Unexpected wars bring unplanned requests for money. Just hours after the U.S. said it killed Soleimani, there was immediate talk of increasing the Pentagon’s budget. Defense stocks have climbed about 6 percent since the New Year’s Eve attack on the U.S. embassy in Baghdad. After a U.S. drone killed Iran’s Gen. Qasem Soleimani on Jan. 3, there was immediate talk of boosting the Pentagon’s budget. But as tensions between Washington and Tehran cooled on Wednesday, so did prospects for a quick increase in defense spending.
“We expect continued volatility despite both sides nominally favoring de-escalation. But if neither wants open conflict, the ‘Iran War’ likely recedes back into the shadows where it has been for years,” Citi analyst Jon Raviv wrote in a Wednesday evening note to investors. “This suggests limited prospect for significantly higher defense spending when the budget is proposed on Feb 10.”
Under last year’s budget deal, U.S. defense spending is capped at $738 billion in 2020 and $740 billion in 2021. If the Pentagon wants more money — say, to replace the helicopter damaged during Iran’s Jan. 7 missile strike on Iraq’s Al Assad air base — it would need to ask Congress to add to the Overseas Contingency Operations account, which doesn’t count toward the caps.
“In the near term, the deployment of additional U.S. personnel and resources to the region and preparation to potentially engage in military action will drive increased spending from the Operations and Maintenance (O&M) and military personnel accounts,” Acascent’s Matt Vallone wrote on Tuesday. “In response to the heightened threat levels following the drone strike, the U.S. military is deploying thousands of additional troops to the region.”
Defense stocks tend to outperform the rest of the market for a half year after a Mideast crisis, a CNBC analysis found. “CNBC used hedge fund analytics tool Kensho to analyze market returns after major events in the Middle East, dating back to the start of the 1990 Gulf War. The analysis found that defense stocks earned double the return of the S&P 500 in the six months after a crisis event.”
On top of the Iran issue, defense stocks typically outperform the rest of the stock market in an election year, UBS analyst Myles Walton writes.
But should they? Bill Hartung, who runs the Arms and Security Project at the Center for International Policy, argues that the Iran crisis should “not exploited to underwrite an across-the-board increase in tax dollars for a department that is already substantially overfunded.”
You’ve reached the Defense One Global Business Brief by Marcus Weisgerber. Hope you had a relaxing holiday season. Among my New Year’s resolutions: read more for pleasure. Currently on my nightstand: “The Warbird,” by friend and Pentagon press corps colleague Tara Copp. Send along your tips, feedback and New Year’s resolutions to email@example.com or @MarcusReports. Check out the Global Business Brief archive here, and tell your friends to subscribe!
From Defense One
What We Know About the Missiles Iran Fired Into Iraq // Marcus Weisgerber
To begin with, they’re getting more accurate.
Iran Is Getting Ready to Blow Up A Fake Aircraft Carrier, Again // Patrick Tucker
To test weapons, try out tactics, and intimidate adversaries, Iranian forces may attack its barge-borne “carrier” as soon as March.
Boeing Has Relieved CEO Muilenburg. Now What? // Marcus Weisgerber
The next CEO will have to right the 737 program, keep the tanker on track, and figure out why a recent rocket launch went awry.
What Happened at Boeing
The fallout from the 737 Max crashes/grounding/investigation continue. Dennis Muilenburg is out as CEO, replaced by David Calhoun. Former Continental Airlines CEO Larry Kellner is now the company’s chairman. Our first chance to hear from the new CEO may be Jan. 29, when Boeing is scheduled to report its 2019 fourth-quarter earnings.
737 crashes in Iran. A Ukrainian 737-800 destined for Kyiv crashed minutes after takeoff from Tehran on Wednesday morning just hours after Iran fired 16 missiles into Iraq. Ukrainian authorities are negotiating with Iran to gain access to the crash site. More here. Newsweek, citing a Pentagon official and U.S. and Iraqi intelligence officials, reported Thursday morning that Iranian anti-aircraft fire mistakenly shot down the plane.
Ukraine to Buy More US Anti-Tank Weapons
Speaking of Ukraine, it’s planning to buy more Javelin missiles. “This purchase became possible due to recent changes in the Ukrainian legislation, which allowed the MoD to make direct procurements of defense articles from abroad,” the Ukrainian embassy in Washington said in a Dec. 26 Facebook post. “We are confident that it will contribute to major increase of defense posture of Ukraine.”
Lockheed Martin Delivered 134 F-35s Last Year
The U.S. military took delivery of 81 jets of various types; foreign customers, 53, Lockheed said. The total is up from 66 in 2017 and 91 in 2018, and the company plans to deliver 131 in 2020. Also, the Pentagon awarded Lockheed a $1.9 billion a yearlong F-35 sustainment contract on Dec. 31. So far, the company has not persuaded the Pentagon to sign a five-year maintenance deal.
Gryphon Acquires Communications Firm
Gryphon, which is part of AE Industrial Partners, acquired Maryland-based OMNITEC Solutions, according to a Jan. 2 statement. “OMNITEC is a leading provider of enterprise technology, cloud, analytical, strategic advisory and advanced engineering solutions to the defense and federal communities,” Gryphon said in a Jan. 2 statement. “Since 1999, the Company has built highly specialized capabilities in enterprise communication, data harmonization and analytics, web-enabled content management, strategic planning and media analysis.” OMNITEC CEO Morris Brown will become Gryphon’s Chief Technology Officer.
Eric Chewning, chief of staff to Defense Secretary Mark Esper, will leave the Pentagon in coming weeks and return to the private sector, Pentagon Press Secretary Alyssa Farrah said in a Jan. 6 emailed statement. Chewning will be replaced by Jen Stewart, minority staff director for the House Armed Services Committee.
Niel Golightly has been named Boeing’s senior vice president of communications, replacing the retiring Anne Toulouse.
Adversary air services company Top Aces has named a vice president of business development: former U.S. Air Force fighter pilot Kevin “Uncle” Fesler.