Global Observations About Financial Markets April 2008
David R. Kotok Chairman & Chief Investment Officer
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Muni Madness
Source: Bloomberg
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Chart 2
Muni Move Unprecedented Munis, Treasurys and the Implied Tax Rate 15 20-Year Treasury Yield 4/04/2008 = 4.37% ( )
12 10
8.6
12
8.0
10
7.4 6.8 6.3 5.8 5.4 5.0
8
7
7
6
6 20-Year Municipal Bond Yield 4/04/2008 = 4.90% ( )
4
5 4
3
3
4/04/2008 = 112.1% 112 Muni Yields as a % of Treasury Yields 104 Munis Undervalued 96 88 80 Mean = 85.0% 72 Munis Overvalued
(B470)
Current Implied Muni Yield Implied Rate= TaxRate =1Treasury Yield -12.1%
Munis Undervalued Munis Undervalued
If in the 35% tax rate, favor Munis on a yield basis If in the 15% tax rate, favor Munis on a yield basis
112 104 96 88 80 72 34.2 30.4 26.6 22.8 19.0 15.2 11.4 7.6 3.8 0.0 -3.8 -7.6 -11.4
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
34.2 30.4 26.6 22.8 19.0 15.2 11.4 7.6 3.8 0.0 -3.8 -7.6 -11.4
Munis, Agencies and the Implied Tax Rate
15
8
5
Weekly Data 4/26/1991 - 4/04/2008 (Log Scale)
Weekly Data 1/08/1965 - 4/04/2008 (Log Scale)
4.6 4.2
20-Year Municipal Bond Yield 4/04/2008 = 4.90% ( )
96 93 90 87 84 81 78 24 22 20 18 16 14 12 10 8 6 4 2 (B471)
Source: Ned Davis B470, B471.
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
20-Year Agency Bond Yield 4/04/2008 = 5.00% ( )
Chart 3
8.6 8.0 7.4 6.8 6.3 5.8 5.4 5.0 4.6 4.2
Muni Yields as a % of Agency Yields
96 93 90 87 Mean = 83.3% 84 81 4/04/2008 = 97.9% 78 Munis Overvalued Current Implied Rate = 2.1% 24 22 20 18 16 14 12 10 Muni Yield 8 Implied Tax Rate = 1 Agency Yield 6 4 If in the 35% tax rate, favor Munis on a yield basis If in the 15% tax rate, favor Munis on a yield basis 2 Munis Undervalued
19921993199419951996199719981999200020012002200320042005200620072008
Commercial Paper, Fed Funds & Eurodollar Daily Data 1/03/1989 - 4/11/2008
Commercial Paper, Fed Funds, & Eurodollar 10 9 8 7 6 5 4 3 2
10 9 8 7 6 5 4 3 2
90-DayCommercialPaper 4/11/2008 = 2.83% ( )
Fed FundsTargetRate 4/11/2008 = 2.25% ( )
3-MonthEurodollar 4/11/2008 = 3.00% ( )
Commercial Paper minus Fed Funds Target Rate
100 75 50 25 0 -25 -50 -75
In Basis Points
4/11/2008 = 58 100 75 50 25 0 -25 -50 -75
Mean = 12
150 120 90 60 30 0 -30 -60
Eurodollar minus Fed Funds Target Rate
30
Eurodollar minus Commercial Paper
4/11/2008 = 75
150 120 90 60 30 0 -30 -60
4/11/2008 = 17
30
Mean = 16
15 0 -15
15 0 -15
-30 -45
-30 -45 Mean = 4
(B0122A)
M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J SD M J S D M J S D M J S D M J S D M J S D M J S D M
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Ned Davis B0122A.
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Chart 4
T-Bills, Eurodollar, & Commercial Paper (3mo) Daily Data 4/10/2006 - 4/11/2008
T-Bills, Eurodollar, & Commercial Paper (3-Month) 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00
3-MonthT-Bill Yield 4/11/2008 = 1.17% ( )
3-MonthCommercialPaper 4/11/2008 = 2.83% ( )
5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00
3-MonthEurodollar 4/11/2008 = 3.00% ( )
Eurodollar minus T-Bill Yield
In basis points 210 180
210 180
150 120 90
150 120 90
Mean = 84
60 210 180 150 120 90 60
4/11/2008 = 183 Commercial Paper minus T-Bill Yield
In basis points
60 210 180 150 120 90 60
Mean = 75 4/11/2008 = 166
30
30
Eurodollar minus Commercial Paper
In basis points
20
20
10
10 Mean = 9
0
0
-10
-10
-20 (B0123)
4/11/2008 = 17 M
J
J
A
S
O
N
D
J
2007
F
M
A
M
Source: Ned Davis B0123.
