Gang of 535 plus 2

Gang of 535 plus 2
July 25, 2011
David R. Kotok


First to the politics, then to the markets.

202-224-3121 gets you to the US Capitol switchboard. The operator gets you to the office or voicemail of a Congressman/woman or Senator. They are the Gang of 535: 100 Senators, 435 Members in the House of Representatives.

Ask them what you should do if you are dependent on a transfer payment like veteran’s disability or Social Security. Ask how you will meet your payroll if you are a vendor making coats for the army and you don’t get paid. Ask how you should value your 401k. Ask if there will be toilet paper in the bathroom in the national park. Put their feet to the fire.

Call the White House, too, if you wish; but remember, the structure of our government requires the House and Senate to reconcile on a bill and then send it to the White House. That’s when the baton officially passes to President Obama. He and VP Biden are the “plus 2.”

Our Sunday-night interview with Martin Soong, CNBC Asia Squawk Box, summarized our view. We believe there will be no default. The US has the absolute capacity to pay its debt and its obligations.

We believe the single best insurance we have is the wrath of the American citizen. If there is a default, that anger will be directed against the incumbents of both parties. Democrat or Republican, you are at risk if there is a default. The power of an angry public is the one thing that politicians fear.

America’s “AAA” credit rating is another matter. Lots of worldwide rules apply to it. The US can use it, as it has for decades, or lose it, which could be very costly. 77% of the Barclays US Aggregate Debt Index is rated AAA; 72% is directly tied to the creditworthiness of the United States. Only 5% is non-US government AAA debt. The other 23% of that index is rated “AA” or “A” or “BAA.” Credit market composition is where the Tea Party freshmen are really playing with fire.

In stock markets, this crisis is giving investors a buying opportunity. Credit Suisse Quantitative Research estimates that 2nd quarter earnings reports, so far, are running 70% positive surprises and 77% positive revenue surprises. They note that 183 companies report this week.

Credit Suisse has raised their aggregate earnings estimates for full year 2011; S&P 500 earnings are expected to be $98.52. For 2012, their revised estimate is $113.73.

US stocks are cheap if these estimates are close. At Cumberland, our US stock market ETF portfolios remain fully invested. We are now over weight financials for the first time in many years; we reduced the weight in May, 2007.

As for our US politicians, they can go soak their heads in a bucket of iced tea.


David R. Kotok, Chairman and Chief Investment Officer

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