Joe Eqcome

PIMCO High Income Fund: Substantially Overvalued?

iel76

Let me address your comments in reverse order. While PHK has paid a constant monthly dividend since inception, two out of three of its CEF peer group reduced its distribution rate since year end: EAD ($.0929 vs. $.1094; payable 8/3/09) and VLT ($.1175 vs. $.1250; payable 12/31/08). The only exception is PHT which has paid the same distribution since its inception in 2002 ($.1375). High yield ETFs seems to payout whatever their net investment income is.

As it relates to PHK's distributions, for year end 3/31/09, it generated $1.37 per share in net investment income (NII). It distributed $.15 per share on NII to it preferred share holders and $1.46 to its common shareholders. Both were characterized as distributions from investment income. It also reported that at year end it has cumulatively distributed approximately $.07 per share in excess of NII. For FY 2009 it was less than a penny.

I agree with your contention that the characterization of distribution is complex as it is based upon a separate set of books (earnings and profits) which is different than accrual accounting you and I analyze.

However, this may be a red herring issue. My main concern regarding the stability of the dividend is the dramatic reduction in leverage and the historic spread that it has contributed to NII. This is where trading profits will need to fill the gap vacated by the leveraged investment NII.

My issue with trading profits is their unreliability. Investors pay very little for trading profits; look at the historical multiples of asset managers versus investment banks. This is not to mention the excessive premium to its mean and the very powerful gravitation to the mean phenomenon working against the stock price.

I don’t have a dog in this fight; I’m agnostic regarding the direction of the stock. Will Rogers once said, “I’m not a comedian, I just watch the government and report the facts.”

Well, I just watch the CEF market segment and report the facts on behalf of the independent retail CEF investor, who I believe has no independent advocate and is vulnerable to ephemeral returns manufactured by fund managements and sworn-off to by brokerage research.

Whether PHK is a comedy or a tragedy will be determined by the facts and investor dialogues like these.

Joe Eqcome


On Jul 10 08:30 AM iel76 wrote:

> The last information available for this fund on the Pimco website
> (I visited 2 days ago) showed Undistributed Net Investment Income
> ("UNII") for this fund. If they are not earning the dividend through
> Net Investment Income, how is this possible unless there are indeed
> realized trading gains. I've spent a lot of time looking at this
> and unfortunately it appears the answer is that dividend coverage
> is impossible to analyze by simply looking at the portfolio at any
> given date. We won't know the results of PHK's trading activity until
> later. What I do know is that the dividend has remained constant
> since July 2003.

PIMCO High Income Fund: Substantially Overvalued?

Viajero

Thank you for your comments and the additional documentation supporting the notion that PHK may be overvalued. I think the facts should speak for themselves.

Joe Eqcome

On Jul 09 04:09 PM Viajero2007 wrote:

> Joe Eqcome,
>
> I enjoyed your two articles on PHK and agree with your main points.
>
>
> After reading all publicly available information on PHK, I have come
> to the conclusion that it is indeed "grossly" over-priced for two
> primary reasons. First, the CEF has become largely driven by retail
> investors who misunderstand the nature of CEFs and the propensity
> for price to revert to NAV eventually. I think they are looking at
> pre-Lehman-bankruptcy price levels to support their investment decisions
> and are unaware or ignorant of the fact that a significant amount
> of PHK's equity capital was permanently impaired when they sold a
> significant amount of their portfolio at distressed prices to repay
> their ARPs. Data from Yahoo! appears to underscore my hypothesis
> on retail-driven activity based on the fact that there were -72.6%
> net institutional sales during 1Q09 are per the following link: finance.yahoo.com/q/it...
>
>
> The second primary reason for the large premium is that PHK was one
> of Bill Gross' primary picks during the 2009 Barron's Roundtable.
> If you look at a five year premium/discount history, you will see
> that PHK never recorded a large premium (which I would define as
> 30% or more) until January 2009, which is when Gross recommended
> PHK in the roundtable. With the exception of a brief return to normality
> during the height of the March sell-off, this large premium has persisted
> for approximately six months. Note that this dynamic was first uncovered
> by JohnnyDiscount as per the following link: seekingalpha.com/artic...
>
>
> I've been frankly amused at some of the creative reasons that retail
> investors have outlined on the Yahoo! and SeekingAlpha comment boards
> to justify this obvious market inefficiency. The most credible sounding
> justification is that "The Bond King," Bill Gross, has taken over
> as manager and that his skill justifies a premium valuation. However,
> if you again look at the premium/discount history, you will see that
> the highest end-of-day premium (97.47%) occurred on 5/6/09, which
> was prior to the 5/15/09 announcement that Gross had taken over the
> reins (the premium was 58.47% as of the close on 5/15). I have yet
> to see a justification which cannot be similarly discredited with
> basic analysis.
>
> The bottom line is that PHK represents a phenomenal pair trade for
> those investors who have enough knowledge and skill to select high
> yielding yet fairly valued longs. This trade is a lock for a skilled
> market neutral trader with a 6 - 12 month time horizon. Furthermore,
> given the abating run in credit prices it seems as if one could make
> a reasonable case for a naked short, particularly if PHK trades back
> into the high 8's or low 9's. This trade is more risky and I would
> only recommend it for highly vigilant traders who are short-term
> oriented and technically savvy. Good work, Joe Eqcome, on publicizing
> this opportunity and warning vigilant longs to prudently take profits.
>
>
> Viajero2007
>
> Full Disclosure: I've been short PHK since 6/3/09 and use JNK and
> a handful of other CEFs and BDCs to hedge income and high-yield exposures.

