Horne presentation - Nov 0308

614 Landis Avenue, Vineland, NJ 08360800-257-7013www.cumber.com

David R. Kotok Chairman & Chief Investment Officer

&J. Paul Horne

Independent International Market Economist (*)

Outlook for the Economy and Financial Markets 3 November 2008

Hebrew University - Jerusalem

614 Landis Avenue, Vineland, NJ 08360800-257-7013www.cumber.com Chart 2

©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.

• Source: The Washington Post, 24 October 2008



Source: IMF “Global Financial Stability Report” – October 2008



Exposure of U.S. fixed income market

• Source: IMF “Global Financial Stability Report” – October 2008



U.S. housing & credit bubbles deflate

• Source: IMF “World Economic Outlook” – October 2008



$28 trln. off world equity capitalization since Oct07 peak

• Source: Bloomberg chart. Data through 19oct08.



Equity losses: from Oct’07 hi to 24 Oct. ‘08

• Source: Bloomberg, MSCI Barra, Wilshire. Data as of 24oct08.

World mkt cap down $27 trn. But above ‘02 low.


©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.Source: Ned Davis davis215.

What Will History Say?Quarterly Data 12/31/1981 - 6/30/2008

(DAVIS215)

Mean = 201.4%

Sum of Household Real Estateand theListed Market Cap (NDR Calculation*)

as a Percentage of GDP6/30/2008 = 238.0% ( )

Concept Courtesy: Paul Jones140150160170180190200210220230240250260270280

140150160170180190200210220230240250260270280

Value of Household Real EstateRelative to GDP6/30/2008 = 135.8%

( )

Total Listed Market Value* Relative to GDP6/30/2008 = 102.2%

( )

*Listed Market Cap includes: NYSE, AMEX, & NASDAQCommon Stock Only, Excluding ADRs, Mutual Funds, & Preferred

405060708090

100110120130140150160170

405060708090

100110120130140150160170

1985 1990 1995 2000 2005

Household Real Estate and Stocks Relative to GDP



What Will History Say?Quarterly Data 3/31/1947 - 6/30/2008

(DAVIS45)

6/30/2008 = 11727.4

Real GDPWhen2-QuarterChangeof Twin RealGDP NominalGDP %Deficit/NominalGDP (bottomclip) Is: GPA GPA of Time

Above0.8 4.3 9.0 14.4Between-1 and0.8 3.4 6.8 69.5

* -1 and Below 2.3 5.7 16.1

16961938221525312892330537774316493356376441736184129613

10985

16961938221525312892330537774316493356376441736184129613

10985

6/30/2008 = -9.5%Trade + Budget Deficit (Surplus)/Nominal GDP

Surplus

Deficit

-8-6-4-20246

-8-6-4-20246

6/30/2008 = -2.8Two Quarter Change of Twin Deficits/GDP

Improving Deficit

Deteriorating Deficit-3-2-10123456

-3-2-10123456

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Real GDP vs Twin Deficits as a % of Nominal GDP


©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.Source: Ned Davis HOT200810091_c.

Capitulation? And Strategy

(HOT200810091_C)

Daily Data 1/03/1950 - 10/17/2008 (Log Scale)

SP500 Average % Gain:

Days Below AllLater -22% Periods

30 3.60 0.98

60 5.00 1.9990 10.80 3.02

252 26.80 9.02

Up Arrows Designate the First Timethe S&P 500 Dropped Below its

200-Day Moving Average by 22%

19253241526786

110141181232298382490628805

103213231696

19253241526786

110141181232298382490628805

103213231696

Very Oversold-30-27-24-21-18-15-12-9-6-30369

12151821

-30-27-24-21-18-15-12-9-6-30369

12151821

1954

1959

1964

1969

1974

1979

1984

1989

1994

1999

2004

Standard & Poor's 500 Index

S&P 500 Percentage From 200-Day Moving Average


©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.Source: Ned Davis S233.

