Cumberland Advisors Week in Review (Aug 03, 2020 – Aug 07, 2020)

The Cumberland Advisors Week in Review is a recap of news, commentary, and opinion from our team.

Week In Review

These are not revised assessments, and circumstances may have changed in the market from the time of original publication. We also include older commentaries that our editors have determined may be of interest to our audience. Your feedback is always welcome.

CUMBERLAND ADVISORS’ WEEKLY RECAP

As part of Cumberland Advisors’ continuous effort to maintain strong customer relationships, we offer this week’s short video discussing current market conditions and how we are positioning portfolios.

Dear Clients & Friends,

Thank you for joining Cumberland Advisors for this end-of-week update on market conditions, bonds & equities with Matt McAleer and John Mousseau, CFA.

This week:

Matt McAleer on ETFs & Equities

-The Market action is broadening
-Seeing a bid to previously beaten down value names
-Massive cash on the side moving in
-Are these catch up trades?
-Are we seeing a rotation out of growth names?
-For weeks we’ve seen a steady bid to value
-As long as money is looking for new homes, the market should retain a bid
-There will still be pullbacks
-We’re seeing big upgrades in earnings estimates
-We’re seeing a little frothy sentiment coming from the institutional crowd
-Massive Fed Liquidity has to find a home somewhere and we’re watching it

 

John Mousseau’s Update on the Fixed Income Market

-T-Yields basically where they were last Friday
-Jobs numbers today were good, payrolls higher, unemployment lower
-The pace of jobs is slowing, something to keep an eye on
-Next week, CPI & PPI will be watched
-Fed less concerned about inflation, willing to tolerate it to offset periods of low inflation
-As we move forward, we expect to see hope for a vaccine to help move markets
-We expect robust muni demand
-The possibility of a Biden victory means high muni demand,
-Munis have higher value if tax rates go up

Please reach out with any questions/comments you may have about this update; we appreciate your calls, comments, and emails. Watch in the player above or at this link: https://youtu.be/Tmpupfrwnfg

 

Stay safe, healthy, and have a great weekend.

-Matt McAleer & Cumberland Advisors

Matt enjoys your feedback. You can reach him at:
-Link to Matt’s Email: Matthew.McAleer@Cumber.com
-Link to Matt’s Twitter: https://twitter.com/MattMcAleer4
-Link to Matt’s LinkedIn: https://www.linkedin.com/in/matthew-c-mcaleer/
-Call Matt: (800) 257-7013

Other questions or comments? Email us at info@cumber.com or give us a call at (800) 257-7013.

Contact Matt or any one of our advisors by following this link: https://www.cumber.com/our-people/


IN THE NEWS

Cumberland Advisors In The News

Camp Kotok: Maine Woods, Economists & Wine

Quoted: David R. Kotok | Posted on: 08/08/2020 read more

Highlands News Sun – COVID-19: Florida vs. Taiwan

Quoted: David R. Kotok | Posted on: 08/08/2020 read more

Barron’s – July Jobs Report: Better Than Expected, Better Than Feared

Quoted: William Witherell, Ph.D. | Posted on: 08/07/2020 read more

The U.S. election is getting ugly – and investors are getting nervous

Quoted: David R. Kotok | Posted on: 07/31/2020 read more

TREASURIES-Yields fall ahead of TIPS auction

Quoted: John R. Mousseau, CFA | Posted on: 07/23/2020 read more

BondBuyer – Confidence high among muni investors

 

Quoted: John R. Mousseau, CFA | Posted on: 07/16/2020 read more


Cumberland Advisors Market Commentary

Cumberland Advisors Market Commentary offers insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies. Our readers appreciate its timeliness, depth of analysis, and quality of research.

To read current and past commentaries, visit https://www.cumber.com/category/market-commentary/


Credit Spreads

Author: David R. Kotok, Post Date: August 6, 2020

Cumberland Advisors - Credit Spreads We track many spreads at Cumberland and circulate a key summary of them every morning. For this public commentary I extracted the ones you see below (the last 7 items are the key ones to examine) because they help tell the story of how the Fed’s activities have decreased risk pricing in the financial markets. […]


Why Investors Are Looking at Taiwan

Author: William Witherell, Ph.D., Post Date: August 5, 2020

Market Commentary - Cumberland Advisors - Why Investors Are Looking at Taiwan Consider a place that has had only 476 Covid-19 cases and just 7 deaths. This sounds like a rural town in the US with a small population and good access to medical care. Actually, it is Taiwan, a small country in Asia with a very dense population of 23.6 million people, situated about 100 miles […]


Florida vs. Taiwan

Author: David R. Kotok, Post Date: August 4, 2020

Market Commentary - Cumberland Advisors - Florida vs. Taiwan “The first time it’s a novelty. The second time, people know what they’re in for and are less willing to take another hit. The virus is exposing socioeconomic fault lines: it’s harder to stay home with a head cold if you work casual shifts for minimum wage and can’t afford to miss a few days.” […]


Some Thoughts for a Sunday Morning

Author: David R. Kotok, Post Date: August 2, 2020

Some Thoughts for a Sunday Morning Some Thoughts for a Sunday Morning #1 – Two quotes from Tocqueville: “Liberty cannot be established without morality, nor morality without faith” (Democracy in America, http://libertytree.ca/quotes/Alexis.de.Tocqueville.Quote.8AF2). “The greatness of America lies not in being more enlightened than any other nation, but rather in her ability to repair her faults” (Democracy in America,  https://en.wikiquote.org/wiki/Alexis_de_Tocqueville). #2 – […]


Markets, Election, Axios Poll

Author: David R. Kotok, Post Date: July 31, 2020

Cumberland Advisors Market Commentary For the next 100 days or so, the growing focus on the US election may drive news flows and alter markets. Remember, though, there is a chasm between what polls are saying now and what markets are pricing as expectations for tomorrow. Most market agents are looking at 2021 and are now focused on a […]


US Stock Market Sectors & Gainesville, Florida

Author: David R. Kotok, Post Date: July 29, 2020

Market Commentary - Cumberland Advisors - US Stock Market Sectors & Gainesville Florida We were about to publish this commentary on the American stock market sectors when a news item about the healthcare sector crossed our screen. So we have decided to lead with it and then go to the stock market. Here is a fresh report about behavior and its consequences at a medical school in Gainesville, […]


A Modest Proposal

Author: Robert Eisenbeis, Ph.D., Post Date: July 28, 2020

Market Commentary - Cumberland Advisors - A Modest Proposal “In practice, the Fed has never adopted operating procedures designed to control reserves in order to use the money multiplier relationship to control deposits.” (Goodfriend and Hargraves, “A Historical Assessment of the Rationales and Functions of Reserve Requirements,” Source: https://www.richmondfed.org) In response to the pandemic crisis, the Federal Reserve has cut the federal funds rate […]


Update on Fed Repo and Reverse Repo Facility

Author: Robert Eisenbeis, Ph.D., Post Date: July 27, 2020

Market Commentary - Cumberland Advisors - Update on Fed Repo and Reverse Repo Facility Details on offerings and takedowns are interesting and provide clues as to the state of liquidity, even given the large volume of Treasuries coming to market.


