Michael Lewis of Lazard Capital Markets predicts that defense stocks will be encountering headwinds as the congressional super-committee set up to rein in deficits deliberates on budget cuts. Maybe so, but analysts have been surprised by the strong turnout at industry investor days and Lockheed Martin’s biggest debt placement in a decade was snapped up by eager buyers despite offering the lowest bond yield in the company’s history. Sentiment on the sector may be bottoming out — which certainly seems warranted in light of the strong possibility Republicans will sweep back into power in 2012 elections. Merrill Lynch analyst Ron Epstein has demonstrated that Republican control of the White House and Senate is by far the strongest predictor of surges in weapons spending, which in turn drive up sector equity prices. I have written a commentary for Forbes.com on why political trends are bolstering the defense industry’s outlook, which can be found here.
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