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Banks and Financials: From Overweight To Underweight

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    January 26, 2014

    We have taken our overweight exposure in banks and financials to an underweight.

    The reason is simple. When the US Attorney General threatens banks in a public forum with statements suggesting that no bank is too big to indict, it is important to pay attention. We looked at the earnings reports of banks, the turnaround in banks, and the settlements that were achieved with banks from prior legacy transactions. For a while, we thought we might have reached a point from which the recovery of the banks and the banking sector could achieve “escape velocity.” For a while, we thought perhaps this persecution of the banking and financial sectors was reaching an end.

    We were wrong.

    It is now obvious to us that the continuing objective of the Obama administration and the US Attorney General is to punish banks and finance. This adversarial stance introduces a financial malignancy into the sector. Our conclusion is that it is still too soon to view banks as  accelerating their recovery. Their troubles are not over.

    Furthermore, our exit strategy from the sector comes on the heels of a terrific market achievement last year. Now, this very large sector of the market looks heavy to us. We have reversed ourselves. We’ve sold the ETFs that we had purchased. In some cases we’ve taken small losses. In other cases we’ve broken even or netted small profits. In all cases, the movement was done quickly.

    The US Attorney General holds the gun. No pun intended on his name, Holder.

    When faced with a gun, we must remember that a key principle is not to needlessly engage in combat. We would like to think of the financial sector as being in the process of healing and recovering, as gaining in profitability, and as reaching a position of stable growth. We hope that is going to occur, and we continue to watch for signs of renewed vigor.

    But hope is not an investment strategy for Cumberland Advisors. The investment strategy we pursued for our clients in this case was not to confront the US Attorney General with an overweight position in a sector that he views as adversarial.

    Cumberland is now underweight in the banking and financial sectors.  We also raised cash from other sectors.  We enter the weekend with a cash reserve.

    Images: Flickr (licence details)

    About the Author

    David R. Kotok cofounded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in economics from The Wharton School of the University of Pennsylvania, an M.S. in organizational dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a masters in philosophy from the University of Pennsylvania.

    Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a participant in Bloomberg radio programs.  He is a frequent contributor to CNBC programs, including Morning Call, Power Lunch, Kudlow & Company, Squawk on the Street, Squawk Box Asia, and Worldwide Exchange. He co-authored the book Invest in Europe Now!

    Mr. Kotok currently serves as a Director and Program Chairman of the Global Interdependence Center (GIC) (www.interdependence.org), whose mission is to encourage the expansion of global dialogue and free trade in order to improve cooperation and understanding among nation states, with the goal of reducing international conflicts and improving worldwide living standards. Mr. Kotok chairs its Central Banking Series, and organized a five-continent dialogue held in Philadelphia, Paris, Zambia (Livingstone), Hanoi, Singapore, Prague, Capetown, Shanghai, Hong Kong, Rome, Milan, Tallinn, and Santiago, Chile. He has received the Global Citizen Award from GIC for his efforts.

    Mr. Kotok is a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), serves on the Research Advisory Board of BCA Research, and is also a member of the Philadelphia Council for Business Economics (PCBE).

    Mr. Kotok has served as a Commissioner of the Delaware River Port Authority (DRPA) and on the Treasury Transition Teams for New Jersey Governors Kean and Whitman. He has also served as a board member of the New Jersey Economic Development Authority and as Chairman of the New Jersey Casino Reinvestment Development Authority.

    Mr. Kotok hosts an annual Maine fishing trip, where, it is rumored, most of the nation’s important financial and economic decisions are actually made.


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