Joe Eqcome

CEF Weekly Review: Ping Pong, Anyone?

In the final analysis the shareholders own the companies in which they invest and should be operated for their benefit. For concerned shareholders not to agitate for a higher valuation is a dereliction of their rights. (Not everyone trades this stock on price variations. In fact, most of the shareholders are probably “buy and hold”.)

Shareholders need to continue to legitimately challenge management to seek demonstrable ways of adding value, or outside influences (raiders) will bring to bear that challenge by removing management in favor of their own interest and that interest may not be aligned with the remaining shareholders’ interest.

I believe not enough pressure is being placed on ADX’s management to close its persistent 12%-15% discount in a portfolio of highly-liquid large cap securities.

Shareholders should seek a resolution for ADX for a trigger mechanism that after a certain time period if the discount remains at 10% (or another legitimate discount) ADX should institute a in-kind tender offer, much like Tri-Continental, so shareholders can at least realize some of the discount in the secondary markets.

I believe a fear of a loss of management fees and potentially a loss of management's jobs would place a new urgency on focusing on getting the value up from this persistent, dismal discount. Let me also note there’s been paltry insider buying by management in ADX. So, apparently, they agree that the discount will persist in the future.

This doesn’t have to necessarily end up in the liquidation of ADX; it could end up in higher valuation for the shareholders and ADX remaining a closed-end fund.

That would make us all happy.
On Nov 08 08:25 PM jse17 wrote:

> “Joe, Leave ADX Alone!”
>
> As mentioned in response to your earlier “attack” on ADX, its P/D
> figures generally correspond to and are often better than similarly
> positioned CEFs. Additionally, as the previous poster mentions, the
> fund’s management is solid if not spectacular. Moreover, it does
> not require a finance Nobel Laureate to formulate a buy/sell protocol
> on this or any CEF.
>
> In the end, all cancers commit volitional suicide by consuming their
> afflicted host! Opening all CEFs is analogous in character!

CEF Weekly Review: A Good Scare

I believe a CEF must pay out its net investment income (NII) and capital gains annually or pay an excise tax if they do not have offsetting losses.

Currently, BIF has $.01 per share in undistributed net investment income losses. For the first 6 months (5/31/09) BIF net investment income per share was break even. Depending on its net investment income for the 2nd half, it may pay a distribution in December. I would be suprised if they reinstated a managed distribution policy.

DNY has approximately $.16 per share in undistributed net investment income.


On Nov 01 03:16 PM Jonquil wrote:

> Is there any indication when BIF and/or DNY will resume paying dividends?

CEF Weekly Review: A Good Scare

I agree with most of your points. (Its weighted alpha is 19.0 versus a CEF market segment average of 43. Yes, you’re paying a fee on PEO; but you’re also getting it at an 11.1% discount.) However, the attraction here is the narrowing of the discount through activist intervention.

Earlier this year I authored an article entitled “The Case for Tender, Liquidation or Conversion of ADX” joeeqcome.web.officeli.... ADX’s discount at that time had an average monthly discount of 13.4% since the end of 2003. My case was essentially the discount has been persistently and unreasonably larger and ADX's board should do more than occasionally buy back some of its stock. It should consider a liquidation or conversion to an open-ended fund (mutual fund or managed ETF) to maximize shareholder value.

I believe the large discount is the attraction to the stock and it will become increasingly difficult for ADX to prevent an activist investor from at least attempting to close the discount in the next 12 months.

I also hyper-linking a study entitled “Activist Arbitrage: A Study of Open-Ending Attempts of Closed-End Funds”. finance.wharton.upenn.edu/~itayg/Files/cefactiv... A key variable in guiding activist arbitrageur is the fund’s discount from its NAV. There empirical results suggest that a one percentage point increase in the discount is associated with a 0.66 percentage increase in the probability of an attack in a given year.

Following an attack by an activist arbitrageur, the discount shrinks or disappears if the fund is open-ended, so that overall activist arbitrage is found to have a substantial effect on CEF discounts.

I believe ADX is as good a target for an active arbitrage as any other CEF candidate. Whether it will take place is speculative. But if you play by the numbers, the odds are favorable.

