Aerospace Reacts To Korean Scuffle, Nuclear Breaking Point

Rick Whittington, 11.30.10, 12:30 PM EST

Here are the aerospace ramifications you should watch for, as tensions brew in the East and nations eye a new START.

As the U.S. contemplates a major new arms control treaty, the various actors and personages might wish to review the events of the past month. President Obama embraced China on the first stop of an Asian whirlwind, sending a clear message of support and succor to Pacific Rim and Indian Ocean neighbors of the world's second-most-populous nation.

After propelling itself out of economic ruins, India has undergone breakneck development over the past decade, elevating global commerce and benefiting both emerging and developed regions alike. As India grabs its piece of the action, other nations of all stripes have gone along for a most dynamic and exhilarating--but at times also enervating--ride.

 

An increasingly integrated global economy has upset nearly all models of economic and financial markets, rendering most forecasts unduly cautious and unable to see the broad benefits of growing trade and commercial interdependence. Today's German business confidence report signals boom time conditions in Europe's most consequential country, on the heels of a year of focus on its least important members; recent fascination with Greece, Portugal and Ireland has led many to reiterate a litany of negatives.

The world remains imperfect, as Washington continues to look the other way on North Korea and its Beijing sponsors rattling the neighborhood dishes, but resurgent figures show the benefits of mitigated government intervention in the America's still dominant economy as it returns to free market principles.

After its Indian love fest and long-delayed mini-romance in resource-rich Indonesia, the U.S. was accorded a most brusque bounce at an ensuing G-20 forum, which bridled at ill-conceived notions of managed trade and rule enactment and rightly left most participants cold. Opening the door to criticism, President Obama endured two days of jibes and insults, intensified by two preceding years in which he talked down his own country's heritage and decades-long beneficial leadership role.

With Pandora's Box open, America's newfound multilateralism backfired in spades and we were sent packing to the next venue, hoping to bolster regional security initiatives in the wake of increasingly aggressive Chinese military actions this past year. 2009's bows did their trick, emboldening instead of pacifying and upping aggression quotients rather than engendering cooperation.

All this action came on the heels of Russian Prime Minister Medvedev's Kurile sightseeing tour that prompted Japan--which still claims the Russian-occupied isles as its own--to recall its ambassador from Moscow and issue a loud protest. Instead of supporting this ever staunch ally, Washington instead chose to amplify the benefits of rapprochement with a post-Soviet empire, in hopes of selling what can only be termed a disastrous new Strategic Arms Reduction Treaty (START) to the American public and Congress.

Arraying an impressive gathering of Republican foreign policy dons, the administration is pushing for ratification of a paper that was negotiated with Russia with reckless disregard to China's growing conventional and nuclear military capabilities. As Britain and France, as well as other NATO allies, further reduce their nonnuclear forces, the last thing we should be doing is reducing the nuclear safety umbrella that has so brilliantly kept the peace for going on 70 years.

The brushfire conflict in Korea and Vietnam was prosecuted without recourse to nuclear weapons. The decisions to execute Saddam Hussein and punish the Taliban for harboring 9/11 terrorists were similarly made without nuclear consideration. Still, the nuclear winter foretold by disarmament advocates never materialized; our aims and deterrent punch were so balanced and restrained that no one dared escalate nuclear conflict.

Yet as America has sharply downsized its military power over the past 20 years, China has materially increased its fighting effectiveness, and we have reached a breaking point. Unable to bridle outrageous North Korean action of the past year and unfettered Iranian nuclear ambition, U.S. foreign policy has emptied its post-Wild West gas tank. The international community upon which we planned to rely is nowhere in sight after recent artillery exchanges. Beijing's puppeteers are resoundingly mum, playing a quite sophisticated but dangerous game.

With fiscal pressure at home and a Republican aisle that is unable to comprehend the profound changes sweeping the international economy, sons of Fannie Mae ( FNM - news - people ) are left to champion Bernanke's balancing act, which promises stronger growth but won't unleash the inflationary bogeyman lawmakers now see under their beds. As the U.S. Dollar firms from the tidal wave of upside corporate profits and indications of new hiring, the broad array of industrial capital goods and new wave technology suppliers that comprise the heart of the American economy will lead in a New Year that promises further new highs in reported earnings.

 

Confidence--which has everything to do with how the market values stocks--will hinge upon numerous imponderables, not the least of which is how the country's leaders stand up to an always volatile and turbulent world. Sending the new START back to the drawing board would be a promising beginning.

The best way to play the equity market has remained the same over the last eight years. Invest in the still relatively low-valued U.S. beneficiaries of global growth. The list encompasses a Boeing ( BA - news - people ) that will either get the 787 off the ground or see much higher orders for its highly profitable 777 to replicate what has already been far better than expected 737 demand. Airbus' A380 Rolls-Royce ( RYCEY.PK - news - people ) engine issues keep the door open for America's formerly Seattle-, now Chicago-based aerospace superstar; the company faces challenges, to be sure, but--along with its European rivals--is sure to be a beneficiary of secularly heightened travel and freight demand.

As the Lockheed/Northrop F-35 continues to fall short of nearly all performance evaluations, demand for Boeing produced upscale F-18s and older F-15s joins with upside satellite buys for both national security and commercial use. If Boeing lands the new aerial tanker contract, which we think is likely, its military side will be as secure as any defense contractor's, while an increasingly profitable commercial aerospace side will propel earnings sharply higher over the course of the new decade. Civil aviation and industrial suppliers such as United Technologies ( UTX - news - people ), Honeywell ( HON - news - people ), Precision Castparts ( PCP - news - people ) and Goodrich ( GR - news - people ) also remain good bets on this theme.

With defense stocks actually declining on the day of the Korean artillery exchange--the first time in memory they didn't go through the roof at reports of active major nation hostilities--the stage remains set for stock-limiting backlog reductions at Northrop, (which JSA Research just put back on a Sell), Lockheed, Raytheon ( RTN - news - people ) and L-3. General Dynamics ( GD - news - people ) is another big loser from altered federal priorities but is somewhat cushioned by promising business jet demand, led by its soon-to-be G-650 powerhouse.