The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

I did not show these slides (from The Chart Store) at the conference, as I did not want to get too deeply into a discussion on broken trends, technicals, momentum, etc.

As you can see, most of the major indexes look similar:

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Dow Industrials: New Trend Channel

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Read the rest of this entry »

David R. Kotok
Chairman and Chief Investment Officer
Oil Slickonomics Part 10-Trouble in Muniland
July 21, 2010

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Since the BP rig explosion, $450,000 of the Louisiana St. Trans Auth Toll Sr. Lien-LA 1 Project-Series A, 4.5% of 12/01/30 tax-free municipal bonds have traded. Prices have ranged from a low of 93.25 to a high of par (100). The average price was about 99, or $990 per thousand-dollar face amount.

The bonds were issued in 2005. At the time, S&P, Moody’s, and Fitch rated them AAA. The rating was achieved because Ambac insured the bonds. Today Ambac itself is rated at a low junk-bond status.

Fitch rated this Louisiana bond BBB in January 2009. S&P rerated the bond A+ in October 2009. Moody’s rerated it Aa3 under its new global scale. That rating occurred on April 16, 2010, four days before the Deepwater Horizon explosion. The rating agencies based these results on the bond’s underlying credit structure; Ambac is ignored because of its junk status.

In May 2010, Moody’s said that the Gulf Oil spill would have a major impact on the shoreline, but a minor impact on Louisiana and local credits. Six months before the BP explosion (October 2009), Moody’s awarded an A1 rating to Louisiana’s General Obligation bonds. Moody’s cited the oil industry as one of the strong factors in Louisiana’s economy.

Four years earlier, in 2005, Moody’s “assigned an Aa3 to the Louisiana Transportation Authority LA 1 Project Toll Revenue Senior Lien Bonds, series 2005A.” The reason given was that the bond has a “first lien on toll revenues, but the “security ultimately hinges on a Cooperative Endeavor Agreement between the State and the Authority in which the State agrees to replenish the Debt Service Reserve Fund if necessary, subject to appropriation.”

Let us be blunt. This is a toll revenue bond. It is dependent on the use of a 16.3-mile elevated highway and bridge system beginning at Port Fourchon, Louisiana. The major customers are the Louisiana-based oil industry and the Louisiana-based shrimp industry. The toll revenue projections are now in jeopardy. First because the fishery industry is decimated by the BP spill. Secondly because the Obama administration’s oil-drilling moratorium threatens oil-industry revenues.

If the tolls are insufficient, the credit support for this bond comes from a state guarantee. The underlying economic assumption for this bond, according to the consultants who prepared the revenue estimates, is that “oil and gas drilling in the Gulf of Mexico will continue unabated, as will the LOOP terminal, with Port Fourchon remaining as the principal service port for these platforms.”

However, the state’s obligation requires that the legislature appropriate money in order to fund any deficiency. They may face this issue if the Debt Service Reserve Fund runs out of money because the toll revenue is insufficient. Will that happen? We do not know. Could it happen? Absolutely, yes.

Will the legislature fund the debt service at the time their state budget is under pressure because of the aftermath of the BP spill and because of the federal government’s oil drilling moratorium? We do not know. However, the pressure to defer any payment will be intense and the legal obligation to fund it is uncertain.

The language in the documents suggests that the legislature’s obligation to pay in the future will remain if the legislature fails to fund any debt service deficiencies as they occur. That implies the legislature may be able to delay the funding while it litigates with the federal government.

We fear this issue may become one contested in a court. If so, the bondholders will be dependent on Ambac for the timely payment of their debt service. And Ambac has gone from a AAA credit to a weak junk bond status. Enough said.

No rating agency has downgraded this bond since the explosion. No rating agency has put it on credit watch. We cannot find any rating agency action that reflected any negative response for this bond because of the BP oil spill and its aftermath.

In June of 2010, someone bought a small piece of this bond at par (100), according to public records of trades. If that person checked the status of the bond, they would have observed the investment grade ratings we outlined above. No current credit report would have mentioned this payment intricacy.

Cumberland would not buy this bond. At the current prices we see in the transactions reports, the bond is trading as if there were nothing happening to elevate the risk. The market pricing assumes that the State of Louisiana has negligible negative credit impact due to the moratorium and the BP spill.

We do not understand the rationale behind this lethargic behavior by the rating agencies. We wonder why this bond, and others like it, is not on a credit watch for a possible downgrade.

Since the Deepwater Horizon explosion, Cumberland has sold about 40 different issues of municipal bonds because of possible exposure to the aftermath of the BP oil spill. The only reason we did not sell this one is that we never owned it to begin with.

Proactive Muni management means sell quickly when a contingent risk is evolving. Acting early means that most of the bonds sold will ultimately pay on time. The idea is to manage a rising risk by selling into market pricing that has yet to reflect that risk. This bond is an example of such a rising risk.

