Defense contractor Lockheed Martin Corp., (LMT) has awarded aluminum giant Alcoa Inc.(AA) a $360 million contract to supply special castings for the special new stealth fighter jet known as the ‘Joint Strike Fighter.’

The U.S. military will use the Lockheed Martin F-35 Lightning II Joint Strike Fighter (JSF) replace such jet fighters as the F-16 Fighting Falcon, the F/A-18 Hornet and the Harrier jump jet currently being flown by the Air Force, Navy and Marines. It’s one of the largest and most-expensive defense-procurement programs ever, with an estimated total cost of $275 billion.

The contract calls for Alcoa’s Cleveland-based division – a specialist in cast and forged products – will design and produce large aluminum structural die forgings for more than 1,200 aircraft over the next 10 years. The forgings consist of 15 large wing- and engine-supporting bulkheads and six wing-box parts per plane.

Lockheed Martin expects to build more than 4,000 of the aircraft for the United States and international forces, Alcoa said.

Alcoa is expecting still more contracts related to the F-35. Other Alcoa units will provide such components as fasteners, alloy plate and high-pressure turbine blades. Those contracts are still being negotiated.

"Our engineers, operations managers and designers have worked collaboratively to offer complex die forgings that will meet weight reduction requirements and extremely tight time frames that will allow our customer to stay on schedule," Joseph E. Haniford, vice president and general manager of the Alcoa unit, said in a statement.

As part of the contract, Alcoa plans to invest $24 million in its Cleveland facility, mainly for new machinery, equipment and infrastructure improvements, said the Pittsburgh- based company, with has executive offices in New York City.

Going Long on Lockheed

Lockheed has a storied history as an aircraft company. During the so-called "Golden Age" of aviation – which lasted from the 1920s until the latter part of the 1930s – Lockheed built such fine civil-aviation airplanes as the Lockheed Vega and the Lockheed Electra. Both were flown to records by famed aviatrix Amelia Earhardt, [click on links to see both of Earhardt's Lockheed aircraft, one of which is on display a the National Air and Space Museum in Washington]. It was a modified Electra that Earhardt was flying on a record-seeking around-the-world flight when she and navigator Fred Noonan disappeared somewhere in the vicinity of tiny Howland Island in the South Pacific in 1937.

Neither Earhardt nor Noonan were ever seen again, and the Electra was never found. The mystery – which many consider as the greatest mystery in the field of aviation – continues to intrigue flying enthusiasts, even today. The Delaware-based International Group for Historic Aircraft Recovery (TIGHAR), headed by the charismatic and controversial Ric Gillespie, continues to investigate the mystery to this day.

When World War II started, Lockheed became a key part of the "Arsenal of Democracy," developing the Lockheed Hudson Mk I twin-engine medium bomber, the first U.S.-built aircraft to be used operationally by the British Royal Air Force during that conflict. Though a bomber, when a Hudson flamed a German Dornier flying boat off the cost of Jutland in October 1939, it recorded the first German aircraft shot down by the RAF in WWII.

But it was with a fighter plane that Lockheed really cemented its reputation – the "first" Lightning, the P-38, the airplane serving as the namesake for the new Joint Strike Fighter.

The P-38 Lightning was a twin-engine, twin-tailed aircraft that the German Luftwaffe nicknamed "The Fork-Tailed Devil." It was even more effective in the Pacific Theater, where the top two U.S. aces of all time – Major Richard "Dick" Bong, with 40 kills, and Maj. Thomas "Tommy" McGuire, with 38 – both flew Lightnings. Atlantic solo flight pioneer Charles "The Lone Eagle" Lindbergh, of Spirit of St. Louis fame, was a civilian advisor in the Pacific Theater, teaching U.S. Army Air Corps pilots how to stretch the range on their P-38s. He often accompanied Army pilots on long missions, flying a P-38 himself, and reportedly even shot down an enemy aircraft.

In more recent years, Lockheed has remained the same innovative aircraft pioneer. With its famed "Skunk Works" project-development unit, Lockheed developed a number of "black budget" aircraft, such as the SR-71 Blackbird, a reconnaissance aircraft that could fly so fast and so high that it was never hit by enemy fire on any of its secret missions. The aircraft has been retired for years, but many of its performance standards and achievements remain classified.

The Skunk Works scored again when it developed the F-117 Nighthawk Stealth Fighter, the odd-looking, faceted fighter-bomber that was able to pierce the night skies over heavily defended Baghdad in the First Gulf War and never trigger the Iraqi air-defense systems.

Lockheed Martin is the prime contractor on the F/A-22 Raptor, the newest Stealth jet fighter to joint the U.S. air arsenal. It beat out Northrop Grumman and its technically advanced YF-23 in a multi-year fly-off, and production aircraft are being fielded operationally.

The F-35 is even more advanced that the F-22, because of vectored-thrust technologies, which will have a major impact on takeoff and landings, and on in-flight maneuverability.

Other Lockheed Contract

Lockheed on Friday said it was awarded a $1.24 million contract from the Defense Advanced Research Projects Agency. The contract is the third phase of a program that enables the U.S. Navy to improve situation awareness in maritime operations.

