Time to Bottom-Fish?

More from my friend David Kotok:

Spain and Its Banks: Is It Time to Bottom-Fish?
June 25, 2012


This commentary was written by Bill Witherell, Cumberland’s Chief Global Economist.  He joined Cumberland after years of experience at the OECD in Paris.  His bio is found on Cumberland’s home page, www.cumber.com.  He can be reached at Bill.Witherell@cumber.com.


Last week the Spanish government released reports on the results of “stress tests” applied to Spanish banks by two independent consulting firms.  These indicated that Spanish banks will need between 16 and 62 billion euros of new capital. These amounts are well below the 100 billion euros European governments have agreed to provide to Spain to strengthen its banking system.  The stress tests indicated that Spain’s three largest banks – Santander, BBVA, and Caixabank – will not need any outside help.   These results do ease fears about Spain’s banking system and about Spain’s possible need for a large-scale bailout in the future. The European Central Bank (ECB) gave a further boost to Spanish and other euro-system banks by loosening collateral criteria, which will increase the availability of collateral for counterparties and thereby support the provision of credit to households and nonfinancial corporations. The greatly depressed Spanish bank stocks responded positively to these developments.


The future course for Spanish banks, however, is not assured. The four major global accounting firms – Deloitte, Price Waterhouse, Ernst & Young, and KPMG – will release by the end of July a detailed analysis of the loan portfolios of Spanish banks. This will be followed up by further, more detailed stress tests in September. Some analysts have complained that the recent stress test was not sufficiently adverse. And, as discussed below, Spanish banks are expected to continue for some time to operate in an economy deep in recession.


The single Spanish market ETF listed in the US, the iShares MSCI Spain Index Fund, EWP, tracks the MSCI Spain Index, covering 85% of the publically available total market capitalization of the Spanish equity market.  Investors in this ETF should be aware of the great importance of the financial sector in this market, accounting for some 41.4% of the fund. This contrasts with the 18.4% average for the eurozone. The next largest sector, telecommunication services, accounts for only 18.2%. The largest individual holding is Banco Santander SA, accounting for 21.6%. Then, following Telefonica SA at 18.2%, the third largest holding is Banco Bilbao Viscaya Argenta at 11.0%. Thus the two largest banks alone account for approximately one third of the total Spanish equity market.


Investors also have to consider, of course, developments affecting the remaining 58.6% of the market, most importantly, the state of the Spanish economy.  Recent developments have not been encouraging. Spain’s industrial production declined by 8.3% in the year through April. GDP is expected to decline by almost 2% on an annual basis this year and probably will register a further 0.7 drop next year. The jury is still out as to whether Spain will be able to cover its financing requirements going forward, with an economy mired in recession and committed to a stringent austerity program. Developments outside of Spain and at the eurozone governmental level will be important, as they will likely determine whether contagion of the crisis to Spain will ease or worsen.  A positive sign is that the Spanish 10-year yield fell from the previous week’s very concerning highs of over 7% to close at 6.34% on Friday.


Spanish equities have been driven down severely by the crisis in Europe and the bursting of a construction and real estate bubble in Spain, a drop of over 24% year-to-date and of about 44% over the past 12 months.  This compares with a decline of about 6% year-to-date and 30% over the past 12 months for the eurozone.  Valuations have become relatively attractive. The average P/E ratio for the equity holdings in the Spain ETF, EWP, is 8, which compares with a P/E ratio of 10 for the eurozone ETF, iShares MSCI EMU Index Fund, EZU.


The MSCI Spain equity index is up 15.3% so far this month from a low reached at the end of May. Bottom-fishing in Spanish equities, particularly the equities of Spanish banks, appears to be already underway.  This may be premature in view of the still unresolved risks to the eurosystem. Markets are still waiting for more effective actions by the European governments. We doubt they will be satisfied by the results of the upcoming eurozone heads-of-state meeting.  We too are waiting for more convincing evidence that Europe is resolving its problems, before we add positions in Spain to our International and Global Multi-Asset Class portfolios.


Bill Witherell, Chief Global Economist


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For personal correspondence: bill.witherell@cumber.com

Twitter: @CumberlandADV


Financial diabetes and cardiac treatments!