Capitulation? And Strategy

(S233)


Average S&P 500 IndexPercentage ReturnsAfter Volatility Spikes

Days After AllLater Spikes Periods

10 0.1 0.3

22 0.3 0.663 8.3 1.9

126 14.5 3.9189 21.3 6.0

252 20.1 8.2

Peaks in Daily Volatility selected in hindsight.Box indicates how S&P 500 performed afterpeaks in Daily Volatility.

4453647895

115140169206249303367446541656796966

11721422

4453647895

115140169206249303367446541656796966

11721422

Spikes in 44-Day Volatility for S&P 500 Index(44-Day Average Daily High Minus Low % Change)

10/20/2008 = 4.3%

7/12/626/25/70

10/31/74

12/10/82

12/15/87

10/15/989/5/02

Mea

n+1

SD

+2 S

D-1

SD

Das

hed

Line

s =

Std

Dev

-2 S

D

Concept Courtesy of Sam Stovall

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1962

1967

1972

1977

1982

1987

1992

1997

2002

2007

Standard & Poor's 500 Index and Daily Volatility



What Do Panic Lows Look Like?

(DAVIS118)

100.9102.4103.9105.5107.1108.7110.3112.0113.7115.4117.1118.9120.7122.5124.3126.2128.1130.0132.0

100.9102.4103.9105.5107.1108.7110.3112.0113.7115.4117.1118.9120.7122.5124.3126.2128.1130.0132.0Historical Cycle DJIA ( )

All cycles indexed to 100 at end of Waterfall Decline (dashed vertical line).

Historical Cycles Based on end of Waterfall Decline Dates of:10/29/192910/18/19375/24/19409/10/194610/22/19575/28/19625/26/197010/4/197410/19/19877/23/2002

DJIA Performance Around Waterfall Declines

56596367717580859095

101107113

56596367717580859095

101107113Historical Cycle 10-Day Smoothing of NYSE Volume ( )

0-21-42-63 +21 +42 +63 +84 +105 +126<--Days After--><--Days Before-->

New Chart


©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.Source: Ned Davis davis118a.

What Do Panic Lows Look Like?

(DAVIS118A)

100.9102.4104.0105.6107.2108.8110.4112.1113.8115.5117.3119.1120.9122.7124.6126.5128.4130.3132.3134.3136.3138.4

100.9102.4104.0105.6107.2108.8110.4112.1113.8115.5117.3119.1120.9122.7124.6126.5128.4130.3132.3134.3136.3138.4DJIA 7/22/2008-10/20/2008 ( )

DJIA & Volume indexed to 100 on 10/10/2008 (dashed vertical line).

Dow Jones Industrial Average This Cycle

535761667177839097

104

535761667177839097

10410-Day Smoothing of NYSE Volume ( )

0-21-42-63 +21 +42 +63 +84 +105 +126<--Days After--><--Days Before-->

New Chart



0

20

40

60

80

100

120

140

160

1986 1990 1994 1998 2002 2006 2010

WTI Nominal Oil Price ($/BBL)

WTI Real Oil Price ($/BBL)

Source: LSU Energy Center and Bureau of Economic Analysis. September 2008 PCE estimated. Data through 10/03/08.

Real and Nominal Price of Oil - West Texas Intermediate Crude

Cumberland estimated September PCE

WTI off to $62.05 on 24oct08


©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.Source: Ned Davis CLD2.

S&P 500 Energy Sector and the S&P 500 Excluding Energy Sector Returns


(CLD

2)

( ) S&P 500 EnergySectorIndex( ) S&P 500 StockIndex ExcludingEnergySector*

*Daily constituent changes to S&P 500 Index introducesa small margin of error in S&P 500 Index excluding Energy sector.