Rebekah Jones

Author: David R. Kotok, Post Date: July 26, 2020

Market Commentary - Cumberland Advisors - A Duel Over Data (Or, Three Cheers for Rebekah Jones) A Duel Over Data (Or, Three Cheers for Rebekah Jones) On April 20, 2020, Dr. Deborah Birx, response coordinator for the White House Coronavirus Task Force, praised the Florida Department of Health website for its useful detail: “The Florida Department of Health’s website is extraordinary, and this is what every department of health should have…. […]


In its 30th year, the Frank G. Berlin Sr. Foundation Small Business Awards recognizes member businesses with locally owned and operated businesses. Cumberland Advisors was recognized last year as the “Professional Services Business of the year” for 2019 and we wish the 2020 finalists continued success and luck for this year’s selection. The Sarasota Chamber will conduct the event virtually on August 28th from 12 p.m. to 1 p.m. Details here: https://www.sarasotachamber.com/2020-virtual-sba.html

The Greater Sarasota Chamber of Commerce - SBA 2019 - Winner- Professional Services Category

July 3, 2019 – Sarasota, Florida – On Friday, June 14, 2019, business and community leaders gathered for the 29th Frank G. Berlin, Sr. Small Business Awards, presented by the Herald Tribune Media Group. Three finalists were selected across five categories: Hospitality and Tourism, Non-Profit, Products and Services, Retail and Professional Services. We are honored to share that Cumberland Advisors was selected as the winner within the Professional Services category. ”

Press Release: https://www.tampabaynewswire.com/2019/07/03/cumberland-advisors-receives-sarasota-chamber-of-commerce-small-business-award-within-the-professional-services-category-78721


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




Cumberland Advisors Market Commentary – Credit Spreads

We track many spreads at Cumberland and circulate a key summary of them every morning. For this public commentary I extracted the ones you see below (the last 7 items are the key ones to examine) because they help tell the story of how the Fed’s activities have decreased risk pricing in the financial markets.

Cumberland Advisors - Credit Spreads

We’ve selected the morning of August 4 (the “Today” column) and three other key dates to demonstrate the time comparison. The December 31 date shows the spreads before all the COVID-19 risk events happened in US markets; March 31 is within days of the extreme. The “Today” and “Last Week” columns demonstrate how these credit spreads are stabilizing at the present levels. Obviously things are much improved from March. Equally obvious is that spreads are much higher (more risk in market prices) than they were pre-COVID. As long as these credit spreads remain stable or keep narrowing, it is likely that other financial metrics will improve and stock prices will maintain their upward trajectory. At Cumberland, our US ETF portfolios are mostly fully invested and have small cash reserves.

Note: If the chart below loses formatting and doesn’t render properly on your computer or mobile device, please use this link to see a JPEG version: Credit Spreads Chart August 2020 v1

Chart Data Source: Bloomberg
LIBOR (Prior Business Day) Today Last Week 3/31/2020 12/31/2019
1m 0.157 0.16113 0.98938 1.7994
3m 0.249 0.26063 1.45013 1.9446
6m 0.3035 0.3155 1.072 1.9208
1y 0.44675 0.46133 0.9685 2.0043
Alternative Rates Today Last Week 3/31/2020 12/31/2019
Secured Overnight Financing Rate (SOFR) 0.09 0.1 0.01 1.53
Broad General Collateral Rate (BGCR) 0.07 0.07 0.01 1.5
Tri-party General Collateral Rate (TGCR) 0.07 0.07 0.01 1.5
LIBOR Forward (compounded semi-annually) Today Last Week 3/31/2020 12/31/2019
3*6 0.359320698 0.371701804 0.735312582 2.156326842
6*12 0.598908427 0.616344361 0.868487061 2.215823222
FRA Composite Today Last Week 3/31/2020 12/31/2019
3*6 0.213 0.221 0.525 1.723
6*12 0.238 0.244 0.407 1.699
Difference (Libor Forward- FRA Composite)
Today Last Week 3/31/2020 12/31/2019
3*6 0.146321 0.150702 0.210313 0.433327
6*12 0.360908427 0.372344361 0.461487061 0.516823222
Today Last Week 3/31/2020 12/31/2019
FED Funds Effective 0.1 0.1 0.1 1.55
Fed Futures Implied Rate
Sep-20 0.07 0.07 0.06
Dec-20 0.05 0.04 0.07
Mar-21 0.02 0.02
T-Bills Today Last Week 3/31/2020 12/31/2019
3m 0.09 0.08 0.01 1.55
6m 0.1 0.08 0.09 1.58
1y 0.11 0.1 0.12 1.49
Treasury Today Last Week 3/31/2020 12/31/2019
2y 0.111 0.111 0.23 1.593
5y 0.203 0.22 0.377 1.709
10y 0.531 0.533 0.684 1.923
30y 1.221 1.196 1.313 2.372
Today Last Week 3/31/2020 12/31/2019
Eonia -0.467 -0.468 -0.445 -0.457
Today Last Week 3/31/2020 12/31/2019
ESTR (Euro Short-trem Rate) ESTRON -0.551 -0.552 -0.528 -0.542
Today Last Week 3/31/2020 12/31/2019
Ted Spread (3M T-bill) 0.16407 0.15922 1.4552 0.38848
Today Last Week 3/31/2020 12/31/2019
S&P US IG Corp Average Yield vs GT10 Spread 127 bps 132 bps 285 bps 88 bps
Today Last Week 3/31/2020 12/31/2019
Spread between Prime and Gov MM 10.452 bps 10.348 bps 75.571 bps 34.148 bps
Today Last Week 3/31/2020 12/31/2019
Moody’s Baa Corp Index  vs GT10 263 bps 261 bps 402 bps 197 bps
Today Last Week 3/31/2020 12/31/2019
HYG Indicated Yield vs GT10 427 bps 431 bps 518 bps 236 bps
Today Last Week 3/31/2020 12/31/2019
CCC Corps OAS (BCAUOAS) 1004 bps 1020 bps 1726 bps 857 bps
Today Last Week 3/31/2020 12/31/2019
HY Corps EX Energy vs GT10 428 bps 441 bps 763 bps 285 bps
Today Last Week 3/31/2020 12/31/2019
CCC ex Energy (BNRCOAS) 834 bps 850 bps 1427 bps 757 bps

Chart Data Source: Bloomberg

 

David R. Kotok
Chairman of the Board & Chief Investment Officer
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries

Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




Cumberland Advisors Market Commentary – Why Investors Are Looking at Taiwan

Consider a place that has had only 476 Covid-19 cases and just 7 deaths. This sounds like a rural town in the US with a small population and good access to medical care. Actually, it is Taiwan, a small country in Asia with a very dense population of 23.6 million people, situated about 100 miles off the coast of the China mainland, where the coronavirus originated. On a per capita basis, the US has had more than 1,200 times as many COVID-19 deaths as Taiwan has. There has been no local transmission there in more than three months. Taiwan’s success in combating this virus is unmatched. It occurred despite the fact that more than one million Taiwanese work in China and there is constant travel between the two nations.
Market Commentary - Cumberland Advisors - Why Investors Are Looking at Taiwan
There are several reasons for Taiwan’s success. The country has learned from its past experiences of having to deal with viruses coming from China, in particular, SARS. The government gave serious attention to planning how to deal with future threats. The population, like those of a number of Asian countries, is used to wearing face masks to limit the spread of disease. But the unique Taiwanese advantage in confronting COVID-19 is the advanced state of the nation’s digital health infrastructure and its readiness to apply it. All citizens have a health card containing their medical history, with a unique ID that is used by all healthcare facilities and doctors. The authorities were able to merge this information with immigration and customs data to identify and test patients most at risk. Taiwan’s testing, tracing, and isolating proved key to checking the spread. No widespread lockdowns were needed. It is important to note the important role played by the country’s democratic norms and institutions. The leadership has demonstrated transparency, honesty, and respect for democratic processes while avoiding politicizing the pandemic.
The Taiwanese economy is benefiting from both its success so far in combating the virus and a $35.9 billion government stimulus program to help offset the headwind from the 4.9% decline projected for the global economy. Consumers started in July to spend government-issued vouchers for consumer goods and tourism, and several weeks ago the government tabled a second supplementary budget for 2020 of $7.13 billion to boost sectors hit by the pandemic. More important than these measures has been the resumption of strong demand for Taiwan’s high-quality telecommunications exports, helped by people around the globe working from home.
Taiwan’s manufacturing downturn in April and May eased in June, with the HIS Markit Taiwan Manufacturing PMI rising to 46.2 from 41.9 in May. In July the PMI moved into expansion territory at 50.6 with output stabilizing. Supply chains are still under pressure and employment continued to decline. Tourism and aviation have been hard hit.
Taiwan’s budget office expects the economy to advance by 1.67% this year, a little slower than the 1.77% gain projected by the Chung-Hua Institution for Economic Research. The Taiwanese economy is classified by the International Monetary Fund as an advanced developed economy. It is looking like Taiwan’s economy will be the only advanced economy to achieve a positive annual rate of growth this year.
Looking beyond 2020, Taiwan looks well situated to take advantage of the projected recovery of the global economy and continued outperformance of the technology sector. Its most important export is semiconductors, an industry key to the accelerating development of 5G technology. China, Taiwan’s most important export market, is expected to expand strongly next year.
Taiwan’s stock market has done better than most national markets so far this year. The iShares MSCI Taiwan ETF, EWT, has recovered from a sharp drop in March and is now up 9.8% year-to-date August 4. In comparison, the iShares MSCI all countries ex-US ETF, ACWX, is still down 6.3%, and the advanced-country ex-US iShares MSCI EAFE ETF, EFA, is down 8.4%. The outperformance of EWT reflects the heavy, 54%, weight of technology stocks in the ETF, with Taiwan Semiconductor Manufacturing Co. accounting for 23.3%. There are several downside risks to monitor. The global economic recovery could be slowed by further outbreaks of the pandemic. China-US relations could deteriorate further, impacting international trade. China could step up its pressure on Taiwan, following its oppressive actions towards Hong Kong. Cumberland Advisors is maintaining its EWT positions in its International and Global ETF portfolios.
Cumberland Advisors holds ACWX in its investment portfolios. The author holds ACWX in his personal investment portfolio.
Bill Witherell, Ph.D.
Chief Global Economist & Portfolio Manager
Email | Bio
__________________________________________________________________
Sources: statnews.com, brookings.edu, Worldometers.com, HIS Markit, reuters.com, forbes.com, cnbc.cometf.com, Financial Times



Cumberland Advisors Market Commentary – Florida vs. Taiwan

“The first time it’s a novelty. The second time, people know what they’re in for and are less willing to take another hit. The virus is exposing socioeconomic fault lines: it’s harder to stay home with a head cold if you work casual shifts for minimum wage and can’t afford to miss a few days.” (Bloomberg Prognosis column, August 1, 2020)

Market Commentary - Cumberland Advisors - Florida vs. Taiwan

On July 11, in a COVID-19 briefing held at Blake Medical Center in Bradenton, Florida, Gov. Ron DeSantis bragged about the amount of coronavirus testing Florida has done compared to Taiwan.

He said, “We’ll go over some of the things we’re doing in terms of the COVID-19 response. Of course, our mission really focuses on protecting the vulnerable. We’ve from the very beginning wanted to expand testing. We are definitely doing that. Two days – yesterday – we reported 95,000 tests; today I think we’re over 80,000 tests. To put that in perspective, Taiwan has done 78,000 tests the entire pandemic, and they are 23 million people, so we’re definitely doing a lot of testing, practicing social distancing, and supporting and protecting hospital and healthcare workers.”

Ron DeSantis’s comparison between Florida and Taiwan caught our attention, so we would like to follow his lead by delving into Taiwan’s COVID-19 story a little further.

Taiwan launched its response to SARS-CoV-2 on December 31, 2019, the day that China announced an unknown pneumonia circulating in Wuhan. Taiwanese officials began screening travelers from Wuhan that day, before passengers deboarded planes. The island, which is situated just 81 miles from China, ramped up its efforts to arrest spread of the virus in January, requiring a 14-day quarantine for everyone who had visited Wuhan within 14 days. Travel from China’s Hubei Province was restricted in late January, and those restrictions were expanded as outbreaks surfaced elsewhere.

Taiwanese officials leveraged data analytics to identify possible cases through the national healthcare system. Travel data was integrated with health data so a doctor seeing a patient would have that patient’s travel history. People deemed at high risk because of their recent travel history were asked to stay at home and were tracked through their cellphones.

Limits were set on mask prices in January; masks sales were rationed in February (at first, two per week and then three) to prevent hoarding and ensure access; and exports of masks were halted to secure domestic supply. Taiwan’s residents could see on a map where pharmacies were located and which pharmacies had masks in stock. Residents almost always wore masks in public spaces.

Taiwan prepared to provide assistance to schools, though schools never had to close; it used government and military funds to ramp up the production of masks; it oversaw resource allocation; it fought misinformation and issued public service announcements and made plans to assist schools, businesses, and furloughed workers.

Please let me insert a Kotok personal note about this timeline:  On March 1, I sat at a private dinner in Sarasota when an email about the first Covid case in a hospital in Sarasota flashed on a device; within 48 hours it was statewide news in Florida.  I wore a mask as a speaker at the global ETF conference in Ft. Lauderdale in January, 2020.  I don’t know what Governor DeSantis knew and when he knew it.  I do know that a lot of other folks were well aware of the Taiwan timeline by early January.

Back to Taiwan.

In fact, the list of actions that Taiwan took during the first two months of the pandemic runs to five pages long and is available as a supplement to a JAMA study, published on March 3, 2020, which concludes, “Through early recognition of the crisis, daily briefings to the public, and simple health messaging, the government was able to reassure the public by delivering timely, accurate, and transparent information regarding the evolving epidemic. Taiwan is an example of how a society can respond quickly to a crisis and protect the interests of its citizens.” (https://jamanetwork.com/journals/jama/fullarticle/2762689)

By April, Taiwan was requiring masks on public transport and closing hostess clubs and ballrooms. Still, Taiwan’s residents were able to retain most of their freedoms, avoiding the full shutdowns many nations experienced. (By all accounts, they did not consider a face covering tantamount to enslavement.) By the end of the month, although Taiwan had to deal with an outbreak aboard a naval vessel, the virus was under control and Taiwanese citizens were permitted to donate their allotments of masks to other countries in need. By May 1, there had been no cases for six days. It was possible to hold a baseball game with 1000 spectators the next week, though restrictions on mass gatherings continued and an annual Buddha Day celebration was moved online.

On May 11, Taiwan reported a coronavirus death, bringing the island nation’s total death count to 7. (By the end of the day on May 11 in Florida, by contrast, 1735 Floridians had died.)

On May 21, a single new case was reported in Taiwan. On that same day in Florida, 527 new cases were confirmed. That number exceeds the total number of cases recorded in Taiwan, which stands at 467 on July 30. Florida’s official total number of cases as of July 30 was 461,379, or nearly 1000 times higher than Taiwan’s.

In early June, given that no local transmission of the virus had occurred in 56 days, some restrictions on mass gatherings were lifted, and later in the month, Taiwan eased travel restrictions for business travel and other purposes from some countries, with testing, screening, and quarantine requirements. (See “Entry restrictions for foreigners to Taiwan in response to COVID-19 outbreak,” https://www.boca.gov.tw/cp-220-5081-c06dc-2.html. Sources for the timeline from April until the present are “Timeline: COVID-19 in Taiwan,” Focus Taiwan,https://focustaiwan.tw/society/202004185001, and Worldometer,https://www.worldometers.info/coronavirus/.)

