CEF Weekly Review: The 13 closed end fund (CEF) types on average squeezed into positive territory posting a 0.1% increase for the week ending 11/13/09. On an aggregate, unweighted basis, the weekly average price change for the 496 CEFs straddled the flat line as it declined by 0.1%.
The weighted 49 CEFs comprising the Claymore CEF Index registered an average advance of 1.7% for the week. The S&P 500, as measured by the SPDR S&P 500 ETF (SPY), extended last week’s 3.4% advance by tacking on an additional 2.3%.
(Click Here for YTD CEF Performance. The table is based on a 273 CEF sample size as all the data fields are not available for the CEF universe.)
The Eqcome CEF Fear Index subsided modestly but did so by declining less than the NAVs (-0.1% versus -0.6%, respectively). The CBOE Volatility Index (VIX), which typically moves inversely with the stock market, has recently gyrated after a long period of quiescence. The VIX rose 37.8% the week of Oct 30th, declined 21.2% last week and eased a further 3.4% this week.
Despite the VIX’s recent moderation, the recent low level of trading with institutional investors sitting out year-end provides a lesser degree of comfort it its reading. The mixed economic data is providing support for the both the bulls and the bears. It’s a matter of where you’re touching the elephant.
CEF Weekly Fund Type Performance: CEF fund type movement was mixed. Munis continue to perform below average as well as USMrtgBndFnds. USMrtgBndFnds not only saw prices decline but it was accompanied by a significant decline in NAV. Possibly the talk of more government aid to the housing agencies and the Fed’s cessation of its mortgage buying program could leave investors with cold feet.
WrldEqFnds was the fund type leader, up 2.9%. President Obama’s tour of the Asian markets is likely to shine a spotlight on the economic growth prospect for the region. It will also solidify for investors the economic influence of China on the global economy.
SpecEqFnds fund types was up 2.8%. This fund type was led by a strong performance of real estate related funds.
The anticipation that GenEqFnds would play catch-up this week for the relative underperformance the previous week (GenEqFnds on average was only up 1.8% versus 3.4% for the S&P 500) did not play out as anticipated. Part of the reason was two small funds Equus Total Return (EQS) and Engex Inc (EGX) were down 10.0% and 28.9%, respectively. EGX has been flirting with an AMEX delisting due to its small net asset value. GenEqFnds on average was only up 0.2%. Excluding the two small funds, the average would have been up 1.44%
CEF Spread Changes: Changes in PrcNAVSprds generally follow the trend of price movement. This is typically the case when markets generate meaningful price changes. While SpecEqFnds demonstrate a strong relative price advance, its related NAV exceeded prices. NAVs for real estate fund were very strong and consistent with the 6.4% advance in the Vanguard REIT Index ETF (VNQ).
CEF Winners and Losers: The CEFs that demonstrated some of the greatest positive PrcNAVSprds were those where the Horejsi Group (see “Insider Trading” below) relented and voted in favor of board approved liquidations: DWS RREEF Real Estate Fund (SRQ) and DWS RREEF Real Estate Fund II (SRO), 10.1% and 6.5%, respectively.
(A positive PrcNAVSprd can be viewed as a negative, subject to other metrics, as it would indicate the stock price has increased greater than the NAV. In theory, CEF prices and NAVs should move in a more tandem fashion.)
One of CEFs with the greatest negative PrcNAVSprd during the week was BlackRock Maryland Municipal Bond Trust (BZM). The share price declined 9.2% while the NAV declined -0.4%. The shares are very thinly traded and the stock dropped on higher volume ex-dividend date. The shares pay a month distribution from income and yield 5.26% (8.1% taxable equivalent yield) and trade at an 8.3% premium. It is very small with only $47 million in assets.
Market Perspective: The next major issue confronting investors is the impact of the government’s fiscal and monetary credit expansion on the economy. Will such a credit expansion lead to an increase or acceleration of inflation? What will the impact of inflation have on equity valuations?
