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With the year winding down, it is time for a very high probability trading strategy that comes around but once. I’m of course referring to the year end strategy where we take advantage of the dislocation caused by tax loss selling and loss aversion in CEF, IPOs, etc. To get all the details check out: My Year-End Strategy and to see how it worked last year, check out: Review of the January CEF Strategy. Those two should give you a very good idea of the trading plan.

If memory serves me, the idea for this came from reading Trading on Volume by Cassidy (Chapter 15). As a voracious reader I picked it up on a lark a few years ago. I don’t usually pay particular attention to volume so I thought this might expose some blind spots.

As a side note, I looked at the reader reviews just now and noticed that most are giving it 1 star and saying it is “not helpful”, “nothing new”, etc. While the overall quality of the book may be up for debate, this one single idea in the book is worth thousands of times the price you’ll pay to read it. I guess it goes to show that, as in everything in life, what we get out of life is a reflection of our own assumptions and beliefs.

In any case, this year presents us with a challenge since due to the US dollar carry trade, all risky assets are correlated, almost every single asset class has gone up. So we don’t have the usual sample of losses, and therefore tax loss selling to take advantage of. In fact, a simple sorting of the CEF, ETF universe shows that this was a fantastic year for most investors (if they just sat on their hands). For example, not including the yield, Pimco High Yield Income Fund (NYSE:PHK) is up 145% for the year!

While they are not all that spectacular, there is no question that this year’s returns are very skewed to the positive side. Out of hundreds and hundreds of such securities, there are (so far) only 7 that are showing losses forthe year:

  • Japan Smaller Capitalization (NYSE:JOF)
  • Swiss Helvetia Fund (NYSE:SWZ)
  • RENN Global Entrepreneurs Fund (NYSEMKT:RCG)
  • First Trust Strategic High Income II (NYSE:FHY)
  • Nuveen Tax-Advantaged Floating Rate (NYSEMKT:JFP)
  • Equus Total Return (NYSE:EQS)
  • First Trust Strategic High Income (NYSE:FHI)

There are also a few that came on the market recently and have lost their NAV. For those unfamiliar with CEFs, they are brought to market at net asset value (NYSE:NAV) but almost always trade at a discount once they start trading. So those who bought them at full price are now faced with a paper loss. They can either lump it or sell and get a year end tax benefit:

  • Nuveen Enhanced Municipal Value Fund (NYSE:NEV)
  • Nuveen New Jersey Municipal Value Fund (NYSEMKT:NJV)
  • Nuveen NY Municipal Value 2 (NYSEMKT:NYV)
  • Nuveen CA Municipal Value 2 (NYSEMKT:NCB)

As I said, slim pickings! Usually I’d have so many options that I am forced to be selective. But this year, this very high probability strategy is shot to hell thanks to the Fed’s US dollar carry trade. The only one that really jumps out at me is NEV:

Nuveen CEF end of year NEV

The one other place we can look is the IPO market. Even here, the choices are rather limited due to the fewness of companies that were floated this year. Here are the IPO losers for the year:

  • NIVS IntelliMedia Technology Group (NIV)
  • Addus HomeCare (NASDAQ:ADUS)
  • Cloud Peak Energy (NYSE:CLD)
  • Concord Medical Services (NYSE:CCM)
  • ChemSpec International (NYSE:CPC)
  • Omeros Corp. (NASDAQ:OMER)
  • Vitacost.com Inc. (NASDAQ:VITC)
  • CDC Software (CDCS)
  • Cumberland Pharmaceuticals (NASDAQ:CPIX)
  • Shanda Games (NASDAQ:GAME)
  • AGA Medical (AGAM)
  • Apollo Commercial Real Estate (NYSE:ARI)
  • PennyMac Mortgage (NYSE:PMT)

I’m sure I’ve missed one or two. If you know of any IPO’s that are underwater or other CEFs and ETFs that deserve our attention for this strategy, drop a comment below.

If you look through the IPOs list you’ll notice that it looks like the tax loss selling arrived earlier than usual this year. I could be wrong, but many of the losing IPOs have already bounced a bit. If that is the case, then you’ll have to tread even more carefully this year.

Finally, just in case it isn’t already obvious… I’m not suggesting that you go out there and buy these or any other security willy-nilly. If that’s the way you’re thinking, give your head a shake. For the rest who are approaching this the smart way, I hope it helps you bank some coin and start off the new year on the right foot.

Source: 2009 Year End Strategy: Look at CEFs and IPOs