Just as the COVID-19 stories of Florida and Taiwan have diverged, so have their economic stories. US Fed Chairman Jerome Powell warned on July 29, “The path of the economy is going to depend to a very high extent on the course of the virus, on the measures that we take to keep it in check. We can’t say it enough.” (“Fed Maintains Stimulus Commitment as Economic Outlook Dims,” https://www.wsj.com/articles/fed-maintains-stimulus-commitment-as-economic-outlook-dims-11596045601). For now, with US cases and deaths surging, the recovery that reopening was meant to achieve is floundering.

Meanwhile, though Taiwan took its own COVID-19 lumps during the second quarter, Taiwan’s budget office now forecasts that the country will see 1.67% growth for 2020 (“Taiwan Reaping Rare Economic Benefits Due To Its Successful Battle Against Covid-19,”https://www.forbes.com/sites/ralphjennings/2020/07/24/taiwan-reaping-rare-economic-benefits-of-its-successful-battle-against-covid-19/#3cf41d44329d). The Brookings Institution offers further analysis of COVID-19’s impacts on Taiwan’s economy here: “Taiwan faces a changed economic outlook in Asia following COVID-19,” https://www.brookings.edu/blog/order-from-chaos/2020/06/29/taiwan-faces-a-changed-economic-outlook-in-asia-following-covid-19/.

This huge, tragic difference in outcomes points up a key lesson in pandemic response: Leadership matters. “They have professionals running the show,” says Tsung-Mei Cheng, a health policy research analyst at Princeton University. “These are people who have trained for years for this.” (“How Taiwan beat the coronavirus,” CNBC, https://www.cnbc.com/2020/07/15/how-taiwan-beat-the-coronavirus.html)

Taiwan’s government had a strong pandemic management plan, which was put in place after Taiwan suffered greatly in the SARS epidemic of 2003. The plan was strictly enforced, and the public respected the rules and obeyed them. “We have this phrase in Taiwan that roughly translates to, ‘This is your country, and it’s up to you to save it,’” Cheng said. People caught not wearing masks in crowded areas, such as the subway, or who break quarantine are hit with huge fines and may find themselves shamed on social media.

In a comment posted on March 5 in response to the JAMA article cited above, expat Lloyd Lalande, who teaches at Taiwan’s Tzu Chi University, noted the nation’s solidarity in fighting the virus and observed residents’ trust of a trustworthy government: “There has definitely been a sense here that the COVID-19 threat has and continues to be managed competently by the government with community members also responsibly and cooperatively playing their part. That response is visible everywhere, whether coming through immigration control, having my temperature checked each time I enter my campus, using the alcohol hand spray at my favorite coffee shop, or buying masks with my residential card….” (“Response to COVID-19 in Taiwan Big Data Analytics, New Technology, and Proactive Testing,”https://jamanetwork.com/journals/jama/fullarticle/2762689)

Meanwhile, in Florida, Gov. DeSantis has maintained that mandating masks statewide just wouldn’t work. “To do police and put criminal penalties on that is something that is probably gonna, would backfire,” DeSantis said on June 26 (West Palm Beach TV, https://www.wptv.com/news/state/mandating-masks-statewide-would-backfire-florida-gov-ron-desantis-says). Across Florida, trust in state leadership is low, and noncompliance with public health recommendations is problematic. (Meanwhile, the evidence for masks mounts, as the Wall Street Journal reports here: “Face Masks Really Do Matter. The Scientific Evidence Is Growing,” https://www.wsj.com/articles/face-masks-really-do-matter-the-scientific-evidence-is-growing-11595083298.)

The governor, for his part, has blamed Florida’s record-breaking spike in COVID-19 cases on increased testing, a theme borrowed from President Trump.

Governor DeSantis is correct about the number of COVID-19 tests Florida has done relative to the number Taiwan has done. But if, like Taiwan, you don’t have many cases anymore because you have almost completely stamped out the virus, you don’t have to do nearly as much testing as you must if your ICUs are full and the number of people you have dying every day is equivalent to a commercial jet crashing with no survivors every single day.

In closing, we offer a Twitter thread on why we need even more testing than we have, posted by Natalie Dean, an assistant professor of biostatistics at the University of Florida:


[Begin thread – adapted for readability here]

THINK LIKE AN EPIDEMIOLOGIST:
The chart below is tests per 1000 people. Relative to other countries, the United States is doing a lot of testing. So why do public health experts say that testing is inadequate in the USA
?

USA Tests per Thousand
Source: (ourworldindata.org/coronavirus-testing)

First, the amount of testing a country needs is not fixed, but rather it depends on the size of that country’s outbreak. South Korea does not need to do the same amount of testing as the United States because our outbreak is much bigger than theirs. For starters, we need enough testing to meet demand, and demand will depend on how many people are sick with COVID-like symptoms or have been exposed to an infected person. With hot spots everywhere, there is much more demand in the US. In addition, for the same amount of testing, many more of our tests come back positive. This is reflected in higher test positivity (>5%). High test positivity implies that we need more testing to uncover more of the infections that are being missed. Here we see daily tests per million (y-axis) against confirmed cases per million (x-axis). Countries at the same height are doing a similar amount of testing, but the US is far off on the right with a larger outbreak and higher positivity.

Daily Coronavirus Tests
Source: (ourworldindata.org/coronavirus-testing)

The other major reason that public health experts are concerned about testing? Long turnaround times! These tests get counted in the official statistics whether it took 1 day or 14 days to get the results. But only the quick turnaround times are useful for control efforts. So while we may be doing a lot of testing on a per capita basis, it is still not adequate because:
- Our outbreak is very large
- Our test positivity is too high
- Out test turnaround times are too slow

[End thread] (https://twitter.com/nataliexdean/status/1288179530264272897)


I thank Governor DeSantis for inviting us to pursue an illuminating comparison of COVID-19 responses and outcomes in the State of Florida versus Taiwan, a nation with a population of similar size. I believe that Florida has options other than the COVID conflagration that we see burning through our population. Governor DeSantis’s flagging approval numbers, which have fallen from 62% to 45% since last year, confirm that I am not alone in my grave concern for our state and the policy path we are on (“Florida Gov. Ron DeSantis’ popularity plummets amid widely panned coronavirus response,” https://www.usatoday.com/story/news/politics/2020/07/31/covid-19-florida-gov-ron-desantis-popularity-polls-plummets/5559026002/).

My company relocated to Florida a decade ago. Forty of us work here. We touch hundreds of people directly in our company and thousands of Floridians in our state. We are watching our state government fall short of the response that this crisis demands while our businesses struggle and our investment risk rises.

For me personally, this statewide failure is a disappointment in both civics and in public health.  In civics, and as a veteran of New Jersey Republican politics (I served two Republican governors, had two Senate confirmations and four Republican appointments), it was not in our early political teaching to see disregard for the safety of a state’s citizens.  In my government experience, that came first, not partisan politics.

For business, I would argue that we have to change course, or we will not get this economy of Florida fully back to work for years. This week, in Sarasota, we personally witnessed testing for COVID still delayed by nine days before results.  We still have no real contact tracing mechanism. We still have no statewide requirement that residents wear masks in public. We can do better. Florida state government must do better.  Otherwise, we will continue to see overburdened hospitals, more deaths, and prolonged negative economic impacts.

David R. Kotok
Chairman of the Board & Chief Investment Officer
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Cumberland Advisors Market Commentary –  Some Thoughts for a Sunday Morning

Some Thoughts for a Sunday Morning

#1 – Two quotes from Tocqueville:

“Liberty cannot be established without morality, nor morality without faith” (Democracy in America, http://libertytree.ca/quotes/Alexis.de.Tocqueville.Quote.8AF2).