Now my friend David Kotok likens our economic global woes to :


Can European policy makers switch from fried fish to pickerel?  Can Americans do the same?  Have we had enough of the financial diabetes and cardiac treatments that follow the ingestion of massive sequential compounding debt structures?   Unquote

Report from Leen’s Lodge
June 24, 2012

Fishermen plying the pristine waters of Maine tend to focus on bass and salmon, while they consider pickerel to be “trash fish.”  Pickerel have a mouthful of sharp teeth, linger in shallow water, and quickly charge bait or a lure.  The fisherman often misses the hook, as the pickerel has crunched and then spit out the artificial lure, leaving the fisherman to sit silently contemplating what just occurred.  Pickerel is a ruthless, prehistoric fish.

As you get older and are afforded the opportunity to visit Leen’s Lodge, healthier dietary choices begin to supersede the usual fried campfire fare.  And so, grilled chicken and salad grace the menu, along with a couple traditional items. However, what about the pickerel?

My guide, Ray Socabasin, scaled the pickerel, slit the back and the ribs after it had been cleaned, and then placed it on a metal plate.  Adding a little light olive oil, some onions, peppers, and seasoning, he then covered it with aluminum foil and placed it on the fire.  A few minutes later we had a baked pickerel.

The pickerel meat is sweet and very flavorful; you might almost call it a delicate, fish-type spare rib. The little bones in the pickerel melt from the heat; and so this otherwise difficult and bony fish becomes a succulent, marvelous delicacy.  You take it off the campfire and behold a feast.  Thus, a visit to Leen’s Lodge, near Grand Lake Stream, Maine, offers a little solace in an otherwise turmoil-filled world of struggling financial markets and cut-throat politics.

Nevertheless, let’s glance at credit spreads.  We have updated and posted them on our website: http://www.cumber.com/content/misc/EU_Contagion.pdf.  There you will see credit spreads and yields on benchmark 10-year bonds of the “good guys” and the “bad guys” in Europe and most of the other important places in the world.

We want to call your attention to an added chart that shows the yields on Swiss government debt. Notice the Swiss shorter-term, 2- to 5-year debt is now trading at a negative yield.  That is correct; people are paying interest to loan their money to the government of Switzerland. In the front end of the yield curve, Switzerland is financing itself at a profit.  The 10-year Swiss franc-denominated government bond has become the benchmark bond of the euro zone.

Imagine a construction in which the benchmark bond of a currency zone of seventeen countries is denominated in a different currency.  That is what is happening in Europe.  Why?  The Swiss have pegged their franc to the euro at a ratio of 1.2 to 1.  The Swiss Central Bank will buy unlimited amounts of euros that are presented to it in order to maintain that price.  The balance sheet of the Swiss Central Bank is growing continuously, as the influx of euros swells into the Swiss monetary system.

Thus, we now have a de facto euro zone benchmark bond denominated in Swiss francs, maintained by the Swiss government and the Swiss Central Bank, and at a yield of almost 100 basis points below the traditional German benchmark bond.

Markets seek this safety because it has become an established “one-way” trade.  Markets are betting that the euro zone will be dismembered, losing or expelling one or two of its members.  The various scenarios have widely different outcomes, but the events are being considered.  Markets are also betting that diminution in the German ability to maintain and finance the rest of the euro zone’s debt structure will eventually cause German credit to weaken.

The strengthening of German credit is not in the cards, nor is the strengthening of European credits.  The euro zone continues to spiral downwards. The economies of the various countries are shrinking.  Debt ratios are rising, and the curious notions of European politicians are not much changed. They think that by piling debt load on debt load upon debt loads, they can solve their problem of insufficient bank capital and very low or no growth.

Markets say, “Okay, if and when the Swiss franc peg to the euro comes apart, the Swiss franc will soar in value.  Meanwhile, I can park my money in one of the safest, strongest credits of sovereign debt in the world.”  Switzerland is viewed as one of the preeminent, AAA-rated, safe, sound, and stable financial economies.