Anyhow, I’m being paid to wait. It clearly not an stock for everyone.

Joe Eqcome

On Nov 01 10:55 AM frogmatic wrote:

> ADX seems to trade at a permanent discount of around 15%; their long-term
> alpha is indistinguishable from zero; and its energy "exposure" is
> only 11% of the portfolio (compare to 21% consumer and 13% financials).
> Not to mention you're paying for two levels of management fees for
> the position in PEO. I'm not sure what the attraction would be relative
> to, say, an straight investment in SPY.

CEF Weekly Review: All Fund Types Positive

VLD

I ask myself the same question. The story seems compelling enough: insider buying, selling at a significant historical discount, buying BRK.A at a discount, etc.

One issue maybe is the fact no one is comfortable with management. I'm hoping that the reinstatement of the dividend would bring another group of buyers to the stock that have avoided it due to its lack of dividend.

Maybe someone can add additional perspective to matter.

Joe Eqcome

CEF Weekly Review: Convert Funds Lead

Jade Bond

Again, thank you for your measured and reasoned response.

While I would agree with you that FHI and PHK are different in many material ways, I keep on getting hung up on the fact that PHK’s premium is so much greater than stock price.

Historically, that premium level has not been maintained for an extended period of time as there is gravitation to the mean. FHI just is just recent proof of that phenomenon--this market sector is littered with them.

The threshold issue is that supporters maintain that the NAV is somehow undervalued. I just want someone to say: “the reason is that the NAV is undervalued is because they have interest rates swap on XYZ Company that can’t be valued until they expire. When they expire they will increase the value NAV by $3.00 per share.”

It’s that inability to pinpoint the missing value I believe may be a flawed investment assumption. Not necessary incorrect, but in the words of Donald Rumsfeld, “it’s an unknown knowable”.

It would also seem that the fair value accounting requirement provides a mechanism for valuing such exotic assets. There is both Tier II & Tier III that allow for valuation based on private market and model assumptions. So, I’m not sure I can buy into the complexity theory of value.

I think your dividend argument is probably the strongest regarding support for the value.

I hope I’m wrong regarding the estimate of value, because individual can’t eat high yield. They rely on the nominal value of the distribution. If the dividend is reduced significantly, it would add insult to injury for those investors who purchased the stock based on the current distribution. They have already experienced a destruction of capital but will also experience a diminution of income.

For investors who buy at these levels with the knowledge that the dividend will be reduced, I believe they can make money in the long term.

So, I don’t necessarily disagree with your longer term assumption.

Joe Eqcome (Disclosure: I’ve short positions in the stock.)



On Jul 27 02:09 PM Jade Bond wrote:

> Ah, I see now, Joe. You're a specialist in CEFs. Sorry, I didn't
> know that was your specialty. Indeed, there is merit to the point
> of view that all asset classes behave similar to each other.
>
> Corporate bonds move in generally the same direction, which individual
> bonds under or out performing based on the internal credit risks
> of the entity they represent.
>
> Equities move in generally the same direction, which individual bonds
> under or out performing based on the cash-flow internals of the corporation
> they represent.
>
> So it makes perfect sense to presume CEFs should move in generally
> the same direction, with individual funds under or out performing
> based on internal operations of the portfolio they represent.
>
> PHK is a true outlier among it's peers. By definition, one doesn't
> even need math to conclude it should revert to the mean. But you've
> presented numbers to demonstrate that it should, and that's fine.
> It's a well-founded high level view. But you want "simple math based
> on observable facts" to demonstrate why it will remain an outlier,
> or why it's NAV will move toward market price faster than the other
> way around, or maybe how internal cash flows can support the current
> dividend.
>
> Unfortunately, you're asking for the impossible. Simple math about
> individuals is too easily refuted, since it necessarily requires
> assumptions and generalizations that omit important specifics of
> the entity under scrutiny.
>
> PHKs portfolio is probably one of the most complicated around, and
> at the portfolio level not at all like FHI except in name and general
> description.
>
> But a quick simply math of the credit ratings reveals these two funds
> aren't alike at all. FHI is around 50% junk grade, and then 20% AAA.
> There's very little left in the mid-range where credit spreads are
> most likely to shrink in an recovering economy, asset prices rise,
> and defaults less likely to occur (relative to junk).
> www.ftportfolios.com/R...
>
>
> Now look at PHK credit mix. There's almost no junk bonds, and they
> even report short AAA credit, which presumably means they expect
> rising interest rates on AAA debt. If those are Treasurys, they got
> that right.
> www.allianzinvestors.c...
>
>
> Furthermore, PHK has 21% of assets in banks. Everyone knows the Federal
> Government is ensuring the cash flow to bondholders is secure, even
> if the bonds are rated and priced below AAA.
>
> PHK is nothing at all like FHI. You're comparison seems to me like
> belief in search of facts, just as mine does. That's not to say PHK
> won't or can't cut the dividend, but the simple math in your comparison
> is like predicting GOOG future performance based on YHOO past performance.
>
>
> The more likely figure, if they cut their dividend, comes from their
> Section 19 filing, showing distributions at an annualized rate of
> $1.02 per share.
> www.allianzinvestors.c...
>
>
> I'd like to see the previous Section 19s to find out if net investment
> income is up, down, or steady. Unfortunately, I can't find it in
> the SEC Edgar database (PHK's CIK = 0001219360). But if operations
> can convert low-yielding assets into high-yielding assets, the net
> investment income might very well make up the current shortfall.
> You can't predict that with simple math -- you need to find out what
> their trading activity is by comparing past and present portfolio
> mix. That would take days.
>
> A short-term short appears to be a good play, but I wouldn't hold
> that for long unless credit market's collapse again.
>
> FD: Long PHK

CEF Weekly Review: Convert Funds Lead

CEF Investors

For some reason, the weekly CEF fund type chart, which was origninally included, was not published with this article. For those of you interested, here is a hyperlink to that chart. joeeqcome.web.officeli...

Have a good week.

Joe Eqcome

CEF Mergers Drives Special Equity Funds

GlobalTrekker

To piggyback on HighTower's suggestion, I am also including a link to the "Journal of Political Economy". The jounal was founded in 1892 and published by the University of Chicago. It is considered by some the most prestigious journals in economic theory and practice.

www.journals.uchicago....

You may find this useful.

Joe Eqcome



















































Joe Eqcome


On Jul 19 12:32 PM GlobalTrekker wrote:

> Decent compendium of CEF activity, some more relevant than others,
> but let's keep this a financial web focus and keep your personal
> politics out of it.

CEF Mergers Drives Special Equity Funds

GlobalTrekker

A little history lesson for you. When economics was original taught at Oxford the course was entitled “Political Economics”. The reason was economics was, and still is, considered a social science. Political policies are designed to influence economic and investment behavior. So, it is almost impossible to separate politics from economic policy and sound investments decision making.

Since America is still a country that recognizes free speech and debate, rather than not injecting my economic and political views—which I believe is crucial to sound investing, why don’t you countermand my arguments with your views if you disagree?

I, and I’m sure others, would like to hear someone defend an out-of-control fiscal policy and what would be the best places to invest if such were to become an economic reality.

Joe Eqcome



On Jul 19 12:32 PM GlobalTrekker wrote:

> Decent compendium of CEF activity, some more relevant than others,
> but let's keep this a financial web focus and keep your personal
> politics out of it.

CEFs: Discount at Historical Average

Oldman

With the possible exception of certain muni bond funds, I’m underweighted on the fixed income side—particularly long government/agency bonds. I’m concerned we’re going to see more inflation at some future point in time as global governments print money to float us out of the toxic assets problem. This would put downward pressure on the asset values.

If you have a slightly positive bias towards the market, you may want to consider “buy-write” CEFs. These CEFs buy a diversified portfolio of stocks and write call option against its portfolio. Such CEFs can generate premium income by writing (sell) the option and if a particular stock gets called away because the share price rises to the option strike price, the CEF can book another gain. You don’t want to owns such funds if you think the market is going to decline as the share price decline can off-set the premium received by writing calls.

Options are a very specialized investment area which I’m not as familiar as I’d like to become, so caution is in order.

