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When President Barack Obama went on national television last week to announce the timeline for withdrawal from Afghanistan, Americans' reactions varied.
Some people looked at the plan for 10,000 troops to be pulled out by the end of 2011 and called it "too slow." Others looked farther out, to the summer 2012 planned withdrawal of the entire 33,000-troop surge, and called it "too small." Others pointed to the fact that, even after these withdrawals, 68,000 American troops will be stuck in Afghanistan for at least three more years, and said that's "too long."
Defense investors had another reaction entirely: "This is too good to be true."
33,000 x $1 million = what?
For shareholders of defense contractors, one of the biggest worries today is the fear that Mideast pullouts will drain away revenues from defense contractors. That may not be the case. When you crunch the numbers on the president's plan, it quickly becomes apparent there's no one-for-one decline in defense spending accompanying the withdrawal. Consider: For fiscal 2010, Congress budgeted $100 billion to fund the Afghan war; for fiscal 2011, $113 billion. At current troop levels, that works out to about $1 million in funds per pair of boots on the ground.
According to the Pentagon, however, removing 33,000 troops from Afghanistan will net American taxpayers only $17 billion in savings next year. That's barely $500,000 per soldier, or about half what you'd expect.
Follow the money
Many Fools question the wisdom of getting involved in a land war in Asia. I'm one of them. But as investors, we need to understand the world as it is, not just as we'd like it to be. And the cold hard truth is that the U.S. will be in Afghanistan for several more years, spending hundreds of billions of dollars more before we're through. In recent weeks, we've seen major military vehicle contracts awarded to Textron (NYSE: TXT ) and Navistar (NYSE: NAV ) . Just yesterday, the U.S. Army contracted to buy 56 Buffalo minesweepers from Force Protection (Nasdaq: FRPT ) , part of a $71 million contract. Hundreds of armored vehicles from General Dynamics (NYSE: GD ) and Oshkosh (NYSE: OSK ) remain in service in-country, supported by helicopters from United Technologies (NYSE: UTX ) , fighter jets from Lockheed Martin (NYSE: LMT ) , and on and on -- all of which generate parts and services revenues for these companies ...
None of this is going away anytime soon. In fact, as we saw last week, even when troops do go away, the money stays in Afghanistan.