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Chart 5
J
J
A
S
O
N
D
J
2008
F
M
A
-20
Eurodollar, Asset-backed & Financial Commercial Paper (1 mo) Daily Data 4/07/2006 - 4/10/2008
Eurodollar, Asset-Backed & Financial Commercial Paper (1-Month) 6
6
5
5 1-MonthAsset-BackedCommercial Paper 4/10/2008 = 2.87% ( )
4
4
In basis points
3
Asset-Backed C.P. minus Eurodollar
80 60 40 20 0 -20 180
1-Month Eurodollar 4/10/2008 = 3.00% ( )
1-MonthFinancial CommercialPaper 4/10/2008 = 2.52% ( )
3
4/10/2008 = -13 80 60 40 20 0 -20
Mean = 4
In basis points
Asset-Backed C.P.minus Financial C.P.
4/10/2008 = 35
180
150
150
120
120
90
90
60
60
30
30
Mean = 20 In basis points
Eurodollar minus Financial C.P.
4/10/2008 = 48
100
100
80
80
60
60
40
40 Mean = 17
20 (B0123C)
M
J
J
A
S
O
N
D
J
2007
F
M
A
M
Source: Ned Davis B0123C.
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Chart 6
J
20 J
A
S
O
N
D
J
2008
F
M
A
30-Day Nonfinancial Commercial Paper Rates Daily Data 4/07/2006 - 4/10/2008
30-Day Nonfinancial Commercial Paper Rates 6.0 5.8 5.6 5.4 5.2 5.0 4.8 4.6 4.4 4.2 4.0 3.8 3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2
140 130 120 110 100 90 80 70 60 50 40 30 20 10 (B0124)
AA Rate 4/10/2008 = 2.16% ( )
A2/P2 Rate 4/10/2008 = 2.94% ( )
M
J
J
A
S
O
N
D
J
2007
F
M
A
M
J
J
A
S
O
4/10/2008 = 78 A2/P2 Rate minus AA Rate (In Basis Points)
30-Day Nonfinancial Commercial Paper Spread
Source: Ned Davis B0124.
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
6.0 5.8 5.6 5.4 5.2 5.0 4.8 4.6 4.4 4.2 4.0 3.8 3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2
Chart 7
N
D
J
2008
F
M
A
140 130 120 110 100 90 80 70 60 50 40 30 20 10
Is It Cheaper for Banks to Borrow From the Fed? Daily Data 1/08/2003 - 4/10/2008
Is it Cheaper for Banks to Borrow from the Fed? 180 160 140 120 100 80 60 40 20 0 -20 -40
In Basis Points
Primary Discount Rate less Effective Fed Funds Rate
4/10/2008 = 19
180 160 140 120 100 80 60 40 20 0 -20 -40
4/10/2008 = -2
120
Cheaper to Borrow from Market
*Fed Changed to a Two-Tier Discount Rate System and Made it More Costly than Fed Funds on 1/09/2003
Cheaper to Borrow from Discount Window
Primary Discount Rate less 30-Day AA Financial Commercial Paper Rate
120 100
100
80
80
60
60 Cheaper to Borrow from Market
40
40
20
20
0
0
-20
-20
-40
Cheaper to Borrow from Discount Window
-40 Primary Discount Rate less 1-Month Eurodollar
120
4/10/2008 = -50
120
100
100
80 60
80 60 Cheaper to Borrow from Market
40
40
20
20
0 -20
0 -20
-40
-40
Cheaper to Borrow from Discount Window
(B0123A)
M
M
J
S
N
J
M
2004
M
J
S
N
J
M
2005
M
J
S
N
Source: Ned Davis B0123A.
