* Possible two-month delay only prolongs uncertainty
* Question remains about truncated time frame for cuts
* Pentagon budget had been set for roughly 10 percent cut in
By Jim Wolf and Andrea Shalal-Esa
WASHINGTON, Jan 2 Shares in some major defense
companies trailed the broad U.S. stock market on Wednesday as
investors fretted that hiring and investment at weapons makers
could remain slow until a longer-term fiscal solution is in
"Merely delaying sequestration by a couple of months will do
little to resolve the uncertainty and chaos surrounding the
defense budget," said Todd Harrison, an analyst at the private
Center for Strategic and Budgetary Assessments.
Lockheed Martin Corp, the Pentagon's biggest
supplier, said it hoped the last-ditch agreement to avoid the
"fiscal cliff" would pave the way for the permanent elimination
of automatic across-the-board cuts that it said would harm
government programs and damage national security.
Until then, "there will be an overhang on our industry that
stifles investment in plant, equipment, people, and future
research and development essential to the future health of our
industry," said Jennifer Whitlow, spokeswoman for the maker of
F-35 fighter jets and Aegis missile defense systems.
Lockheed's shares rose 0.5 percent on the New York Stock
Exchange, trailing the almost 2-percent gain in the overall Arca
Defense Index and a 1.8-percent advance in the Standard &
Poor's 500 Index.
The defense industry's biggest trade group, the Aerospace
Industries Association, said a long-term solution was urgently
"If sequestration is not solved in the next 57 days, it
would be an abdication of responsibility by the leaders of this
country, one that will only heighten Americans' cynicism and
cement the public image of a gridlocked Washington that simply
doesn't work," said the group's president, Marion Blakey.
Lockheed and other big arms manufacturers including Boeing
Co and Northrop Grumman Corp have complained
about the difficulty of running their businesses while facing
the potential indiscriminate, automatic spending cuts.
Northrop Grumman shares rose by 0.3 percent on Wednesday
while Boeing advanced 1.7 percent.
Blakey last week called the indiscriminate cuts required
under sequestration a "mindless meat axe" and urged lawmakers to
give the Pentagon more authority over any cuts required.
The 157-page deal reached on Tuesday to avert the "fiscal
cliff" delayed $109 billion in spending cuts by two months and
delayed the pain of tax hikes for almost all U.S. households,
but left many larger issues unresolved.
The spending cuts, which had been slated to take effect on
Jan. 2, have been delayed until March 27, giving lawmakers time
to debate how to come up with $1.2 trillion in deficit-reducing
measures over the next decade.
Of the total cuts slated for fiscal year 2013, which ends
Sept. 30, $54.7 billion were to come from the Pentagon's budget,
excluding military pay.
Loren Thompson, a Virginia-based defense consultant, said
the last-minute agreement by lawmakers signaled that
sequestration cuts were unlikely to be ever implemented as
currently planned, although some additional cuts were likely.
"When the chips are down, the two parties can find common
ground and that means sequestration is not going to happen the
way it is currently mandated," Thompson said. "This is not just
a reprieve for the defense industry, it's a signal that the
worst aspects of sequestration are never going to occur."
Byron Callan, analyst with Capital Alpha Partners, said the
deal meant weapons makers would face challenges in framing their
financial guidance when they announce quarterly earnings later
this month since lawmakers were unlikely to reach a final deal
by the next deadline at the end of March.
"Defense spending absolutely will be part of the next debt
ceiling/sequestration cliff debates," Callan wrote in a note to
investors, noting that any reductions in the Pentagon budget
agreed as part of a final solution could be even more disruptive
since half the 2013 fiscal year would already be over.
The delay means the defense reductions are now slated to go
into effect just when the U.S. Treasury runs out of the ability
to borrow money, making for another cliff-hanger.
The deal also leaves unresolved whether the Pentagon would
be given more flexibility in how its savings are achieved. The
Pentagon has sought to prioritize rather than trim by the same
percentage its more than 2,500 programs or projects. Getting
more flexibility would require another act of Congress.
The existing law calls for stripping more than $500 billion
from projected Pentagon spending levels over 10 years - on top
of $487 billion in cuts already being wrung out under a
deficit-reduction deal enacted into law in August 2011.
If the same level of security-related cuts were maintained
under a future deficit-reduction deal, they would be crammed
into the final half of the fiscal year that ends Sept. 30, which
could pose fresh challenges for Pentagon budget officials.