Joe Eqcome

CEF Weekly Review: Expect Increased Volatility

Thanks. I didn't know they had such an index.

Joe Eqcome

CEF Weekly Review: Real Estate Extends Gains

BCT's special distribution of $.531 per share will go to reduce the NAV and therefore will reduce the liquidating distribution by a like amount.

As a result, the current NAV is approximately what shareholders will likely get as a liquidating distribution--it just will come in two parts.

Joe Eqcome

CEF Weekly Review: Real Estate Extends Gains

Here' a hyperlink to the BCT press release mentioned above. It didn't see to take above.

www2.blackrock.com/web...

Joe Eqcome

CEF Weekly Review: Real Estate Extends Gains

Another BCT Update:

I received an e-mail on my website from "FM" regarding this BCT distribution. It was very helpful and posed some additional questions.

FM points to a press release on 6/3/09 from BCT regarding the distribution for BCT. In the press release, BCT states BCT will make its final liquidating distribution on or about October 30, 2009, as opposed to the end of 2009—as previously noted.

www2.blackrock.com/web...

The press release goes on to state, a special distribution in connection with the Trust's liquidation will be made to shareholders of record 10/15/09. This special distribution is for $.531949 per share.

FM points out with a flat price to discount, the special distribution would generate, and I quote, "about 5.3% for 1 month if you believe the NAV will stay flat. Could be better in NAV improves. Still not bad when you annualize."
This makes it a little more interesting.

I guess the threshold question with regards to the special distribution is: wouldn't such a distribution just lower the liquidating NAV by a similar amount? If so, in the final analysis, a shareholder might just be getting a $.53 per share distribution in a separate distribution.

The final liquidating distribution might be the pre-special distribution NAV less the special distribution? Assuming the NAV doesn’t change that much, the cumulative distribution would represent the current NAV or about $12.42 per share as of 9/18/09? Don’t know?

If the special liquidation distribution is separate and apart from liquidating NAV then this might be interesting as FM suggests.

Again, thanks FM for the "heads up".

Joe Eqcome

CEF Weekly Review: Real Estate Extends Gains

Follow Up on BCT

In a conversation with Blackrock with regards to BCT, its original objective was to liquidate the CEF at the original issue share price of $15 per share at the end of 2009. However, this was not a guarantee.

The trust will be liquidated now on or about October 30, 2009 at NAV--which is now approximately $12.42 per share.

Assuming you buy 200 shares of BCT at the prevailing price of $12.25 per share and pay a commission of $10 per share your average cost would be $12.30 per share. Assuming you get approximately $12.42 per share liquidation distribution, the liquidation payment would represent a $.12 per share increment over your embedded cost.

This would be a return on your money of less than 1% for the holding period of approximately a month and a week. However, the distribution would be a return of capital, i.e. you wouldn’t have to pay taxes on the increment distribution.

There are too many moving parts and a low projected return for this to be an interesting arbitrage. I’m sure there will be some liquidation costs that might reduce the liquidation distribution.

The stated objective of returning to investors their original IPO invested capital of $15 per share and then placing a caveat that they just might not seems a little misleading. A more accurate and honest objective would have been, "protection of the original shareholders' invested capital".

And they didn't even do that--let alone investors getting back their original $15 per share.

Yes, Virginia, it was too good to be true.

Joe Eqcome

CEF Weekly Review: Municipal Funds Rule

Mavericks

I used the WSJ category for "OptArbStrgy" and I counted 31.

Of the 49 CEFs in the Claymore CEF Index as of 9/4/09, 11 are classified as "OptArbStrgy" representing 21.4% of the portfolio. The CEF that were classified and "OptArbStrgy" were: BDJ, BGY, EOD, EOI, EOS, ETB, ETV, ETW, JPZ, JSN & NFJ.

Some may feel this is an overweighting of the category as a component of the CEF market segment.

Here's a link to the composition of the index: www.claymoresecurities...

Joe Eqcome

On Sep 07 10:30 AM mavericks wrote:

> Where do the equity buy/write funds fall under in the Claymore CEF
> Index? I think there should be a separate category for them considering
> how many there are. I count at least 30.

Closed End Funds Lag the Market Advance

Garrett

I use several sources for data collection: Thomson, Lipper and Morningstar. All the data is inputted into a proprietary database model I’ve developed along with other investment metrics.

With regards to munis premium/discounts, I have 222 national and single state muni CEFs in the data base. The current discount is 1.68% versus an historical discount of 7.9%. Approximately 73 are trading at an average premium of 6.2%. So, this supports your contention of deterioration in comparable historical valuation.

I have done a sample of 36 single state munis and all but 3 have increased their monthly distribution in the past 12 months. I believe this may different from your observation. I’m hoping to complete this study in the next couple of weeks.

So, the question is: are munis overvalued and vulnerable to a price correction based on historical valuations? This answer may be yes, but it may be the wrong question.

Muni valuation may be more a function of current relative valuations than historic ones. While the spreads between munis and treasuries have narrowed from historic highs, they still seem compelling. Investors can still get 5% yield and a taxable equivalent of 8% in the highest tax bracket. Additionally, the prospect of higher taxes is also a current incentive for muni investors.

At this point, for CEF investors it more of stocks picking opportunity rather than a sector call for muni CEFs.

Joe Eqcome

Closed End Funds Lag the Market Advance

Dan,

Please do me the honor of a clinic on the issue(s).

Would you be a buyer of SRO or SRQ?

Joe Eqcome

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