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Markets, Ukraine and Paris

  • Written by Syndicated Publisher 1 Comment1 Comment Comments
    March 4, 2014

    Fast-moving events in Ukraine point to a bifurcation of the country. It seems clear that Russia will take the Autonomous Republic of Crimea and that Russian influence will likely dominate the eastern side of Ukraine where the Russian language is spoken and the majority of the population is sympathetic with Russia.

    That will leave Western Ukraine and a divided country. US sanctions and rhetoric will have some, but not major,  impact. Mr. Putin will decide this outcome. EU weakness and consequent reluctance to act will be confirmed. For an interesting discussion on Ukraine, see this Foreign Policy Research Institute brief: http://www.fpri.org/articles/2014/03/russian-invasion-ukraine .  My colleague, Bill Witherell, will be publishing more on this subject later this week.

    The issue to be determined is whether this division of the country will be accompanied by major military activity that could lead to a regional war. If it is, contagion risk rises. If the situation does not erupt into an extensive military engagement, Ukraine-related events will be contained within the geographical area. Bill Witherell has already written about this and the second-order effects that can occur if contagion spreads from the events in Ukraine. See www.cumber.com for his commentary.

    For Cumberland, our base case is that there will be no contagion.

    Investors have to determine what actions to take. Last week major markets ignored the situation based on the assumption that it will be contained. The US stock market reached a new high in the midst of the evolution of events. That advance is now in question, and the question may provide an entry opportunity.

    One sector can benefit from events. That is the Energy sector. The outcome of this Central Europe upheaval will add to pricing pressures or diminish downward pricing pressures on energy in some parts of the world. The use of natural gas and other energy sources is a critical element in Russian strategy.  The possible release of some oil from the US strategic reserve may have a temporary impact.  President Obama has authority to release now since the reserve is holding more than the 90-day required amount.  The reason the reserve is higher is that the US has reduced its oil imports and the reserve is sized under law that was passed when imports were higher.  The reserve is currently 100% full.

    Cumberland has already taken its position in the Energy sector to overweight. We have utilized a number of exchange-traded funds (ETFs) in the US market to gain that position. So far that strategy has worked.

    The outlook for the evolution of the US energy patch is fundamentally positive. We think it will only benefit further amid the fallout of the geopolitical turmoil that is occurring in several parts of the world. Ukraine and its subsequent events will be one instance. Questions about Venezuela will be another. Elements of instability resulting from Islamic persecution of Christians in Nigeria are another. The Middle East and Persian Gulf are already well-known risks. Troubles can be seen in various places that are sensitive to energy, oil, and natural gas. The bottom line is that the Energy sector now requires an overweight position. We will likely maintain that position for some time.

    We implement that strategy at Cumberland in the ETF arena. We also implement it with separately managed accounts using Master Limited Partnerships (MLPs). That sector also requires extensive research and development. We think of MLPs as participating in multiple American businesses with geographical distribution. We believe it is necessary to use in-depth research into the cash flows and accounting structures that are required to make MLPs successful investments. One should not venture into that area precipitously or blindly.

    With world events as they are, it looks like we are going to be in the Energy sector for a long time.

    We are leaving for Paris, France, on Wednesday, March 5. Private meetings are scheduled on arrival. The Global Interdependence Center (GIC) delegates’ and speakers’ dinner is being held on March 9, 2014. The GIC conference at Banque de France will be held on March 10, 2014, followed by a delegates’ and guests’ roundtable discussion on March 11, 2014. As this is written, there are still a handful of seats available at the sessions (fewer than ten vacancies at last count), so any last-minute registration is not guaranteed. You need to confirm directly with GIC. If you plan to be in Paris on those dates, you can still attend if you are able to register. Information can be found at  www.interdependence.org .

    Cumberland Advisors is a proud sponsor of the GIC.

    Lastly and on a separate subject we have championed.  We steadfastly believe it is an error for politicians to use the debt ceiling and that their actions injure the United States by raising risk premia which all of us pay.  Chris Whalen is on the program in Paris in the second day roundtable. He has penned a column on why the Tea Party should stop the debt ceiling gun-to-the-head approach if it wants to succeed: http://www.breitbart.com/Big-Government/2014/03/01/Washington-Wall-Street-Time-for-Republicans-to-Abandon-Debt-Default-Strategy. Now if only folks will listen.

    À bientôt.  See you in Paris.

    About The Author

    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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