Obama v Romney

From my friend David Kotok to share:

Taxes: Obama or Romney Part 2
October 26, 2012

“Lies, damned lies, and statistics” (attributed to Mark Twain)

There were a lot of responses on the tax piece, “Taxes: Obama or Romney”(http://www.cumber.com/commentary.aspx?file=102512.asp).  Thank you for the emails.

Some comments supported Obama.  The most extreme came from Lori S., a stock broker from San Francisco who is clearly a dyed-in-the-wool Pelosi-ite Democrat.  She heaped opprobrium on me. She criticized everything we wrote as well as the Tax Foundation view of the Romney tax plan.  She offered no concrete support for Obama’s positions. She produced no numbers, only ridicule.  Clearly, Lori does not know me well.  With behavior like hers, she never will.

Joe G. from Washington gave a thoughtful response. He said to look at the Tax Policy Center commentary that has a different set of assumptions. Joe, I agree with you. We both know that assumptions make all the difference in the world. The reason I chose the Tax Foundation analysis is that they took a stand, even though their positions make strong growth assumptions that may or may not be realized. Something is better than nothing, as you and I discussed in our email exchange. Thank you, Joe, for your helpful comments.

Readers may find this link to the TPC website of interest.  “Toppling Off the Fiscal Cliff: Whose Taxes Rise and How Much?” can be viewed by clicking here: http://www.taxpolicycenter.org/publications/url.cfm?ID=412666

In addition to the link we offered in our first commentary, we also suggest the following one.  The Tax Foundation analysis, “Analysis of Romney’s Tax Plan With and Without a $25,000 Cap on Itemized Deductions,” can be viewed by clicking here: http://taxfoundation.org/article/analysis-romneys-tax-plan-and-without-25000-cap-itemized-deductions.

Sherman B. of New Jersey roared back as a Romney supporter.  “Excellent!” harrumphed Sherman who celebrates iced tea, green tea, black tea, and hot tea. He is either at the tea party or in his wine cellar. Thank you, Sherman; I always appreciate the responses.

Roger B. of Pennsylvania says, “Hey, how about the CBO or some neutral scoring facility?” Thank you Roger, your response is thoughtful. The key is to go back and look at CBO scoring techniques. Turn the clock back five years to see how well they have done. Their margin of error is measured in the hundreds of billions on either side and in either direction. They are constrained by a set of rules passed by Congress, who wrote the rules to make themselves look good. Sadly, this is now a flawed system.

Media responses were appreciated as well. Some asked why there is such a difference between the analyses. Has Romney been completely clear? What are the substantive issues that are unresolved? These are great questions, which demand complex answers although both candidates do not give them.  We will offer some thoughts in the closing comments.

No one talks much about expectation changes or behavioral changes. The tax debate ignores the difference between static versus dynamic analysis. It is not a simple statistical matter.

However, the fundamental issue is simple. If you want more of something, lower the taxes on it. If you want less of something, raise the taxes on it. I learned that from a fine economics professor and good friend, Bill Poole.  Apply that concept first; it makes compromise easier to obtain if you do.  If only our politicians would listen!  That principle includes personal income and aggregate GDP.

Here is where we stand today. We talk about a fiscal cliff in a conversation laden with political acrimony but without solutions. We talk about tax changes, yet the most important tax change, a 2% cut in the payroll tax that would deliver a thousand dollars in spending power to every household in America and relieve working people of the most regressive taxation, is not on the table. Neither Obama nor Romney has proposed extending the payroll tax cut. They are both busy defending the respective special interests that are on their sides of the political aisle.

Why not put the payroll tax cut on the table? Why not debate regressive taxes and whether to make them permanent? The reason is simple. The so-called political forces of the United States (Democrats and Republicans), aspirants for the White House, and incumbent congressmen all have the same issue. They do not want to give the revenue back to the people who work and pay taxes in the US. They have their own program agendas that they want to push forward. The common issue of tax relief is talked about and not acted upon.

Taxes are a big deal in the campaign. Are we drilling deep enough in the debate? No. Do we have to resort to looking at analyses that come from private organizations whether it is the Tax Foundation, the Tax Policy Center, or somewhere else? Yes. That is the best we have.