Nothing in the documents suggests that BP has any liability for any debt-service shortfall. BP did cause damage to the shrimp industry but BP did not create the drilling moratorium. There is no stated obligation of the federal government to pay for any debt-service shortage because of the moratorium. Ultimately, the Feds will either pay voluntarily or the State will have to prevail in court.

We wish the holders of these bonds good luck. They may need it.

Note: the GIC delegation will visit Port Fourchon by helicopter as part of its August 11-12 research seminar in Baton Rouge. There are four seats still available on the delegation’s helicopters. For details see: www.interdependence.org or call 215-898-9453.

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David R. Kotok, Chairman & Chief Investment Officer, Cumberland Advisors, www.cumber.com

There is no doubt that a primary driver of capital markets, for better or worse, is the human ego.  Depending upon which definition of ego you subscribe to (Freud did not invent the term), for purposes of this post, the essence of ego is primarily unconscious and self-serving.

Ego is not inherently good or bad but may be best considered as having great potential to be destructive; therefore the investment trader is wise to be aware of what ego wants and how it can be harmful.

Illusions commend themselves to us because they save us pain and allow us to enjoy pleasure instead.  We must therefore accept it without complaint when they sometimes collide with a bit of reality against which they are dashed to pieces. ~ Sigmund Freud

The ego is an illusionist.  If you, as both observer and the observed, are aware of ego’s illusion, however, the illusion ceases to exist.  In other words, ego and self-awareness cannot co-exist.

Awareness of ego (self-awareness) begins with understanding some of the things and some of the results that ego wants:

• Ego wants to be heard: It is the inner voice that chatters endlessly in your mind.
• Ego wants to be “right:” It wants you to believe that your successes are self-created and that failures are anomalies:  “I can predict financial market movements.”  “I was right before, I will be right again.”  “This mistake is a fluke.” “What the market (the herd) is saying is wrong.”
• Ego wants to thrive and survive: It consumes messages that give it energy; it looks for information that confirms its biases (i.e. If the bias is toward falling stock prices, ego wants information supporting falling stock prices and economic recession; and ego ignores information supporting rising stock prices and economic growth).
• Ego wants to compete: It wants to win and for others to lose; it wants to make more money than your neighbor; it wants to be right; and it wants to prove others wrong.
• Ego rationalizes: Losses are perceived as temporary setbacks; successes are affirmations of “I am right.”

Awareness minimizes the negative effects of ego; awareness dissolves the illusion that ego presents.  The ego, however, is a natural function of human survival; therefore, it is not healthy to fight or deny the ego; and it is not necessary to be a PhD in psychology to counter it; simply be aware of it.

For the investment trader, there is only control over the individual trader’s actions (not the market’s), and more importantly, the observation and reflection of those actions for improvement and future application.

If you’re fighting a trend, you’re defending your view. And that means you’re ignoring the market. When the ego is out of the way, the view doesn’t matter: you’re free to sit back, read the market, and follow its signals. Conversations, with markets and people, go much better if you maintain an open mind and simply listen. ~ Dr. Brett Steenbarger

As an investment trader, observe yourself; think about your thinking by asking questions:

Are you listening to ego or are you listening to the market?

Are you placing this investment trade to prove yourself right, to prove others wrong?

If the truth needs no defense, then why are you defensive?

Are you comfortable saying “I don’t know?”

Do you find yourself reading only information and media sources that confirm your biases or do you read opinions of every variety, even those that disagree with your biases?

Are you trying to “beat” something (e.g. S&P 500 Index) or do you have a personal, concrete investment objective?

Do you rationalize decisions, not willing to admit mistakes?

Is your life a tool for money, or is your money a tool for life?

What personal practices do you apply to minimize the potential harm of ego?  Does self-awareness matter or does it add to “analysis paralysis?”  What do you think?  Or should I say, what do you think about thinking?

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Kent Thune is blog author of The Financial Philosopher.

Terrific set of posters from Alamo Drafthouse Cinema in Austin, Texas: The SPock version is below; there is an Uhura version as well.

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The Trouble with Tribbles

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via Wired

Dan Gross calls out America’s CEOs, noting “the government’s giving them everything they want, yet still they whine.”

Excerpt:.

“After an eight-year slumber, the Environmental Protection Agency is again issuing regulations. Two years after an appalling financial debacle, Congress has finally moved to regulate Wall Street. But to hear our nation’s corporate chieftains tell it, it’s enough to plunge us back into recession . . .

On July 12, the U.S. Chamber of Commerce, the Business Roundtable, and the National Federation of Independent Business held a “Jobs for America” summit. While President Obama met with CEOs at the White House, the summiteers called for—wait for it!—cutting taxes for companies, extending tax cuts for the wealthy, and opening up federal areas for resource exploration.