If you’re so inclined, you might want to consider Eaton Vance Tax-Managed Buy-Write Income Fund (ETB). It has over $300 million in assets, currently yielding 13.9% and is selling a discount of 5.8%.

Breaking down the 13.9% distribution yield: 2.2% is supported by investment income; if you add on net realized gains it boosts it to approximately 5.8%; the rest coming from return of capital. So, the distribution yield is priced accordingly.

I hope this is helpful.

Joe Eqcome



On Jun 08 10:00 AM oldman wrote:

> with weakness in employment, housing, retail etc is there any good
> reason funds that hold goveernment/agency bonds sold off? My thought
> is perhaps a strong stock market has temporarily changed the flow
> of funds and weakness in bonds will become stronger a gain. Where
> would you get your income from now?

CEFs: Discount at Historical Average

bsharvy

I maintain my own database of approximately 640 CEFs and download pricing data daily. So, the CEF discount is calculated on that basis.

I post the month end Prem/Disc on my website for the Eqcome Index along with its CEF sub-indices (see "CEFIndex", on the website. That Prem/Disc is different than the one I noted in the article as it included a comparison of data I had available for all CEFs in the data base; the Eqcome CEF Index is comprised of just 130 CEFs.

These number would be different that Claymore CEF index as it is constructed differently.

You're aware that Claymore updates its index daily? Its available on under indices/fund/clmref/hi...

I hope this is helpful

Joe Eqcome


On Jun 07 01:55 PM bsharvy wrote:

> Where are you getting the info that the average discount is 5.7%
> on the index. Claymore's site last updated the info on March 31.

CEFs Up for the Week; Insider Buying at Boulder Growth Surges

Anarchist

By definition closed end funds (CEFs) must distribute their net investment income and capital gains on an annual basis or its equivalent. The only way it can obviate this regulatory requirement is to pay taxes on the income and gains or offset gains with carry forward losses. While from time-to-time, the former, may make sense on a special situation basis, it would be in direct conflict of the purpose of a CEF which is a conduit by definition and would be subject to shareholder protest.

BIF does Berkshire Hathaway; it also owns other stocks that do pay dividends. In fact, 25% of its total portfolio it REITs that are conduits and pay dividends. Also, any realized gain in the appreciation of Berkshire’s stock held by BIF would be subject to distribution requirements.

I would submit that if BIF reinstated its dividend that was suspended last year, the stock would respond positively. One would presume that the insiders that currently own 20% of the fund recognize that fact. I thing it is reasonable to assume that dividend will be reinstated; just went would be subject to loss carry forwards and the not so transparent agenda of the insiders who own the management company that advising BIF.

Joe Eqcome



On Jun 02 09:23 PM anarchist wrote:

> My question above was covered in your May 17 article. If 30% of BIF
> is invested in Berkshire Hathaway then where does the dividend come
> from since neither BRK.A or BRK.B pays a dividend?
> Thanks

CEFs Up for the Week; Insider Buying at Boulder Growth Surges

Dan

Thank you for your comment.

I try to be somewhat disciplined with my CEF market segment reviews. I have a very limited mission that I try to restrict it to two pages. That mission is to: 1) provide a top-down overview of what’s going on in the CEF market sectors; 2) try to discern if there are any major trend developing for the time period selected; 3) compare it to other related performance metrics; 4) end with an investable idea.

So, my intent wasn’t to explore in-depth the relationship of the insider buyers at BIF, but to provide the underlying reasoning for the investment idea portion of the article. (That is not to say that there isn’t significant intrigue with regards to the interrelationships of the CEFs you noted above and the related managements and insiders. In fact, you have done a yeoman’s job of chronicling it.)

I find that it actually takes more time than one imagines for a investment idea like BIF to gain traction. I, like you, think this stock has “legs” and I’m willing to wait. There’s an old adage in real estate business, “buy at the perimeter and sell when they meet you.” I’m buying BIF and I will be selling it when everyone else figures I what we know; or, if I uncover a flaw in my logic.

A detail analysis of BIF’s insider issues is subject for a different article.

