This page has been archived and commenting is disabled.
David Kotok | CDS, Market Turmoil, Asset Allocation
Latest from David Kotok of Cumberland Advisors -- Chris
CDS, Market Turmoil, Asset Allocation
David Kotok David.Kotok@CUMBER.COM
Let us consider this week’s credit default swap (CDS) debacle in the following manner. People purchased CDS with the understanding that they had a type of insurance policy against the default of a sovereign debtor. Now they have learned that what they thought they had is something they do not have. The European Greek debt deal and the International Swaps and Derivatives Association, www.isda.org (ISDA) have clarified that.
What do they do? They must realign their positions. First, they have to face the reality that they were misinformed or misadvised. They must accept that their position has changed. Second, they must take action.
The spike in yields on sovereign debt of Italy was attributable, only in part, to the Italian political turmoil we are witnessing. The other aspect dealt with CDS on Italian debt. Those holders thought they had one type of CDS protection. They realized from the events in Greece that they had something else.
This is true of other sovereign CDS as well, and this change has roiled the markets. Interest rates have risen as bond prices have fallen. The cost of finance for Italy has gone up to levels that are deemed unsustainable. This is what one would expect with CDS realignment.
Does that mean the world is ending? No. In fact, there is a considerable possibility that the current stock market rally has the outlook correctly discounted, after this turmoil runs its course. If you examine Italy’s budgetary characteristics, you realize the country is headed for a primary surplus in 2013. “Primary surplus means after you deduct interest payments.”
Will Italy be able to complete the plan? Will they be able to implement it? What is going to happen? What about other exogenous shocks? All these questions are fair and they are additive to the uncertainty premium.
Italy may have a difficult issue when it attempts to roll its present debt, and that debt roll of maturities is coming up very quickly. However, with the help of the European Central Bank (ECB) Italy is likely to have some market access and be able to roll that debt on the heels of budgetary action
How will it roll? What will the yields be? These and more questions await answers.
Another crunch is coming up on for the debt roll of Greece. That is why the referendum threat dates were December 4 and December 11: the second half of December is when Greece must roll billions of euro-denominated debt. The authorities in Europe know they need sufficient structure in place so that this debt can roll without market access by Greece. Greece has been shut out of market access. The market believes it is an insolvent sovereign. In addition, there are the continuing operational demands for cash by the Greek government. This money will be provided with institutional lending, through one of the forms we presently see discussed.
Does this mix of European debt roll condemn the US to a recession? We think not.
The United States is not in recession. It is in a very slow-growth environment. Uncertainties are very high and uncertainty premiums are large, but decisions about US portfolios are based upon whether you are betting on recession, or slow growth.
If it is slow growth, stocks are inexpensive and markets are headed higher. That is the position of Cumberland Advisors. If a double-dip recession is coming, then stocks are headed lower and you should not own them.
The course of action to take in global portfolios is a different matter. In our global multi-asset class, we have taken our precious metal positions to 6% of the total deployment. That is very, very high and it is a considerable overweight for us. Precious metals are a tiny weight in global asset allocation under normal circumstances. We use several ETFs to reach that position, and they reflect an amalgamation of precious metal exposure.
We have this precious metal weight very high because, we are able to see a monetary policy transmission effect that reaches into precious metals. That supports our view that precious metals are likely to be priced higher in US dollar terms in the future. There is a considerable time lag between central bank actions and monetary effects and resultant higher precious metal prices; we measure that somewhere between nine and eighteen months.
We do not find the same relationship with commodities. Commodities are driven by other extensive factors in addition to liquidity flows from the creation of credit. Central bank balance sheet expansion has a weak link to commodities in this current environment, where central banks are attempting to provide as much liquidity as possible to avoid systemic meltdown.
When it comes to global stock markets, our international positions in Europe are far below the 24% weight that Europe holds in the benchmark index. Our exposure is limited to Germany, France, the Netherlands, and a broader-based international ETF. For Europe as a whole, we are very much underweight. In our international models, that weight is 11%, with all of it in Northern Europe.