“The greatness of America lies not in being more enlightened than any other nation, but rather in her ability to repair her faults” (Democracy in America,  https://en.wikiquote.org/wiki/Alexis_de_Tocqueville).

#2 – A 21-year-old paints swastikas in Sarasota and is caught on film by security cameras (“Deputies charging 21-year-old man for vandalizing 2 Jewish temples in Sarasota,” WFLA, https://www.wfla.com/news/sarasota-county/deputies-charging-21-year-old-man-for-vandalizing-2-jewish-temples-in-sarasota/). One wonders what he has been viewing and reading to influence him.

#3 – “It’s really a wonder that I haven’t dropped all my ideals, because they seem so absurd and impossible to carry out. Yet I keep them, because in spite of everything I still believe that people are really good at heart. I simply can’t build my hopes on a foundation of confusion, misery, and death. I see the world gradually turned into a wilderness. I hear approaching thunder, I feel the suffering of millions, and yet, if I look up to the heavens, I think that it will all come out right one of these days; that this cruelty will end, and that peace and tranquility will return again. In the meantime, I must hold on to my ideals for perhaps the day will come when I shall be able to carry them out.”

The writer was Anne Frank (The Diary of a Young Girl, https://en.wikipedia.org/wiki/The_Diary_of_a_Young_Girl). Readers may wish to try an experiment. Ask younger persons a question: “Do you know the name Anne Frank?’ Hear what they say. Then ponder again what a 21-year-old views and reads.

#4 – Here’s a very positive story about a white cop and kids playing basketball in the street. It was featured on “Good Morning America” back in January 2016: “Shaquille O’Neal Joins Florida Cop to Surprise Kids at Pickup Basketball Game,” ABC News, https://www.youtube.com/watch?v=gYbW5Q91hyA. Hat tip to my friend Bill Dunkelberg.

Happy Sunday Morning!

David R. Kotok
Chairman of the Board & Chief Investment Officer
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Cumberland Advisors Week in Review (Jul 27, 2020 – Jul 31, 2020)

The Cumberland Advisors Week in Review is a recap of news, commentary, and opinion from our team.

Week In Review

These are not revised assessments, and circumstances may have changed in the market from the time of original publication. We also include older commentaries that our editors have determined may be of interest to our audience. Your feedback is always welcome.

CUMBERLAND ADVISORS’ WEEKLY RECAP

As part of Cumberland Advisors’ continuous effort to maintain strong customer relationships, we offer this week’s short video discussing current market conditions and how we are positioning portfolios.

Dear Clients & Friends,

Thank you for joining Cumberland Advisors for this end-of-week update on market conditions, bonds & equities with Matt McAleer and John Mousseau, CFA.

This week:

Matt McAleer on ETFs & Equities

– Matt has some charts this week
– He first takes us through Domestic Sectors
– Next, he offers insight for the International Markets

John Mousseau’s Update on the Fixed Income Market
– John give us various rates for a big picture view of muniland
– He also discusses government relief for industries and local/state governments

Please reach out with any questions/comments you may have about this update; we appreciate your calls, comments, and emails. Watch in the player above or at this link: https://youtu.be/L0ahbGPDjZE

 

Stay safe, healthy, and have a great weekend.

-Matt McAleer & Cumberland Advisors

Matt enjoys your feedback. You can reach him at:
-Link to Matt’s Email: Matthew.McAleer@Cumber.com
-Link to Matt’s Twitter: https://twitter.com/MattMcAleer4
-Link to Matt’s LinkedIn: https://www.linkedin.com/in/matthew-c-mcaleer/
-Call Matt: (800) 257-7013

Other questions or comments? Email us at info@cumber.com or give us a call at (800) 257-7013.

Contact Matt or any one of our advisors by following this link: https://www.cumber.com/our-people/


IN THE NEWS

Cumberland Advisors In The News


Cumberland Advisors Market Commentary

Cumberland Advisors Market Commentary offers insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies. Our readers appreciate its timeliness, depth of analysis, and quality of research.

To read current and past commentaries, visit https://www.cumber.com/category/market-commentary/


Markets, Election, Axios Poll

Author: David R. Kotok, Post Date: July 31, 2020

Cumberland Advisors Market Commentary For the next 100 days or so, the growing focus on the US election may drive news flows and alter markets. Remember, though, there is a chasm between what polls are saying now and what markets are pricing as expectations for tomorrow. Most market agents are looking at 2021 and are now focused on a […]


US Stock Market Sectors & Gainesville, Florida

Author: David R. Kotok, Post Date: July 29, 2020

Market Commentary - Cumberland Advisors - US Stock Market Sectors & Gainesville Florida We were about to publish this commentary on the American stock market sectors when a news item about the healthcare sector crossed our screen. So we have decided to lead with it and then go to the stock market. Here is a fresh report about behavior and its consequences at a medical school in Gainesville, […]


A Modest Proposal

Author: Robert Eisenbeis, Ph.D., Post Date: July 28, 2020

Market Commentary - Cumberland Advisors - A Modest Proposal “In practice, the Fed has never adopted operating procedures designed to control reserves in order to use the money multiplier relationship to control deposits.” (Goodfriend and Hargraves, “A Historical Assessment of the Rationales and Functions of Reserve Requirements,” Source: https://www.richmondfed.org) In response to the pandemic crisis, the Federal Reserve has cut the federal funds rate […]


Update on Fed Repo and Reverse Repo Facility

Author: Robert Eisenbeis, Ph.D., Post Date: July 27, 2020

Market Commentary - Cumberland Advisors - Update on Fed Repo and Reverse Repo Facility Details on offerings and takedowns are interesting and provide clues as to the state of liquidity, even given the large volume of Treasuries coming to market.


Rebekah Jones

Author: David R. Kotok, Post Date: July 26, 2020

Market Commentary - Cumberland Advisors - A Duel Over Data (Or, Three Cheers for Rebekah Jones) A Duel Over Data (Or, Three Cheers for Rebekah Jones) On April 20, 2020, Dr. Deborah Birx, response coordinator for the White House Coronavirus Task Force, praised the Florida Department of Health website for its useful detail: “The Florida Department of Health’s website is extraordinary, and this is what every department of health should have…. […]


Inflation coming? Maybe, maybe not?

Author: David R. Kotok, Post Date: July 23, 2020

Market Commentary - Cumberland Advisors - Inflation coming Maybe, maybe not There are many prescriptions and forecast models for a coming inflation or the lack of it. They range widely. Some forecasts include deflation. Inflation adjusted bonds (like TIPS) are currently priced for very low inflation. Nominal bond markets are saying that little to no inflation is expected. That is why high grade bonds are pricing […]


The Fed & Nonprofits

Author: David R. Kotok, Post Date: July 21, 2020

Market Commentary - Cumberland Advisors - The Fed & Nonprofits The extraordinary and massive COVID-19 economic shock has triggered another first-time action by our nation’s central bank. The Fed now has expanded a facility directed at lending to nonprofits. Among those nonprofits targeted are “educational institutions, hospitals, and social service organizations.” Here’s the link to the July 17 press release announcing the modification of the […]


Chinese Economy: Global Locomotive but Significant Risks

Author: William Witherell, Ph.D., Post Date: July 20, 2020

Market Commentary - Cumberland Advisors - Chinese Economy Global Locomotive but Significant Risks China’s economy, the second largest in the world after that of the United States, is recovering from a sharp slowdown in the first quarter of the year. The first estimate of the annualized second-quarter GDP growth rate is +3.2% versus 2.4% expected, a strong reversal from -6.8% in the first quarter. The advance indicates that […]


The Room Where It Happened Responses

Author: David R. Kotok, Post Date: July 19, 2020

Market Commentary - Cumberland Advisors - The Room Where It Happened Last Sunday morning we offered readers “The Room Where It Happened” (https://www.cumber.com/cumberland-advisors-market-commentary-the-room-where-it-happened/). We thank many readers for their kind replies. Here are just a few. Harvey wrote: “All I can say is, patience is a virtue, along with not wanting to spend hundreds to see a play, no matter how well done, when we knew […]


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




Cumberland Advisors Market Commentary – Markets, Election, Axios Poll

For the next 100 days or so, the growing focus on the US election may drive news flows and alter markets. Remember, though, there is a chasm between what polls are saying now and what markets are pricing as expectations for tomorrow. Most market agents are looking at 2021 and are now focused on a COVID vaccine and a post-COVID economic resurgence in 2022 and 2023. Those agents also look at the many other factors that influence markets, including the level and direction of interest rates, the prospective rate of inflation, the bankruptcy rate, the employment/unemployment statistics, and the developing Cold War between the world’s two largest economies, China and the United States.

