Defense stocks soar as Trump, North Korea trade threats; Light-attack fly-off in the desert; Arms exports head toward a new record.

On Tuesday, U.S. intelligence analysts said North Korea had built a miniaturized nuclear weapon that could ride atop an ICBM. Soon after, President Donald Trump threatened Pyongyang with “fire and fury." The next day, defense stocks soared.

The stock market as a whole is up recently, but on Wednesday, markets were generally down. Yet L3 Technologies, General Dynamics, Huntington Ingalls, and Textron were all up, and Raytheon, Lockheed Martin and Northrop Grumman hit all-time highs. Financial analysts quickly fired off emails talking about missile defense interceptors and the companies that build them.  

Defense stocks remain an attractive commodity. A Morgan Stanley team of analysts took a look at the defense sector this week, and forecast a positive outlook. They rated Lockheed and Raytheon “overweight,” meaning they expect both stocks are likely to go up.

All this despite the political hurdles in raising the U.S. defense budget, which we’ve discussed here at length. “[W]e expect this intense budget debate over the next few weeks and months to yield positive results for defense spending,” Michael Strianese, chairman and CEO of L3 Technologies said in the company’s second-quarter earnings call last month.

Phebe Novakovic, chairman and CEO of General Dynamics, offered these thoughts on the Pentagon budget: “Right now, it's a giant fur ball and we're going to have to work through the process and see what comes out the other side.” She mentioned the Trump administration’s spending request, which is $54 billion above budget caps, and then congressional marks that are even higher.

“I believe that there is real interest and desire in additional defense spending which will manifest itself in some more additional funding and budget for defense,” Novakovic said. “It's just a question of how much and what accounts and when.”

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Light-Attack Fly-off in the Desert

A whole decade after the Air Force seriously began debating whether it needed a cheap-to-fly plane that could support troops on the ground, it appears the much-debated project is finally cleared for takeoff.

I first wrote about the subject in 2010, after an Air Force colonel named Gary Crowder — then-deputy director of CENTCOM’s air and space operations center in Qatar — talked to me at length about how small, relatively inexpensive turboprops could be just as effective as fighter jets while saving taxpayers billions of dollars.

The idea received mixed reviews: one four-star general told me such a plane would get pilots shot down. Others saw it as a budgetary threat to the F-35 Joint Strike Fighter. But enough Air Force leaders backed the plan. Studies were done and notional programs were put in the service’s long-term plans.

Companies formed partnerships to enhance their offerings. I even got a ride in the back of a Beechcraft AT-6B, the attack version of the popular pilot trainer.

But in the end, the effort died when the Pentagon’s budget started shrinking. The Air Force bought A-29 Super Tucanos on behalf of the Afghan Air Force, and that was it. No light-attack squadrons for America.

But something interesting happened: industry kept investing in their prototypes. Beechcraft finished development of the AT-6, Embraer and Sierra Nevada opened a U.S.-based production line for the Afghan Super Tucanos, Airland and Textron worked to finish development and certification of the Scorpion, and Air Tractor found two companies — L3 Technologies and IOMAX — to militarize its cropduster.

Fast-forward to this week. Out in the New Mexico desert at Holloman Air Force Base, officials are putting these four planes through their paces, deciding whether this type of aircraft is a good fit.

This time, all the talk might just turn into real purchases. The project has received lots of support from the Air Force brass, both on the military and the civilian side. But something else is different this time around. Because of legislation passed by Congress last year, Gen. David Goldfein, the service’s chief of staff, is now more involved in the acquisition process, should the project ultimately get the green light.

Goldfein, a fighter pilot by trade, was in New Mexico this week, flying the evaluation aircraft. That’s taking his new acquisition oversight duties seriously.

Sen. John McCain, R-Ariz., the chairman of the Senate Armed Services Committee and crafter of that new acquisition language, is happy.

“The light attack experiment at Holloman Air Force Base, New Mexico, provides an example for how rapid acquisition and experimentation can help our military procure the needed capabilities more quickly, more efficiently, and more affordably than we have in the past,” McCain said in a statement.

Foreign Arms Sales on Pace for More Records

The number of foreign sales approved in fiscal 2017 totals $64 billion, just $4 billion shy of the $67.8 billion record from 2012, according to Cowen’s Roman Schweizer. “Regardless of the record, we see the last three years combined as particularly robust, suggest a solid pipeline of foreign sales for defense primes,” he wrote in an email to investors. Last week, the State Department cleared a $108.7 million deal with Australia for ALE-70 Radio Frequency Countermeasures.

Summer Reading

In August, notionally at least, everyone has a bit more time for reading. May we suggest two reports that could be worth your while. First, GAO weighs in on the the $4 billion in upgrades needed to the F-35 Joint Strike Fighter. It’s great background for a debate that often comes up on the Hill.

Second, the Center for Strategic and Budgetary Assessments’ Katherine Blakeley has a new report out about trends in Congress’ review of the Pentagon’s 2018 budget request. “Procedural and political hurdles make it difficult to see how a substantial defense buildup on the order of the $54 billion proposed by the Trump administration, the $621.5 billion agreed to by the House Armed Services Committee and the Appropriations Committee Defense Subcommittee, or the $640 billion proposed by the Senate Armed Services Committee can be realized.” This debate will certainly heat up when Congress returns to Washington in September.

Making Moves

Former Deputy Defense Secretary Bob Work and Joint Chiefs Vice Chairman retired Adm. Sandy Winnefeld have been appointed to the advisory board of big data and analytics firm Govini.

Wendy Anderson — former Defense Secretary Chuck Hagel’s deputy chief of staff, former Deputy Defense Secretary Ash Carter’s chief of staff and former Commerce Secretary Penny Pritzker’s chief of staff — has been named general manager for defense & national security at AI startup SparkCognition.

Add another position to Deborah Lee James’ resume. This week, the former Air Force secretary was elected to the board of the IT firm Unisys. In case you missed it, she’s also been elected to the boards of Textron, MKACyber and the Atlantic Council. James is also special advisor to Bain & Company, a senior advisor to the Center for Strategic and International Studies and an advisory board member to LeanIn.org, Beacon Global Strategies and MIT Lincoln Lab.

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