Here at Leen’s Lodge, we have discussions of the significance of the credit spreads.  What do they mean for banking systems and for banking enterprises?  Chris Whalen, an expert on the banking sector, is dissecting the credit spreads and how they are impacting the profitability of banks in the US and abroad. Jim Lucier from Capital Alpha talks about Washington-based policy makers and essentially suggests that nothing happens for the rest of this year, other than the interminable debating of our political season.  Others in attendance here are investors and consultants from various locations around the country.  They are concerned about low yields and are watching the destruction of savers’ income. They wonder how long this apparent madness in financial markets and pricing will continue.

The plate comes off the fire and the pickerel are delicious, succulent – and vanish quickly as hungry fishermen switch from fried fish to baked fish.  We take this as a metaphor for a change of policy.  Policy change is very helpful to the diets of fisher folk at Leen’s Lodge.

Can European policy makers switch from fried fish to pickerel?  Can Americans do the same?  Have we had enough of the financial diabetes and cardiac treatments that follow the ingestion of massive sequential compounding debt structures?

We will find out soon enough.  Leen’s Lodge is a great place to contemplate some very important subjects, in addition to finding cooperative fish in pristine waters, in beautiful surroundings. You can call (800) 99-LEENS or visit www.leenslodge.com for more information.


David R. Kotok, Chairman and Chief Investment Officer


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For personal correspondence: david.kotok@cumber.com

Twitter: @CumberlandADV

Reckless v Tenacious

Just received this from my dear friend Janice Dorn, a trading Psychologist, whose insights will benefit traders especially newbies!  Thank you, Janice, for sharing.


RECKLESS VERSUS TENACIOUS   (With deepest apologies to Aesop)

Janice Dorn, M.D., Ph.D.


Don’t be afraid to give your best to what seemingly are small jobs.  Every time you conquer one it makes you that much stronger.  If you do the little jobs well, the big ones will tend to take care of themselves…Dale Carnegie


Once upon a time there was a rabbit named Reckless who was always boasting about how fast he could run.   He criticized all the other animals (especially the smaller ones)—saying that were slower and lazier and could never beat him.  He was really rough on this one particular turtle (let’s call him Tenacious) and bullied him constantly.  Reckless said ugly, nasty words to Tenacious who just sat there day after day and appeared to let the words roll off his shell.

But enough was enough.

Finally, Tenacious got really fed up with this.  He stuck his head out of his shell, looked up at Reckless and said “Who do you think you are anyway?  Why are you always bragging about how you are “all that” and so fast that nobody can beat you?  I am sick and tired of hearing his abuse from you. “
Reckless smirked, looked down at Tenacious and squealed with laughter.   “Nobody can beat me.  Especially you—since you are slower than molasses.  If you want to race, bring it on because you don’t have a chance.  I will win, no matter how hard you try. “

“It’s on” said Tenacious, “we’ll race tomorrow at the crack of dawn. The next day came and Reckless and Tenacious showed up ready to go. The race course was all laid out and they both stood on the starting line.  Reckless was cocky and confident as he watched Tenacious move slowly along the path. Reckless had been up most of the night partying with the other rabbits, so he was sleep-deprived and decided to take a nap.

Reckless woke from a fitful sleep and gazed round, looking for Tenacious. Slowly and steady moving forward, Tenacious was about a third of the way to the finish line. Breathing a sigh of relief, Reckless decided he was hungry and had lots of time to eat. The heavy meal and the hot sun made his eyelids droop. With a quick glance at Tenacious– now halfway along the course– he decided to take another quick nap before running past the turtle to beat him to the finish line.

The nap turned into a longer sleep and when Reckless woke up, the sun was beginning to set. Reckless jumped up in alarm and saw that Tenacious was now almost at the finish line. Reckless bolted as fast as he could, gasping for breath, leaping high into the air, giving it everything he had.  Too bad.  Too late. Tenacious beat Reckless.

This is my rendition of one of the stories from Aesop’s Fables and the moral is:  Slow and steady does it all the time.

Many traders come to the markets with the idea of making huge profits by doing very little or getting rich quickly. They are like the reckless rabbit who thinks he can win with the least amount of work possible.  What they don’t understand is consistent winning in the markets has to do with slow and steady gains.  The real secret of winning is to get rich slowly.  This is done by striking out (taking stops and small losses), hitting some singles and doubles (taking profits larger profits on a regular basis) and occasionally hitting home runs.