646771757983889398

103109115121128135142150158167176186196207218230243256270285301317335353

646771757983889398

103109115121128135142150158167176186196207218230243256270285301317335353

1999M J S D

2000M J S D

2001M J S D

2002M J S D

2003M J S D

2004M J S D

2005M J S D

2006M J S D

2007M J S D

2008M J S

S&P 500 Energy Sectors Returns and the S&P 500 Excluding Energy Sector Returns



Food, fuel, metals - real trends



©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.Source: Ned Davis E246I.

Housing Inventory to Sales RatiosMonthly Data 6/30/1982 - 8/31/2008

(E246I)

Total 8/31/2008 = 10.1

Balanced Market

Too Few Homes Available

Too Many Homes Available

Measured as Months' Available Supply456789

101112

456789

101112

Existing Single-Family Homes 8/31/2008 = 10.0

Source: Haver Analytics, National Association of Realtors456789

10111213

456789

10111213

New Homes 8/31/2008 = 10.9

4

5

6

7

8

9

10

11

4

5

6

7

8

9

10

11

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Housing Inventory-to-Sales Ratios


©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.Source: Ned Davis E0760.

S&P/Case-Shiller Composite Home Price Index Monthly Data 1/31/1987 - 7/31/2008 (Log Scale)

(E0760)

Composite10 HomePriceIndex7/31/2008 = 178.5

( )

Composite20 HomePriceIndex7/31/2008 = 166.2

( )

The indexes measure weighted-average changes in values of residentialhousing markets across select major regional metropolitan areas.

667176828996

103111120129139150162174188202218

667176828996

103111120129139150162174188202218

Composite10 HomePriceIndex7/31/2008 = -17.5%

( )

Composite20 HomePrice Index7/31/2008 = -16.3%

( )

Prices Rising

Prices Falling-16-14-12-10-8-6-4-202468

101214161820

-16-14-12-10-8-6-4-202468

101214161820

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

S&P/Case-Shiller Composite Home Price Indexes

S&P/Case-Shiller Composite Home Price Indexes (Year-to-Year Change)



Reuters / University of Michigan Consumer Sentiment Index for Personal Finances

Source: Ned Davis CDL3.

Monthly Data 1/31/1978 - 9/30/2008

(CDL

3)

Personal Finances

Shaded areas representNational Bureau of

Economic Research recessions dates.

Each month 500 surveys of US households are conducted asking -Is your family better or worse off financially than a year ago?

Source: Reuters/University of Michigan Surveys of Consumers707274767880828486889092949698

100102104106108110112114116118120122124126128130132134136138140142

707274767880828486889092949698

100102104106108110112114116118120122124126128130132134136138140142

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Reuters/University of Michigan Consumer Sentiment Index for Personal Finances



Real GDP v. Conference Board’s Expectations of Business Conditions

(E0817)

Monthly Data 12/31/1970 - 6/30/2009

-28-26-24-22-20-18-16-14-12-10-8-6-4-202468

101214161820222426283032 Real GDP

Smoothed Year-to-Year ChangeScale Right

( )

ExpectedBusinessConditionsIndex(Moved Ahead Nine Months)

Scale Left( )

Latest Expected Business Conditions Index ReadingCorresponds to -0.9% Real GDP Growth

Correlation Coefficient = 0.71

Source: The Conference Board -2.7-2.4-2.1-1.8-1.5-1.2-0.9-0.6-0.30.00.30.60.91.21.51.82.12.42.73.03.33.63.94.24.54.85.15.45.76.06.36.66.97.27.57.88.18.4

1975 1980 1985 1990 1995 2000 2005

Real GDP vs Conference Board's Expectations of Business Conditions



Unemployment Rate v. NFIB Hiring Plans

(E832)

Monthly Data 10/31/1974 - 1/31/2009

UnemploymentRate9/30/2008 = 6.1%

Scale Right( )

3.84.04.24.44.64.85.05.25.45.65.86.06.26.46.66.87.07.27.47.67.88.08.28.48.68.89.09.29.49.69.8

10.010.210.410.610.8NFIB Hiring Plans Index

(Six-Month Smoothing)Advanced Four Months

1/31/2009 = 5.5%Inverted Scale Left

( )

Correlation Coefficient = -0.85

National Federation ofIndependent BusinessThe Small Business Economic Trends

Source:

Implied Unemployment Ratefor 10/31/2008 = 7.21%

Data reported quarterly prior to 1986

-5-4

-3

-2

-10

12

3

4

56

78

910

1112

1314

1516

17

18

19

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Unemployment Rate vs NFIB Hiring Plans


©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.Source: Bloomberg. Daily data through 10/21/08.

