Report from Maine

Report from Maine
August 8, 2012
David R. Kotok

This year’s gathering at Leen’s Lodge in Grand Lake Stream, ME was the largest ever. We brought together financial market professionals, economists, traders, academics, and Fed advisors. Our discussions were conducted under the Chatham House Rule. We thank Bloomberg TV, National Public Radio, Wall Street Journal.com, and others for their respect of the Chatham House Rule and for their permitted coverage of our annual gathering in Maine.

Without naming all the colleagues and invitees, we are able to summarize views and “take-aways” from the gathering. WSJ.com did this in a succinct way. You can read about it and see the short video. Connect to “Four Risks That Could Derail the Recovery,” http://blogs.wsj.com/economics/2012/08/07/four-risks-that-could-derail-recovery . If this link fails to open, go to www.cumber.com for a redirect to WSJ.com

We will save the fishing report for a later writing and talk about the muni world. We entirely disagree with Meredith Whitney, who persists in predicting that this world of state and local government finance will end in disaster. We say it won’t. In Maine, we can point to a concrete example.

Discussion topics in Maine included the tax-free municipal bond market. In our group we had very skilled municipal bond professionals and analysts. By the way, they do not masquerade as bank analysts. We also had several skilled and knowledgeable bank analysts; they do not masquerade as municipal bond analysts. In Maine, there were discussions of both banks and municipal debt.

A highlight of this year’s trip was a Friday night visit by Maine’s governor, Paul LePage. Accompanying him was Maine’s commerce commissioner, George Gervais. Governor LePage received an award from the guide’s association of Grand Lake Stream for his environmental policies and his commitment to protect this pristine area of Maine. He stayed with us for dinner.

Over dinner, he talked about some of his policy initiatives. I was particularly impressed by his commitment to manage the state’s debt, reduce debt ratios, pay Maine’s bills in full, and operate its government with a business-like approach. Through personal conversation over dinner, I learned that Governor LePage had transitioned into political life after establishing a record of success in the private sector as the CEO of a business operating in Maine.

Maine is a very good muni credit and likely to get better. It is heading toward improvement. A little disclosure is in order. Cumberland Advisors has clients throughout Maine and substantial holdings in bonds issued by Maine.

Let’s be clear. There are some municipal organizations in trouble. And there are cities in California and elsewhere that are seeking bankruptcy in order to gain relief from contracts. And there are states where the pressures of finance are severe and the states have not yet made the changes needed to address then. Illinois is an example of a state that we are currently avoiding.

But our view is that of a tax-free bond investor. Our job is to deploy a client’s money in the tax-free sector. We do not own Illinois GO debt. We avoid cities like San Bernardino, CA. We saw Harrisburg coming years before it made the headlines. They were dumb enough to build a politically motivated project, an expensive incinerator that made no economic sense. Now they have to pay the price of a bad governmental decision.

In Muniland, the key is to do the homework and avoid the troubled patches. If you are not satisfied with the credit, don’t go there. We don’t.

At our Maine gathering we delved deeply into this issue. And in Maine we met a governor who vows that his state will not be like Illinois. We thank him for joining us and staying for dinner.

David R. Kotok, Chairman and Chief Investment Officer

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