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
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©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.
• Source: The Washington Post, 24 October 2008
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©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.
Source: IMF “Global Financial Stability Report” – October 2008
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©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.
Exposure of U.S. fixed income market
• Source: IMF “Global Financial Stability Report” – October 2008
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©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.
U.S. housing & credit bubbles deflate
• Source: IMF “World Economic Outlook” – October 2008
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©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.
• Source: IMF “Global Financial Stability Report” – October 2008
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©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.
$28 trln. off world equity capitalization since Oct07 peak
• Source: Bloomberg chart. Data through 19oct08.
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©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.
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.
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©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.
• Source: IMF “World Economic Outlook” – October 2008
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©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
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©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.Source: Ned Davis davis45.
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
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©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
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©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.Source: Ned Davis S233.
Capitulation? And Strategy
(S233)
Daily Data 3/05/1957 - 10/20/2008 (Log Scale)
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
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©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.Source: Ned Davis davis118.
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
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©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
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©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.
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
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©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
Daily Data 12/21/1998 - 10/20/2008 (Log Scale)
(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
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©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.
Food, fuel, metals - real trends
• Source: IMF “World Economic Outlook” – October 2008
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©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
614 Landis Avenue, Vineland, NJ 08360800-257-7013www.cumber.com Chart 20
©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)
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©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.
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
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©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.Source: Ned Davis E0817.
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
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©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.Source: Ned Davis E832.
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
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©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.Source: Bloomberg. Daily data through 10/21/08.
Muni Madness
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©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
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©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
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©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
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©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.
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
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©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.
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
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©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.
Financial crises compared
• Source: IMF “Global Financial Stability Report”, October 2008
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©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.
• Source: IMF “Global Financial Stability Report” – October 2008
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©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.
World trade and decoupling in doubt
• Source: IMF “World Economic Outlook” – October 2008
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©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.
Leading indicators off the cliff
• Source: IMF “World Economic Outlook” – October 2008
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©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.
Summer time optimism at the IMF
• Source: IMF “World Economic Outlook” – October 2008
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©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.
• Source: IMF “World Economic Outlook” – October 2008
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©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.
USD - EUR Trends
• Source: Daily data from Federal Reserve.
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©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.
Long view in real terms – Up & Down
• Source: Standard & Poor’s, Cowles Commission data. Dividends not reinvested.
614 Landis Avenue, Vineland, NJ 08360800-257-7013www.cumber.com Chart 38
©Copyright 2008 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.
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.
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