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Chart 8
J
M
2006
M
J
S
N
J
M
2007
M
J
S
N
J
M
2008
Credit Default Swap Spreads I (Inv Grade and Emg Mkts) Daily Data 3/21/2005 - 4/10/2008
Credit Default Swap Spreads I (Investment Grade and Emerging Markets) 200 180 160 140 120 100 80 60 40
In Basis Points
North America Investment Grade Index
4/10/2008 = 121.58
Source: Dow Jones Indexes
4/10/2008 = 283.75
North America Investment Grade High Volatility Index
400 350 300 250 200 150 100
200 180 160 140 120 100 80 60 40 400 350 300 250 200 150 100
300 270 240 210 180 150 120
Emerging Markets Index
4/10/2008 = 242.36
300 270 240 210 180 150 120
270
Emerging Markets Diversified Index
4/10/2008 = 219.27
270
240
240
210
210
180
180
150
150
120
120
90
90
(B385)
A
M
J
J
A
S
O
N
D
J
F M
2006
A
M
J
J
A
S
O
N
Source: Ned Davis B385.
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Chart 9
D
J
F M
2007
A
M
J
J
A
S O
N
D
J
F
2008
M
A
CDS Spreads Hit New Highs Daily Data 3/21/2005 - 4/10/2008
Credit Default Swap Spreads I (Investment Grade and Emerging Markets 200 180 160 140 120 100 80 60 40 400 350 300 250 200 150 100
In Basis Points
North America Investment Grade Index
4/10/2008 = 121.58
Source: Dow Jones Indexes
4/10/2008 North America Investment Grade High Volatility Index = 283.75
200 180 160 140 120 100 80 60 40 400 350 300 250 200 150 100
300 270 240 210 180 150 120
Emerging Markets Index
4/10/2008 = 242.36
300 270 240 210 180 150 120
270
Emerging Markets Diversified Index
4/10/2008 = 219.27
270
240
240
210
210
180
180
150
150
120
120
90
90
(B385)
A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A
2006
2007
2008
Credit Default Swap Spreads II (High Yield) In Basis Points
North America Crossover Index
Daily Data 4/13/2005 - 4/10/2008
4/10/2008 = 280.00
450 400 350 300 250 200 150
450 400 350 300 250 200 150 North America High Yield Index
800
4/10/2008 = 654.24
800
700 600 500
700 600 500
400 300 200
400 300 200
Source: Dow Jones Indexes
600 540 480 420 360 300 240 180 720 660 600 540 480 420 360 300 240 (B385A)
North America High Yield BB Index
4/10/2008 = 412.52
North America High Yield B Index
4/10/2008 = 665.28
600 540 480 420 360 300 240 180 720 660 600 540 480 420 360 300 240
M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A
2006
2007
2008
Note: The North America Investment Grade Index is a portfolio of credit-default swaps of 125 investment grade entities domiciled in North America, distributed among 5 sectors. The Crossover Index contains issues straddling the divide between speculative and investment grade. Source: Ned Davis B385, B385a.
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Chart 10
Mortgage Spread at 5-year High Monthly Data 4/30/1971 - 3/31/2008
10-Year Treasury Note Yield vs Conventional Mortgage Rate 18
18 10-Year Treasury Note Yield 3/31/2008 = 3.51% ( )
17 16
17 16
15
15
14
14
13
13
12
12
Conventional 30-Year Fixed Mortgage Rate 3/31/2008 = 5.97% ( )
11 10
11 10
9
9
8
8
7
7
6
6
5
5
4
4
440 400 360 320 280 240 200 160 120 80 (B337B)
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
3/31/2008 = 246
(In Basis Points)
Mean = 168
Conventional Mortgage Rate Less 10-Year Treasury Note Yield
Source: Ned Davis B337B.
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
Correlation Coefficient = 0.98
Chart 11
440 400 360 320 280 240 200 160 120 80
Financials – Returning to Underweight Highs Daily Data 4/10/2006 - 4/10/2008
OAS on Agencies, Mortgages, Corporates, and High Yield U.S. Agencies
90 80 70 60 50 40 30
180 160 140 120 100 80 60 40
Mortgage-Backed Securities
180 160 140 120 100 80 60 40
300 270 240 210 180 150 120
U.S. Investment-Grade Corporate Credit
300 270 240 210 180 150 120
90 80 70 60 50 40 30
OAS = Option-Adjusted Spread (in basis points)
Source: Lehman Brothers
U.S. High Yield
800
800
700
700
600
600
500
500
400
400
300
300
(B384)
M
J
J
A
S
O
N
D
J
2007
F
M
A
M
Source: Ned Davis B384.
