- More US Ebola news. A second worker is infected in Texas. Meanwhile, vaccine production for healthcare workers is now underway. Reports are that there will be 20,000 shots available by December 2014. The media is questioning what happens between now and December. In African countries the spread continues, and governments remain corrupt (hat tip to Dennis Gartman for case studies reported in his newsletter). Nurses’ union disclosures of health administration management failure in Texas are ongoing and disturbing. Congressional hearings are coming once the politicians are finished asking us for money and getting themselves re-elected next month.
- ISIL: US policy seems unclear. Turkey sits and watches across its border with Syria. ISIL gains on the ground as airstrikes seem to have diminishing impacts. The Middle East turmoil worsens. There is no reason to expect improvement.
- Oil prices plummet while the Middle East smolders – another unwelcome economic surprise. Geopolitical risk premia in oil have evaporated. We now watch the Energy sector decimated by falling prices. Big stocks like Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX), large Dow Jones components, have felt the pain. They have more ahead. Exchange-traded funds (ETFs) that are volatile and sensitive to the oil price, like Market Vectors Oil Services (ARCA:OIH), have suffered their own versions of an energy rout. In the Energy patch it is a full-scale bear market. OIH has lost about 30% from peak. We think the bottom may come soon, but it is too soon to be a buyer in energy. Watch out for a falling knife in the Energy patch. Cumberland Advisors is at maximum underweight in Energy-sector ETFs, as it has been for some time. Very carefully, we are now taking advantage of the price weakness in the MLP space. It is important to do the homework here.
- Bonds: The Germany 10-Year yield is under 1%. There are reminders of Japan’s decades-long nightmare of no growth, no inflation, and interest rates pinned so close to zero that there was very little distinction between short-term cash equivalents and intermediate-term highest-grade government debt. Europe is a mess; the mess is worsening. Germany is the world’s fourth-largest economy (OECD). It holds the keys to a turn. France, the-fifth largest (OECD), remains a messy quagmire.
- Federal Reserve (Fed) policy continues to raise the uncertainty premium. Ask market agents when the Fed will make its first interest rate hike: the answers range from early 2015 to 2017. Ask Fed speakers and you get a similar range. Connect the Fed’s dots and see an array of Fed forecasts way above the current market option pricing of the future path of interest rates. Who is right, the Fed with what they are saying, or the markets with what they believe? Markets establish prices with real-money bets by skilled market agents. Feddies opine and then revise opinions in their next quarterly revelation. At Cumberland Advisors we think the skilled market agents have the better forecast. We would reconsider this conclusion if the Fed actually gave us the forecast and matched it with the name of the forecasting member of the FOMC. But now the Fed only gives us the dots and keeps the names of the forecasters private. Transparency? Or is it purposeful opacity? Hmmm.
- Stocks get pummeled as uncertainty rises and volatility seeks its way back to a new normal. The world watches the VIX every day in the lower right-hand corner of the Bloomberg TV screen. It is repriced every minute. Everyone runs into the VIX when the market falls and sells the VIX when the market rises. Is the VIX a forward-looking indicator? Maybe. But maybe not. Is it now reactive because everyone watches it? In that case, it has lost its value as a forward-looking indicator. The question is debatable. That is what Goodhart’s Law is all about. (Google “Charles Goodhart.”)
- Separate accounts allow investors to see everything they hold every single minute in real time. Separate accounts allow the investor to ask the manager why something was bought or sold and the reasoning behind the transaction. The investor can request an explanation of rationale or policy, the principle behind the decision, and the macro view driving it.
Investors have huge questions about the world right now. Investors and their agents seek clarity and understanding. They can achieve this goal most effectively in separately managed accounts with full transparency and personal explanations. Or they can choose opacity or fuzziness. To be perfectly clear: at Cumberland we do not use “unconstrained” funds.
Ebola vaccines will start to roll out in 2015. Oil prices will reach a bottom somewhere below the marginal cost of production. That will start to change behavior in the Energy patch. Cycles go in both directions. Volatility is now returning to what it was before the 2007 onset of the financial crisis and the 2009 onset of central bank policies (zero interest rates) that suppressed volatility for the last five years.
And finally, a most disturbing news item this morning.
We now have to ask the hardest question in American politics. It is a throwback to the Richard Nixon era: “What did the president know and when did he know it?” The New York Times is reporting that chemical weapons were found by American forces in Iraq between 2004 and 2011, and the information was not released by the Pentagon. That really gives us huge pause. The report suggests that neither Congress nor American citizens were fully informed. The Pentagon was following orders issued by the administrations of Presidents Bush and Obama.
For both presidents the question remains, “What did the president know and when did he know it?”
David R. Kotok, Chairman and Chief Investment Officer