In our global multi-asset class, we have only 3% exposure to the Eurozone stock markets. So clearly, we have a bias against Europe and in favor of other locations around the world, as well as other asset classes. In our global multi-asset class, we have 6%, or twice the exposure, in precious metals than we do in the stock markets of the Eurozone. That is a remarkable statement to make. It reflects the high degree of uncertainty given the times we are experiencing.
David R. Kotok, Chairman and Chief Investment Officer
»
- advertisements -
Any chance we can get some equity traders posting Tyler. I am sick of reading about wides CDOs Forex and Fed swaps.
TIA
The Final Solution: Refuse all debts to parties with no credit risk. Give credit where credit is due, and no further. No extension of credit to unknown parties. No acceptance of credit from unknown parties. All deals made in public, all shadow banking deflated; defeated. If people are shown to be incapable, or refuse to create value - no credit, no goods, no cashish, no thing - not even a facsimile of life. Accept the real thing people. Out with the TelAvizion!
I don't agree with the author's "whatevah" attitude about CDS contracts on Greece. This is a black swan event IMO, that will be felt in coming months. The CDS market is in the hundreds of trillions according to many estimates. Now all of those old contracts are in some state un-ease. No one knows if their CDS is solid. No one knows if they will get paid. They all thought they would get paid on a 50% Greek bond haircut. Whoops. This is huge IMO and the author just says....oh well, everyone will just adjust. I don't think it will be that easy and will certainly not be painless.
...we have taken our precious metal positions to 6% of the total deployment. That is very, very high... - David Kotok
Thanks for the laughs, Tyler!
We need the Keynesian endpoint to see true price discovery. Fed will continue to support the government massaged stats and the market going into Obama's election this year. Straightforward bet imo, but personally I cant sleep at night when I'm holding anything long but guns and gold.
Your wife said the reason you never slept was you were always holding something short.
The quality of US Fund managers is on a par with US politicos & other global elites. This guy is cautiously optimist as the global financial system is in cardiac arrest. No recession here says Mr. Kotok, just uncertainty & slow growth. Right, just another mal-educated, mis-guided, asset allocator with zero perspective of history. And this man runs a financial firm managing other people's money? Good grief!
Lionhead -- there are U.S. fund managers, and then there are CNBC regulars who proffer all the traditional market bromides.
And Kotok is the former, or the latter ?
Bingo ! Give that man a cee-gar !
The US is not in recession? Only if you believe obviously phoney government statistics using deflators that are obviously too low AND you believe that growing expenditures on parasitic, anti-growth govt employees, lawyers,crony capitalists, etc constitute growing GDP. Hard to believe that anyone does.
Lionhead, your assessment of Kotok is far too kind.
MAN UP rcwalen and explain to the readers of the Hedge why cutting and pasting some shillshit qualifies as a contribution.
You know, I tend to agree, and have noticed that Mr. Walen has been rather weak recently. He was going strong for a while regarding the Mortgage & the Muni mess, but the last few things I read nder his banner kind of sucked.
Righto!
"The United States is not in recession. It is in a very slow-growth environment."
Take away the fantasy finance sector of the CDS monopoly of Goldman Sachs, JPMorgan Chase, Morgan Stanley, Citi and BofA, and it sure does appear to be the makings of a super-depression.
But then, I did receive a perfect score on the Math Achievement Test on the old CEEB college boards.
Plus, it is obvious we both understand arithmetic......
revision needed:
"The United States is not in recession. It is in a very slow-death environment."
Japan's lost decade coming to America!
It is 2012 soon folks. nearly half way to lost decade of shitty economy WHILE working your ass off.
Austerity for labor, socialism for capital.
"The United States is not in a recession".
Psssttt.
Stay away from the goverment stats....
