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Market Commentary

Cliff, Stocks, Churchill
November 29, 2012  David R. Kotok, Chairman and Chief Investment Officer

We have written about the Washington charade, including the fiscal cliff and the debt limit.  For details see www.cumber.com .
 
Our friend and fishing buddy Jim Bianco summed the situation up in a note.  What we like about Jim’s work is his numeracy and his intellectual commitment to accuracy.  We thank Jim for permission to quote him. 
  
“Currently the Treasury is just $81 billion from the $16.394 trillion debt ceiling limit.  This limit is expected to be reached in the next two weeks.  After that the Treasury will run down its cash balances and ‘borrow’ from government trust funds and pension funds.  This should allow the government to fund itself through February.  As a side note, if a private sector company funds itself by running down cash balances and raiding trust and pension funds, everyone goes to jail. When the government does it, it is considered sophisticated asset/liability public sector management.”  Jim Bianco, November 28, 2012
 
Meanwhile, financial markets are looking past the political debate.  Stock prices are rising worldwide.  The US seems to be a leading market among the larger mature ones.  Payroll growth in the US continues slowly, and Fed policy remains predictable for a considerable period.  Inflation is low and likely to be tame for some time.  Cumberland remains fully invested.  We expect stocks to go higher and, maybe, much higher.
 
Our bond positions continue to maintain mid-to-longer durations.  It is too soon to sell out all the bonds and panic about a future rise in interest rates.  That time will come but not for a while. 
  
Bond credit decisions are key!  This is especially true in the state and local government sector.  We worry about states such as Illinois and California.  The so-called state fiscal “fixes” of higher taxation and inadequate reforms are not working.  California cities remain a danger spot.  We are seriously avoiding most of them.  General fund balances deteriorate.  More trouble lies ahead in the local budgeting arena.  The key for an investor is to dig, dig, dig.  Research in municipal credits is critical.  The old days of “it’s insured and AAA” are gone.
 
Now to another correction of a quote we used.  We are bullish on intellectual pursuit and the importance of accuracy.
 
In a writing that followed our error with the Tocqueville quote, we cited two attributions to Winston Churchill.  We published the links to the verification sources.  The exact text we used is, “Winston Churchill said, ‘It has been said that democracy is the worst form of government except all the others that have been tried.’ Churchill also said, ‘You can always count on Americans to do the right thing – after they've tried everything else.’ "
 
Well, we were half right.  That is better than the zero percentage we scored on Tocqueville. 
  
Our friend and another fishing buddy Scott Frew drew on his relationship with a Churchill scholar, who sent the reply copied below.  We asked for and obtained permission to reproduce the message.  For those who are still reading and enjoy the intellectual pursuit of accuracy, as we do, here is the message that Scott Frew received.
 
Dear Mr Frew,

Thank you for your email. I have conducted some research on these two quotes using an extensive book we have here on Churchill’s words and those misattributed to him by Richard Langworth.
 
It seems that the quote, ‘Americans can always be trusted to do the right thing, once all other possibilities have been exhausted’ is unattributed to Churchill. He certainly would never have said this publicly, as he was careful about slips such as this, and it cannot be found in the memoirs of his colleagues. The author has it as a ‘likely remark’ as he did have sentiments like this from time to time during World War II.

Of the other quote on democracy Churchill certainly said it, in the House of Commons on 11 November 1947, but he was quoting an unknown predecessor and did not originate the famous remark about democracy.
‘No one pretends that democracy is perfect or all-wise. Indeed it has been said that democracy is the worst form of government…’
 
Regards,
Philip Cosgrove
Archives Assistant
Churchill Archives Centre
Churchill College
Cambridge
CB3 0DS

Thank you, Scott Frew, Philip Cosgrove, and all readers who noted the issues about quotations and accuracy of research.

David R. Kotok, Chairman and Chief Investment Officer

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