Let me add one final comment on the tax-comparison pieces. The analysis of taxation was done by the Tax Foundation, not us. We provided readers with the link, as we have also done with the Tax Policy Center.  Those folks are responsible for their numbers.

Cumberland assembled the analysis of municipal taxation (taxation of tax-free bonds or tax treatment of tax-free bonds) – whether they are going to change and what the rates will be. We work in that turf.

Our conclusions are clear. The benefits of tax-free bonds are huge. The political constituency that supports them consists of school boards, sewage authorities, airport authorities, counties, townships, and states. That is a massive constituency. Every finance officer in those agencies knows that the cost of finance goes up if you eliminate the tax exemption of interest or the favorable tax treatment of interest on tax-free bonds. Simply put, there is almost four trillion dollars of outstanding state and local government debt in the US. It is turning over, rolling over, refunding, or otherwise changing every day.

If you add 100 to 150 basis points to the cost of the financing, that added cost falls on state and local government issuers. Unlike the federal government, those organizations must balance their budgets.  Thus they will find the revenue to pay the higher debt service from one source or another. They will raise user fees, raise local taxes, hike property taxes, and/or increase sales taxes. One way or another, they will pass on the cost added by increased debt service. Think about it. Do we really want to burden state and local governments in the US at the time when they are retrenching, deleveraging, and altering the entire concept of provision of their services? That, too, is a question that should be part of the political debate this year.

My colleague Michael McNiven makes an interesting point of comparison between Obama and Romney.  Mike uses the state and local government balancing requirement to illustrate his view.  Michael wrote:

“Romney has not been completely clear.  A lot of what he proposes is conceptual and vague.  He says he will balance the budget by 2020, but is not clear on how he will do so.  What we do know about him, however, is that he has balanced every budget within his responsibility for the balance of his career.  This includes business as well as public budgets.  He does bring credibility and a transparent track record to this budget balancing issue.  Yet, how and when he would balance this federal budget is an open question.  He has indicated his strong desire to do so, which is consistent with his personal record.

Obama has been clear on the deficit: he has run sequential trillion-dollar deficits.  With Obama’s future plans, we will have deficits for a very long time.  All of the improvements take place in out years and are speculative as to results.  Using history as a clue, there is no historical record of Obama ever balancing a budget.

Thank you, Michael, for articulating an even-handed view.  I’m sure some of or readers will dispute this but you have encapsulated the actual results accurately.

We thank all readers for their comments both positive and negative as we try to advance this taxation discussion.

David R. Kotok, Chairman and Chief Investment Officer

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Californian cities

Follow up  by David Kotok:


Our position continues to be that there is systemic municipal risk in California. It is evolving in the cities now and is likely to spread. The old cliché applies: there is never just one cockroach. In this case, we already know there is an infestation of cockroaches in California, and they seem to be spreading.


California Update
October 17, 2012

Some follow-up notes to our commentary about California cities are in order. The most recent news involves San Bernardino and other California cities attempting to defer payments to CalPERS. For a timely article on this subject see “San Bernardino defers CalPERS payments as it pushes toward bankruptcy eligibility” published by DebtWire. http://www.cumber.com/content/special/DWMuniSB1016.pdf


Now let’s incorporate some comments forwarded to us by Sherman Bruchansky, an enrolled actuary for over 30 years and an expert in pensions. We’ve known Sherman for a long time. He is forthright and doesn’t mince words. His response concerning Vallejo and the situation there follows.


“David, I have been following the Vallejo bankruptcy since it first occurred. My reading has informed me that there were no changes to police and firefighter pensions. They were and still are 90% of final year’s salary and can begin as early as age 50. Obviously, much overtime is worked in that final year to enhance the pension to over 100% of final pay. I have not seen where the cost of living increases were removed. This means that an officer can work 25 years, retire and collect 5 times or more in retirement than when they working. When I looked at this situation 3–4 years ago the average police officer was making $122,000 per year and the captains were over $200,000. As of this year the average police officer is costing the city $230,000 in salary and benefits and the average firefighter $211,000. For a city of 120,000 people this is unsustainable. Apparently another battle is looming with these unions, since this was not handled during the bankruptcy. As you well know, pensions like these are not available in the private sector under ERISA. The debtors vs. the unions litigation will be here again shortly. Apparently, many CA cities are in this same boat. I find it strange that private company pensions can be curtailed and terminated, but municipal pensions cannot be, or so the unions claim.”


