Cumberland Advisors Market Commentary –  Two Covers; Two Sectors

If you looked at the two different covers of The Economist for May 30, 2020, you saw the 100,000-death message on the American version, and you saw the Hong Kong security law depiction on the Asian edition. Internal content was mostly the same, but the lead stories reflected the world as the Economist editors saw it and wanted to portray it to their readers.

The-Economist-Covers

In my view, The Economist is the finest weekly global news magazine in the English-speaking world.

In the US, the contrasts in economics and financial markets are extraordinary. The stock market is setting recovery new highs, one after another. See the May 29th “Week in Review” video by Matt McAleer and the charts he uses in his discussion of the trading strength of this monster rally in the US market (https://youtu.be/isgC8sSacEI).  Anyone interested in those charts can email me, and I will ask that they be sent to you. At least one viewer found them hard to see on the video (beginning at 2:47).


 

The US higher-grade bond markets seem to be calming down. John Mousseau talks about them at the beginning of the May 29th weekly video clip linked above. Readers who like the Mousseau beard or who dislike it are invited to send an email to John and voice an opinion. There is a charity bet underway, so feel free to make your opinion known directly to John.

You can get the sense of Cumberland’s various portfolio positions from those two clips, so I won’t take time to repeat the points John and Matt make here. But there is an additional portfolio issue worth discussing that last week’s videos did not cover. The issue is what will happen to the US dollar in the FX markets and how that will impact the Energy sector and the Materials sector. The two covers of the Economist help frame this debate.

What is happening to Hong Kong is a geopolitical shock. A Cold War of words is intensifying between the two largest economies in the world. Some of the policy issues are troubling. Why fight with the WHO in the midst of a global pandemic when you need to achieve globally interdependent and curated outcomes in treatment and vaccines? If the US wants to pressure China, why not move for Taiwan’s admission to world bodies like the WHO instead of withdrawing (running away from the fight). Why not open the US visa program to Hong Kong citizens like the UK just did? We have done that in the past with Hungarians when a similar power shift occurred. We did that with Cuba after the Castro power grab. The intellectual property transfer to the US from China (Hong Kong) and the brain drain we could impose on China would be enormous. All could hugely benefit the United States.

Hong Kong is a monetary and financial center, and capital flight is underway. America can benefit immensely by attracting the flows and the talent. Our doing so will alter the US dollar for the benefit of the United States. We are still the strongest financial center in the world.

The two Economist covers also reveal the underlying determinants of stock market participation for the Energy sector and the Materials sector. Both sectors do well when the world’s economies are growing. Both are weakened by worldwide recession or depression. Both require longer-term capital investment, and neither can turn production on or off in a split second. Opening or closing a mine or shutting down a natural gas pipeline or drilling platform takes time and costs money. Companies try to manipulate the volumes rather than make “on or off” binary decisions. The COVID-19 shock was abrupt and not a business-cycle transition. If there is no second killer wave, the economic bottom at a very low level is happening now, and the recovery will accelerate for the rest of the year. Coming off such a dramatic and extreme shock means that the initial phase of recovery will be robust because it starts from such a low point.

Recovery means that demand will increase in the Energy and Materials sectors, though we do not yet know how fast demand will increase and in what components. And remember, both sectors are global in nature, and most commodities are traded and priced in US dollars in their worldwide trading regimes. This is where the two covers of the Economist come together. One cover warns about the fluctuation of the US currency and the geopolitical risk. The other warns about death and disease in America and the vast divide in American politics. The tragic death of George Floyd and the events that have erupted in response only confirm how fragile the American civil society has now become.

At Cumberland, we are in constant discussion about the Energy and Materials sectors. Matt McAleer and I have talked about them, and our research focused on them every day of last week. Energy, for example, is now about 3% of the capital weight of the S&P 500 index. That is a remarkable low point in the entirety of the post-World War 2 period. Having traded the sector twice in the last few years and lost both times, we are warned about the old adage, “Fool me once and shame on you; fool me twice and shame on me.” Do we take a third attempt with the Energy sector? The same logic can be applied to the Materials sector.

