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Pending cuts in Pentagon budget have investors wary

August 3, 2011 | 12:58 pm


Seeing the call from Congress for steep cuts in the Pentagon budget, investors have grown wary of defense stocks in recent weeks.

The dollar amount has yet to be decided, but few dispute that the cuts will amount to hundreds of billions of dollars over the next decade. That translates into fewer sales of military hardware for the nation’s largest defense contractors.

Investors have taken notice. While the Standard & Poor’s 500 index hit its summer high on July 7, it has fallen 7.2% since, through midday Wednesday. However, since July 7 the S&P's aerospace-stock group is down 12.4%.

The nation’s three largest aerospace companies -- Century City-based Northrop Grumman Corp., Boeing Co. and Lockheed Martin Corp. -- are all down in trading since the beginning of this week. And Motley Fool recently reported that hedge funds have begun dumping defense stocks.

Wall Street isn’t alone its concern. Defense Secretary Leon Panetta wrote a memo Wednesday to Pentagon personnel addressing the pitfalls of budget cuts:

Spending choices must be based on sound strategy and policy. In the past, such as after the Vietnam War, our government applied cuts to defense across the board, resulting in a force that was undersized and underfunded relative to its missions and responsibilities. This process has historically led to outcomes that weaken rather than strengthen our national security -- and which ultimately cost our nation more when it must quickly rearm to confront new threats.

I am determined not to repeat the mistakes of the past.


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Aerospace suppliers brace for defense cuts

Boeing earnings rise, Northrop's fall in second quarter

-- W.J. Hennigan

Photo: Northrop Grumman Corp.'s headquarters in Century City. Credit: Genaro Molina / Los Angeles Times