Aerorick

13 Defense and Aerospace Stocks to Consider

Defense stocks should be bought today if, and only if, the purchaser believes Republicans retain the White House in six weeks. The Democratic candidate will, much as the incumbent from 1992-2000, gut the military budget which has roughly doubled the past seven years, excluding war-fighting supplements which bring total spending even higher. Deterring an increasingly outrageously behaving natural resource-fortified Russia, and ambiguous but nonetheless very real Chinese military power, will require a further 40-50% spending increase in real dollars over 6 years to 5-6% of GDP from 4.5% today, bringing annual spending to $700-750 billion in 2014, imputing 8-10% compound growth in contractor revenues and 12-14% per share earnings. A Democratic administration will follow an internationalist agenda focused on multilateral institutions and reduce spending toward the 2-3% of GDP of the mid-late 1990s, when the party last held power, imputing 5%-8% annual reductions in contractor revenues and 10-15% lower earnings as the cutbacks will fall disproportionately on weaponry and services. P/Es that today are roughly market multiples will rapidly jump 30%, or more, if McCain wins, while the market will be slower to cast an Obama victory as negatively as our analysis casts, hence a protracted sell-off as reported fundamentals climb into 2010 from the last Bush budget (FY09). We believe the odds favor the bull case, so we continue to recommend purchase of leading aerospace/defense shares such as GD, NOC, LLL, RTN, BA, COL, CW, MOG/A, GR and PCP, but will have more to say on November 5th.

Are Speculators Driving the Agriculture Market?

No more so than "speculators" - as opposed to real demand outstripping supply - have elevated oil these past several years. With the same said regarding the recent iron ore price hikes accepted by Asian steel producers, and grain price hikes by food producers. Global growth, commoditizing IT and rampant Internet adoption are fueling an integrated global economy, producing unforecast demand for basic industries and services underinvested in by the developed world. This results in positive pricing power, expanding profit margins and financial in-flows to redress the imbalances. Much as office and factory automation propelled Silicon Valley in the 70s, 80s and 90s, a favorable terms of trade has swung violently in favor of resource and industrial producers enjoying the the fruits of technologic re-engineering, able to compete while expanding returns. Yet, many of these shares remain priced as cyclicals, or at best growth cyclicals, where history warrants a more secular perspective. Recall the 1990-1991 1x or lower price/sales ratios of many US semiconductor stocks, which by the 2000 peak had in many cases reached low-mid teens.