Impeachment. The USMCA. The Fed. The UK. U.S./China trade. It was easy to miss. Little hype. Investors though, need to see these things. Well camouflaged by all of the media hype surrounding all of these other events, the news cycle seemed quiet as of late Monday. The House Armed Services Committee released a compromise on a defense spending bill after negotiators from both the House and Senate apparently worked through the weekend in an effort to avoid a government shutdown. This bill, if passed, would authorize $738 billion in defense spending for 2020, which comes to $22 billion more than was spent on defense in 2019.
Perhaps most important thing here is the 3.1% pay raise for service members. Also of interest would be the realization of the creation of the U.S. Space Force, which would appear to fall under the Department of the Air Force, akin to the relationship between the U.S. Marine Corps and the U.S. Navy. The Space Force will draw staffing at least at first from the Air Force, in the way the Air Force drew from the Army Air Corps upon the creation of the Air Force itself at the start of the Cold War. The Space Force will be represented among the Joint Chiefs of Staff.
The Space Force was a priority on the Republican wish list. Democrats hoped to extend to all federal employees on the job at least a year, 12 weeks of paid parental leave (DoD employees already have this benefit). Both sides got what they wanted. This version of the bill, which still has to broadly pass on the floors of both bodies of the legislature, scraps a provision in an earlier version that would have prevented using military spending on the building or expanding of "the wall" on the nation's southern border. The bill does not designate funds for that purpose either, meaning that there is still something for the swamp to fight about after impeachment proceedings end going into the election.
Expensive Toys
I remember well the early 1980's. Half of the stuff we used was of Vietnam era vintage. Heck, enough of the stuff still bore bullet holes. A specific helicopter that picked us up in one spot and put us down inn another at 29 Palms on a crazy hot day, probably in 1983, comes to mind. How that thing stayed in the air, I don't know. All I do know is that the door gunner never stopped laughing.
Then came the Reagan Revolution and with it, new toys. Expensive toys. Lots of vehicles (mostly Chryslers). What toys are likely to benefit this time around? More specifically, what companies that manufacture expensive toys are likely to benefit this time around?
By Air
Remember back in October when the Pentagon announced that the F-35 stealth fighter jet would not be cleared for full-rate production this year due to ongoing issues with certain components? The decision on full-rate production had been put off until early 2021. This new bill allows for $1 billion to be spent on adding 12 more F-35A's to the U.S. Air Force fleet, which is actually more than requested by the Trump administration. On Tuesday (yesterday), the Pentagon's chief of acquisition, Ellen Lord, told the media that she now expects to see this decision by Autumn 2020. The bill also authorizes 10 F-35B's for the Marine Corps and 20 F-35C's for the Navy.
In addition, in order to augment the service's fleet of stealth fighters, the Air Force expects to eventually upgrade a total of 144 fourth generation (non-stealth) F-15 Eagles from the current F-15C version to the modernized F-15EX model. The bill authorizes eight of these upgrades. The Eagle, by the way, is a Boeing (BA) product. The Air Force, by the way, does not expect the availability of an increased number of F-35's to reduce any plans to update the F-15's. The Navy will also see an additional 24 F-18 Super Hornets added to its fleet of fighters, another Boeing aircraft. In addition, full funding will be provided for the further development of Northrup Grumman's (NOC) B-21 long rage bomber.
By Sea
The bill will also include authorization for the Navy to add three class destroyers. This project is the product of both Huntington Ingalls Industries (HII) and General Dynamics (GD) . General Dynamics will also benefit from an $8.4 billion allocation to the Virginia Class submarine program. You will recall that General Dynamics recently won a multi-year $22.2 billion contract to construct nine of these vessels by 2029.
On Land
I don't see a lot in here, at least at the headline level for the ground-pounders outside of $249 million set aside for U.S. Army Stryker Combat Vehicles. I guess a victory on Saturday in Philadelphia will have to be enough for that crew. The Stryker is also manufactured by General Dynamics.
Trading
If you've ever read me, you know that I have long been involved with almost all of these stocks at one time or another. You also know that I have been long Lockheed Martin (LMT) the longest among these names, and that LMT at up 47% for the year, has returned that loyalty. The benefits of the above mentioned programs will extend in terms of engines, weapons systems, electronics, parts and beyond will reach hundreds of subcontractors as well. Chief among them would be the likes of Raytheon (RTN) , United Technologies (UTX) , General Electric (GE) , L3Harris (LHX) , but the list is endless. We'll focus on Lockheed Martin here.
From 30,000 feet, we see that shares of LMT peaked back in September and have largely traded sideways since. The shares have found support at the 50 day SMA of $380 for roughly six weeks now as concern over the federal budget weighed upon the group.
Zooming in to take a look at this recent action, some might see a double bottom (early October, mid-October). For, me that's just too sloppy. I choose to see a cup with handle formation that needs to make another run at a pivot of $393 to realize another breakout. That is the posture that I now assume, with an eye still focused on holding that 50 day line.
Lockheed Martin
Target Price: $470
Pivot: $393
Add: $380
Panic: $370
