Posted By thestatedtruth.com on August 12, 2010

The Oil  Spill

August 12, 2010

It has been over three months since the beginning of the oil spill in the Gulf of Mexico.  Since then it has cost billions of dollars in terms of lost jobs, tourism, and the battering that local fishing industries have had to endure.

At Cumberland Advisors, we have written about the impact in the Gulf region and on the country as a whole in our “Oil Slickonomics” series, which you can find at http://www.cumber.com/content/Special/OilSlickonomics052010.pdf.

We have also written about the potential impact of the oil spill as it relates to the municipal bond market.  We have concerns on a long-term basis regarding debt-service coverage on already issued bonds that depend on tourism-derived sales taxes or usage taxes from bridges or roads leading to the affected areas.  We also had concerns in regard to the potential damage that the oil spill could cause to drinking water and aquifers near affected areas, especially if the oil spill and its movement were to be exacerbated by tropical storms.  To this list of concerns, we would now add the current moratorium on well drilling, an economic hammer that will inflict even more damage on already beleaguered Gulf Coast economies.

We took a proactive stance on this.  Cumberland Advisors selectively sold about 40 different issues of bonds that we thought might face negative repercussions from the Gulf disaster.  The reason for this action was simple.  Where good market bids could be achieved, we could take the proceeds of these sales and invest in similarly structured bonds and diversify away from the POTENTIAL risk without an impact on yield to portfolios.  Since then we have watched the gushing well that has just been capped, the expanding slick of oil across the Gulf, and a municipal bond market that has not changed greatly vis-à-vis the oil slick.  Clearly this will be an evolving story that will depend on cleanup efforts, nature’s recuperative powers, tropical storm formation for the balance of the hurricane season, and consumer confidence as it relates to tourism and the seafood industry.

Cumberland is joining the Global Interdependence Center this week in a conference in Baton Rouge, Louisiana, focused on the oil spill and its effects on fishing, tourism, state and local governments, and present and future environmental concerns.  We will use this event as a launching point for a renewed look at the Gulf region, the impact on the municipal bond market in general, and the Gulf municipal credits in particular.

John Mousseau, CFA, Managing Director and Portfolio Manager

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