What Obama's Victory Means for the Defense Sector

As anticipated, Barack Obama won the election for the White House and will take the office of President of the United States on 20 January 2009. With the election settled, it is time for us to turn our focus toward the impact that this new administration will have on the defense sector considering our anticipated withdrawal from Iraq, budgetary pressures from a weakening economy, and the costs associated with a revamped finance and banking system.

Instead of speculation, here is what we know based on comments made during the campaign by President-elect Obama, his campaign officials, and supporters.

1. Iraq: A withdrawal from Iraq is to occur, but in stages over a likely 12 to 18 month time period. It's been cited the plan is to remove 1-2 brigades a month but with no strict timetable and subject to military commanders' input. The new administration is likely to retain (or try to retain) several military figures in order to reduce the learning curve necessary for understanding the situation in Iraq and to ensure stability in Iraq as we depart. The speed of the withdrawal will rely on the recommendations of the local field commanders.

2. Afghanistan: The plan is to move 2 more brigades to the region. An increased mobilization of activities in the Afghan region has already begun and defense organizations have begun issuing contracts.

3. Secretary of Defense: It has been widely reported that a number of key officers and officials, including Secretary Gates, will be asked to continue in their posts to speed the transition and enable the administration to focus on domestic and economic issues in the early days of the administration.

4. The Budget: The FY09 budget has already been signed into law and will likely remain with minor changes taking us to October 2009. The FY10 budget proposal will be submitted to Congress in February with some input from Obama advisers. With a new Quadrennial Defense Review scheduled for release in 2010, elements in the FY10 budget may see a greater focus on upgrade and maintenance of existing systems rather than new development programs. Although it is rumored that DoD may request $60 billion a year above the existing core budget for the next six years, it is likely that the budget will remain consistent with that proposed in the FY09 budget. Anything in addition would be a very positive upside for the sector.

5. Budget Cuts: Obama’s advisers has repeatedly stated that they recognize that the world situation will not allow any major changes to defense spending over the next several years. To rebut Rep. Barney Frank (D-MA) who was quoted as saying that we should cut defense spending by 25%, this is a great example of a member of Congress speaking without thinking. The likelihood of this happening almost doesn’t

6. Acquisitions: It is likely that many of the changes to what DoD buys and funds will reflect the fact that 2009/2010 will be a planning year focused on upgrading and maintaining existing systems. While the budget may not change, large system procurement programs are likely to face increased scrutiny as many of these efforts have gone severely over budget. Already DoD has begun to get its house in order cancelling some programs and delaying others. It's also been stated that there may be an increased focus on buying a greater number of less sophisticated weapons systems.

7. Weapons: Areas of interest include maintaining unparalleled air power capabilities, modernizing the current ship fleet, investing in small Combat Ship program, a focus on cyber warfare and UAVs; and making sure the DoD doesn’t become too focused on terrorists at the expense of traditional air and sea power.

8. Contracting Reforms: It is likely that DoD will issue more fixed price contracts in the coming years instead of cost-plus contracts in order to keep budgets in line. The impact could be a gain for companies that are able to bid effectively as it could lead to improved margins. The real issue is whether DoD can issue a defined set of requirements without numerous changes.

9. Military Size: Supports the drive to grow the Army by 65,000 and Marines by 27,000.
 

Comments

[Dr.Jackpot:]

I'm not worried about spending on defense. It's spending on 'offense' that concerns me.

2008 Nov 07 09:15 AM

[silverslut:]

The military industrail complex is the greatest threat there is to the future of this country. Currently, it does almost nothing to promote the security of this country and it mostly it works to reward the warmongers and psychopaths. Why americans accept the propaganda that our thoroughly compromised media shits out on this subject is a great embarassment. If you want to hear some intelligence on this subject and many others, research what Ron Paul has to say. I say, 75% of our overseas bases should be closed. Both Irag and Afganistan are worse off, as is the whole world, because of our involvement there. We do no good whatsoever there, as it currently stands, when weighed against all the harm. A little intelligence, no wait, that is the currently problem, that we use so little intelligence, could be applied without troops, to support those locals who are trying to bring peace and growth. The real problem, is that the mil/indst and banking complex has bought off most of the critical traitors in congress and that our nation has been highjacked by sociopaths who should be put down. We could easily have twice the security with half the outlays that we currently piss away awarding the enemies of peace. Anyone who says differently, is either stupid, or compromised.