The notion of these guys holding a jobs summit is a little like BP holding a deepwater-drilling safety summit. Between 2001 and 2009, corporate America designed the playing field to its specifications—easy money from the Federal Reserve; lower taxes on capital gains, dividends, and income; an administration that let industry essentially write its own regulations. But the players proceeded to put up goose eggs. In January 2001, there were 111.6 million private-sector payroll jobs in the United States. In January 2009, when Bush left office, there were 110.9 million. The stock market is basically where it was a decade ago. The lost decade ended with the deepest recession since the Great Depression.”

Great stuff. . .

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Source:
Poor Little CEOs
The government’s giving them everything they want, yet still they whine.
By Daniel Gross
Posted Saturday, July 17, 2010
http://www.slate.com/id/2260634/

This is the this is the powerpoint that was part of the presentation in Canada.

I discussed about half of the slides; the breakout session today will get more granular and detailed about the rest . . .

Agora Symposium Slideshow

David R. Kotok
Chairman and Chief Investment Officer
Oil Slickonomics: a bird’s eye view
July 16, 2010

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There are only seven helicopter spaces unfilled for this special GIC event. The Global Interdependence Center, www.interdependence.org, is arranging a special three part series on the BP spill and its aftermath. This is the first leg of the dialogue. This session is under the Chatham House Rule. No quotes without explicit permission of participants or speakers. The intention is achieve a first hand evaluation of the region and candid discussion of the issues. Anyone interested in a delegate spot must act immediately to become a credentialed member of GIC and a delegate. For information, call 215-898-9453.

August 11-13, 2010
The Impact on the Oil Spill in the Gulf of Mexico
Part I of GIC’s Three Part Energy Conference Including a Helicopter Tour of the Gulf

Taking place in Baton Rouge, Louisiana, GIC will be arranging for a select group of members and guests to participate in an exclusive program focusing on the impact of the oil spill and its affect on various industries including the environment, tourism, state and local government, oil and gas. The program will include a helicopter ride over the gulf to observe the impact first hand.

Speakers include David Kotok, CIO Cumberland Advisors and GIC Program Chair, Loren Scott, Professor Emeritus, Louisiana State University, Jim Lucier, Capital Alpha Partners, Edward B. Overton, Professor Emeritus, LSU Department of Environmental Sciences, David E. Dismukes, Professor, Associate Executive Director, and Director of Policy Analysis at the LSU Center for Energy Studies, and Stephen Barnes, Assistant Professor, Research, LSU Department of Economics.

Wednesday, August 11th – Arrival in Baton Rouge.
Dinner at Juban’s Restaurant. Speaker from the National Oceanic and Atmospheric Administration.

Thursday, August 12th

8:15: Welcoming Remarks – David Kotok, CIO Cumberland Advisors and GIC Program Chair, Loren Scott, Professor Emeritus, LSU and Baton Rouge Event Chair

8:30: Dr. Stephen Barnes – Impact on fisheries, tourism, & state/local fiscal issues

9:30: Dr. David Dismukes – Impact on oil and gas industry

10:15: Dr. Ed Overton – Impact on the environment

11:00: James Lucier – Impact on political environment in Washington

11:30: Light lunch at LSU Center for Energy Studies

12:15: To Baton Rouge Airport (transportation provided) to meet helicopter

12:30-4:30: Helicopter Tour of the Gulf: Leaving from the Baton Rouge airport, the tour will include the village of Cocodrie, to observe cleanup operations, landing in Port Fourchon for a briefing from the Port Director, flying over Grand Isle and Elmer Island to see the impact on beaches, then concluding with a look at the community Venice, and returning to the Baton Rouge Airport.

5:00: Return to Cook Hotel

6:00: Galatoire’s Restaurant for dinner with remarks from Captain Ed Stanton – U.S. Coast Guard

Friday, August 13th – Depart Baton Rouge.

Price for the program is $2600/person excluding airfare and hotel accommodations. Space is limited. Please contact Jillian Fornito at GIC at 215-898-9453 to register as soon as possible.

Cumberland Advisors is a proud sponsor of the GIC.

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David R. Kotok, Chairman & Chief Investment Officer, Cumberland Advisors, www.cumber.com

Now add big upside in revenue vs estimates with the earnings beat and you have the perfect formula for a higher stock price as seen with Apple but we know Apple is its own asset class. Stocks, bonds, commodities and Apple. With a 3rd day of gains in China to a 3 1/2 week high, copper is also up for a 3rd day rising to a 7 week high and the new front month oil contract is at a 4 week high. With a new multi decade low in the 30 yr mortgage rate at 4.59%, the MBA said refi’s rose 8.6% to the highest since May ’09 and purchases bounced 3.4% off their lowest since Dec ’96. ABC confidence confirmed the weakness in last week’s UoM figure, falling 1 pt to -45, matching a 2 month low led by the Buying Climate component. At 2pm Bernanke will give his semi annual outlook and views on monetary policy and the economy. What everyone watching must ask is has the law of diminishing returns set in with the actions of the Fed. I believe yes.

This is the powerpoint from the speech I gave Tuesday:

Agora Vancouver 2010

Click for PDF