For the news flow, the focus is on COVID-19 – its infection rates and death rates,  testing and antibody testing, crowded hospitals and shortages of PPE, and rushed development of treatments and vaccines that will work and be available in wide distribution. Unfortunately, the United States has become the world leader in terms of the chaotic and confusing administration of its coronavirus response and in terms of resulting cases and deaths. We have endured so many inconsistencies in the last six months, and we are paying the price. We practice blame-game politics rather than responsible planning. Market agents have accepted the American mess for what it is, but most agents wish it were otherwise.

The divide in America is over who did what (or failed to) and who is responsible. We are divided over whom to believe and whom to distrust. How do we know what the truth is, and where do we find facts we can rely on?  About one-third of us believe one conspiracy theory or another even though there is no hard evidence to support our belief.

Below is a link to a recent Axios poll. It vividly depicts the divides on these questions and the changes that are occurring in public perception. It also provides a warning about how volatile this election cycle will be. Readers may want to spend a few quick minutes looking at the poll numbers and thinking about the gaps in viewpoints.

“Axios-Ipsos poll: The skeptics are growing,” https://www.axios.com/axios-ipsos-poll-gop-skeptics-growing-deaths-e6ad6be5-c78f-43bb-9230-c39a20c8beb5.html.

Note the diversity of views. We see that at Cumberland among our cohort of clients, consultants, institutional and family office managers, and among our clients’ lawyers, accountants, actuaries, and other professionals who interface with them.

Example: One client that I personally talk with and have known for decades gave me an earful about how highly credible Laura Ingraham is on Fox News and how she is his primary source of viewpoints about the virus and other issues of the day, including the Biden-Trump contest. He believes that China is responsible for the virus and for undermining America’s medical response. The conspiracy theories running rampant in America have become credible to him. He is a 100% Trump supporter.

Another client with whom I regularly converse holds just the opposite view. She cites Trump’s “This [pandemic] is a hoax” comment. She sees Trump as a pathological liar and dismisses his cognitive abilities. She holds him responsible for the sickness and death that she has personally seen in her circle of friends and acquaintances. She is a 100% Biden supporter.

And, of course, we see all shades of views in between these two extremely hardened political positions.

We note that where each of these persons lives becomes critical in an election that is decided by the Electoral College.

As we have written several times, we believe that there is a long road to travel from here to election day. Polls reflect only today’s opinions, driven by the news flow and influences that shape the views of undecided or unsure voters in the key Electoral College states. Lots of guesses are circulating about November. They remain just guesses. And polling data is derived under very difficult conditions, which means that margins of error must be taken into serious consideration. In our view those margins must be widened because of the extreme conditions we now face.

We’ll end by citing a new study that dispassionately analyzes America’s pandemic response to date, makes clear the risks we face, and then proposes a hopeful plan that, the author says, could by October 1 bring the entire nation to a level of containment sufficient to safely open schools and colleges, host sporting events, and return Americans safely to the workplace. (“COVID19 in America: An October Plan,” ScienceDirect, July 23, 2020, https://www.sciencedirect.com/science/article/pii/S1286457920301416)

Please note that this is a source in science/medical community and not Democratic or Republican politics or biased-media reporting.

Here again is the link to the Axios poll: https://www.axios.com/axios-ipsos-poll-gop-skeptics-growing-deaths-e6ad6be5-c78f-43bb-9230-c39a20c8beb5.html.




Cumberland Advisors Market Commentary – US Stock Market Sectors & Gainesville, Florida

We were about to publish this commentary on the American stock market sectors when a news item about the healthcare sector crossed our screen. So we have decided to lead with it and then go to the stock market. Here is a fresh report about behavior and its consequences at a medical school in Gainesville, Florida: “18 in UF Health anesthesiology contract virus after party,” https://www.gainesville.com/news/20200727/18-uf-health-anesthesiologists-contract-virus-after-party. Readers can judge for themselves. Consider the following questions. Should the school investigate the party? If there was a party, should the school congratulate the medical students for achieving herd immunity at this party and offer them a cum laude degree? Expel them? Suspend them? Assign a research paper on epidemiology? I plan to share reader responses in a follow-up. If you reply with an email, please indicate whether you wish to remain anonymous or to use your name. I cannot use your identity without permission.

Market Commentary - Cumberland Advisors - US Stock Market Sectors & Gainesville Florida

Now let’s segue to the US stock market.

We thank DataTrek for permission to quote their research from their July 23, 2020, daily. DataTrek’s Morning Briefing” is essential reading for me. It’s available by subscription only, but readers can sign up for a free trial here: http://datatrekresearch.com/?inf_contact_key=361804e086110e1dd546ab955846c9bf.

DataTrek opened with this summary:

“Markets: Big Tech is now 38% of the S&P 500. The only other sector to ever get close to this percentage is Energy: 29% in December 1980. We have a complete history of every other S&P sector’s peak weight below, but the common factor is they all had a big macro story to match their outsized allocation. Can Big Tech ever be 50% of the S&P? If Energy was once 29%, and narratives matter, then the answer is very likely ‘Yes’.”

Kotok note: I remember the 29% peak, which occurred in early 1979 when the Shah of Iran fell from power and was replaced with the current government of religious zealots, which is anti-West. A few years earlier, in October 1973, the Yom Kippur War started when a coalition of Arab states led by Egypt and Syria launched a joint surprise attack on Israeli positions in the Sinai Peninsula and the Golan Heights. After several days, Israel halted the Egyptian offensive and then launched a counter-offensive deep into Syria. Israel had been attacked on the holiest day in the Jewish calendar; hence the nickname for the fight. (“Yom Kippur War,” Wikipedia, https://en.wikipedia.org/wiki/Yom_Kippur_War). The price of oil subsequently quadrupled, from $3 to about $12 a barrel, and by the end of the decade the price stood at $30. Also note that the Energy sector weight in the S&P 500 before the Egyptian-Syrian attack was under 6%.

Given this history, it should be clear that DataTrek’s discussion of relative sector weights is critical analysis for any thoughtful investor in US stocks. If you’re in the wrong (declining relative weight) sectors, your portfolio is swimming against the tide. If you’re in those sectors that have rising relative weight, the tide is bearing you along.

DataTrek then gets into the weeds of sector weighting peaks. The following is an extended excerpt:


How much more of the S&P 500 can Big Tech swallow? We’re not just talking about the Tech sector here, but names like Alphabet/Google and Facebook (in Communication Services) as well as Amazon (in Consumer Discretionary). Once Tesla goes into the S&P, the same question will apply to it.

Three thoughts on this:

#1: The current state of play and a bit of history:

• Technology as a sector is 27.0% of the S&P 500 today. Amazon is 4.9%, Google is 3.4%, and Facebook 2.2%.

