October 5, 2011
David R. Kotok



Here are the bullets.

1. Cumberland Advisors is avoiding any exposure to Dexia in its 1083 separately-managed bond accounts. We have reviewed about 4000 bond positions and several billions of holdings. We view Dexia risk as part of a risk-management process, just as we do for a hurricane. Get out of the way and hope nothing bad happens.

2. We have to take this risk seriously because of Dexia-related exposure in the derivatives, guaranteed investment contracts and letters-of-credit arena.

3. There are many issues in Muni-related financings tied to Dexia.

4. The issuers are ultimately responsible for any payment, so the underlying credit review is critical to evaluating a bond tied to Dexia. As usual, the most important element is to do the homework.

5. We are a separate-account manager only. We do not use blind funds or traditional mutual funds in separate accounts, so we will not comment on those funds’ exposure to Dexia.

6. It is important to watch the Europeans’ response to Dexia. Those national regulators and supervisors must evaluate the capital requirements for the derivative exposure and they must assess the actual default risk. Do they have accurate information? Is it credible? Will there be intervention, if needed? How much and when? Our conversations with Europeans affirm that they know they must avoid a Lehman-style outcome. The issue is about their political will and their capacity to deliver a constructive outcome. They must do so rapidly. Time will tell.

7. Dexia is connected to other banks, which is why there is some contagion risk. Contagion appears without notice. Markets fear it for that reason. At Cumberland our policy is to avoid it if we can.


David R. Kotok, Chairman and Chief Investment Officer

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