Joe Eqcome

Blackrock's Toxic Asset CEF: Buy in Post-IPO After-Market

I agree with all your points regarding “is your money safe” being the central issue regarding this offering. Particularly with regards to the conflict of interest issues you raised—some of which were addressed.

The IPO discount is a statistical fact; it is one I believe investors readily understand. The hope is that the IPO discount will give retail investors pause to contemplate more central issues regarding this particular CEF.

While statistically significant premium can become part of “irrational exuberance” within a particular sector due to its momentum, the gravitation to the mean is a very powerful force in the CEF market sector. It has a tendency to level valuations over time. That doesn’t mean you can trade these aberrations, but it’s probably not a good long term investment strategy.

The stabilization of the syndicate bid is typically short lived.

By-the-way, your “keys in the mailbox” is a great line.

Joe Eqcome




On Jul 29 10:22 AM User241885/(FAMCO) wrote:

> One cannot generalize about premiums or discounts to NAV. Mathematically,
> right after the initial public offering the funds should trade below
> the IPO price, providing the underlying assets have not increased
> in value, because the IPO includes a sales charge which clearly is
> not part of the overall asset value.
>
> But that's not the way it works. Several things can happen. First,
> the underwriters can, by prospectus "stabilize the market" by buying
> back the shares at the IPO price. That can last for 30 to 60 days.
> Not until they stop stabilizing will you see a trade at NAV.
>
> Secondly, you can have investor demand for a particular investment
> style CEF that creates a higher price for the shares than the undrlying
> assets would support, hence the premium to NAV. This was not a regular
> occurance when CEF IPO's started to pick up in the nineties but definitely
> began to occur in this decade when option writing funds and specialty
> funds enjoyed an usually strong response.
>
> This demand that creates NAV premiums is not limited to the retail
> investor, by the way. Large commercial banks acting as prime brokerage
> for hedge funds were buying CEF's spades. We know that from looking
> at the deluge of CEF's regurgitated by Wachovia and super regional
> and money center banks. The endless margin calls during the massive
> sells offs at the end of 2008 drove some CEF discounts to NAV into
> record territory of 30% or greater.
>
>
> The real issue, however, is not whether the fund trades above or
> below its NAV. That's a total red herring. The real issue is simple:
> Is you money safe?
>
> I would like to know what incentive the managers have to maximize
> the value of this portofolio? They doubtless will find a way to take
> part in massive trading opportunities but that benefits the management
> and the management company's shareholders, not the fund itself and
> its shareholders.
>
> It also should cause some concerns that the fund managers are doing
> things the same way as before: all-leverage-all-the-t... but this
> time they are using the Fed as the bank. Is that what they mean by
> "the lender of last resort?".
>
> Furthermore, what happens when you stress test these massive portfolios,
> most of which are repackaged mortgages that weren't working a year
> ago. NINJA (no income, no job, assets) didn't perform then, why should
> they now? When things don't go well at investment act company funds,
> the prospective gives them the right to distribute "in kind", meaning
> you get the actual physical indicia of whatever that investment is.
> Typically, you get shares, and fractional shares, of the underlying
> portfolio,
>
> If this goes badly, when I open my mail box looking for the dividend
> check, I am going to get hundreds of sets of house keys instead?
> If anyone ever had any question about what the term "risk transfer"
> means, we are about to find out.

Blackrock's Toxic Asset CEF: Buy in Post-IPO After-Market

Klarsolo

Yes, but not indefinitely. There is a powerful gravitation to the mean that over time will bring outlier premiums or discounts to their mean. PHK is such an outlier trading at a 42.7% premium. Its historical premium is around 4%. It is also trading at a 16.8% distribution yield when its peer group is trading closer to 10%. The market is already telling you that the stock is going to cut its dividend.

But, more to your point, PHK is trading at a 41.7% discount to its IPO price.

Joe Eqcome (Short PHK)



On Jul 29 07:51 AM klarsolo wrote:

> Don't count on it being available at a discount. It usually happens,
> but not always. If you look at Pimco's High Yield Funds trading at
> 50 % premium just because of the Pimco name, this fund can also easily
> trade at ludicrous premiums simply because of its appeal.