Muni Madness


©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.Source: Ned Davis B470, B471.

Muni Move UnprecedentedWeekly Data 4/26/1991 - 10/17/2008 (Log Scale)

(B471)

20-YearAgencyBondYield10/17/2008 = 5.12%

( )

20-Year MunicipalBondYield10/17/2008 = 6.01%

( )4.2

4.6

5.05.4

5.86.3

6.87.4

8.0

8.6

4.2

4.6

5.05.4

5.86.3

6.87.4

8.0

8.6

Munis Overvalued

Munis Undervalued

Muni Yields as a % of Agency Yields

Mean = 83.6%

10/17/2008 = 117.5%80859095

100105110115

80859095

100105110115

ImpliedTax Rate= 1 - Muni YieldAgency Yield

If in the 35% tax rate, favor Munis on a yield basisIf in the 15% tax rate, favor Munis on a yield basis

Current Implied Rate = -17.5%

MunisUndervalued

-15-12-9-6-30369

12151821

-15-12-9-6-30369

12151821

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Munis, Agencies and the Implied Tax RateWeekly Data 1/08/1965 - 10/17/2008 (Log Scale)

(B470)

20-YearTreasuryYield10/17/2008 = 4.60%

( )

20-YearMunicipalBond Yield10/17/2008 = 6.01%

( )3

4

5

6

7

8

10

12

15

3

4

5

6

7

8

10

12

15

Munis Overvalued

Munis UndervaluedMuni Yields as a % of Treasury Yields

Mean = 85.2%10/17/2008 = 130.7%

72808896

104112120

72808896

104112120

ImpliedTax Rate= 1 - Muni YieldTreasury Yield

If in the 35% tax rate, favor Munis on a yield basisIf in the 15% tax rate, favor Munis on a yield basis

Current Implied Rate = -30.7%

MunisUndervalued

-26.6-22.8-19.0-15.2-11.4-7.6-3.80.03.87.6

11.415.219.022.826.630.434.2

-26.6-22.8-19.0-15.2-11.4-7.6-3.80.03.87.6

11.415.219.022.826.630.434.2

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Munis, Treasurys and the Implied Tax Rate


©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.Source: Federal Reserve Board of Governors and Global Insight. Data through 10/20/08.

TED Spread, Fed Funds and TAF

-1

0

1

2

3

4

5

6

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08

London Interbank Offered Rate, (USD LIBOR), 3 MonthUSD Swap OIS 3 MoTreasury Bill, Benchmark, 3 month, Yield percent, USFederal Funds Target Rate, Percent, US

3 MO LIBOR

3 MO T-BILL Fed Funds

OIS 3 Mo

TAF

TermAuctionFacility


©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.Note: Date are weekly averages for all but the Foreign Central Bank TAF which are as of the last day of the week.Source: Federal Reserve Board of Governors Statistical Release H.4.1. Data through 10/23/08.

