A Strategy Change at Cumberland

Author: David Kotok, Post Date: June 6, 2007

Before we leave for Dublin in a few hours we want to report making some major strategy changes. These were done during the last two weeks. Cumberland clients will see them in their reports. Here are the bullets:

We have instituted a cash reserve in the US managed accounts. The target is 10% with a variance of 2% depending on the separate account size and special needs. This is a change from a fully invested position. We had been fully invested in the US markets for many months. Some accounts have higher cash reserves now because we are taking our time in redeploying monies into the stock market.

We have instituted a cash reserve in international accounts. The target is 5% with variance depending on account size and special needs. We still like the global mature markets and the emerging markets but wish to put some profits in the bank. The bias is toward higher cash and slow redeployment just as in the US domestic accounts.

We have taken the energy weight to market weight or a little under. This is a major change from a very heavy over weight position. We have had substantial profits from our four year over weight in energy and wish to put some of those profits in the bank. Furthermore, we believe that the oil and gasoline sector are now discounting a mountain of bad news and risks. True there could be a major event ahead (hurricane or war) but also true that the market now has a huge fear risk premium which may subside. We see a lower oil price in the fall and not a higher one.

Total return bond targets remain at market neutral or shorter duration when compared with benchmarks. We have been in this mode for a while and it has certainly helped the account’s performance.

Many reasons are behind these changes and we will be discussing them over the next month or two. We wanted to get the trading done first.

We will only address one reason now. That one is the change in interest rates.

The world’s central banks are all raising rates or are on hold. Not one of them is cutting rates. Higher rates mean the discounting mechanism for stocks is under pressure. Higher rates also mean that pressure is building on credit and banking and financials. We are coming off a period of very narrow credit spreads. They have stopped narrowing and some are widening.

We also see shorter term interest rate indicators worsening Look at the TED spread as an example for those who have done the professional work on it and understand it. Also look at the TIPS-nominal spread and note how the real interest rate is rising around the world and particularly in the US.

Higher real rates may provide a future opportunity for us to lengthen bond maturities. It is too soon to do it now. We are getting ready to do that and are building a cash reserve in bond accounts for that purpose. When risk less cash earns 5%, all other investments must compete against it on a risk adjusted return basis to warrant deploying money in them. Right now that is tough test for some of them to pass.

Ok. We are off to Dublin for the GIC conference. There are 12 seats left at this very informative meeting. Anyone who can get there on short notice or any of European readers is most welcome while there is still room. To register call 215-898-9453; the speaker’s line up are below.

While I am away, you can reach the following colleagues to discuss the strategy change and your portfolios. Use our 800-257-7013 or email to reach Peter Demirali at extension 322, Matt Forester at 313, John Mousseau at 307, Carol Mulcahy at 316, Terri Pantalione at 315 or Bill Witherell at 338.

I will have black berry for email in Ireland. The Dublin program follows:

Global Interdependence Center (GIC)

GIC Abroad in Ireland

in partnership with the Central Bank & Financial Services Authority of Ireland

and the Irish American Business Chamber and Network

11 – 12 June, 2007

CONFERENCE VENUE: Morrison Hotel, Lower Ormand Quay, Dublin 1

Monday, 11 June

08:30 – 09:00

Registration / Coffee and Tea Service

09:00 – 09:15

Conference Welcome

by David Kotok, GIC Program Chair

09:15 – 11:45 (coffee break from 10:15 – 10:30)

“Monetary Policy Perspectives”

A panel discussion moderated by

Kathleen Hays, Anchor & Journalist, Bloomberg TV

Speakers include:

John Hurley, Governor of the Central Bank & Financial Services Authority of Ireland

Sandra Pianalto, President and CEO, Federal Reserve Bank of Cleveland

Charles Goodhart, Financial Markets Group, London School of Economics Professor Emeritus; former member of Bank of England’s Monetary Policy Group

Presentations and panel discussion followed by a question and answer period

11:45 – 12:30

“How the Financial Press Decides What Makes Economic News”

Address by Constance Mitchell Ford, Economics Editor, The Wall Street Journal

Presentation followed by a question and answer period

12:30 – 13:15


13:30 – 15:00

“Global Investment Strategies – ‘Traditional’ … ”

A panel discussion moderated by J. Paul Horne, Independent International Market Economist, previously of Smith Barney/Citigroup in London

Speakers include:

Paul F. O’Brien, Executive Director, Fixed Income Portfolio Manager
“Traditional Investing – Stocks, Bonds and Allocation”

Bill Clark, Director, State of New Jersey Division of Investments
“Global Asset Allocation of a Large Institution”

Martin Barnes, Managing Editor, The Bank Credit Analyst
“Global Stock Markets, Valuation and Outlook”

Presentations and panel discussion followed by a question and answer period

15:15 – 16:45

“Global Investment Strategies – ‘Exotics’ – New Investment Options … ”

A panel discussion moderated by Robert Eisenbeis, retired Executive Vice-President and Director of Research at the Federal Reserve Bank of Atlanta. Speakers include:

Ralph Segreti, Director, Global Inflation-Linked Product Manager Barclays Capital, “Inflation as an Asset Class”
Mike Buttner, Managing Director/CEO Wachovia Bank International
“Derivatives, Notional Value Exposure, Policing Collateral and Safety Issues for Financial Systems”

Howard Simons, Strategist, Bianco Research LLC
“Yen Carry Trade and its Impact on Global Financial Markets”

Presentations and panel discussion followed by a question and answer period

16:45 – 18:15 Reception at the Morrison Hotel sponsored by

Tuesday, 12 June

09:00 – 09:15

Welcome and introduction by William J. McLaughlin, President of the Irish American Business Chamber and Network

09:15 – 12:30 (coffee break from 10:30 – 10:45)

“Ireland’s Economic Development and Convergence” A panel discussion moderated by Tom O’ Connell, Assistant Director General, Economic Policy, Central Bank of Ireland. Speakers include:

Sean Dorgan, CEO, IDA, Ireland
Patrick Honohan, Professor of International Financial Economics and Development, Trinity College, Dublin
John Moloney, Group Managing Director, Glanbia plc
Mike Ryan, CEO, Merrill Lynch International Bank Ltd.
Presentations and panel discussion followed by a question and answer period

Closing Remarks by John Hurley, Governor of the Central Bank & Financial Services Authority of Ireland

12:45 – 14:00


18:30 – 20:30

Reception hosted by US Embassy in Ireland Deputy Chief of Mission Jonathan S. Benton at 7 Mespil Road, Ballsbridge, Dublin 4

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Cumberland Advisors® is registered with the SEC under the Investment Advisers Act of 1940. All information contained herein is for informational purposes only and does not constitute a solicitation or offer to sell securities or investment advisory services. Such an offer can only be made in the states where Cumberland Advisors is either registered or is a Notice Filer or where an exemption from such registration or filing is available. New accounts will not be accepted unless and until all local regulations have been satisfied. This presentation does not purport to be a complete description of our performance or investment services. Please feel free to forward our commentaries (with proper attribution) to others who may be interested. It is not our intention to state or imply in any manner that past results and profitability is an indication of future performance. All material presented is compiled from sources believed to be reliable. However, accuracy cannot be guaranteed.