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Chart 12
J
J
A
S
O
N
D
J
2008
F
M
A
Spreads Keep Widening? Weekly Data 7/07/1989 - 4/04/2008
OAS on Agencies, Mortgages, Corporates, and High Yield 90 80 70 60 50 40 30 20 10
90 80 70 60 50 40 30 20 10
U.S. Agencies
Mean = 30
In Basis Points Mortgage-Backed Securities
140 120
140 120
100
100
80 60
80 60
Mean = 66
40
40
270 U.S. Investment-Grade Corporate Credit 240 210 180 150 120 Mean = 107 90 60 1000 900 U.S. High Yield 800 700 600 Mean = 520 OAS = Option-Adjusted Spread 500 NDR Estimates prior to August 15, 2000 400 300
270 240 210 180 150 120 90 60 1000 900 800 700 600 500 400 300 2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
(B368)
1990
Source: Lehman Brothers
In basis points
75 70 65 60 55 50 45 40 35 30
30-Year Dollar Swap Spread 4/10/2008 = 36 Scale Right
85 80 75 70 65 60 55 50
10-Year Dollar Swap Spread 4/10/2008 = 63 Scale Left
110 105 100 95 90 85 80 75 70 65 60 55 50 45 40
5-Year Dollar Swap Spread 4/10/2008 = 83 Scale Right 105 100 95 90 85 80 75 70 65 60 55 50 45 40 35 (B386)
Source: Ned Davis B368, B386
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Daily Data 4/07/2006 - 4/10/2008
U.S. Dollar Swap Spreads
Chart 13
2-Year Dollar Swap Spread 4/10/2008 = 81 Scale Left M
J
J
A
S
O
N
D
J
F
2007
M
A
M
J
J
A
S
O
N
D
J
F
2008
M A
Dash for Cash Historical Treasury Yield Curve Perspective 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1
16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1
Treasury Yie;ds 3/31/08 Instrument Yield (%) Long-Term Bonds ( ) 4.28 91-Day Bills ( ) 1.26
Shaded Areas Represent National Bureau of Economic Research Recessions
4
4
Long-Term Treasurys minus T-Bill Yields
3
3
2
2
1
1
0
0
-1
-1
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
-3 3/31/2008 = 3.02% 1940
-3 1935
-2
1930
-2
(B12)
Daily Data 4/10/2006 - 4/11/2008
Monthly Data 12/31/1929 - 3/31/2008
T-Bills, Eurodollar, & Commercial Paper (3-Month) 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00
3-Month Eurodollar 4/11/2008 = 3.00% ( )
3-Month T-Bill Yield 4/11/2008 = 1.17% ( )
Eurodollar minus T-Bill Yield
In basis points 210 180
210 180
150 120 90
150 120 90
Mean = 84
60 210 180 150 120 90 60
4/11/2008 = 183 Commercial Paper minus T-Bill Yield
In basis points
60 210 180 150 120 90 60
Mean = 75 4/11/2008 = 166
30
30
Eurodollar minus Commercial Paper
In basis points
20
20
10
10 Mean = 9
0
0
-10
-10
-20 (B0123)
Source: Ned Davis B12, B0123.
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
3-Month Commercial Paper 4/11/2008 = 2.83% ( )
5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00
Chart 14
4/11/2008 = 17 M
J
J
A
S
O
N
D
J
F M
2007
A
M
J
J
A
S O
N
D J
F
2008
M A
-20
Were the Fed’s Moves Successful? Daily Data 4/10/2006 - 4/10/2008
Daily Data 12/04/2001 - 4/10/2008
OAS on Agencies, Mortgages, Corporates, and High Yield 90 80 70 60 50 40 30
U.S. Agencies OAS = Option-Adjusted Spread (in basis points)
300 270 240 210 180 150 120
180 160 140 120 100 80 60 40
U.S. Investment-Grade Corporate Credit
Source: Lehman Brothers
U.S. High Yield
800 700 600 500 400 300 (B384)
90 80 70 60 50 40 30
Mortgage-Backed Securities
180 160 140 120 100 80 60 40
300 270 240 210 180 150 120 800 700 600 500 400 300
M J J A S O N D J F M A M J J A S O N D J F M A
2007
30-Day Eurodollar Rate vs 30-Day Overnight Indexed Swap Rate
2008
5.7 5.4 5.1 4.8 4.5 4.2 3.9 3.6 3.3 3.0 2.7 2.4 2.1 1.8 1.5 1.2
30-Day EurodollarRate 4/10/2008 = 3.00%
(
)
30-Day Overnight Indexed Swap Rate 4/10/2008 = 2.05% ( )
Light shaded areas represent Fed Tightening Cycles Dark shaded areas represent Fed Easing Cycles
5.7 5.4 5.1 4.8 4.5 4.2 3.9 3.6 3.3 3.0 2.7 2.4 2.1 1.8 1.5 1.2
J M M J S N J M M J S N J MM J S N J MM J S N J MM J S N J MM J S N J M
2002 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0
2003
2004
2005
2006
2007
2008
4/10/2008 = 95
In Basis Points
Money Markets Tight
Mean = 10
140 130 120 110 100 90 80 70 60 50 40 30 20 10 0
30-Day Eurodollar Rate Less 30-Day Overnight Indexed Swap Rate
(B0123E)
Source: Ned Davis B384, B0123E.