So- what are a few of the many trading lessons from Reckless and Tenacious?

(1) Overconfidence is a badge of ignorance. Unless you approach the markets with humility, you are doomed to failure. You might knock out a few good trades, and then get even more confident. You are an accident waiting to happen.

(2) Self-confidence is great, but it must be tempered with continual self-analysis and vigilance.

(3) While you are sitting back resting on your laurels and bragging to yourself and others about your wins, another trader is out at the gym doing pushups and strength training. He/she is preparing to do battle with you. Stay strong and alert!

(4) You and you alone are responsible for your successes and your losses.

(4) Learning to trade properly is a marathon, not a sprint.

(5) Never underestimate the value of patience.

(6) Take your setups and use them to maximal advantage.

(7) Chasing price is almost always a recipe for disaster and losing.


With ordinary talent and extraordinary perseverance, all things are attainable…Thomas Foxwell Buxton


Thanks and Good Trading!


Amaranth Saga






I was rather surprised to receive in my mailbox  this Legal Notice airmailed to me in Singapore without being enclosed and sealed in an envelop, just a few days ago (June  20, 2012).  I am Claimant ID No.0070159400 according to the notice with my name and reference number as claimant.

According to this Notice, given under pendency of this class action and of the two proposed settlements pursuant to Rule 23 of the Federal Rules of Civil Procedure and an Order of the United States District Court for the Southern District of New York (the Court).

The purpose of the notice is to inform me of my rights in connection with two proposed settlements and the pendency of the above-captioned class action (Action).


CLASS ACTION. amaranth

Op Twists

Compliments of my friend David Kotok:

Operation Twist 1.1
June 21, 2012

Bob Eisenbeis is Cumberland’s Chief Monetary Economist. Prior to joining Cumberland Advisors he was the Executive Vice President and Director of Research at the Federal Reserve Bank of Atlanta. Bob is presently a member of the U.S. Shadow Financial Regulatory Committee and the Financial Economist Roundtable. His bio is found at www.cumber.com.  He may be reached at Bob.Eisenbeis@cumber.com.


The FOMC extended “Operation Twist” through the end of the year and committed to move another $267 billion of assets from its holdings of securities with maturities of 3 years or less into maturities of 6 years or more.  This will reduce its portfolio of short-term securities by about 1/3 and increase its holdings of securities in the 6-years and older category to over $2 trillion, or about 75% of its total holdings of $2.6 trillion.  Such a lengthening of the duration of its portfolio is indeed significant, especially when it comes to evaluating the implications of possible exit strategies that don’t simply allow for longer-term securities to mature and run off.  The current duration of its assets is estimated http://www.cumber.com/content/index/duration.pdf  to be about 39 basis points, which means that a parallel shift in the yield curve by that amount would exhaust the Fed’s capital if its assets were marked to market.  But that isn’t the concern here.  The key question is, what impact has Operation Twist had on the term structure to date and how stable has that impact been?  But first some general observations on the policy decision and its context, which are best considered by looking at the changes in the FOMC’s forecasts that were released following its meeting.

FOMC participants in this June meeting significantly downgraded their outlooks for both GDP growth and unemployment.  GDP growth for this year was reduced noticeably below what it was in January of this year, and this is on the heels of an increase at the April FOMC meeting.  The reductions carried through not only this year but 2013 and 2014 and even to the intermediate term.  Similarly, after dropping the upper bound of the central tendency for unemployment to below 8 percent in April, the new forecast has 8 percent as the lower bound for the central tendency.  A similar pattern held for the 2013 forecast.  Additionally, the central tendency for 2014 widened significantly.  What this says – and markets reacted accordingly – is that the FOMC is much more concerned now about the likely performance of the real economy than it was in April.

