Markets and Banks

Author: David Kotok, Post Date: January 24, 2014

We have taken our overweight exposure in banks and financials to an underweight.

The reason is simple. When the US Attorney General threatens banks in a public forum with statements suggesting that no bank is too big to indict, it is important to pay attention. We looked at the earnings reports of banks, the turnaround in banks, and the settlements that were achieved with banks from prior legacy transactions. For a while, we thought we might have reached a point from which the recovery of the banks and the banking sector could achieve “escape velocity.” For a while, we thought perhaps this persecution of the banking and financial sectors was reaching an end.

We were wrong.

It is now obvious to us that the continuing objective of the Obama administration and the US Attorney General is to punish banks and finance. This adversarial stance introduces a financial malignancy into the sector. Our conclusion is that it is still too soon to view banks as  accelerating their recovery. Their troubles are not over.

Furthermore, our exit strategy from the sector comes on the heels of a terrific market achievement last year. Now, this very large sector of the market looks heavy to us. We have reversed ourselves. We’ve sold the ETFs that we had purchased. In some cases we’ve taken small losses. In other cases we’ve broken even or netted small profits. In all cases, the movement was done quickly.

The US Attorney General holds the gun. No pun intended on his name, Holder.

When faced with a gun, we must remember that a key principle is not to needlessly engage in combat. We would like to think of the financial sector as being in the process of healing and recovering, as gaining in profitability, and as reaching a position of stable growth. We hope that is going to occur, and we continue to watch for signs of renewed vigor.

But hope is not an investment strategy for Cumberland Advisors. The investment strategy we pursued for our clients in this case was not to confront the US Attorney General with an overweight position in a sector that he views as adversarial.

Cumberland is now underweight in the banking and financial sectors.  We also raised cash from other sectors.  We enter the weekend with a cash reserve.

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