2008 Nov 07 11:58 AM

[Bobco23:]

So, Silverslut; do you have any investment ideas to contribute or is this just a format for you to rant?

2008 Nov 07 06:33 PM

[User 137633:]

Unless Obama gets us into a war with Iran, I don't think defense stocks are where you want to be near-term. The earnings transcripts from a number of defense contractors expect lower growth.

Then again, you never know what's going to happen. Most of us didn't predict 9/11 and the War on Terror. Who knows what the future holds for an aggressive Russia, China, etc.

I've read a number of articles from Scott Sacknoff, and I wish he would go into a little more detail.

2008 Nov 08 12:59 AM

[David Martin:]

There are a lot of dangerous, trigger happy lunatics in the world.
Fortunately Cheney is leaving office.
The US will be unable to afford it's present wars to seize oil and dominate the Middle East through Israel.

2008 Nov 08 05:53 AM

[PeteK:]

David,
USA is a peaceful country. They brought the war to the World Trade
Center at the heart of New York. There's no guaranty another 9-11 won't happen. We can't be too naive.
The US never seize anyone's oil, we pay good price for it. Don't be rediculous!

2008 Nov 09 12:13 AM

[David Martin:]

If it is so peaceful, how come the US and it's surrogates are killing so many people?
How come they bombed Palestinians in the heart of their own country for many years before they were hit back?
Don't be naive.

2008 Nov 09 10:37 AM

[00Billy:]

Defense will do okay, if no more hot spots spring up, there will still be the new cold war with Putin when he elects himself again. Oops the people elect him...right.

Rant of peacefulness:
What he said.
USA is a socialist 'mother' to Israel. The spoiled little child. If we're so republican why do we support these maniacs. If they can't survive with the A-bombs we gave them then they aren't worth it. Their a PR nightmare - as usual. We should send a brigade to Gaza and then see what the Israeli soldiers will do. I bet peace breaks out - there at least


On Nov 09 10:37 AM David Martin wrote:

> If it is so peaceful, how come the US and it's surrogates are killing
> so many people?
> How come they bombed Palestinians in the heart of their own country
> for many years before they were hit back?
> Don't be naive.

2008 Nov 09 05:51 PM

[dr.doolittle:]

wow, this is a hot site! i'm more interested in the "war" trade as to whether it ever goes away. in other words, does it even matter what BO does? Isn't the war coming to us now (the repudiation of the so called "Bush Doctrine" of self-defense) and how does that relate not so much to "war stocks" but more mundane things like real-estate and the budgets of state and local governments. In other words are Americans buying all those firearms for personal protection for good reason?

2008 Nov 10 10:18 PM

[bocon:]

Now that President-elect Obama has had his Presidential level intel briefings, I suspect that you will see some very different policy attitudes (i.e., he will not be pulling out of Iraq as he says, but will save face by pulling out a brigade here and there).

Although the likes of Barney Frank are promoting defense cuts, we can not afford to have another Carter administration (i.e., evicerate our defense capabilities). I believe that Obama is going to try to show that he is strong on defense and may cut a few big ticket items, but he has to fight two wars and be prepared for other incidents that will flare (e.g., Iran, Russia).

2008 Nov 14 07:00 PM

[John Tandlich:]

Beware of the law of unintended expectations here. Following the end of the Cold War and the inauguration of Clinton, everyone expected defense stocks to tank [no pun intended]. Instead, they soared, here and in Europe, amid a wave of industry consolidtion. Even Obama is not going to eliminate the deense budget. Some big ticket items such as the Future Combat System and missile defense will be slashed or eliminated, but funds for repair and restoration of equipment after two wars will be there.

2008 Nov 15 01:07 AM

[Jim Regan:]

I really like this article to put things into perspective. I'm a big proponent of Defense names down here... namely the C4ISR defense technology companies. The Obama factor is a typical over-reaction when there is nothing really to suggest that these companies are doomed.

2008 Nov 17 10:56 AM

[Pilm:]

Maybe we should turn our miliary power into an oil robbing machine. Wouldn't take long to crush Venezeula and take their oil. Drop a few bombs on Iran and their oil is up for grabs. Figure if all these liberal idiots out there think the US is already warring over oil, we might as well do so and reap the benefit of low cost oil.

2008 Nov 25 04:34 PM