Other commentaries about the California city systemic evolution have flowed from readers, analysts, and reporters who cover those cities in national and California-based media.  Some Wall Street “mavens” have taken the position that the California city problem is “not a big deal.” Those views tend to be centered in the “sell side” where the affiliated firm is in the business of marketing the municipal bonds of many California jurisdictions.  Note: it is hard for a broker to sell a bond when his firm is recommending caution about holding it.  Readers are invited to draw their own conclusions about any biases implied here.


Other views, that are more in agreement with us, seem to be concentrated on the “buy side.”  Buy side analysts are usually more independent and therefore less constrained about making negative or cautionary recommendations.  That said, many are restrained in the degree with which they take positions on risk.  This is especially true when common fund vehicles are used.


Time will tell which view is correct.  Meanwhile, Cumberland’s view originates in a fee for service only management firm.  We do not sell bonds.  We ONLY manage separate accounts and we are state specific in almost all 50 states (I think the current count is 48).  We emphasize risk management and avoidance is problems; thus, we tend to sell early.  This view of preserving capital and diminishing risk is the driver behind our investment conclusion about California.  In sum, we see developments in CA and also in Illinois as the worst two states in the country.  In both, the source of trouble is the underfunded pension systems and the underfunded or unfunded post-retirement benefit systems.


A final point is necessary when it comes to selection of each individual bond.  It is important to distinguish among the various seniority status levels of claims on local budgets. There are differences among these claims. For example, an essential-service revenue bond secured by a first lien on the revenue of a municipal water utility has been upheld by courts as a senior claim. In this example, the bond holders lend money to the municipality, its water utility, or other governmental form. The money is used to drill wells, maintain water lines, process and purify water, maintain reservoirs, and do all the other things that happen when one is engaged in the municipal water business.


The revenues from the sale of the water to municipal users secure, and make the payments to, the bond holders who loan the money to the water company to create the water project. That is usually structured as a senior claim. In addition, the water company promises, through covenants in the bond indenture, to maintain sufficient coverage and financial reserves.  This protects the bond holders, so that they are paid the agreed principal and interest in a timely manner.


In this example, if the town folds up, ceases to exist, becomes a ghost town where no citizens remain and there are no customers to buy water, the water utility bond holders will be in trouble. The bonds will default. That is not the dominant case in the cities we are talking about in California or elsewhere. Why would anyone want to buy the bond of a water utility in a city in which the population was declining, the economic ability to sustain and develop the town was disappearing, and the likelihood that the water company would continue to exist was growing increasingly remote? Anyone who bought such a bond would be guilty of financial foolishness.


The point of the above description is that there are many tax-free municipal bonds issued to support essential-service revenues. These bonds have senior claims and are very well protected. The bond holder can expect payment of principal and interest in a timely manner, even when circumstances in the economic arena are adverse.


That safety is not the case when payment streams are funded without such detailed and legally upheld structural commitments.


We see examples of the latter case taking place in California cities where lease bonds, certificates of participation, and other forms of indebtedness are being used to finance these cities. These are weaker claims that are not tied to specific general obligations or specific revenue liens. They are more likely to be tied to the availability of monies in the general funds of the cities.


What happens when the city is trying to use Chapter 9 bankruptcy or other legal forms to diminish its payments? Standard & Poor’s has warned about cities engaging in the use of Chapter 9 to avoid payments. “Willingness to pay” is the code term for the political resolve of a city governing body to meet obligations.


So what happens in these communities? In order to demonstrate that they have a financial emergency, they must, by definition, not be able to make payments. So they play games with municipal budgeting in order to weaken the credit structure of the more questionable types of bonds, notes, certificates, or lease payments. The communities can then go to the state and say they do not have the money; therefore they have an emergency and need help.