We have taken overweight positions in alternative forms of energy. We are overweight the solar and wind-power sectors and also hydroelectric power as part of an ESG strategy. In fact, those positions are very heavily overweighted in our US ETF portfolios. We would point to the new Gemini project in Nevada as a billion-dollar solar power structure that will power 200,000 households: “U.S. Approves Giant Solar Project in Nevada,” https://www.wsj.com/articles/u-s-approves-giant-solar-project-in-nevada-11589216400. For readers who want a lot of detail about why that move makes sense now, here’s a link to an in-depth discussion on solar power: “Solar’s Future is Insanely Cheap (2020),” https://rameznaam.com/2020/05/14/solars-future-is-insanely-cheap-2020/.

Two covers, two videos, two sectors. As of this writing, Cumberland hasn’t bought any direct positions in Energy or Materials. Please note that could change at any time.

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.




Bloomberg Radio Interview: Saudis Are Going In For The Kill, Targeting U.S. Oil (Podcast)

Bloomberg Radio Interview: Saudis Are Going In For The Kill, Targeting U.S. Oil (Podcast)

April 21, 2020 — Running time 26:59

John Kilduff, Founder of Again Capital, on the oil market collapse, and what comes next. David Kotok, Chairman & Chief Investment Officer at Cumberland Advisors, discusses how the Fed is trying to control the yield curve. Eric Fine, Portfolio Manager: Emerging Markets Fixed Income Strategy at Van Eck Global, on the mixed bag in emerging markets. Ira Jersey, Chief US interest rate strategist for Bloomberg Intelligence, discusses LIBOR vs SOFR, and the flight to Treasuries. Hosted by Lisa Abramowicz and Paul Sweeney.

David Kotok Interview

LISTEN HERE: https://www.bloomberg.com/news/audio/2020-04-21/saudis-are-going-in-for-the-kill-targeting-u-s-oil-podcast

NOTE: 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.


If you like podcasts, check out this one from July 2015 featuring David Kotok talking about his background and Camp Kotok with Barry Ritholtz. They also talk about the history of Cumberland Advisors since its founding, and delve into fundamental principles of investing and valuation: https://www.stitcher.com/podcast/bloomberg/masters-in-business/e/48339521

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More “Masters in Business” podcasts here:
https://www.bloomberg.com/podcasts/masters-in-business/




Cumberland Advisors Market Commentary – Year-End & 2020 Forecast Note #5: Energy

The worst-performing US stock market sector in 2019 is energy. In retrospect, we regret that we held a position in it. Our rationale failed so far and the timing was clearly poor.  But we did hold energy and we do still do.

Market Commentary - Cumberland Advisors - Year-End-&-2020-Forecast-Notes 5 - Energy

Our focus has been on domestic US energy because we believed it is (and was) insulated from geopolitical risk. We also see the US’s potential as a large exporter of energy, including liquefied natural gas (LNG). As a matter of fact, Prof. Adam Tooze tweets, citing a Financial Times report, the “US exported 89,000 more barrels of crude oil and refined petroleum products a day than it imported in September = 1st full month of a positive oil trade balance since the 1940s. Ten years ago imports exceeded exports by 12m barrels a day a decade ago. (Adam Tooze, https://twitter.com/adam_tooze/status/1200784043924738048?s=21

But the US energy stocks haven’t reflected any of this positive evolution. Why? Is it that US reserves have expanded faster than export-led sales have? Maybe. We have, however, also watched repeated delays in the completion of the pipeline and terminal infrastructure needed to fulfill the LNG export opportunity. And we also see (and saw) that China wanted to buy LNG from us. They need it. We have it. Our American energy companies want to sell it.

So, what’s in the way? The demand from China and elsewhere abroad is still there. And our abundant supply can be exported at low cost. Remember, we are at record high exports and the number is rising. The missing link is the ability for US producers to engage in reliable long-term LNG contracts with foreign buyers. And the biggest would-be buyer is China. Right now, longer-term contracts between China and the US are on hold. The Trump Trade War has killed them. The same is true with other countries, but China is a biggest energy buyer, sitting in the wings.

