Ride The China-India Wave, Sell The Gates Goose

Howard Hughes' Spruce Goose was a six propeller, WW2-designed super-transport seaplane with a wingspan longer than a football field--half again a 747's--that only got 70 feet off the ground on its one and only test flight ... two years after Japan surrendered. Designed to carry 750 troops from U.S. shores across the sea, it is a perfect example of designing something for the war we're fighting today, not the next war, which seems to be this new administration's philosophy. It is also an apt metaphor for the present military revamp, or better yet, ramp-down. Investors should continue to move out defense stocks as their funding sources dry up.

While you won't get anyone on the federal dole to acknowledge it, the country is embarked on a risky makeover of its armed forces based on a simple, and wrong, extrapolation of the present into the far future. The Iraq and Afghan conflicts haven't required much air or sea power the past couple of years, ergo, presume this going forward.

Such backward reasoning reminds one of the top of a bull market, or the bottom of a bear, when the crowd thinks the most recent trend will last forever and bases portfolio decisions accordingly. Oh well, your federal government at work. It's not much different than cap-and-trade, stripping bond holders or car emission standards. By canceling and suspending a number of defense programs, principally impacting air and naval forces, America will have to fight with less.

Led by greater China and India, Asia is quickly moving back to boom times. The steps they've made to incorporate their billions into the global economy creates a bigger pie for everyone. As the region's economic growth continues, China builds national wealth, not just larger markets, and increased per capita income and spending.

This enrichment of the world's largest population expands the ability to fund what is proving a significant military modernization. Its standing army is already the world's largest, and even if technologically inferior to battle-honed U.S. forces, size can be a mighty compensating variable, as we found out to our chagrin in 1950. Air and naval modernization is taking place at an ever more feverish pace.

Even as political change continues to inhibit U.S. business confidence, the world's mega-economy continues to climb out of the hole, with a succession of favorable economic data this past week signposting additional gains. America's trading partners demand its credit, agricultural technology and foodstuffs, a wide range of complex capital goods, retooled IT software and Internet services, and, yes, even financial services.

It may be politically expedient to harp on the country's short-comings but these are not unique to these shores, nor are they handicaps to continued waves of innovation and technological leadership upon which our trading partners depend to further their own economic progress. Talk of a "new normal" is mere recognition we are today governed by interventionist, no-longer-free market principles. If allowed to persist a decade or more, such could begin to limit the country's long-term growth potential, but we're just 100-plus days into this, so the impact is as yet negligible.

Resumed economic growth lends impetus to commercial and industrial adjuncts of the aerospace industry, especially energy services, power generation, building services, factory automation and fuel-efficient new generation aircraft.

Supply-limiting measures imposed by Washington will propel energy prices higher, benefiting United Technologies ( UTX - news - people ), Honeywell ( HON - news - people ), Teledyne ( TDY - news - people ), General Electric ( GE - news - people ), Curtiss-Wright ( CW - news - people ), Precision Castparts ( PCP - news - people ) and Moog ( MOG-B - news - people ).

Satellite GPS and communications technology maven Rockwell Collins ( COL - news - people ), along with Goodrich ( GR - news - people ), Spirit ( SPR - news - people ), BE Aerospace ( BEAV - news - people ), Hexcel ( HXL - news - people ), Esterline ( ESL - news - people ) and Boeing ( BA - news - people ) are beneficiaries of resumed air travel. Again, if the emerging-market stocks work, it signals greater need for airliners, business jets and helicopters.

China might allow North Korea to shoot off a nuke or a couple of short-range missiles, but none of this is more than public relations and hollow threats. While far from a game, the aim is to see how a one-term senator, now president, responds. Important stuff, but not 9-11 revisited. There is no expedition to the Asian mainland. China, which still holds the keys to North Korea's zany kingdom, is viewed as a partner to be counted upon for keeping things in check. Secretary of Defense Robert Gates wants to only spend where we fight today--on the mountainous slopes of Afghanistan where one doesn't need artillery, tanks, air superiority fighters, naval surface combatants, submarines or modern satellites.

Appointment of a direct action commander in Afghanistan signals a move to decapitate the Taliban leadership, a strategy which worked to great effect with al-Qaida in Iraq. Several years overdue, it's the right move to combat what Gates terms Taliban momentum, and morale loss if we don't soon close the fight. Hellfire missile-launching Predator drones have proved hugely effective, but there's nothing quite like the up close and personal in Taliban and al-Qaida huts and caves. For sure, this is today's war. It deserves our hearty support. We just wonder what the next one will look like.