Factors Adding to Reserves and Off Balance Sheet Securities Lending Program

8/8/07 – 10/23/08

TDW

P 08/17/07

TSLF 03/11/08

PDC

F 03/16/08

TAF 12/12/07

Series Break

450

650

850

1050

1250

1450

1650

1850

8-Aug-07

14-Nov-07

12-Dec-07

9-Jan-08

6-Feb-08

5-Mar-08

2-Apr-08

30-Apr-08

28-May-08

25-Jun-08

23-Jul-08

20-Aug-08

17-Sep-08

15-Oct-08

Week

$ B

illio

ns

Securities Lent - Off Balance Sheet -OvernightSecurities Lent Off Balance Sheet -Term Facility

Mutual Fund Facility

Other Assets less Euro-TAF

Maiden Lane

Other Credit Extensions

Primary Dealer Credit Facility

Foreign CB TAF inc. 9 CBs

TAF

RPs

Misc (Float, Treas Curr, Spec DrawRights & Gld Stock'Reg Disc Window Lending (Prim,Second & Seas Credit"

Securities



0

200

400

600

800

1000

1200

1400

1600

1800

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Global Bond Risk Premiums Were ShrinkingOutside the United States (1/2/98 – 10/21/08)

Source: JP Morgan and Cumberland Advisors.

Daily Spreads of JPMorgan's Emerging Market Bond Index (EMBI)+ Sovereign over US Benchmark Bond Yields. Daily data through 10/21/08.

Bas

is P

oint

s

LTCM

9/11

Argentinadefault

9-May-06100

200

300

400

500

600

700

800

Jan-06 Jan-07 Jan-08

21-Feb-0718-Jul-07

17-Mar-08



100200300400500600700800900

100011001200130014001500

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Global Bond Risk Premiums Were ShrinkingInside the United States (1/7/98 – 10/16/08)

Source: Bloomberg and Cumberland Advisors.

CS High Yield Index II (formerly DLJ High Yield Index) Spread to Worst expressed in basis points. Weekly data through 10/16/08.

Bas

is P

oint

s LTCM

9/11

Argentinadefault

100

800

1500

Jan-06 Jan-07 Jan-08 Jan-09

9-May-06 21-Feb-0718-Jul-07

17-Mar-08



Financial crises compared

• Source: IMF “Global Financial Stability Report”, October 2008



World trade and decoupling in doubt




Leading indicators off the cliff




Summer time optimism at the IMF




USD - EUR Trends

• Source: Daily data from Federal Reserve.



Long view in real terms – Up & Down

• Source: Standard & Poor’s, Cowles Commission data. Dividends not reinvested.



About Cumberland AdvisorsCumberland Advisors supervises approximately $960 billion in separate account assets for individuals, institutions, retirement plans, government entities, and cash management portfolios. Cumberland manages portfolios for clients in 42 states, the District of Columbia, and in countries outside the U.S. Cumberland Advisors is an SEC-registered investment adviser.

Munis, Taxables, ETFs Cumberland’s portfolio management efforts emphasize long-lasting relationships and continuous dialogue among clients, their consultants, tax advisors, accountants, estate planners, and their assigned portfolio management contact at Cumberland. Cumberland offers several different investment portfolio management styles. Our investment strategy is described in detail on our website.Fixed IncomeAll of our fixed-income offerings are total return strategies, but can take the client’s current income needs into consideration. Our fixed income styles areTax-Free Municipal Bonds, Taxable Bonds, and Short-Term Investment Program

StocksCumberland uses Exchange-Traded Funds to manage global equities. Exchange-Traded Funds (ETFs) are securities that mimic the price performance and dividend yield of an index, or a basket, of securities. Cumberland uses ETFs as building blocks in crafting a portfolio, investing in attractive equity sectors, industries, market capitalization strata, styles, and regions. Our equity portfolios are U.S. Exchange-Traded Funds (ETF) Equity, International Exchange-Traded Funds (ETF) Equity, Emerging Markets Exchange-Traded Funds, and Global Multi-Asset Class Exchange-Traded Funds.Balanced AccountsCumberland can blend the strategies presented above to create a balanced mix of stocks and bonds.For further information about Cumberland Advisors, please visit our website at www.cumber.com.

* Cover page : J. Paul Horne is not and has not been an employee of Cumberland Advisors.

http://www.cumber.com/

Horne presentation - Nov 0308

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Transcript of Horne presentation - Nov 0308