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
The Overnight Indexed Swap (OIS) Rate Provides Market Expectations of Fed Funds Over the Next 30 Days
Chart 15
Ted Spread, Fed Funds and TAF 6 3 MO LIBOR Term Auction Facility
Fed Funds
5 3 MO T-BILL
4
3
2 YELLOW AREA IS THE TED SPREAD LONDON INTERBANK OFFERED RATE (USD-LIBOR), 3 MONTH
1
FEDERAL FUNDS: TARGET RATE, PERCENT - U.S. TREASURY BILL: BENCHMARK, 3-MONTH - YIELD, PERCENT - U.S.
TAF
0 Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Source: Federal Reserve Board of Governors and the British Bankers' Association. Data through 4/11/08.
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Chart 16
Jan-08
Mar-08
Factors Adding to Reserves 1,000,000 Grey: Special Drawing Rights
950,000
Treasury Currency Special Drawing Rights
900,000
Treasury Currency
Gold Stock Gold Stock
850,000
Other Credit
Red: Primary Credit
Other Fed Assets
Float
800,000
750,000
P rim Dlr Cred Fac
Term Auction Facility
Securities
Other Fed Assets
700,000
Other Credit Extension Primary Dealer Credit Facility Seasonal Credit Secondary Credit Primary Credit
650,000 Term Auction Facility 600,000
RPs Securities
550,000 Jun-07
Aug-07
Oct-07
Dec-07
Source: Federal Reserve Board of Governors and the British Bankers' Association. Data through 4/11/08.
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Chart 17
Feb-08
Global Bond Risk Premiums Were Shrinking Outside the United States (1/2/98 – 4/11/08) 1800
400
LTCM
Basis Points
1400 1200
17-Mar-08
350
1600
9/11
Argentina default
1000
300 250 18-Jul-07
200 9-May-06
800
21-Feb-07
150 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08
600 400 200
Daily Spreads of JPMorgan's Emerging Market Bond Index (EMBI)+ Sovereign over US Benchmark Bond Yields. Daily data through 04/11/08.
0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: JP Morgan and Cumberland Advisors. Š Cumberland Advisors
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Chart 18
Global Bond Risk Premiums Were Shrinking Outside the United States Green EAFE; Red S&P500; Blue EMBI 2000
250
First Japanese Rate Hike (Jan-06 to Aug-06)
1520 2400
240
2300
220 1420
210
2100
210
2000 1900
1320
170 160 150
1600
220
190 180
1700
2200
140 Jan-06
1420
200
200 1800
1520
240 230
230 1900
250
Second Japanese Rate Hike (Sep-06 to May-07)
1800
190 180
1320
170 160
1700
5/9/06
1220 1600 Apr-06
140
Sep-06
Jun-06
2/21/07
150
Nov-06
Mar-07
1220 May-07
Daily Spreads of JPMorgan's Emerging Market Bond Index (EMBI)+ Sovereign over US Benchmark Bond Yields. Daily last price of S&P500 index and EAFE index. Daily data through 5/31/07. Source: JP Morgan, Bloomberg, MSCI, and Cumberland Advisors. Š Cumberland Advisors
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Chart 19
Sub Prime Blowup Outside the United States Green EAFE; Red S&P500; Blue EMBI (June 2007 to Present)
2600 390
1650 JPM / Bear Stearns 3/17/08
2400 340
1550
2200 2000 290
1450
1800
240
1600 1350 190
1400
Bear Stearns 7/18/07
1200 140
1250
J un-07 J ul -07 A ug-07 Sep-07 Nov -07 Dec -07 Feb-08 M ar -08 A pr -08 Daily Spreads of JPMorgan's Emerging Market Bond Index (EMBI)+ Sovereign over US Benchmark Bond Yields. Daily last price of S&P500 index and EAFE index. Daily data through 04/11/08. Source: JP Morgan, MSCI, and Cumberland Advisors. Š Cumberland Advisors
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Chart 20
Global Bond Risk Premiums Were Shrinking Inside the United States (1/7/98 – 04/11/08) 800
Argentina default
1200
9/11
1100
Basis Points
700 600 500
1000 900
17-Mar-08
400
LTCM
300
18-Jul-07 9-May-06
200 Jan-06
800
21-Feb-07
Jan-07
700 600 500 400 300 200
CS High Yield Index II (formerly DLJ High Yield Index) Spread to Worst expressed in basis points. Weekly data through 04/11/08.
