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Erik Gholtoghian's  Instablog

Erik Gholtoghian
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Persuasive. Honest. Financial.
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  • High Income Fund Showdown: JNK Versus NCV Versus PHK
    The economy is in an uncertain state, but one which appears to have some footing of some sort.  Europe, although unsteady, seems to have most of the fear factor eroding.
    US junk bond fund payments/dividends fell apart for years, but of late they have been holding up more steadily. 

    The SPDR Barclays Capital High Yield Bond ETF (NYSEARCA:JNK) for example has been holding steady with an average monthly dividend of roughly 24 cents for the prior six months, which translates to 7.92% per year at current prices.  The AGIC Convertible & Income Fund (NYSE:NCV) on the other hand is a closed-end fund which is offering 12.19% and a steady payment history of roughly nine cents per month.  The PIMCO High Income Fund (NYSE:PHK) is offering a monthly payment of 12 cents, which equals approximately 11.90% per year at these prices.

    The funds have their own unique advantages.  (JNK) offers options and the most liquidity.  It also offers quick transparency with the actual bond markets.  Meaning, when junk bonds fall in value, (JNK) falls in value nearly in lock-step.

    (NCV) offers a managed fund of mostly convertible bonds, with the goal of trying to earn even more income than junk bond funds by adding in leverage and some other management techniques.  The risk is that the monthly payments are set for long periods of time and are then rapidly hiked or in this environment cut.  The downside is this can trap investors who do not want to take principal risk.  The fund also nearly always trades at a premium to NAV (net asset value).  The current premium is 10.80%, which means the fund could someday fall to net asset value very easily, trapping investors further.

    (PHK)
    offers the same managed fund style as (NCV), but the big difference here is you are paying a much larger premium to net asset value.  The current premium to net asset value is a whopping 70%!  This can be looked at two ways.  Either the fund is in fact the best managed in the world, and the premium is justified by the superior management techniques, or you can look at this premium as a rip-off of 70%.  It does not happen often, but I have seen hedge funds try and knock down this fund's premium by shorting the shares, and at times they are effective.  But the Bill Gross managed fund continues to regain its composure every time it is knocked down.  The main reason the premium lives on is that the large monthly dividend of this fund is one of the only in existence with such standing power that it has not dropped its gigantic dividend payments even one time.  The fund has been known to employ unconventional fund techniques, such as being net short US treasury bonds.


    Conclusion:

    If you are looking for a liquid instrument for which you can accurately trade the high yield bond market, (JNK) is your choice.  Options give your positions tremendous flexibility as well.  If you are looking for a fund with a huge monthly dividend but only a small premium to (NYSE:NAV), (NCV) is your choice.  But beware that the huge dividend is more likely to be cut than many other funds if the market contracts too far.  (PHK) is the choice for those who want their money managed by the largest name brand in the business.  70% is truly an astonishingly high premium to pay, but something about having Bill Gross manage your bond portfolio in turbulent times does feel good. 

    An excellent idea is to diversify across all three funds to have the best of all of the fixed income world.  (JNK) puts can also serve as excellent insurance for all three funds losing principal.  (JNK) is shown below versus both (PHK) and (NCV).



    Disclosure: I am long JNK.

    Additional disclosure: My position is a synthetic option position.
    Tags: JNK, NCV, PHK, Bonds
    Dec 15 12:41 AM | Link | 8 Comments
  • Technology, Golden Growth, and the Future: A Verbal Illusion

    Plain and simple, the WTO, NAFTA, free trade, the housing crisis, and all the rest.  It is all related.  Everything was caused by Chinese currency manipulation of the US dollar.  Free trade with other countries caused it too.  This is allowed by the US and isn't pressed because the long run result is it makes the United States the technology leader of the world.

    In other words, China finds it artificially easy to build factories and ship products to buyers in the US because of the currency situation.  The US on the other hand is becoming a country without dirty industry.  A country in which the only way to survive and compete is to reduce cost through technological means to compete with currency manipulators.  The end result is a country which essentially eliminates costs of production of all types.

    My prediction is that 50% of the US working population and possibly students will be telecommuting on a daily basis in as soon as five years.  When that gigantic process is completed, the United States will have officially taken over the world economy by regaining the illusory capital flows it has lost.

    You see, the US is so powerful that there truly is no long run competition.  As the Chinese have devalued their own currency for decades, the US has been forced to adapt into the absolute top technology-based economy in the world.  There is no other economic solution for US businesses to survive in the free market.

    Just think back to economics 101.  Imagine a very three dimensional, illusory dimension which only Gods can see.  The image which should be burned into your mind is the topic of "golden growth."

    The US is in the process of possibly the largest expansion of golden growth economics in its history.  This is not nominal growth; this is growth which re-engineers the very landscape in which we work and play each day.  In due time, the trade deficit will finally shrink down to nothing, and the world will witness the most perfectly functioning economy in recorded history.  Health care for all who need it.  Cars which do not pollute nor require more than the slightest amount of fuel.  People will be able to see this in the coming year, emerging from the cocoon.

    It appears to me that the US is destined to become a nation of information technology-based researchers, who work from their homes and earn excellent pay. 

    Some look back to the dot com boom as a problem in US economic history, but sometimes it takes something that big to usher in the future.  Real estate may even be falling due to a lack of commercial demand over the long run, as companies that used to house people in large skyscrapers no longer need to spend the funds on this.  Instead, these companies can save tremendous amounts of money by just designing companies in which all or nearly all of the workers telecommute.

    We could one day see the freeways to big cities in the US nearly empty because so few people commute by car anymore.  While countries with artificial funds use those funds to build intricate transportation systems, the US is being forced to due away with transportation entirely.



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: SPY, DDM, QQQ, Economy
    Nov 19 10:54 PM | Link | Comment!
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