Few RIA firms devote the resources to investment research and management that Cumberland Advisors does. Founded in 1973 by David Kotok, the firm claims capital preservation is its overriding goal and believes that both equity and bond prices are “enduringly linked to interest rates.”
The Sarasota, Fla.-based RIA possesses a team of investment professionals that virtually rivals wirehouses and money center banks in talent and depth of analysis, if not breadth. Bob Eisenbeis, its chief monetary economist, is a former executive vice president of the Atlanta Federal Reserve. William Witherell, its chief global economist, spent years as director for financial and enterprise affairs for OECD.
So when three of the firm’s investment advisors––Michael Comes, David Kotok and John Mousseau––author a book entitled Adventures In Muniland: A Guide To Municipal Bond Investing in the Post-Crisis Era, it merits attention.
For financial advisors with clients dispersed around the nation looking for tax-free income, the book provides a thorough analysis of a market consisting of many diverse markets––some sound, others flimsy. Most advisors have read about Puerto Rico, Illinois, New Jersey and other municipal trouble spots, but Comes, Kotok and Mousseau analyze them in detail.
In some ways, the Great Recession transformed the entire asset class. After all, variable-rate auction bonds were among the first fixed-income securities to run into trouble in 2007. At one point, the Port Authority of New York and New Jersey had to pay a 20% interest rate to reset their securities.
I personally remember overhearing a passenger on airline complain to his accountant that he lacked the funds to pay the IRS because they were invested in supposedly safe auction bonds.
As the Great Recession came to an end in 2009, the prospect for most municipalities appeared bleak indeed. State and local governments, confronted with huge revenue shortfalls, were slashing budgets and services and there was no light at the end of the tunnel.
For doomsayers who made good calls on the sub-prime crisis, the muni market proved to be an irresistible target. Kotok quotes Jane Bryant Quinn’s famous warning to a forecaster to provide either a number or a date, “but never give ‘em both at once.”
Alas for Meredith Whitney, she forgot that piece of advice. Her prediction in 2011 of 50 to 100 sizable muni defaults totaling about $100 billion went down like a Peter Schiff call. In March of that year, Kotok assigned “nearly zero chance” to her forecast materializing.
Kotok gives Nouriel Roubini a little more credit. Roubini suggested that $100 billion of defaults over five years might be conceivable, but added typical 80% recoveries on munis are much higher than those corporate defaults. He understood than “governments cannot be liquidated like companies” and earns a measure of respect from Kotok, who once served as commissioner of the Delaware River Port Authority and as chairman of the New Jersey Casino Reinvestment Authority.