100 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Bloomberg and Cumberland Advisors. Š Cumberland Advisors
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Chart 21
Jan-08
Global Bond Risk Premiums Were Shrinking Inside the United States Green EAFE; Red S&P500; Blue EMBI First Japanese Rate Hike (Jan-06 to Aug-06)
2000
400
1520
2400
400
Second Japanese Rate Hike (Sep-06 to May-07) 1520
1470
1900
2300 2200
350
1420
350
2100 1800
1370
300
1320
1700
1420
2000 1900
300
1320
1800 1270
5/9/06 1600
1700
250
Jan- Feb- Mar- Apr- May- Jun06 06 06 06 06 06
1220
Jul06
1600
Aug06
2/21/07 250
Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May06 06 06 06 07 07 07 07 07
CS High Yield Index II (formerly DLJ High Yield Index) weekly Spread to Worst expressed in basis points. Daily last price of S&P500 index and EAFE index. Data through 5/31/07. Source: Bloomberg, MSCI, and Cumberland Advisors. Š Cumberland Advisors
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Chart 22
1220
Sub Prime Blowup Inside the United States Green EAFE; Red S&P500; Blue EMBI (June 2007 to Present)
2600
JPM / Bear Stearns 3/17/08
800
1600
2400 700
1500
2200 600
2000 1400
500
1800 1600
400 1300
1400
300
1200
200
Jun-07
Bear Stearns 7/18/07
1200
Aug-07
Oct-07
Dec-07
Feb-08
Apr-08
CS High Yield Index II (formerly DLJ High Yield Index) weekly Spread to Worst expressed in basis points. Daily last price of S&P500 index. Data through 04/11/08. Source: Bloomberg and Cumberland Advisors. Š Cumberland Advisors
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Chart 23
Three Ways to View The World - 1998 1998 PPP ($mm)
1998 GDP ($mm)
World’s 10 Largest Stock Markets ($mm) Measured in USD at 12/31/98 exchange rates
World Total
40,219,240
%
World Total
29,633,310
%
World Total 25,683,171
%
1. United States
8,650,777
21.5
1. United States
8,694,600
29.3
1. United States 12,926,177
2. China**
4,185,190
10.4
2. Japan
3,931,051
13.3
2. Japan
2,495,757
9.7
3. Japan
3,114,543
7.7
3. Euronext*
2,208,083
7.5
3. U.K.
2,372,738
9.2
4. Euronext*
2,213,188
5.5
4. Germany
2,144,493
7.2
4. Euronext*
1,903,278
7.4
5. India
2,127,580
5.3
5. U.K.
1,423,379
4.8
5. Germany
1,093,962
4.3
6. Germany
1,930,148
4.8
6. China**
1,111,543
3.8
6. Switzerland
689,199
2.7
7. U.K.
1,413,974
3.5
7. Italy
1,196,631
4.0
7. China**
579,,427
2.3
8. Italy
1,333,139
3.3
8. Spain
588,011
2.0
8. Italy
569,732
2.2
9. Brazil
1,140,947
2.8
9. Canada
606,909
2.1
9. Canada
547,841
2.1
865,820
2.1
413,825
1.4
402,163
1.6
11,732,128
29.2
6,256,091
21.1
Rest of World 2,102,897
8.2
10. Russia Rest of World
10. India Rest of World (171 Countries)
* Euronext includes Belgium, France, Netherlands, and Portugal. ** China includes China and Hong Kong. *** India includes National Stock Exchange of India and Mumbai Exchange. Source: World Bank Data, World Federation of Stock Exchanges, and Cumberland Advisors. Š Cumberland Advisors.