At Cumberland Advisors we are avoiding this level of weaker credit. We don’t want to own it. We don’t advise clients to buy it. If a client brings a portfolio into our firm for management and the client has already purchased this type of bond, we will advise that it be sold.


In sum, don’t lend your money to a municipal government, or any government, that is not actively demonstrating the commitment and willingness to pay you back. If you do, you engage in financial foolishness.


In Cumberland’s view, there is a systemic problem in California. It is rooted in the pension system, which has promised more than it can deliver. California has enacted legislation that is supposed to address this problem over a long period of time, but we are highly skeptical as to whether the legislation is sufficient. We also think the economic assumptions that led to the legislation may be flawed. We will not know for several decades whether the legislation can cure the pension problem. Meanwhile, as investment advisors, we do not want our clients to find out the hard way.


Our position continues to be that there is systemic municipal risk in California. It is evolving in the cities now and is likely to spread. The old cliché applies: there is never just one cockroach. In this case, we already know there is an infestation of cockroaches in California, and they seem to be spreading.



David R. Kotok, Chairman and Chief Investment Officer


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Chap 9 Bankruptcy

My friend David Kotok thinks a re-structuring of the Chapter 9 Bankruptcy is due:

Idiosyncratic vs. Systemic: California Cities, A Case Study
October 10, 2012


“MOODY’S MAY DOWNGRADE 30 CALIFORNIA CITIES. The review may affect $14.3 billion in general obligation and lease-backed debt.”  Source: Bloomberg Brief, October 10, 2012


“When a municipality files a Chapter 9 petition under the U.S. Bankruptcy Code, Standard & Poor’s Ratings Services believes the municipality is raising the issue of its willingness to fund some or all of its financial obligations.  In our view, there are few actions that should carry greater stigma in the municipal credit markets than a bankruptcy filing. We believe any potential weakening of an obligor’s willingness to pay its obligations may reflect degraded credit quality. Moreover, once a bankruptcy occurs, we anticipate the credit implications will remain after the municipality technically emerges from bankruptcy. Restoration of market access could be many years into the future.”   Source: Municipal Bankruptcy: Standard & Poor’s Approach And Viewpoint, 05 Oct 2012


We thank readers and media friends for the quotes originating at the Bloomberg State and Municipal Finance Conference held on October 3, 2012, in New York. We also thank Bloomberg’s Kathleen Hayes, our panel moderator, who gave me a few minutes to make the distinction between idiosyncratic and systemic issues.


In our presentation, we discussed several California cities.  The first mentioned was Vallejo, California, a city of 116,000 at the north end of the Bay Area. (You can take a ferry ride from San Francisco to get there.) Vallejo enlarged its municipal budget by giving raises to its municipal workers and subsequently ran out of money. Hat in hand, it went to the State of California looking for a bailout. California said it did not have any money, either, and would not be providing assistance. Vallejo provoked a fight. It sought Chapter 9 bankruptcy protection under California law.


The first result was the squandering of ten million dollars in legal fees and costs. Vallejo was able to break and redo the labor contracts with its municipal workers who had achieved huge raises. But by 2011, salaries and benefits were 80% of the general fund budget. The potholes in Vallejo were not fixed. The old political regime was kicked out, and the new political regime has inherited a mess.


The second result for Vallejo was that the bondholders did not get “stiffed.”  But the city tried to get them. Senior bondholders were repaid in full.  The COP holders recovered only 65 percent of principal.  COP means Certificate of Participation and is a weaker credit claim.


Fast-forward to the important question.


Is this an idiosyncratic event, or is it the first in a string of systemic events? That question was discussed at the Bloomberg conference. At the time of Vallejo it was viewed as idiosyncratic. This seemed to be a “one-off” event.


What do we do when we want to find the signs of “morphing” from idiosyncratic to systemic? The earlier an investor, professional, or analyst can see the signs, the faster they can move to protect their portfolios, strategies, and implementation options.


In California, Vallejo has been followed by Mammoth Lakes, Stockton, San Bernardino, and Atwater.  At the bottom of this commentary, my colleague Michael Comes, Vice President of Research at Cumberland Advisors, will provide a summary of each of these credits.