Lockheed Martin will provide software upgrades to the program, called "Fast Connectivity for Coalitions and Agents Program," and install the operations at several U.S. Navy commands as part of the deal.

For investors seeking a top defense contractor for their portfolio, here are the key factors to consider about Lockheed Martin: Based in Bethesda, Md., it is the country’s largest aerospace and defense contractor. During 2007, Lockheed’s shares soared more than 46%, due to strong sales of everything from jet fighters-including the F-35 and the F-22 Raptor-to satellites.

News and Related Story Links:

• The San Jose Mercury News:
  Alcoa awarded fighter jet parts deal.

• CNNMoney.com/Thomson Financial:
  Alcoa Wins $360 Million Aluminum Forgings Contract From Lockheed Martin.

• Forbes.com/The Associated Press:
  Lockheed Martin Wins New Contract.

• Lockheed Martin Corporate Press Release:
  Lockheed Martin to Transition Technology That Dramatically Improves Situation Awareness in Maritime Domains.

• Wikipedia:
  Lockheed Aircraft.

• Wikipedia:
  Skunk Works (Lockheed).

• Wikipedia:
  Lockheed P-38 Lightning (The Fork-Tailed Devil).

• Wikipedia:
  The Golden Age of Aviation.

• Wikipedia:
  Amelia Earhardt.

• The International Group for Historic Aircraft Recovery (TIGHAR):
  The Amelia Earhardt Disappearance Investigation.

References:

• Crosby, Francis, The Complete Guide to Fighters & Bombers of the World, Herme’s House, 2006.
• Eden, Paul (Editor), The Encyclopedia of Modern Military Aircraft, Amber Books, 2004 and 2006.

Just what motivated Alcoa Inc (AA) to dump its stake in China’s biggest aluminum company this week is not clear, but the $1.8 billion cash infusion should appease suffering stockholders while giving the aluminum giant maneuvering room.

It’s only been a few months since Alcoa’s hostile attempt to buy Canadian rival Alcan Inc (AL) was undercut by an even bigger offer from a bigger company – Rio Tinto LTD PLC RTP – and called into question just what Alcoa’s strategy should be.

The conjecture now is that Alcoa may take the cash proceeds from the sale of its roughly 7% stake in the Aluminum Corp of China LTD ACH to and a share buyback or fund capital spending and restructuring.

Alcoa shares soared more than 35% after speculation that its proposed hostile takeover of Alcan was a defensive play to prevent its takeover by a larger company such as BHP Billiton Ltd BHP, have pared those gains in the last two months as rumors were put to rest.

Analysts said the company never got what it wanted out of the investment. It was unable to garner more control or create more strategic ties with a company with which it competes.

Related News and Story Links:

• Reuters:
  Dealtalk: Chalco sale opens doors for Alcoa.
• Money Morning:
  Alcoa Sells Chalco Stake for $2 Billion.

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Central banks continued funneling cash into the world’s wounded financial systems Monday, the latest in a series of liquidity infusions that began last week. The European Central Bank offered another $65 billion in emergency funds, while the Bank of Japan injected $5.1 billion. The Federal Reserve again came in on the low end of the scale, injecting $2 billion.

As a result, Europe’s Dow Jones Stoxx 600 index had made its biggest climb in more than a year, 2.3%, after dropping 2.6% last week. The FTSE 100 index closed up 180.7 points, or 3%, marking its biggest gain since 2003.  

U.S. stocks failed to make such noteworthy comebacks. The day started off with an optimistic tenor as market indexes spent most of the day in the black. Fears concerning the ongoing credit crunch were assuaged as central banks continued to offer loans, along with the release of an impressive sales report.

But the Dow Jones Industrial Average and Standard & Poor’s 500 Index both slightly down, at 0.2% and 0.5%, respectively. At their highest point in the day the Dow was up 0.7%, and the S&P 0.8%. Unfortunately they could not sustain a comeback, and collapsed at the closing bell.

Some came out ahead however. Blackstone Group (NYSE: BX) picked up 1.7% after reporting it had tripled its quarterly profit and revenue.  Alcoa (NYSE: AA) climbed 2.45%, and Hewlett Packard (NYSE: HPQ) jumped 2.58%. 

Bad news took the day off yesterday.

Or so it seemed.

On Wall Street, the Standard & Poor’s 500 index and the Dow Jones Industrial Average rocketed to record highs, with strong exports, an upbeat earnings report from Wal-Mart Stores Inc. (NYSE: WMT), and the latest set of mega-merger deals providing the fuel.

Both of the closely followed U.S. stock indexes eclipsed their previous records, which had been set June 4. The S&P 500 climbed 29.94 points, or 1.9%, to close at 1547.70. The 30-stock Dow soared 283.86 points, or 2.1%, to close at 13,861.73.

It was the Dow’s biggest gain in four years.

And U.S. investors weren’t alone. Canadian stocks hit another record high of their own yesterday, after London-based miner Rio Tinto PLC (NYSE: RTP) said it would buy Canadian aluminum producer Alcan Inc. (NYSE: AL), for $38.1 billion, outbidding rival suitor Alcoa Inc.  (NYSE: AA) by 36% in a deal that would form the world’s largest aluminum producer.

