Taking Stock

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Tony Crowell

Stocks, Elections And The Long-Term Perspective

 The stock market is a curious beast. It attracts a large number of observers, some of whom attributed market weakness in the days preceding the first Presidential debate to increasing polling strength by Presidential Obama. This seemed odd as most of Wall Street is linked to the Republicans. The analysts explained that a loss by the President would jeopardize Fed Chairman Bernanke’s reappointment, perhaps ending the Fed’s ongoing financial stimulus measures.

Failure to continue his policies would certainly be damaging as they have led to an unusually favorable investment arena of remarkably low interest rates with only moderate inflation. These factors prevented the nation from sliding back into recession and are finally resulting in a resurgent homebuilding sector.

The three years of the Obama Administration have accompanied a very favorable stock market with the S&P 500 currently up over 80% since he took office on January 20, 2009. Two months later in March of 2009, when stock market averages had slumped to 12-year lows, he responded to a question about the market saying ‘What you’re now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal, if you’ve got a long-term perspective on it.”

He was right. The S&P 500 hit bottom a week later. Since 2009, earnings have increased to record overall levels keeping ratios at reasonable levels. Barring reversals of existing trends, conditions for further market advances remain favorable.

My newest recommendation, BlackRock (BLK-$190), dipped on concerns that its respected CEO, Larry Fink, could be tapped to leave the company and become Treasury Secretary in a Romney cabinet. Should this take place, I hope he will have as much success with the Treasury as with BlackRock.

BlackRock, which he co-founded in 1988, has grown to become the world’s largest money manager with $3.7 trillion in assets under management. Sales rose 4% in the third quarter to $9 billion while earnings were up 8%. Earnings for all of 2012 will be about $13.25, a quite reasonable ratio of 14 to its current price.

The company weathered the financial storms of the last few years much better than most. Analyst estimates of $14.75, up 11% for 2013, seem well founded. Its stock price wobbled recently on worries about fee pressure on ETF’s, a sector in which the company’s iShares is the largest. These concerns are exaggerated and its 3% yield enhances its appeal.

New technologies have sometimes produced substantial profits. One technology, 3D printing, is moving from the experimental stage to commercial application. The process, sometimes called additive manufacturing, makes three-dimensional solid objects from digital instructions. This technology has almost unlimited potential applications. The Economist said that 3D makes it as cheap to create single items as to produce many thousands, thus undermining economies of scale, the foundations of the factory system.

These machines read data from CAD drawings and lay down successive layers of liquid or powder materials, which are fused automatically to create a three dimensional object. They can produce almost any shape and are now in use in the fields of aerospace, dental and medical industries, footwear, jewelry and many others.

This is an embryonic industry but contenders are appearing and 3D Systems (DDD-$37) seems worth a try. The company has $300 million sales with real earnings that will exceed a dollar a share for all of 2012. It added capital through a sale of stock in June, which it has employed in acquisitions in Korea and the Netherlands. No dividend, of course, but a promising speculation.

The stock market and political campaigns share a weakness in their focus on short-term developments, as indicated by a lack of attention to climate change. The scientific consensus is that climate change is taking place, mainly due to human activity. There are no credible scientific skeptics but the subject seems taboo to political debate due to denials by “conservative” think tanks and energy lobbyists.

Already, the consequences are here as the hottest and driest summer in half a century is shifting the Corn Belt northward. Kansas suffered the most and many farmers are switching to less thirsty but also less profitable crops like wheat and sorghum. Meanwhile, Saskatchewan and Manitoba, traditional wheat growing areas are beginning to plant corn. DuPont (DD-$50) and Syngenta (SYT-$74) will gain some sales from their advanced seeds but many farmers will suffer. Whoever wins the election, I hope he and his Administration will pay attention to long-term issues like this.

Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1993. [email protected] 949.494.1376/

800.697.2622 www.crowellroberts.com

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