PPA, the Powershares Aerospace & Defense ETF (NYSE: PPA) saw tremendous trading volume today as shares changed hands in excess of 90 times recent activity, trading more than 2.5 millions shares according to Yahoo Finance. More than 1 million shares traded hands before the noon-hour when it was announced that President Obama would be detailing sizable cuts to the federal budget which would impact the defense sector.
Fear drove the big five defense sector prime contractors down significanty -- Boeing (BA down 1.30%), General Dynamics (GD - Down 1.52%), Northrop Grumman (down 2.08%), Lockheed Martin (down 2.56%) and Raytheon (2.91%) -- while PPA rebounded to decline by just 1%.
As an indication that the White House can move stocks even when reporting existing knowledge, Defense Secretary Gates announced earlier this month plans for a third round of cuts and restructuring. Earlier this year, $178 billion in cuts were announced with roughly $78 billion going toward deficit reduction and $100 billion being reallocated from lower priority programs to higher priority initiatives. The second round consisted of a reorganization which would reduce the number of generals, eliminate more than 1,000 positions, combine several operational organizations, and save more than $13 billion. Details of round three, announced this month, have not been released only that the military leadership had been directed to find additional cuts and cost savings.
Ultimately though, the reported $400 billion over 10 years should be achievable. With the Pentagon set to receive between $100 billion and $150 billion annually over the next several years for the war efforts in Afghanistan and Iraq, reductions in these efforts would save significant funds as will restructuring the defense health care and pension systems.