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Chart 24
10. Spain
(36 exchanges)
50.3
Three Ways to View The World - 2006 2006 PPP ($mm)
2006 GDP ($mm)
World’s 10 Largest Stock Markets ($mm) Measured in USD at 12/31/06 exchange rates
World Total
66,582,750
%
48,244,879
%
1. United States
13,201,819
19.8
1. United States
13,201,819
27.4
2. China**
10,310,539
15.5
2. Japan
4,340,133
9.0
2. Japan
4,614,069
9.1
3. India
4,247,361
6.4
3. Euronext*
3,472,884
7.2
3. U.K.
3,794,310
7.5
4. Japan
4,202,524
6.3
4. Germany
2,906,681
6.0
4. Euronext*
3,708,150
7.3
5. Euronext*
3,088,858
4.6
5. China**
2,857,869
5.9
5.
China**
2,860,418
5.6
6. Germany
2,570,810
3.9
6. U.K.
2,345,015
4.9
6.
Canada
1,700,708
3.4
7. U.K.
2,118,130
3.2
7. Italy
1,844,749
3.8
7. Germany
1,637,610
3.2
8. Italy
1,753,663
2.6
8. Canada
1,251,463
2.6
8. India***
1,592,994
3.1
9. Brazil
1,707,712
2.6
9. Spain
1,223,988
2.5
9. Spain
1,322,915
2.6
10. Russia
1,704,036
2.6
10. Brazil
1,067,962
2.2
1,212,308
2.4
21,677,298
32.5
13,732,316
28.5
Rest of World 8,622,794
17.0
Rest of World
World Total
Rest of World (171 Countries)
* Euronext includes Belgium, France, Netherlands, and Portugal. ** China includes China and Hong Kong. *** India includes National Stock Exchange of India and Mumbai Exchange. Source: World Bank Data, World Federation of Stock Exchanges, and Cumberland Advisors. Š Cumberland Advisors.
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Chart 25
World Total 50,635,248 1. United States 19,568,972
10. Switzerland
(36 exchanges)
% 38.6
World Measured by Purchasing Power Parity (PPP) 1998 (Total $40.219 trillion)
China 10.4%
India Japan Euronext 5.3% 7.7% 5.5%
United States 21.5%
2006 (Total $66.583 trillion)
Japan 6.3%
Germany 4.8% U.K. 3.5% Italy 3.3% Brazil 2.8%
China 15.5%
India 6.4% U.K. 3.2% Italy 2.6% Brazil 2.6% Russia 2.6%
United States 19.8%
Russia 2.2% Rest of World 29.2%
Germany 3.9%
Source: World Federation of Stock Exchanges, World Bank Data, and Cumberland Advisors. Š Cumberland Advisors
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Euronext 4.6%
Chart 26
Rest of World 32.5%
World Measured by Gross Domestic Product (GDP) 1998 (Total $29.633 trillion)
Japan 13.3%
2006 (Total $48.245 trillion)
Japan 9.0%
Euronext 7.5% Germany 7.2% U.K. 4.8% China 3.8% Italy 4.0% Spain 2.0%
United States 29.3%
Rest of World 21.1%
Euronext 7.2%
U.K. 4.9% China 5.9% Italy 3.8%
United States 27.4%
Spain 2.5% Brazil 2.2%
Canada India 2.0% 1.4%
Canada 2.6% Rest of World 28.5%
Source: World Federation of Stock Exchanges, World Bank Data, and Cumberland Advisors. Š Cumberland Advisors
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Germany 6.0%
Chart 27
World Measured by Stock Market Capitalization 1998 (Total $25.683 trillion)
Japan 9.7%
U.K. 9.2%
2006 (Total $50.635 trillion)
Japan 9.1%
Euronext Germany 7.4% 4.3% Sw itzerland 2.7% China 2.3%
United States 50.3%
Italy 2.2% Canada 2.1% Spain 1.6% Rest of World 8.2%
United States 38.6%
Source: World Federation of Stock Exchanges, World Bank Data, and Cumberland Advisors. Š Cumberland Advisors
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Chart 28
U.K. 7.5%
Euronext 7.3%
China 5.6% Canada 3.4% Germany 3.2% India 3.1% Spain 2.6% Switzerland 2.4%
Rest of World 17.0%
Look What Happened Since 2006 Stock Market Capitalization October 2007 (Total $63.050 trillion)
2006 (Total $50.635 trillion)
Japan 9.1%
U.K. 7.5%
Euronext 7.3%
Euronext U.K. 7.0% 6.7%
China 5.6% Canada 3.4%