Alcoa ended its own two-month quest to create the world’s largest aluminum company last night when it withdrew its own $27.94 billion hostile bid for Alcan – a move that likely makes Alcoa a takeover target, now.

Nor were Canada and the United States the only markets with the capital markets’ version of the “warm and fuzzies.” Also yesterday:

• South Korea’s Kospi Index yesterday closed above 1900 for the first time ever, after the Bank of Korea said an increase in its key-lending rate wouldn’t cause that country’s economy to sputter and stall.
• Mexico stocks soared Thursday, helped by gains in miner Grupo Mexico SA de CV (OTC: GMBXF) – gains that were clearly sparked by the Alcan deal, and by expectations that the long-running bull market in such commodities as copper will continue due to consolidations and continued demand from fast-growing China.
• British stocks rose, with the benchmark FTSE 100 Index climbing 1.3%, led by a 4% surge in the shares of BHP Billiton Ltd.  (NYSE: BHP), the world’s biggest mining company. Anglo-American PLC (Nasdaq: AAUK), the No. 2 miner, saw its shares jump 2.8%.
• Europe’s Dow Jones Stoxx 600 Index climbed 1.2%, its biggest gain since mid-June, with all industry groups advancing. Commodity-related shares – including BHP Billiton – helped the gains here, too, although several European cell phone firms – including Nokia PLC (NYSE: NOK), whose American Depository Receipts rose nearly 3.8% — benefited from the international sales shortfalls that U.S. rival Motorola Inc. (NYSE: MOT) revealed earlier in the week.

Pardon my cliché, but what a difference a day ….or two …makes.

Believe me when I tell you that yesterday’s “global” rally wasn’t all that it seems.

First of all, even though yesterday’s rally was broad-based insofar as all 10 industry groups in the S&P and all 30 Dow companies rose, there’s still a problem. And I think it’s a big one. Most of the index gains I’ve cited here are really due to one thing: Takeover deals, and the expectation that these deals will continue.

Okay, that’s two things. But they’re related. And they’re important. Alcan soared because Rio Tinto outbid Alcoa for Alcan. By a lot. A whole lot. Commodity-related shares across the globe soared in sympathy. While more deals may be coming, I can guarantee that every one of these companies isn’t going to be taken out. But a lot of these stocks rallied as if additional deals are a foregone conclusion.

I believe that another key factor yesterday was a Bloomberg News revelation that militant-activist investor William Ackerman has taken a position of more than 5% in Target Corp. (NYSE: TGT), the nation’s No. 2 discount retailer behind Wal-Mart. The shares jumped nearly 7% to close at a record $70.04 yesterday, after the report surfaced.

Ackerman has taken positions in other companies, including McDonald’s Corp., and Wendy’s International, pressuring them to sell divisions, cut spending, or take other steps to better-reward shareholders.

Though Ackerman is likely looking to do the same with Target – there’s speculation he’ll pressure Target to sell its credit-card unit. – there was obviously some “fringe” speculation that this bold move means that even a company of the size and reputation of Target isn’t too big to take over.

And that brings me to my next concern about all the euphoric relief that I saw yesterday.

Look, we all know that a big percentage of the run-up in U.S. stock prices – and a smaller percentage of the share-price gains overseas, where high growth rates warrant the surges we’ve seen in such markets as China and Korea – is due to all the merger deals, and private-equity buyouts.

And there’s a limit to how much longer that can continue.

Interest rates have risen. Credit quality has deteriorated. And as we’ve seen before – in the LBO craze of the late 1980s (remember “Barbarians at the Gate?”), for example – when too much money chases too few properties, the deal quality starts to suffer. Buyout artists pay up for companies that they shouldn’t have paid anything for – I mean, there were even some they shouldn’t have paid attention to.

And like any kind of speculative frenzy, the pros move fast and early, and make the best deals. Then they’re out and on the sidelines as the amateurs move in, driving up prices for companies that towards the end of the cycle aren’t really worth buying.

Early this week, we were terrified of credit quality issues, and that the subprime meltdown would spread. It will. Indeed, it already has. The two key Wall Street debt-rating agencies, S&P and Moody’s, have either downgraded hundreds of subprime bonds, or are going to. That will drive up borrowing costs in general, as lenders demand higher compensation for risk.

That will affect the buyout market, and the housing market – at least to some degree.

And in the worst-case scenario, those two separate-but-related factors could assault U.S. share prices like a cavalry pincer movement – hitting it from two sides. The credit crunch will crimp the buyout binge, which will cause the bull market to sputter. The credit crunch will also exacerbate the housing slump, which will in turn affect consumer spending – still two-thirds of U.S. economic activity.  And that will cause the retail sales that seemed to buoy stocks yesterday to slump, as well.

This is only a worst-case scenario, mind you, and it’s unlikely we’ll see it all break loose at once. Nor will it deal the U.S. economy a blow to the recessionary solar plexus.

But sitting here tonight, I do find it bothersome that none of the “experts” are even talking about the possible flipside to all of today’s good news.