Given the forecasts, it is clear the committee had to do something, if only to maintain credibility.  But what to do?  Simply modifying the statement language would not prove to be credible upon release of the minutes detailing the actual committee discussions and the concerns expressed about the risks to the expansion.  Moving to another round of quantitative easing might suggest panic over both the US economy and the risks emanating from Europe.  To this one might also add uncertainty about the exact nature of the benefits to growth and employment of another round of quantitative easing, and also the risk that strong action might be interpreted as a political move during an election year.  Chairman Bernanke has opined on the former issue several times.  So, simply extending Operation Twist was the least-cost way of “doing something” while not expanding the Fed’s balance sheet, keeping its powder dry, and only incurring marginal additional risk, once exit from its extremely accommodative stance becomes necessary.

Now the question remains as to what impact the move is likely to have on interest rates and the rest of the economy.  To investigate the first of these two issues, we compare the daily yield spreads across the maturities, as reported by the US Treasury (http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield ) over the course of Operation Twist, which was announced after the September 2011 FOMC meeting and commenced on October 3rd.  The first chart http://www.cumber.com/content/special/history1.pdf  shows the term structure for several maturities, as reported by the Treasury.  The baseline is the term structure as of 10/3/2011, the date that Operation Twist actually began.  Between September 21, following the program’s announcement, and the actual start of the program, the spread for maturities out beyond 5 years decreased by a maximum of 25 basis points but then subsequently varied above and below the baseline across time.

The spread history for the longer maturities is more easily seen in the second chart http://www.cumber.com/content/special/history2.pdf. In particular, spreads for maturities 7 years and longer were consistently above what they had been after the program was initiated.  The seven-year spread only turned negative for three short intervals, before turning consistently negative in early May 2012.  For the longer maturities, the spreads never turned negative until the very end of May 2012.
During May, longer-term spreads began to decline and fell below the baseline in a sequential and regular way.  For example, the 7-year dropped below the baseline and stayed there, beginning about May 5th.  The 10-year didn’t fall below the baseline until May 14th,and the 20-year followed a day later.  The 30-year didn’t exhibit this pattern until May 30th.

So, far from long-term rates being lowered over most of the Operation Twist period, long term rates initially rose and stayed above the baseline.  Interestingly, rates on the maturities the Fed was selling fell slightly below where they were on October 3rd, while rates on the maturities the Fed was adding to its portfolio actually rose above the October 3rd baseline.  Long-term rates didn’t drop below the baseline until seven months after the program began.  This pattern suggests a combination of a sequential reach for yield and a flight to safety by investors, based upon uncertainty about the US economy and developments in Europe.

What does this tell us about the likely term structure going forward under the extended Operation Twist?  Given that investors and the Fed have finally bid up prices on longer maturities and lowered rates, it is not likely that the previous pattern of variable spreads, noted above, will reappear.  Instead, we look for a continued modest drop in longer-term rates, which will be reinforced by the continued flight to quality by European and other investors seeking safety.  This time rates will be lower, and will likely remain extremely low across the term structure, until the Fed reverses the lengthening of the duration of its holdings.  Moreover, at the end of the year, stopping the program will not change the duration of the Fed’s portfolio or the term structure.

Will the low rates induce corporations to invest, will banks respond by seeking yield on loans and nongovernmental securities and will consumers borrow and begin to spend?  That, of course, is the Fed’s gamble; but there is the risk that continued uncertainty will negate this portfolio-balancing approach to stimulating the economy.  The data suggest that uncertainty and perceived risks were as important or more important than Fed purchases and sales in affecting the term structure and spreads.


Bob Eisenbeis, Chief Monetary Economist, email: bob.eisenbeis@cumber.com


To sign-up for Market Commentaries from Cumberland Advisors: http://www.cumber.com/signup.aspx
For Cumberland Advisors Investment Portfolio Styles: http://www.cumber.com/styles.aspx?file=styles_index.asp
For personal correspondence: david.kotok@cumber.com

Twitter: @CumberlandADV

Ray on Cashflow today

Tues. Jun. 19 2012 | 11:20 AM[05:41]
Chi Lo, CEO, HFT Investment Management said the Greek election results only provided a short-term boost to the markets, adding that it will …
Tues. Jun. 19 2012 | 11:40 AM[03:16]
Angus Geddes, CEO, Fat Prophets says investors should be looking to return some cash to the market, as he eyes a rally on the ASX 200 to 4,3…

Wake Up!


Janice Dorn, M.D., Ph.D.