China 10.7% Canada 3.6%
Japan 7.3%
Germany 3.4% India 4.9%
Germany 3.2%India 3.1%
Spain 2.9%
Spain 2.6% United States 38.6%
Switzerland 2.1%
Switzerland 2.4%
United States 33.2%
Rest of World 17.0%
Source: World Federation of Stock Exchanges, World Bank Data, and Cumberland Advisors. Š Cumberland Advisors
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Chart 29
Rest of World 18.2%
Share of World Stock Market Value: Selected Mature Countries October 2007 (Total $63.050 trillion)
1998 (Total $25.683 trillion) OMX 2% Canada Australia Norway Belgium Portugal
Canada 4%
OMX
Norway 1%
Rest of World
France
Switzerland 2%
U.S. 50%
Switzerland Germany UK Austria Spain Luxemborg Italy Ireland Finland Euronext
Germany 3% UK 7% Austria 0% Spain 3%
Japan
Luxemborg 0%
Netherlands
Source: World Federation of Stock Exchanges and Cumberland Advisors. Š Cumberland Advisors
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Rest of World 28.5%
Chart 30
US US 40.4% 43.0%
U.S. 33.2%
ROW 53.5% ROW 48.8% Italy 2% Ireland 0%
Euronext 7%
Japan 7%
Share of World Stock Market Value: Selected Emerging Countries 1998 (Total $25.683 trillion)
Rest of World 44%
US 50%
6%
Indonesia Iran Israel Korea Malaysia Philippines Sri Lanka Taiwan Thailand Turkey Singapore South Africa Mauritius Egypt Poland Hungary Slovenia Argentina Brazil Chile Colombia Peru Mexico
Source: World Federation of Stock Exchanges and Cumberland Advisors. Š Cumberland Advisors
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Chart 31
October 2007 (Total $63.050 trillion)
Others 11.8%
Rest of World 39.0%
US US 40.4% 43.0% ROW 53.5% ROW India 48.8% 5.0% China 11.0%
US 33.2%
Look What Happened Since October 2007 Stock Market Capitalization October 2007 (Total $63.050 trillion) Euronext U.K. 7.0% 6.7%
January 2008 (Total $55.573 trillion)
China 10.7%
U.K. 6.3%
Canada 3.6%
Japan 7.3%
Germany 3.4% India 4.9%
Euronext 6.7%
China 10.9% Canada 3.7%
Japan 8.4%
Germany 3.3% India 5.1%
Spain 2.9%
Spain 2.9%
Switzerland 2.1% United States 33.2%
Rest of World 18.2%
United States 33.4%
Source: World Federation of Stock Exchanges, World Bank Data, and Cumberland Advisors. Š Cumberland Advisors
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Chart 32
Switzerland 2.2% Rest of World 17.2%
Growth Differentials Between the US and the ROW 9% 8% 7% 6% 5% 4% 3% 2% 1% 0%
EM 8.0%
US 4.2%
EM OECD 3.0% ex US 1.6%
1998
US 1.9%
EM 7%
OECD ex US 3.2% US 2%
2007
OECD ex US 3%
2008
Source:IMF. OECD Countries include Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States. Data as of 3/31/08.
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Chart 33
614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Chart 34
About Cumberland Advisors Cumberland Advisors supervises approximately $900 million in separate account assets for individuals, institutions, retirement plans, government entities, and cash management portfolios. Cumberland manages portfolios for clients in 39 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 web site. Fixed Income All of our fixed-income offerings are total return strategies, but can take the client’s current income needs into consideration. Our fixed income styles are Tax-Free Municipal Bonds, Taxable Bonds, and Short Term Investment Program. Stocks Cumberland 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 Accounts Cumberland 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. 614 Landis Avenue, Vineland, NJ 08360 800-257-7013 www.cumber.com
Chart 35