Stronger than the Kool-Aid even.
"The United States is not in recession."
http://www.youtube.com/watch?v=FwJnnf1Ogcw&feature=related
David Kotok is about to be assassinated.
We need mass assassinations of whores in congress and on wall street.
We don't have the piss poor demographics that Japan has. We don't have near the debt that Japan has AND we do have a more flexible banking system to deal with the problem. We may have a Japan style economy here, but with a lot less intensity. Japan has no oil and the US only imports 40%. Japan has to keep the Yen high to buy oil cheaply, but now that Asia may be rolling over Japan has to weaken the Yen to make their exports cheaper. They have already made moves in this direction.
It seems there would be better bragging right to a position that held NO Euro vulnerability. What would be helpful, if an investor was interested in following the model that is presented here with real cash, is a weekly feed back as to total amount invested compared to that amount current date. Maybe better would be a weekly report showing week to week and date of initial investments to date .
From my view point this seems risky, but given that this is a professional trade, if it works, the ZH World needs to know.
Low Profile, I was thinking about the same thing.
Glad I'm not dumb and trusting enough to let Mr. Kotok mismanage my money.
Dave: your entry came up alongside an ad for "trade with Cramer" on my screen. Kind of serendipitous what?
I'm pretty sure he(or somebody) paid for his ad, but I"m not sure how yours got yours on here posing as a "commentary."
Could you let us know the secret of your access here? Help out the community and so on!><?
btw...so you're "overweight on precious metals" now are you? Got some hot ETF tips for us huh? Good to see you finetuning your approach for the target audience....but I think you might need to dig deeper....it's still too soon to hope we've forgotten your call on MFG!
We are seeing startled reaction in response to the Italian situation. Investors haven't decided what kind of creature they've stumbled upon. They just know that it means n escalation of risk.
http://georgesblogforum.wordpress.com/2011/11/02/the-daily-climb-2/
6% in real money is extreme, huh?
Extreme like http://www.youtube.com/watch?v=Tbxq0IDqD04
Translated: "Oh SHIT. They are changing the fucking rules AGAIN. ...Now what?!".
But what action to take!? What to take!? OMFG WHAT DO I DOOOOOOOOoooo...!
Lol, "slow-growth". Given the inflationary nature of the Fed, "slow-growth" should ring all sorts of alarm bells. But no!
What if you're in an undeclared depression? What do you do with stocks then (besides order the certificates and wipe your ass with them)?
OMFG, 6%?!?!?! So very very high... So very very "overweight"!!!
Things must be dire indeed!!!
...And we're sure those ETF providers are more more trustworthy than the CDS providers!!!
Yeah. 6%. That should do it. That should be enough. GOD, I hope that's enough!
Oh God Oh God Oh God Oh God we hope the system doesn't melt down. Because then... Who needs us?
Remarkable! It's Remarkable! 6 whole percent!
(end/Snark)
Thank you, Messrs. Durden(s) & Whalen for continuing to provide these peeks into the minds of "asset managers" as they sloooooowly begin to pull their collective heads out of their asses. We all need to have our earplugs ready so we do not go deaf from the Earth-shaking "POP" the sound will doubtless make...
I thought the phrase was supposed to be:
"Slow boat to China"
NOT,
"Slow growth to China" ????
Whadayamean they borrowed billions against their CDS? With who? MF Global? Who the Phuck are they? And the City of Atlanta is involved? WTF???!!!!!
Well at 6% they might be able to not lose any net. Except they went for the ETFs. Sorry guys.
"In our international models, that weight is 11%, with all of it in Northern Europe."
I wonder how much of the 11% is in Statoil and Novo Nordsk who keep their books in Norwegian kroners?
"Does that mean the world is ending? No."
I'm sorry, could you repeat that? I couldn't hear over the noise of the maurading zombie hoards outside my house.
should have bought platinum instead. why would so many lose money than to read?
http://expose2.wordpress.com