For us, as a Muni sector manager, the question is, how do we see the transition? Where do we determine whether there is more than one cockroach in the nest? Now, we know there is an infestation of cockroaches in California, and we find them turning up in its cities.


In the argument we summarized at the Bloomberg conference, we made the case that cities in California have a systemic problem. This is not a “one-off.” It is not idiosyncratic. The systemic issue is now statewide and is a heavy load for the state of California.  It piles onto other problems in California.  These include underfunded pension systems, inadequately funded post-retirement health-care benefits, and high taxation (which is driving marginal taxpayers out of the state to other jurisdictions).


At Cumberland, we are worried about some aspects of California debt. We are on the side of selling or under-weighting California debt and restricting and limiting our California credit exposure.  There are two reasons.  The first is headline risk.  The second is default risk.


There is headline risk that hurts the credit, injures the state’s debt-trading characteristic, and causes the pricing of bonds to be weak in a relative sense. That does not mean California will or will not default. It does mean that if you have to sell your bond into a weak market, you have no choice but to accept a price that is lower than you would otherwise get if the markets were clearing without adverse news flow to hurt them.


Headline risk is important: it is necessary to review it, discuss it, and price it because it can affect the contingent sale of a bond. When you have to sell a bond because you need the money, you have to go into the market at the time of the sale, regardless of the efficiency or inefficiency of the pricing.  Headline risk means a sale under duress will get a poor price.


The other side of this question is default risk. So far, California courts have upheld the rights of the bondholders to get paid. These courts have rejected each of the arguments to place the claims of the specific city ahead of the claims of the bondholder. The bondholders have been paid in Vallejo (except for COPs), San Bernardino, Atwater, Mammoth Lakes, and Stockton. In his summary, Michael Comes will have a quick comment about the credits of these cities and the status of those bonds.


We know something else about the California cities. The rating agencies are now out with extensive municipal questionnaires. Cumberland Advisors consults for some municipalities, and we have seen these questionnaires. Our expectation is that the cities in California are under scrutiny by rating agencies. The likely outcome will be warnings about credit deterioration or downgrades (see Moody’s news above). We see little likelihood of credit upgrades.


In other words, the credit picture of the troubled California city is asymmetrical. It is more likely to go down than up. It is more likely to deteriorate than improve. The pressures in California have not been resolved.


Below you will find the city-by-city summary. We thank Michael Comes for preparing it. We thank readers and participants at the Bloomberg conference for their emails and comments.


At Cumberland, we look at California as a troubled state. We look at the cities within California as troubled municipal credits. Cumberland Advisors does not hold positions in those troubled California cities. You can own plenty of bonds in California that are amply protected with senior claims on revenues and structure. A bond investor does not have to gamble on a deteriorating credit in California.


Michael Comes’ research notes follow.


ATWATER, CA. A typical agricultural community located in the central San Joaquin Valley with a population of 28,000, Atwater declared fiscal emergency on Wednesday as a result of financial uncertainty built up during the past three years. The city has roughly $82 million in debt outstanding across government and business-type activities, all of which the city is on the hook for. Declining property taxes from lower home values, a new wastewater treatment plant, and lack of willingness to reduce personnel costs have created structural imbalances in the city’s budget that have significantly reduced municipal cash balances and ability to remain solvent. As a result, the city has been forced to increase debt issuance to fund deficits, transfer restricted funds from its water and sewer entities to pay debt service in the general fund, and increase rates on city-provided services to levels substantially higher than those of surrounding communities.  The city’s ability to pay debt service has been reduced to barely sum-sufficient levels. We view declaration of fiscal emergency as the inevitable path toward any sort of restructuring because of the city’s lack of leadership in controlling its finances and protecting bondholders. Fortunately for bondholders, the declaration will allow the city to lay off personnel, restructure labor contracts, and reduce benefits without negotiations.


