Defense on Low Fat Diet? - Analyst Blog

A nation burdened by $15 trillion of national debt and an unemployment rate of 9% has resorted to bariatric surgery of its budget. The administration is catching up to reduce flab in the budget, and the defense budget seems to stand out. In what is one of the final steps, the Pentagon has submitted to President Barack Obama a draft of its strategic budget review before its release.

In the review, the Pentagon is seeking to trim about $450 billion in defense spending over 10 years to meet deficit reduction targets. The review, which will go to Congress in early 2012, will be accompanied by a defense funding plan through fiscal 2017. Defense Secretary Leon Panetta expects fiscal 2013-2017 defense budgets will be reduced by about $260 billion as part of the $450 billion in cuts.

The U.S. economic fundamentals are basically being kept on a leash as the Euro-crisis continues to cast its spell over financial markets keeping recessionary risks in U.S. a real possibility, though the threat has abated a bit in the recent past. Per the Bureau of Economic Analysis in October, personal income rose 0.4%, disposable personal income (DPI) rose 0.3% and personal consumption expenditures ( PCE ) witnessed a meager rise of 0.1%.

The sharp drag from the recent energy price surge offset much of the beneficial effect of the implementation of the two-percentage point payroll tax holiday and contributed to the stagnancy in the growth of consumer spending. The sharp rebuke that the American Jobs Act faced has lowered the odds that the payroll-tax holiday will get extended in fiscal 2012, though there are indications of some meeting of minds in Congress on the issue in the last few days.

Finally, the failure of the Joint Select committee ( JSC ) and Budget Control Act's dictum that the failure to implement any deficit reduction moves of at least $1.2 trillion over ten years would result in automatic cutbacks across the board from fiscal 2013, would not result in any extra bacon for defense goliaths.

In the backdrop of such a scenario it would not be too pessimistic to advise investors to adopt a wait-n-watch approach on defense and aerospace goliaths with a Zacks Rank #3 (Hold) stocks over the near term. These include The Boeing Company ( BA ), General Dynamics Corp. ( GD ), Huntington Ingalls Industries, Inc. ( HII ), Lockheed Martin Corporation ( LMT ) and Northrop Grumman Corporation ( NOC ).

BOEING CO ( BA ): Free Stock Analysis Report

GENL DYNAMICS ( GD ): Free Stock Analysis Report

HUNTINGTON INGL ( HII ): Free Stock Analysis Report

LOCKHEED MARTIN (LMT): Free Stock Analysis Report

NORTHROP GRUMMN (NOC): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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