raytheon Co. on his outperformer list. He also rates General Dynamics and Northrop Grumman.
Recently, McCain’s senior economic adviser said he could remove $150 billion from the war budget by 2013 through reduced deployments to Iraq and Afghanistan, and another $160 billion from less “non-defense” and procurement spending.
He’s also targeted three projects for termination: the C-17 Globemaster and the Airborne Laser, both built by Boeing, and the Future Combat Systems, a modernization program being jointly developed by Boeing, Science Applications International Corp.
But getting rid of those programs amounts to just $9 billion. As a result, Lawrence Korb at the Center of American Progress says he’s dubious that McCain’s campaign rhetoric will carry over into his governing.
“He will have to cut many more and larger defense programs, such as the National Missile Defense Program or the Joint Strike Fighter, or make more than $150 billion in reductions in non-defense discretionary spending,” Korb said.
The wars in Iraq and Afghanistan alone are projected to cost U.S. tax payers $3 trillion over the long term, making McCain’s cost-trimming a mere 10% of the total bill. See related column.
McCain has also expressed displeasure with the F-22 Raptor, an air-to-air fighter that has been criticized as being useless for asymmetrical threats in the Middle East and Asia. He’s also been uncertain on the Zumwalt destroyer, which is being built by Northrop, Raytheon and General Dynamics.