David Kotok is chairman and chief investment officer of Cumberland Advisors, a registered investment advisory firm based in Sarasota, Florida. Cumberland offers several fixed-income, equity and balanced portfolios, with its equity portfolios constructed using solely ETFs. Kotok is a frequent guest on various financial television networks and is quoted regularly in the financial press. His latest book, "Adventures in Muniland: A Guide to Municipal Bond Investing in the Post-Crisis Era," was published in August.
ETF.com: We just received a disappointing September jobs report. What's your reaction?
David Kotok: Big surprise. The revisions are negative. This is altogether a bad report from the viewpoint of economic recovery. You see an immediate reaction in financial markets, for good reason. The 10-year Treasury yield is under 2 percent. I'm not surprised at all; I thought it would go under 2 percent without this. Where it goes now remains to be seen.
ETF.com: Does the Fed look a little sharper by not raising rates back in September now?
Kotok: I'm not sure. You didn't hear the Fed say, "We're not going to raise rates because we fear the economy is weakening and the employment rate will be a surprise and negative." They didn't say that.
They said, "We're not raising rates because we're worried about things like China." They said, "We're not raising rates because we're worried about foreign influences," whatever that means. They implied the IMF can influence the Fed in policy making. They didn't say it; they implied it. But not once did they say anything other than, "It looks like the recovery's doing better and there's gradual improvement in the labor statistics."
ETF.com: Is it important to see a rate increase, or is this just being blown out of proportion?
Kotok: Yes, versus the developed economies from which the allocations would be coming.
ETF.com: And obviously right now that's inverted.
Kotok: I think the answer is yes. I don't care if the rate increase is 5 basis points. This has been the longest drum roll in central banking history. We have been talking about liftoff for 2 1/2 years. Every time the Fed miscommunicates, which they are doing as a group with regularity, they introduce greater uncertainty premia.
They say to businesses, "We're not sure. We don't have confidence. We're data-dependent. We look at incoming data." And the businesses say, "What am I supposed to do? How do I decide what to spend and what to defer?" Investors have the same problem. Savers have the same problem, except they are victims of financial repression.
I am very harsh on Fed communications. They have misled market agents and businesses.
ETF.com: Let's talk a little bit about inflation and energy. Last summer when we talked, you had sold out of energy when oil was still at its recent peak. Today we are seeing oil production falling, demand increasing. Has energy become more attractive?
Kotok: I am still max underweight energy, as of today. I have been looking at entries. I don't see them.
I need to see more blood flow in the energy sector. I need to see bankruptcies of some of the companies. I need to see reconstruction of the credit agreements, which will start this month. I need to see the revaluation of the reserves. So, for me, it is too soon to enter the energy patch, whether the oil price is $40, or $35, or $55, or $60. It's too soon.