• This sums to 37.5%. One could add other Tech-ish names like Netflix (0.8% of the S&P), but in truth there’s not many other companies in the index one might need to reclassify to have a clean all-in Tech weighting.

• Today’s 37.5% weighting compares to 32.5% in March 2000, at the peak of the dot com bubble. Amazon was not in the S&P 500 at the time, and neither Google nor Facebook were even public.

Takeaway: On an apples-to-apples basis Tech’s weighting in the S&P 500 is now at a record that exceeds even March 2000. As we’ve written, this is entirely understandable: Apple, Microsoft, and today’s other Big Tech companies enjoy much higher levels of absolute profitability and return on capital than the flotsam that populated the Tech sector during the dot com bubble. Still, in our next point you’ll see that 38% isn’t just a record for Tech – it is an all-time record for any industry weight.

#2: Other sectors have had notable peaks in their S&P 500 weightings; here’s what we can learn from them. Sectors don’t always stay exactly the same, so we will note any changes that might inform this discussion:

Consumer Discretionary: peak weight in June 1986 at 16.9%. Current weight: 11.1% but take out Amazon and it’s just 6.2%. Even adding back Disney (0.8% weight), Netflix (0.8%) and other names recently reclassified to Communication Services doesn’t get you close to the 1986 high.

Comment: demographic and economic/financial asset tailwinds made the 1980s the best time for Consumer Discretionary company profitability and return on capital.

Consumer Staples: peak weight in December 1991 at 17.2%. Current weight: 7.0%.

Comment: the early 1990s was ‘peak brand power,’ with consumer packaged goods companies seeming to have infinite pricing power and significant international growth potential as well. ‘Marlboro Friday,’ when Philip Morris cut prices by 20% in response to generic competition, was in April 1993 and the group really hasn’t been the same since.

Energy: peak weight in December 1980 at 29.0%. Current weight 2.7%.

Comment: Energy’s star had been rising since the 1973 Saudi oil embargo first spiked commodity prices, but the 1979 Iranian revolution was the catalyst that took the sector from 19.2% in March 1979 to that 29.0% peak just 7 quarters later.

Financials: peak weight in December 2006 at 22.3%. Current weight (including Real Estate, spun off in September 2016) 12.7%.

Comment: Financials peaked in December 2006… Not much of a surprise.

Health Care: peak weight in March 2003 at 16.0%. Current weight 14.7%.

Comment: peak Health Care coincided with the investors looking for safe havens during Gulf War II, and despite many medical advances since then the group has not been able to take incremental market cap from other sectors.

Industrials: peak weight in March 1986 at 15.6%. Current weight 8.0%.

Comment: Jack Welch was at the height of his powers at a still-industrial GE in 1986, and defense companies (also Industrials) benefited from dramatically increased government spending through the 1980s.

DataTrek’s Takeaway from these examples: secular peak sector weights always come with a story that goes beyond industry-level fundamentals. It might be geopolitics (Energy), or risk aversion (Health Care) or the illusion of endless pricing power and international growth (Staples), but there’s always a big narrative that goes with big valuations.

#3: In order for Big Tech to keep outperforming from here, it has to take more relative market cap from other sectors. A few ideas on that:

• Energy, Materials and Real Estate total 8.0% of the S&P 500 and each in its own way faces fundamental headwinds in a post-COVID recovery. None of these sectors are going away, but their collective S&P 500 weighting in a year could just as easily be 6% as 10%.

Bottom line: a longer, choppier global economic recovery may see capital further leave traditional cyclical plays and move more to “growth cyclicals” like Tech.

• Consumer Discretionary weighting has been stable at 10-11% since the start of 2019, but Amazon has taken 2.5 points of sector market cap at the collective expense of every other name in the group. It is now 25% of the entire sector’s value.

Comment: this is the easiest place to see where Tech can continue to gain market cap.

• Health Care (14.7%) and Financials (10.0%) are the 2 largest S&P sectors with no real Tech exposure. Over the long term, both are certainly in Tech’s crosshairs: “medtech” and “fintech” are established subindustries with their own venture capital funding and Big tech corporate planning departments.

Comment: to be ultra-bullish on Tech’s long-term promise – that it can one day be 50% of the S&P 500, for example – one has to tell a credible story about how it takes profits from these two industries. Nothing else in the 500 is big enough to really matter anymore.

Summing up: being market historians at heart, we keep coming back to that 29% peak Energy weight in 1980 because it’s the only non-Tech sector to ever get close to Tech’s current +30% weight. If prosaic oil companies were once 29% of the S&P, why can’t innovative Tech one day be 50% of the index? Yes, at that point I think we’d all agree Tech would be in a bubble just like Energy was in 1980. But we’re not there yet….

[End excerpt]


We thank DataTrek for permission to share this sector analysis and the discourse on relative weights among the S&P 500 sectors.

Note that Cumberland manages US stock market ETF strategies in several different ways. We use sector ETFs as part of those strategies. We file a quarterly public report on our ETF holdings. We can also send anyone interested the marketing materials on those ETF strategies. It may help to have a conversation with us prior to our sending all of them.

David R. Kotok
Chairman of the Board & Chief Investment Officer
Email | Bio

 