In addition to the US-China elements, the energy sector is buffeted by the OPEC price-setting mechanism and also by the changing characteristics of the oil business as Saudi Arabia monetizes some of its investment with the Aramco offering.  In a fully functioning, non-trade war restricted global environment, all this would work to the advantage of the US energy sector.  That is why the energy sector rallies every time there is a news item suggesting a trade war truce is coming.

The result of the trade war turmoil is that the energy sector in the S&P 500 Index has fallen to its lowest relative weighting in many decades. It is close to 4%. At its peak weight in 1980, when the first energy shock brought the oil price to $30 a barrel, the US energy sector was close to 25% of total market weight. Think of that figure and realize that the entire tech sector today is about 22%. Energy is clearly a most beaten-up sector.

Meanwhile, the world’s energy demand from fossil fuel sources continues to rise, even as the pursuit of cleaner non-fossil alternatives intensifies. So, too, do the latest estimates of fossil fuel output continue to rise. While we believe any acceleration in global climate change is going to dampen that trajectory, we also know that large-scale changes in the oil industry are hard to make and that the climate skeptics still have a strong voice in the “no changes” camp. The United States is currently in that camp, given Trump’s withdrawal from the global climate-change conversation.

To emphasize the difficulty in making large changes in fossil fuel use, I will cite the Economist (pg. 73, November 23, 2019) and the data from 188 countries that pledged to curb their greenhouse-gas emissions. The research examined the internal approvals and documents from each country and compared them with the pledged reductions by country. Actual output went up in spite of the pledges to reduce. The Economist cites data from the United Nations Environment Programme and states that “global CO2 emissions from fossil fuels will reach 41 gigatonnes by 2040 which is 5 gigatonnes higher than the 36 gigatonnes pledged. Meanwhile, scientists estimate that 19 gigatonnes or less is required to keep global warming limited to 2 degrees centigrade.” (Paywall: https://www.economist.com/science-and-technology/2019/11/23/fossil-fuel-producing-countries-say-one-thing-and-do-another)

So like it or not, the production and consumption of fossil fuels is headed higher. Markets are ignoring this data.

An additional item that seems to be a continuing puzzle is the low geopolitical risk premium in oil. It persists even after the Sept. 14 attack on Saudi oil facilities and other ongoing hostilities in the Persian Gulf and throughout the Middle East. It would appear that market agents are pricing geopolitical risk at a low level because the world’s inventories provide a cushion that market agents believe is sufficient to make up any interim gap. This thesis was supported when the Saudis delivered oil from their inventories as they brought their disabled facilities back online after the drone attack.

At this point we have alternate scenarios regarding our energy investment position, so our forecast for year-end and 2020 is clouded by these crosscurrents. We would prefer a “greener” outlook, as we are climate change believers. But we are also investment advisors and have to respect data and not wishes. We hope for a cleaner world. But in the market space, hope is not a strategy.

Right now, we are still holding some domestic US energy positions.  Those positions focus on four factors: 1. Domestic US; 2. Some natural gas; 3. Some solar; 4. Some wind.   Also note that there are only a few ETF choices in the non-fossil fuel space so details within the ETF are important.  Also note that there is a growing movement to raise asset allocation in favor of non-fossil fuel sources.  This suggests positive investment inflows into the ETFs that capture the cleaner (or less dirty) energy sources.

On Friday, March 20, 2020, I’ll be participating in a program, “An Outlook on Energy Policy,” in partnership with the University of South Florida Sarasota-Manatee. The half-day conference will explore investing, government affairs, alternative market solutions, as well as its effect on the Federal Reserve and Fed policy. If this interests you, please visit the Global Interdependence Center’s website for more details: https://www.interdependence.org/events/browse/an-outlook-on-energy-policy/

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio

Read the full series of “Year-End & 2020 Forecast Notes” by David R. Kotok at this link (updated as they are published):
https://www.cumber.com/cumberland-advisors-market-commentaries-year-end-2020-forecast-notes-by-david-r-kotok/


Upcoming event with Cumberland Advisors…

Cumberland Advisors is pleased to announce that registration is now open for our annual conference, “Understanding Global Markets & Finance”. This is our Fourth Annual Financial Literacy Day of advanced concepts and discussions held at the University of South Florida Sarasota-Manatee (USFSM). We plan a deep dive into the Bond Market where we’ll examine the categories of debt and the influences on those categories including budget deficits plus larger issues like central bank QE and its impacts on interest rates for this debt. We’re also featuring a discussion about Real Time Payments (RTP) to include Bitcoin, Libra, Venmo and other versions of electronic money. Do you trust Big Tech with your wallet?

