Markets, Ukraine, Paris

March 6, 2014

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Fast-moving events in Ukraine point to a bifurcation of the country. It seems clear that Russia will take the Autonomous Republic of Crimea and that Russian influence will likely dominate the eastern side of Ukraine where the Russian language is spoken and the majority of the population is sympathetic with Russia.

That will leave western Ukraine and a divided country. US sanctions and rhetoric will have some, but not major, impact. Mr. Putin will decide this outcome. EU weakness and consequent reluctance to act will be confirmed. […]

The issue to be determined is whether this division of the country will be accompanied by major military activity that could lead to a regional war. If it is, contagion risk rises. If the situation does not erupt into an extensive military engagement, Ukraine-related events will be contained within the geographical area. […]

For Cumberland, our base case is that there will be no contagion.


One sector can benefit from events. That is the energy sector. The outcome of this Central Europe upheaval will add to pricing pressures or diminish downward pricing pressures on energy in some parts of the world. The use of natural gas and other energy sources is a critical element in Russian strategy. The possible release of some oil from the US strategic reserve may have a temporary impact. President Obama has authority to release now since the reserve is holding more than the 90-day required amount. The reason the reserve is higher is that the US has reduced its oil imports and the reserve is sized under law that was passed when imports were higher. The reserve is currently 100 percent full.


The outlook for the evolution of the US energy patch is fundamentally positive. We think it will only benefit further amid the fallout of the geopolitical turmoil that is occurring in several parts of the world. Ukraine and its subsequent events will be one instance. Questions about Venezuela will be another. Elements of instability resulting from Islamic persecution of Christians in Nigeria are another. The Middle East and Persian Gulf are already well-known risks. Troubles can be seen in various places that are sensitive to energy, oil, and natural gas. The bottom line is that the Energy sector now requires an overweight position. We will likely maintain that position for some time.

We implement that strategy at Cumberland in the ETF arena. We also implement it with separately managed accounts using Master Limited Partnerships (MLPs). That sector also requires extensive research and development. We think of MLPs as participating in multiple American businesses with geographical distribution. We believe it is necessary to use in-depth research into the cash flows and accounting structures that are required to make MLPs successful investments. One should not venture into that area precipitously or blindly.

With world events as they are, it looks like we are going to be in the energy sector for a long time.

We [left] for Paris, France, on […] March 5. […] The Global Interdependence Center (GIC) delegates’ and speakers’ dinner is being held on March 9, 2014. The GIC conference at Banque de France will be held on March 10, 2014, followed by a delegates’ and guests’ roundtable discussion on March 11, 2014. As this is written, there are still a handful of seats available at the sessions (fewer than ten vacancies at last count), so any last-minute registration is not guaranteed. […] Information can be found at

Cumberland Advisors is a proud sponsor of the GIC.

Lastly and on a separate subject we have championed. We steadfastly believe it is an error for politicians to use the debt ceiling and that their actions injure the United States by raising risk premia which all of us pay. Chris Whalen is on the program in Paris in the second day roundtable. He has penned a column on why the Tea Party should stop the debt ceiling gun-to-the-head approach if it wants to succeed: Now if only folks will listen.

À bientôt. See you in Paris.


The preceding is an abridged commentary by David Kotok of Cumberland Advisors and has been reposted with permission of the author. The complete commentary is available at

The ideas and opinions expressed in this blog are those of the author, and they should not be perceived as investment advice or as any other kind of advice.

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