PIMCO High Income Fund: Substantially Overvalued?

Hops

I'm happy for your buying opportunity.

Joe Eqcome


On Jul 09 09:22 AM Hops wrote:

> Funny how these over-valued theories keep coming out the day of ex-dividend
> when the ETF has the weakest support. A short-selling setup or creation
> of a buying opportunity.
>
> I'm long the fund because I think it's assets will improve in value
> as the market unfreezes. Last time it took a hit from such an analysis
> I bought and made a good return.
>
> BL

PIMCO High Income Fund: Substantially Overvalued?

amorgano

If you go to my website homepage (joeeqcome.web.officeli...) you'll see that the article was posted after the market closed yesterday.

Be careful of impugning someone’s ethics before you have the facts.

The earlier share drop was more a function of PHK going ex-dividend today.

Joe Eqcome



On Jul 09 09:57 AM amorgano wrote:

> Apprently the people who had knowledge of your article before it
> was published got out yesterday...nice ethics

PIMCO High Income Fund: Substantially Overvalued?

User 444056

Thank you for your analysis.

Your analysis rests on the foundation that PHK is now a trading company versus an investment company. I’m not sure if there is any restrictions regarding what percentage of income a CEF can generate from short term trading activities. (I’m sure someone more knowledgeable can answer this question.)

Assuming that there is no such restriction, investors are willing to pay a very large premium for Bill Gross trading skills. There might be some justification for that valuation. However, there is not much data to support a CEF trading at such a significant premium as PHK is relative to its mean. The powerful and documented gravitation to the mean is likely to occur over time in the absence of a significantly undervalued, stealth NAV.

I’m an agnostic regarding PHK’s trading success. I’m just basing my observation on historical facts. Maybe, this time it’s different.

Joe Eqcome



On Jul 09 12:13 PM User 444056 wrote:

> Joe said, "I’d appreciate any additional insight into why this stock
> is trading where it is."
>
> I'll take a stab at this. I'm not a professional analyst, but here's
> my confusion with Seeking Alpha's analysts and why I own PHK.
>
> PHK is a leveraged high-yield fund. Why must "high-yield" come from
> securities income generated by the fund's portfolio instead of the
> fund's trading activity?
>
> The securities in the fund might not be "earning" +20%, but the money
> I get out from the trading activity is earning me +20%. Why is that
> bad for me?
>
> Why are analysts analyzing it like a value play? (seekingalpha.com/artic...)
> I get the math about subtracting distributions from income, but the
> part about not earning and paying out the income from trading --
> well why shouldn't I expect that? When I buy/sell securities and
> generate income, I call that "earning". It's not the value-investing
> form of the word, but it's earnings from my activities, which is
> security trading. Isn't this what a hedge fund does? (See my interpretation
> below).
>
> Why is this analyst using only the historical premium as a gauge
> instead of the historical yield? seekingalpha.com/artic...
>
> "This is well in excess of its historical premium of 4%."
> and
> "Compare this with the metrics of three ETFs that invest in junk
> bonds"
>
> Aren't those other comparative securities getting their yield from
> the securities in the portfolio instead of their trading activities?
>
>
> In this piece, much more detailed and in depth, I still can't tell
> why the peer comparisons are valid. seekingalpha.com/artic....
> Do the 3 ARPS leveraged peers use the same strategies and portfolio
> mix as PHK? Are they yielding less because they aren't as successful
> at milking the system? Point 2 is moot if PHK generates it's yield
> from trading instead of investment income. Point 3 is moot if they
> adapt to the changing market by moving to more traditional securities.
> Point 4 is a valid concern. But on the flip side, if the worst is
> indeed behind us, NAV of PHK will indeed rise. Point 5 is true and
> valid. But my interpretation is they've changed because the world
> in which they operate has changed. Point 6: I quite buying, too.
> How much do the insiders already own, and why should they continuously
> keep buying more?
>
> My interpretation is that PHK has become a hedge-fund-type of investment
> for the retail investor to take advantage of the distorted market
> in MBS and CDO securities. For sure, that's a risky game to be in.
> But doesn't that argue for analyzing PHK as a hedge fund rather than
> a value or typical high-yield fund? Seems to me the correct analysis
> is to look at trading strategy, the market in which it trades, and
> the hedging/risk management of the strategy, not securities analysis
> ratios.
>
> What I gather from these three analysis is they expect PHK will revert
> to it's historical 12% yield by falling in value to match other high-yield
> funds producing 12% returns. My reason for owning it is the opposite
> -- I presume the yield will return to 12% as the management (currently
> Bill Gross himself) cycles the portfolio out of the old MBS/CDO instruments
> through trading activities into newer historical norm high-yield
> instruments, or as the holdings themselves rise in value (as the
> portfolio securities' internal cash-flows resume) from the shifting
> economic landscape.
>
> Granted, some who follow Elliot Wave Theory don't think we're done
> with the economic collapse, and others think these old toxic-waste
> debt instruments are going to live up to expectations of 75% defaults
> (or worse). But it's my belief that a) the worst is over in the global
> economy, and b) Bill Gross and company know how to pick the right
> MBS/CDOs.
>
> I sure hope my questions aren't treated as rhetorical. I still haven't
> read the classic book "Security Analysis", so I really would hope
> someone can address my misunderstanding on the particular questions.