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries

Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




Cumberland Advisors Market Commentary – A Modest Proposal

“In practice, the Fed has never adopted operating procedures designed to control reserves in order to use the money multiplier relationship to control deposits.” (Goodfriend and Hargraves, “A Historical Assessment of the Rationales and Functions of Reserve Requirements,” Source: https://www.richmondfed.org)
Market Commentary - Cumberland Advisors - A Modest Proposal
In response to the pandemic crisis, the Federal Reserve has cut the federal funds rate target to 0%–.25%; instituted a series of at least eleven special programs to support financial markets, including a facility to support the government’s paycheck protection program; begun an aggressive asset purchase program; expanded its central bank liquidity swaps program; and, in March, cut reserve requirements to zero. The Fed has also made clear that interest rates will be low for a long time – until the economy starts to really recover and, by implication, until inflation really starts moving back to its 2% target. The nagging question at this time, and still unaddressed, is what the Fed’s exit strategy is and what it will do about the elephant in the room – its balance sheet.
Coming out of the Great Recession, the Fed’s balance sheet peaked at $4.516 trillion on January 14, 2015, before drifting down to $3.760 trillion on August 28, 2019, after the Fed stopped rolling over maturing securities. It took a full four years and seven months to decline by only $756 billion, during which the FOMC pursued a zero-interest rate policy. But when the COVID-19 pandemic hit, the Fed again expanded its balance sheet, which peaked at $7.169 trillion on June 10, 2020, before slipping back to $6.965 trillion on July 23, 2020. Interestingly, this most recent decline was due almost entirely to a drop in its central bank liquidity swaps program, which peaked on June 6 at $445 billion before falling to $122 billion on July 23. If it took more than four and a half years for the balance sheet to decline to $3.76 trillion through the runoff of maturing securities, what strategies might the Fed employ to bring its balance sheet into a more normal equilibrium once the economy recovers, and how long will that process take? We are potentially looking at many years before equilibrium is reached, and there is the very real possibility that interest rate policy alone may not be sufficient to control the expansion.
What the Fed should not do is turn to asset sales. With less than $50 billion in capital and surplus, significant asset sales in a rising-interest-rate environment would generate capital losses that would have to be recognized, either by writing down capital or by creating a negative asset account into which to book losses that was negotiated by Chairman Bernanke with the Treasury during the Great Recession. If capital losses were incurred, then remittances would be curtailed until the losses could be recovered, posing problems for the Treasury, not to mention creating bad optics as far as domestic and international financial markets were concerned, should the losses in the negative asset accounts exceed the Fed’s capital.
For this reason, the Fed will likely have to employ other strategies to restore normalcy. There is a strategy that would buy the necessary time and provide the necessary policy flexibility for the Fed to normalize its balance sheet, and it could do so employing several complementary tools without having to resort to asset sales and without short-run costs to the banking system.
The key to managing the dynamic reduction in the Fed’s balance sheet over time lies in a timely and calibrated use of reserve requirements along with judicious use of differential interest rates on required versus excess reserves as a complement to the interest rate policy tools currently being employed. As the initial headline of the report linked above implies, neither the existing Board of Governors, nor the members of the FOMC, nor their staffs have had any practical personal experience in the use of reserve requirements as a policy tool, because reserve requirements have not been used as a monetary policy tool since WWII.  Indeed, as the next chart shows, because reserve requirements historically have been low and excess reserves minimal at best, making changes in reserve requirements has always been judged by Fed policy makers and economists to be a blunt, unwieldly, and impractical instrument compared to making marginal changes in outstanding excess reserves using changes in the overnight funding rate. This mindset has dominated economists’ thinking about reserve requirements as a useful policy tool. The relationship between excess and required reserves changed dramatically, however, after the Fed expanded its balance sheet in 2008 in response to the Great Recession. The ratio of required reserves to total reserves declined from about 95% before the Great Recession to only about 5% in its aftermath.
As a result, in a fractional reserve system, with required reserves set at zero, the Fed is sitting on a time bomb because of the potential increase in the money supply and the inflation that it implies. In a fractional reserve system, the potential increase in the money supply, in the limit, is equal to 1/reserve requirement times the volume of outstanding reserves. For example, if reserve requirements were 5%, then a dollar of reserves would support up to a $20 increase in the money supply. At zero, there is no limit or constraint. (As an aside, it is interesting to note that the Fed provided little convincing justification for the elimination of reserve requirements in March of this year.)
Right now, banks are sitting on over $2.732 trillion in excess reserves. However, they are not lending them out at an alarming or dangerous pace at present, in part due to the lack of loan demand; in part due to regulatory liquidity constraints; and in part due to the fact that, even with a low rate on reserves of only .10%, which is only two basis points below the rate on a one-month Treasury bill, that is still a riskless rate of return without the transactions and accounting costs of going back and forth into the Treasury market.
What the Fed should do now, as part of a multi-step process for putting in place a workable risk-management exit strategy, is the following:
  1. Raise reserve requirements to sterilize as much of the existing excess reserves as possible, e.g. perhaps up to 80%. This move will be especially important since most of the COVID-19 rescue package seems to have ended up on the Fed’s balance sheet.
  2. Commit to cut required reserves in parallel with the decline in the Fed’s balance sheet as assets mature and run off.
  3. Adjust the actual ratio applied to ensure that excess reserves are sufficient to provide adequate liquidity in the overnight federal funds market as well as the tri-party repo market.
  4. Vary the size of the excess reserve buffer created by a required reserve ratio less than 100% as an additional policy tool when markets change as the economy recovers. The flow of liquidity and pricing in the tri-party repo market could serve as the canary in the mine to indicate how large the buffer should be to ensure smoothly functioning financial markets. We saw, for example, in the fall of 2019, that there was a miscalibration on the part of the Fed as to how big its balance sheet should be, which resulted in a spike in the repo rate that went away only when the Fed introduced an emergency repo facility to support that market.
  5. Establish a different reserve requirement rate for large banks and for branches and agencies of foreign institutions, because reserve balances are not evenly distributed across banks of all sizes. Note that before the Fed reduced reserve requirements to zero, required reserves were zero for banks with eligible deposits up to $16 million, 3% for banks with eligible deposits up to $122.3 million, and 10% thereafter. So, there is historical precedent for differential reserve requirements. Right now, the 25 largest banks hold 61% of the deposits and have 56% of the reserves. Agencies and branches of foreign institutions hold only 7% of US deposits but hold 24% of the reserves. US chartered banks not in the top 25 together hold 32% of the deposits and only 20% of the reserves. Since the objective is to sterilize the excess reserves, it also makes sense, as was the case in the past, to establish different requirements for different-sized institutions, especially since 85% of the reserves are in just a few institutions and their propensity to lend and expand credit varies. At the same time, a lower reserve ratio that might continue to be zero for small institutions would ensure that these banks can accommodate individual and small business loan demand in their local communities. Because the objectives are to prevent an explosion in the money supply and a runup in inflation, to manage a smooth transition to a smaller Fed balance sheet, and to avoid having to sell assets, there is no economic justification for the Fed’s having reduced reserve requirements to zero last March.
  6. Establish different interest rates that the Fed pays on excess reserves as opposed to the rate paid on required reserves. This strategy would enable the Fed to dynamically control the opportunity costs of holding excess reserves as opposed to the incentives for expanding credit and shifting excess reserves into required reserves. With a rate on required reserves greater than the rate on excess reserves, for example, institutions would be incentivized on the margin to make loans rather than to hold reserves idle in the form of excess reserves. A zero rate on excess reserves would provide an additional stimulus and would not require maintaining a lower federal funds rate, which might otherwise be required. On the other hand, setting the rate on excess reserves greater than that on required reserves would tend to dampen incentives to expand lending on the margin. Thus, employing differential rates on required and excess reserves provides an additional tool for fine-tuning reserve holding incentives as a complement to differential reserve requirements themselves, which are not well suited for day-to-day adjustments in monetary policy.
The above proposals would expand the Fed’s tool box with a system of reserve requirement policy levers that would not impose costs on existing depository institutions, especially if the program were started in the near term. Banks are voluntarily holding a huge volume of excess reserves, so converting these to required reserves by imposing a non-binding constraint while still paying interest is effectively no different than what is currently in place, incentive-wise, since the rate is presently the same on both excess and required reserves. The expanded tool kit would include differential reserve requirements, differential interest rates paid on excess and required reserves, the federal funds target rate, the discount rate, the repo rate and open market operations, plus forward guidance in terms of a commitment to relax required reserves at a pace consistent with the Fed’s growth, inflation, and unemployment objectives. This policy approach avoids any risk that credit creation, the money supply, and inflation will get out of hand. In addition, the Fed would have no need to worry about selling assets and incurring all the risks and the public scrutiny that sales would entail. The Fed could announce the program now, clearly laying out how it would be implemented in coordination with the decline in the Fed’s balance sheet. Some might be concerned that it is too soon to announce such a program and that an announcement of one might cause problems in financial markets; but the reality is that now is perhaps the best time to announce the program, when reserves are plentiful, the increase in requirements would be costless to the affected banks, and the Fed’s other liquidity programs are in place and functioning.
Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
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Cumberland Advisors Market Commentary – Update on Fed Repo and Reverse Repo Facility

A measure of how last fall’s disruption in the repo market has subsided can be observed by the takedowns in the Fed’s repo facility, designed to enable dealers to temporarily finance their inventories of securities. The program included offerings with multiple maturities, and after March 31 the maximum size that each offering could be was $500 billion. The chart below shows the evolution of the takedowns of the program and total outstanding daily amounts.

A few observations are relevant. The program peaked in March, and totals outstanding have declined steadily thereafter. The bulk of the outstanding volume in April and May was term issues of 84 days. Overnight volume increased for a bit in late May and early June but has been negligible since June 16. Details on offerings and takedowns are interesting and provide clues as to the state of liquidity, even given the large volume of Treasuries coming to market. The last takedown of an 84-day offering was on March 13, and there have been no offers for the five subsequent offerings the Fed has made. The last takedown of a 28-day offering was June 16, and it is quite interesting that from July 5 through July 24 there have been no overnight transactions. All this portends well for the state of liquidity.

Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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