Below is a chart of the “earnings yield” (P/E ratio inverted) of the S&P 500 versus the CPI –U (All Urban Consumers) index. The S&P 500 earnings yield is calculated by dividing the year-end EPS of the S&P 500 by its year-end index value. (Example: a stock has a price of $21 and year-end EPS is $3. The earnings yield would be: 14.3% (3/21 = 14.3%). The P/E would be 7 times (21/3). If you divide 1 by the P/E (7) you would arrive at an earning yield of 14.3 %.)
The graph above shows a positive relationship between the YOY change in the CPI and the S&P 500’s earnings yield at year-end. This means that as inflation increases so does the earnings yields of the S&P 500. Since the P/E is the reciprocal of the earnings yield, an increase in inflation would lower the P/E and create a lower relative valuation for the S&P 500.
This would make sense: as inflation increases investors would require a higher earnings yield to generate a “real return” (nominal return minus inflation).
The average and median real earnings yield for the S&P 500 since 1942 has been 3.4%. Based upon a forecasted inflation rate for 2010 of 2.0%, the nominal earnings yield would be 5.4%. The P/E (reciprocal) would be 18.5. Whether by the “luck of the draw” or the model’s merit, the current S&P trailing P/E is approximately 18.5.
Now comes the “So what?” factor, or: “how can I make money on this”?
The “bears” will be looking for the first sign of credit tightening. When it does appear, we’re likely to have the Dow down 300 points on the day. So get your “shorts” ready. Then after the market stabilizes, be prepared to aggressively buy for an interim holding period as the S&P 500 will rally back.
It’s just one guy’s opinion.
ETFs: (Click Here for ETF YTD sector performance.)
Insider Trading: For the third week in a row, the major insider buyers were the Horejsi Group. The group added significantly to its position in Boulder Growth & Income Fund (BIF), adding an additional 118,837 shares at an average price of $5.53 per share for a value of $657,358. This brings their total purchased amount month-to-date to $753,860. The Horejsi Group total holdings of BIF are 5,315,130 shares, or over 20% ownership.
The Horejsi Group has an ownership interest in the advisors to BIF. The advisor suspended its managed distribution program last year. It’s likely we may see a small compulsory distribution declared this year to comply with the IRS code. BIF’s fiscal year ends in November.
The Horejsi Group also added to their position in Denali Fund, Inc. (DNY) through the purchase of an additional 9,900 shares. The average share price was $13.50 per share for a total expenditure $133,805. The Group has effectively taken the DNY private as it now controls almost ¾’s of its outstanding stock. Horejsi also owns the advisor to DNY.
The bulk of the remaining insider trading in the other CEFs was a function of Merrill Lynch buying (exercising) and selling in various CEFs. This must be a function of Merrill’s sale of its management businesses and voiding the remaining equity interest in the CEFs.
The only other notable acquisition was Stephane D. Choquette, an officer of Putnam, who acquired 6,775 shares of Putnam Premier Income Trust (PPT) at 5.88 per share for a total outlay of $39,837. The transaction brings Stephane’s holding to 24,483 shares. Encouragingly, there have been other officers of Putnam buying PPT. (Click Here for Weekly Insider Table.)
CEF Distribution Announcements This Week: The following is a link to a table of CEF distribution announcements this week as well as previous weeks’ with yet expired ex-dividend dates. The list is not intended to be inclusive. The report is produced Friday mornings and is posted on Joe Eqcome website to enable investors a look at those CEF that go ex-dividend the following Monday. The report is again updated over the weekend. (Click Here for Weekly CEF Distribution Announcements.)
CEF Focus for the Week: The focus stock of the week continues to be Adams Express (ADX). Shareholders should pressure the board to change the by-laws to provide a mechanism to narrow the persistent discount if the discount remains over a reasonable level over an agreed period of time. I think that is fair to the shareholders. Either a conversion to an active ETF or a “like-kind” exchange offering should be seriously considered as alternatives. (See report entitled: “The Compelling Case for Converting ADX to an Active ETF” (11/12/09) for background.)
Consider it food for discussion.
Disclosures: SPY & GLD and a diverse CEF portfolio including ADX.