Data on the sequester and defense

by on March 19, 2013 at 7:04 am in Current Affairs, Law | Permalink

From Sober Look, here is an index of defense stocks plotted against the S&P 500:

Defense ETF

Of course you can read this as simply suggesting that the sequester, or parts of it, will soon be reversed, and/or some parts of the sequester were not that fearful in the first place.  There is more here.

Bill March 19, 2013 at 9:32 am

I would look at the level of discretionary spending–furniture, cars, housing salesetc.–in communities where a significant portion of the population receives a notice that they or a neighbor will be or could be furloughed.

What’s the sentiment in Virginia?

Defense contractors earnings are based on past contracts that go for a long time and cannot be terminated, although the government can purchase less, it has to pay a price for rescaling the contract.

John Thacker March 19, 2013 at 1:42 pm

Defense contractors earnings are based on past contracts that go for a long time and cannot be terminated, although the government can purchase less, it has to pay a price for rescaling the contract.

Not necessarily, and not in my experience. There are lots of labor contracts where the amount of money available to be charged can and has instantly been reduced. Especially in Virginia and Maryland, a lot of the defense contractor money is based off these kind of services, consulting, and SETA contracts, where physical presence at a site is handy. (Not to say that the big manufacturing contracts don’t bring in money for contractors as well, but they’re only a part of the money.) So the sentiment in Virginia is somewhat different from what it would be in a manufacturing city. (Northern Virginia, that is; Newport News is one of those manufacturing places.)

Even beyond that, there’s a lot of other cost-plus contracts where in the short run the price is negotiated basically on the basis of “how much is in the budget?” In the long run, companies will leave the competition, but in the short run they’re often price-takers.

Willitts March 19, 2013 at 9:55 am

Stock prices are, if you believe all the rational, forward looking growth models, a function of total returns. As someone kindly pointed out, one large defense firm is yielding well above treasuries. I stated that the company had a beta close to 1. So there is nothing at all surprising or even remarkable about this. Your prior is that defense firms are going to take a massive hit. They’ve already cut costs (indeed entire divisions) in anticipation not just of.sequestered cuts but cuts more generally. And they have been developing new product lines and finding new markets.

Defense firms should be a part of any well diversified portfolio, and even a stock picker shouldn’t be too hasty in dumping them. If you want to dump something, I’d get rid of alternative energy stocks. Despite Obama’s SOTU address, their funding is going to be ravaged and their outlooks are poor.

Brian Donohue March 20, 2013 at 8:46 am

Do Paul Ryan’s efforts to restore Pentagon sequester cuts have anything to do with this?

I find this depressing. The logic of cutting spending applies with at least as much force to the Pentagon as it does anywhere else. If Republicans insist on protecting the Pentagon, they lose a lot of credibility in my eyes.

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