VALLEJO, CA.  Four years before Atwater, the city of Vallejo filed a Chapter 9 petition on $53 million of general-obligation debt before the start of FY08-09, when it otherwise would have been insolvent. Vallejo is extremely important in our analysis, because it set the precedent. Before Vallejo, the need for Chapter 9 relief usually arose from a one-time, idiosyncratic catastrophe, most of the time against a small city (think Mammoth Lakes).  Rarely was there a large entity filing as a result of something like a legal judgment (Orange County). Vallejo was the first major city to file for bankruptcy because it had become structurally insolvent due to systematic factors such as the combined impacts of the housing, economic, and banking crises.  The city’s structural insolvency came as a result of its unsustainable expenses and stalled revenues as it ate through all its reserves, and its budget could not be balanced without relief. Vallejo’s experience highlights positive and negative aspects of a bankruptcy. On the positive side, Vallejo was able to restructure labor and debt contracts deemed otherwise unsustainable, to the tune of over $100 million. On the other hand, the bankruptcy was very expensive, costing over $10 million – largely because of its long length and the litigation of new issues.


MAMMOTH LAKES, CA.  On Monday July 2 the city declared bankruptcy to seek legal protection against having to pay a legal judgment equal to 2.1 times its annual operating budget. This city of 8200 residents, located 300 miles north of Los Angeles, has $2.678 million in Certificates of Participation (debt with interest backed by lease payments) outstanding, issued for capital projects in 2000. In 1997, the town entered a development agreement that required real estate developer Terrance Ballas to construct retail and residential buildings near the Mammoth Yosemite Airport. In return, Ballas would receive rights to develop a $400 million hotel project on 25 acres of airport land and an option to buy the land. The town backed out of the deal because it wanted to use the land to extend the airport’s runway to allow larger jets to land. In 2006, the developer, through its closely held company, Mammoth Lakes Land Acquisition, sued the town for breach of contract and was awarded a $30 million judgment against the town. The judgment accrued interest at 7% and grew to $43 million, up until August of this year, when the city settled out of court with the developer. The town’s bankruptcy plan does not allow restructuring lease payments on its $2.678mm in outstanding debt, which amount to 1.2% of its general-fund expenditures. It is unclear how the bankruptcy filling will affect future debt-service payments; however the bonds continue to be paid in full.


SAN BERNARDINO, CA. The commonly held belief about Chapter 9 is that it is a remedy of last resort for cities that, after attempting to do so in good faith, cannot repay or renegotiate their debts as they come due.  San Bernardino’s use of Chapter 9 is an exception to this rule. Over the course of the last decade, personnel expenses for public safety increased 350%. Reserves in the general fund were depleted years ago, and the city encumbered itself with debt-service obligations and labor agreements that put large risks on the general fund.  The city reached a breaking point in June of this year when the city council came to the realization that the resources on hand were insufficient to make August debt service and other contractual obligations – this after a decade of fiscal mismanagement and structural budget imbalances. California law AB506 allows debtors to bypass private 30-day negotiations with creditors if it is determined the city will be insolvent before the 30 days have elapsed.  To remedy that issue, it was more convenient for the city to declare, eventually allowing it to pass an emergency budget (after a month of wrangling) that included no general-fund payments toward its $50 million POBs (pension obligation bonds), out of a total $233 million in outstanding debt.


STOCKTON, CA.  On June 28th of this year, about sixty miles northwest of Atwater, Stockton became the first – and by far the largest – California city to seek relief under bankruptcy, after failed AB506 negotiations with its creditors. The negotiations failed to achieve a negotiated settlement that would allow the city to adopt a balanced budget for FY12-13, as required by law. A pendency plan submitted by the city during the AB506 process – essentially a budget for the city under Chapter 9 protection – did not include payments for debt service on $350 million out of $702 million of debt, and also reduced costs for labor, retirees, and long-term healthcare obligations. As in the other bankrupt inland cities in the state of California, the bankruptcy code is being used as a last resort, enabling Stockton to continue general-fund operations while giving the city time to negotiate settlements with creditors, thus providing long-term stability.