As individuals, groups, and businesses, we’re often so busy cutting through the undergrowth we don’t even realize we’re in the wrong jungle.  We are more in need of a vision or destination and a compass (a set of principles or directions)…Effectiveness–often even survival–does not depend solely on how much effort we expend, but on whether or not the effort we expend is in the right jungle…Stephen R. Covey

You are the problem and you are the solution.  It just doesn’t get any simpler than that.  How wonderful to know this!   It’s a revelation of sorts. You cannot change or control anything or anyone but you. At this moment, you are becoming the person you want to be IF you pay attention and take action.  Doing nothing is not an option for success.  Doing nothing is unacceptable.  Without movement, there is only complacency, stagnation and death.

But it is not enough just to do something.  It is not enough to be busy. There is too much “busy-ness” and always having to do something.  It’s like trying to build a house starting at the roof or somewhere on the second story. How is that working for you?  You need a blueprint and even that is not enough.  So what is enough?

Make a blueprint for your life.  Follow that blueprint exactly as you have drawn or envisioned it.  There is a sequence to be followed and each step flows logically from the previous one. If you attempt to deviate from the sequence, you will falter and lose your way.  Yes- you may be “crazy busy” but you are not focused on the outcome.  You are so busy that it is making you crazy.  You are doing so many other things that are trivial and absolutely not relevant to the task at hand that you lose sight of what you started out to do in the first place.  You will fail and your house will crumble on shifting sands.

Your blueprint in the markets is your trading plan.  Make it, work it and stick with it.  Don’t be tempted to jump into or out of “the next best thing.”  There is no next best thing.  There are no “quick fixes” or “win the lottery” systems.  NOTHING WORKS WITHOUT YOU!!  There is only you and your plan.  There is a clear sequence to trading and investing success. You must take each step to trading competence in its own time.  Read the linked article below this one:  So You Think You Can Trade?”   Read it and live by it because it is your own personal trading success blueprint.

Among the most critical aspects of knowing yourself as a trader is understanding—truly, madly and deeply this one question:  WHAT ARE MY VALUE SYSTEMS IN AND OUT OF THE REALM OF MONEY

If you do not know who you are, i.e., what are your true value systems are they relate to money, you have no business whatsoever trading.  Do something else. You must know this and they make it work for you. If you are unaware of your true value systems outside the realm of money, you are not truly alive.  It’s about taking personal responsibility for your own values.  It’s about being in complete integrity and authenticity with your own values.

I am a survivor of two near-death experiences that changed my value system radically and took me to a completely new understanding of who I am—–both in and out of the realm of money.  Prior to these experiences, I was a “reactor” who tended to focus on what I now believe to be matters of extreme unimportance. The victories I achieved may seem enormous to others, but, in retrospect, they were not.  I had no idea who I really was, what other people truly meant to me and what was the meaning of money in my life. Boy- did I ever have a wake-up call (actually two!!) —totally beyond description!   Now (most of the time), I know who I am, where I am, where I am going and how I am going to get there.  Slowly, one step at a time, over many years, I have rebuilt my life based on the solid foundation of my core value systems.

It’s time to eliminate every person, place and thing in your life that is not in congruence with your core value systems.  These are energy vampires that detract from what should be your major focus:  Evolution to your own higher self and true enlightenment.  You are a living creature that requires nourishment, rest, safety, movement and encouragement to blossom and grow. Take charge of your own life and your own trading.  Don’t wait for someone else to bring you flowers or throw you a hot trade.  Empower yourself.  Become your own leader. Be your own hero. If not now, then when?

There’s a hero
If you look inside your heart
You don’t have to be afraid
Of what you are

There’s an answer
If you reach into your soul
And the sorrow that you know
Will melt away

And then a hero comes along
With the strength to carry on
And you cast your fears aside
And you know you can survive

So when you feel like hope is gone
Look inside you and be strong
And you’ll finally see the truth
That a hero lies in you…Mariah Carey, “HERO”

Janice Dorn, M.D., Ph.D.

Copyright and Illustration Copyright:  Janice Dorn, M.D., Ph.D.:    2006-2012 ALL RIGHTS RESERVED

Wake Up Illustration Credit:   http://wakeup-newcastle.blogspot.com/