Our conference wraps with a Keynote Speech from Loretta Mester, President of the Federal Reserve Bank of Cleveland. Her areas of research expertise and interest include the organizational structure and productive efficiency of financial institutions, financial intermediation and regulation, agency problems in credit markets, credit card pricing, central bank governance, and inflation. See her bio & cv here.

If you’re interested in learning more about financial markets and the economy (and escaping the snow for our friends in northern climes), please join us on Friday, February 14, 2020 in Sarasota, Florida. Information and registration here: https://www.interdependence.org/events/browse/fourth-annual-financial-literacy-day/


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 – Turkey & Trump

Here is an updated report from Al Jazeera on the Turkey ceasefire and related developments. While it reflects network leanings, they are much different from the CNN-Fox distortions, and more facts may often be gleaned.

Market Commentary - Cumberland Advisors - Turkey & Trump
https://www.aljazeera.com/news/2019/10/turkey-military-operation-syria-latest-updates-191017051518215.html

Next we have the presidential tweeter’s self-proclaimed brilliance, hard on the heels of Pence and Pompeo’s trip to Ankara to meet with President Erdogan. He tweeted this at 2:17 PM on Thursday:

“This is a great day for civilization. I am proud of the United States for sticking by me in following a necessary, but somewhat unconventional, path. People have been trying to make this ‘Deal’ for many years. Millions of lives will be saved. Congratulations to ALL!” (https://twitter.com/realDonaldTrump/status/1184895160871571456)

President Trump also remarked that the Kurds “didn’t help us in the Second World War. They didn’t help us in Normandy.” Actually, the Kurds were our allies in both World War I (http://www.kaiserscross.com/304501/407043.html) and World War II (https://www.dailykos.com/stories/2019/10/9/1891413/-The-Kurds-did-help-the-Allies-in-WWII). In both conflicts they fought with distinction in the Iraq Levies, which were troops recruited by the British to fight on the soil of Iraq, Palestine, Cyprus, the Persian Gulf, Albania, Greece, and Italy.

And here’s a personal statement from and report about a 100-year-old Kurd who fought with the allies in WWII: https://www.rudaw.net/english/kurdistan/13102019. Ahman Mustafa Delzar responded to the ill-informed tweet: “Trump was not born then – that is why he does not know that the Kurds participated in the war.” He explained, “The Levies were mainly Assyrians and Kurds and a smaller number of Arabs. I was the 8,000th Kurd who joined the Levies during the Second World War.”

The bottom line is well-summarized by this Washington Post article: “Trump’s retreat in Syria turns into a mess” (https://www.washingtonpost.com/world/2019/10/14/trumps-retreat-syria-turns-into-mess/).

The following Atlantic piece by Joseph Votel and Elizabeth Dent provides additional trenchant detail on the negative effects of Trump’s decision to withdraw: “The Danger of Abandoning Our Partners,” https://www.theatlantic.com/politics/archive/2019/10/danger-abandoning-our-partners/599632/. (General Votel is currently a nonresident Senior Fellow on National Security with the Middle East Institute (MEI). As commander of CENTCOM, General Joseph Votel oversaw U.S. military operations across the Middle East, including the campaign against the Islamic State in Iraq and Syria, from March 2016 to March 2019. Elizabeth Dent is likewise a non-resident fellow at MEI, focused on counterterrorism, and worked in various capacities at the State Department for the US Global Coalition to Defeat ISIS from 2014 to 2019.) The authors conclude that Trump’s Syria policy reversal “threatens to undo five years’ worth of fighting against ISIS and will severely damage American credibility and reliability in any future fights where we need strong allies.”