In this time of uncertainty, bankruptcy has looked increasingly attractive. Revenue increases, except in certain instances, require voter approval; and specific taxes (e.g., a tax on a certain good) require a 2/3 vote by town residents.  A “typical” tax-plan increase such as a sales or utility tax hike could erase deficits and maintain debt-service coverage levels. But will electorates support new taxes, given the risks to municipalities of litigation and escalating costs? Probably not, until the city council can regain the trust of its citizens. We use as an example the city of Vallejo, which, once it got its fiscal affairs in order and regained the trust of its citizens, saw its citizens approve a tax increase. Now, the city is a model of austerity in the deleveraging world in which we find ourselves.


At a minimum, a restructuring of contracts relating to labor, retirees, debt, etc. is required to regain fiscal sustainability.  Unfortunately, given the failures we’ve seen with AB506, bankruptcy is looking like the only way to attain this. The long-term budget forecasts we’ve seen show the problems facing these California municipalities are so severe that aggressive tax hikes or cutting services are not enough to make them viable. Revenues and expenditures are only one source of the problem: debt and contractual liabilities, which can only be addressed through AB506 or Chapter 9 bankruptcy, must be restructured.


David R. Kotok, Chairman and Chief Investment Officer, David.Kotok@Cumber.com

Michael Comes, Vice-President, Municipal Research, Michael.Comes@cumber.com


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Energy Survey

From Singapore, we have Sri Jegarajah, anchor at CNBC, as shared by my good friend David Kotok of GIC.  Thank you David and I will be seeing you in Tokyo in December for your GIC conference there.

Sri Jegarajah, Kevin Kerr, Jim Roemer on Oil, Commodities & Weather.
October 6, 2012

About once a week, Sri Jegarajah sends a survey to a list of market observers located around the world.  We have the good fortune to be among the group.  The group shares its views internally.  It seems we find each others comments helpful.  At least, I do.


Sri is based in Singapore and can be seen anchoring or reporting on the set of CNBC Asia.  We have been interviewed by him and have participated in conferences with him.  He is sharp.  Sri usually writes up the results of his energy surveys and publishes them via the CNBC website and other media.


Our most recent response to the energy survey was bullish.  We argued that the geopolitical risk in the “oil patch” is rising.  We disagree with the market’s celebration based on passive regime change in Iran and calm transition in Venezuela. We see turmoil spreading in Nigeria. The activity on the Turkish-Syrian border is not about to cease.


Sanguine outcomes in the energy sector?  Nope.  In our view the world just doesn’t work that way.  Despots do not give up easily.


What happens if we add a weather shock to the geopolitical outcomes?  Then our case gets even more bullish.


Kevin Kerr added this view to the survey responses:  “We are using this softness to add several different positions in the products and natural gas.  We do not expect these low prices to continue long, and we also anticipate a very cold and challenging winter in the Midwest and northeast US, both areas of key HO and NG usage.”  Kevin is one of the survey’s thoughtful respondents.  He constantly migrates between his Palm Beach office and his Tallinn, Estonia location.  Learn about him at  www.kerrtrade.com .



We took the weather question to Jim Roemer, one of our Sarasota neighbors, who is a meteorologist and adviser to some hedge funds.  Jim and I exchange world views occasionally over a glass of wine and a meal at Salute, one of Sarasota’s lovely “al fresco” bistros.  After listening closely for a few minutes, I asked Jim if he would send me a guest piece that I could post for Cumberland’s readers.


Readers can find the guest commentary on Cumberland’s website, www.cumber.com , in the “Special Reports” section.  The direct link is: http://www.cumber.com/content/special/jimroemer.pdf .  We invite readers to view this lesson in weather, El Nino, and sunspots.  We asked Jim for specific comments on ETFs that are commodity related and that may be impacted if his forecasts are correct, and we thank him for sharing these views with our readers.


Cumberland continues to overweight the energy sector.  We use a number of ETFs so that we can construct portfolio positions that include oil and natural gas, exploration, distribution, and refining.  We are strategically bullish on the energy sector.  We believe that the longer-term price of oil is headed higher and that the trough in natural gas pricing is behind us.  We think the world is a dangerous place when it comes to geopolitical risk.


We do not know about a cold winter, but we respect the views we are seeing.  Hmmm, I wonder if a freeze will reach south to Sarasota.  Maybe my winter meal with Jim will require us to sit indoors and turn up the heat?


David R. Kotok, Chairman and Chief Investment Officer


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