Joe Eqcome



On Jun 01 11:46 AM Dan Plettner wrote:

> Joe, was it your intent to adequately discuss the relevance of insider
> buying of BIF? Given the mention in your article's title and your
> historically thorough writing style, I was very surprised that you
> didn't really discuss the unique details pertinent to BIF market
> participants.
>
> How do you perceive the insider buying surge to relate to the 2nd
> Shareholder Vote Adjournment, Control Issues, and the 'Manipulation
> or Hallucination' story that you previously authored?
>
> Personally, with analysis of those topics, I could reasonably see
> BIF trading at a 15-20% premium some time next year, with the related
> funds (BTF, FF, DNY) then trading at a 30%-40% discount.
>
> Disclosure: Long BIF (added to pre-existing long position today)

Weekly CEF Review: Highs and Lows

Alan Young

I’ll try to include the average weekly prem/disc change per CEF fund type in next week’s CEF review.

CHN may be a more interesting China play than CAF given the former is trading at a discount, has a higher distribution, lower expense ratio and has not appreciated as much as CAF YTD. (Food for thought)

You’re correct on ascribing the term “trader” as opposed to investor regarding playing the volatility in commercial real estate securities (URE: long; SRS: short). I have a tendency to play URE both long and short as a result of it’s recent share price being under $4.00. However, more conservative traders should consider SRS as a short position.

Joe Eqcome.



On May 24 11:00 AM Alan Young wrote:

> Thanks for this fine overview. Would it be possible for you to post
> the average premium/discount within each sector? That change from
> week to week is of considerable interest.
>
> With regard to CAF, a week or so ago it was sporting a PREMIUM of
> over 30%! It's finally coming back to earth.
>
> With regard to real estate, I believe you mean that TRADERS (not
> investors) should consider URE and its inverse, SRS. Unless you are
> asserting that REITs are going to rally again?
>
> Thanks

Weekly CEF Review: Highs and Lows

Dan

On its face, it appears the actions initiated by BIF’s management (“insiders”) in late ‘08 may be intended to benefit insiders at the expense of majority shareholders.

Those actions include a staggered board, a suspended dividend and a cessation of new investments post a successful rights offering. All this curiously was enacted prior to the significant, systematic purchase by insiders of BIF’s stock at significantly lower prices.

We’ll all be curious to see what actions BIF’s management will take post completion of their share acquisition program with regards to reinstatement of the dividend and deployment of funds for investment. They may just shoot themselves with a smoking gun.

With respect to a staggered board, I believe this would not be in the best interest of the majority of shareholders (vote “No”). As someone once said, in the investment business, there’s either a conflict of interest or there’s no interest. The key is to manage the conflict.

I believe there are currently no checks and balances with regards to the potential conflict of interest of the insiders’ ownership (control person) and management of BIF being the same. The ability to summarily replace the entire board by a super-majority action (2/3’s) should provide some protection to shareholders as well as management.

Joe Eqcome (I have a small ownership position in BIF)

On May 24 01:10 PM Dan Plettner wrote:

> Joe, do you think that the Current Board of Directors has been acting
> in the best interest of the average shareholder? Assuming there is
> to be a final outcome of the Proposal 1 Proxy vote If there is an
> outcome on Proposal 1 at the previously "adjourned" May 29th reconvened
> shareholder meeting, what would the best possible outcome for the
> average investor be?
>
> I realize you continue to believe BIF is a long and I continue to
> believe your "house money" thesis holds merit. While I agree that
> restoration of the distribution policy would have positive effects
> on market returns, I believe an ethical Board of Directors not subjected
> to enormous Conflicts of Interest would do much more for all shareholders.
>
>
> Disclosure: I too am long BIF, as many readers already know.

Weekly CEF Review: Highs and Lows

Mavericks

To make a statement of opinion is your right under the First Amendment of the United States Constitution. However, as Hubert H. Humphrey once said, “The right to be heard does not automatically include the right to be taken seriously.”

To make a dismissive comment, as you have, without providing as basis for your investment position is of little value. I, and I’m sure others, would encourage you to substantiate your case against BIF. You may have strong reasoning from which we could all benefit. However, so far you haven’t provided any; you’ve just wasted electrons.

Joe Eqcome


On May 24 11:19 AM mavericks wrote:

> Long BIF, huh? Your credibility with CEF's just took a hit.