Nevertheless, the president declared on Saturday, Oct. 19 that “We’ve had tremendous success I think over the last couple of days,” adding, “We’ve taken control of the oil in the Middle East” – a claim that observers had difficulty in connecting with the situation in Syria.

Dear readers, there is no rational way to seek an investor path through the bewildering twists and turns of present American foreign policy, if policy it be. It changes continually; and its disruptiveness, accompanied by constant, corrosive hyperbole, makes macro-dependent investing a high-risk adventure.

Here’s our position. We don’t own the Turkey ETF. We see the entire Middle East as a risky place. Think about it. Saudi gets attacked, and drones disable 5% of global oil production. Then nothing happens. Next, two missiles hit an Iranian tanker. Still nothing happens. Now, hundreds of ISIS fighters have escaped, and the lives of hundreds of thousands of Syrian Kurds are at risk. What will happen next?

US policy seems to be lurching toward isolationism in fits and starts, in deadly counterpoint to domestic political turmoil. Remember, Senators McConnell and Graham have both strongly repudiated Trump, as did over two thirds of House Republicans when they joined all the Democrats in an anti-Trump vote on Wednesday, Oct. 16.

On Oct. 14 McConnell said, in part, “For years, the United States and our Syrian Kurdish partners have fought heroically to corner ISIS and destroy its physical caliphate. Abandoning this fight now and withdrawing U.S. forces from Syria would re-create the very conditions that we have worked hard to destroy and invite the resurgence of ISIS. And such a withdrawal would also create a broader power vacuum in Syria that will be exploited by Iran and Russia, a catastrophic outcome for the United States’ strategic interests.” (https://www.courier-journal.com/story/news/politics/2019/10/14/mitch-mcconnell-issues-second-major-statement-syria-crisis/3977983002/). McConnell followed that statement with further remarks on Oct. 16. They can be viewed here: https://www.courier-journal.com/story/news/politics/2019/10/14/mitch-mcconnell-issues-second-major-statement-syria-crisis/3977983002/.

Senator Graham expressed his views in a series of tweets on Oct. 16 tweets, at https://twitter.com/LindseyGrahamSC. He minced no words: “The worst thing any Commander in Chief can do is to give land back to the enemy that was taken through blood and sacrifice. I fear those are the consequences of the actions being taken right now.”

We remain overweight domestic US oil production, exploration, and natural gas. We remain fully invested in our domestic US ETF strategy and in our quantitative strategies (three of them).

Now a personal note.

My family members served in one branch of the military or another for several generations and during multiple wars. I personally attended a special NATO multi-country officers’ course in the 1960s. The British were the hosts. My task partner happened to be a Dutch colonel. I met and worked with WWII veterans in uniform and worked with others who served in their countries’ underground networks, fighting the Nazis.

Alliances matter. Long-term, tested alliances matter a lot.

Experienced leaders know that trustworthy allies are hard to develop and easy to lose. You don’t throw them under the bus. And you certainly don’t brazenly recite insults based on a false understanding of history, offending your friends and emboldening your enemies.

David Kotok, US Army. In memory: Leslie Kotok, US Navy. In memory: Sam Serata, US Air Force. In memory: Oscar Hacker, US Army. I’ll stop there. There are several more.

David R. Kotok
Chairman and 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.




Bloomberg-Expect Markets to go Higher – Kotok (Radio)

Cumberland Advisors’ David R. Kotok says the moves we have heard on trade are lacking in substance, but the market has still been given some comfort.
Cumberland's David Kotok on Bloomberg Radio
He goes on to his expectations for a strengthening energy sector.

If you’ve enjoyed this exchange, please feel free to explore other interviews and conversations at the Cumberland Advisors website or YouTube channel.
Website: https://www.cumber.com/tag/radio-podcasts/
YouTube: https://www.youtube.com/CumberlandAdvisors


NOTE: 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.


If you like podcasts, check out this one from 2015 featuring David Kotok talking about his background and Camp Kotok with Barry Ritholtz. They also talk about the history of Cumberland Advisors since its founding, and delve into fundamental principles of investing and valuation.


Links here
https://itunes.apple.com/us/podcast/masters-in-business/id730188152?mt=2

And here
http://www.bloomberg.com/podcasts/masters-in-business/