Joe Eqcome's  Instablog

CEF Weekly Review: The 13 closed end fund (CEF) types on average were up 1.7% for the week ending 11/6/09. On an aggregate, unweighted basis, the weekly average price change for the 488 CEFs was up 1.6%.

The weighted 49 CEFs comprising the Claymore CEF Index registered an average advance of 3.4% for the week. The S&P 500, as measured by the SPDR S&P 500 ETF (SPY), increased 3.4%. The S&P 500 more than reversed its loss from the previous week.

(Click Here for YTD CEF Performance. The table is based on a 272 CEF sample size as all the data fields are not available for the CEF universe.)
 
The Eqcome CEF Fear Index subsided with share prices increasing more than related NAVs (1.64% versus 1.14%, respectively). The CBOE Volatility Index (VIX), which typically moves inversely with the stock market, substantially reversed its surge of 37.8% the previous week by declining 21.2% this week. The frenetic gyration of the VIX seems to reflect the emotional nature of the equities markets as it sorts through mixed economic data.

CEF Weekly Fund Type Performance: The CEF fund types swung back in almost a pendulum-like fashion with risk-trade switch being “turned back on”. ConvtSecFnds led the advances with WrldEqFnds and WrldIncFnds all advancing over 3.5%.

At first blush, ConvtSecFnds leadership makes sense as its asset type straddles both equities and debt in this uncertain investment environment. USMrtgBndFnds was the only fund type not to register either a positive advance in share price or NAV.

Lately, a simple strategy of buying fund types that underperform one week and selling them the next when their fortune’s reverse would have been a profitable strategy. However, having made that proclamation you can be assured that it is no longer viable.

Click here for a link to October '09 month-end data and historical charts for closed end funds (CEFs). October is the first month since February '09 that CEFs' on average experienced a downtick in both share price and NAV on a month-over-month basis.

CEF Weekly Review: The 13 closed end fund (CEF) types on average were down 3.5% for the week ending 10/30/09. On an aggregate, unweighted basis, the weekly average price change for 493 CEFs was down 3.1%.

The weighted 49 CEFs comprising the Claymore CEF Index registered an average decline of 5.6% for the week; First Trust CEF Composite Index was down 4.2%. The S&P 500, as measured by the SPDR S&P 500 ETF (SPY), registered a decline of 4.2%. Not a pretty picture.

(Click Here for YTD CEF Performance. The table is based on a 270 CEF sample size as all the data fields are not available for the CEF universe.)              
The Eqcome CEF Fear Index jumped with prices declining twice as much as NAVs (-3.1% versus -1.4%, respectively). The CBOE Volatility Index (VIX), which typically moves inversely with the stock market, surged during the week. The VIX advanced 37.8% to over 30 after a long period of quiescence. The 4.2% decline in the S&P this week more than wiped out previous month-to-date gains with the S&P 500 off 1.9% for the month of October.

CEF Weekly Fund Type Performance: In times of equity markets stress, investors head for the comfort of fixed-income securities and other conservative investments. However, with the “risk trade button” turned to “off”, even the WrldIncFnds fund type was not spared.

While all fund type categories registered a decline, OtherFnds declined the least. This category has a high proportion of “buy/write” option CEFs funds. Investors gravitate towards such investments as the option premium income cushions stock price declines. While a reasonable investment strategy in a less volatile market, it does not protect investors in sustained market declines.

CEF Spread Changes: Changes in PrcNAVSprds generally follow the trend of price movement. This is typically the case when markets generate meaningful price changes. All fund types experienced price declines greater than NAVs—save for SingleStMuniFnds which was essentially a push.

CEF Winners and Losers: CEFs that demonstrated positive PrcNAVSprds was in the MLP energy area. Cushing MLP Total Return Fund (SRV) generated a PrcNAVSprd of 7.6% through a combination of a 1.5% increase in price and a 6.1% decline in NAV.

Kayne Anderson MLP (KYN) generated a positive spread of 6.2% on a 3.6% increase in price and a 2.6% decline in NAV. (A positive PrcNAVSprd can be viewed as a negative, subject to other metrics, as it would indicate the stock price has increased greater than the NAV. In theory, CEF prices and NAVs should move in a more tandem fashion.) 

One of the poorer performing CEFs during the week was First Trust Active Div Income (FAV). It was the second week in a row that it held this status. Its PrcNAVSprd was a negative 9.1%. The stock’s downdraft was more than likely caused by an astute CEF trader pointing out that you can make more money in FAV by buying the stock some time after the ex-dividend date when the shares decline; then riding the price increase forward and selling it prior to it going ex-dividend. It is sort of a reverse “dividend capture”.

Market Perspective: Being a contrarian has historically carried the hazard of being a curmudgeon. So, during the recent stock market swoon it is out of character for most contrarians to see the “silver lining”. (Did you think you’d get out of October unscathed?)

The chart below is an illustration of the continuing claims for unemployment (inverted) versus the monthly percentage change in the S&P 500 against the backdrop of economic cycles since 1966. There is a high correlation between the change in continuing unemployment and the S&P 500.

It makes sense: 70% of our economy runs on consumption and jobs are central for the purpose. What is noteworthy is that once there is a turn in continuous unemployment claims it seldom retraces. Yes, the decline has been breathtaking; however, the recovery could be surprising.

 A constructive equity investment thesis has been based upon: 1) no double dip recession; 2) close to the end—if not the end—of an economic contraction. That has typically been good for investors looking out from this vantage point.

Revenge of the Humans: The “machines” are currently in charge of the stock market swings with small pricing anomalies being magnified as they build on themselves. That’s doesn’t qualify as investing.

As the Warren Buffett reminds us, when others are fearful, investors should be greedy, and visa versa. If you don’t have your toe in the water you should consider getting wet.

(Click here for next week’s economic calendar; click here for earnings announcements and estimates.)

ETFs: (Click Here for ETF YTD sector performance.)           

Insider Trading: There was only one significant accumulation of insider buying during the last week of October. Lola Brown Trust 1B accumulated an additional $224,161 of shareholder value of Denali Fund, Inc (DNY). The 16,724 shares were accumulated at an average cost of $13.39 per share. This brings the total shares owned by the trust to 3,082,560 shares.

Summary: There have been 17 stock market cycles (April ’42 first trough) and 12 US economic cycles (Oct ’45 first trough) since the early 1940’s. (See Chart below)
While each stock market and economic cycle is different due to its underlying economic fundamentals, one thing is constant: the stock market recovers prior to the general economy as investors discount economic events. The average stock market trough precedes it economic counterpart by 14 months with a median lag of 6 months.

Stock Market and Economic Cycle Interplay: While acknowledging there is no such thing as a typical stock market/economic cycle—particularly with regards to their interaction, the chart below is a graphic depiction of the stock market sectors’ response to a normal cyclical economic contraction and expansion.

Invest by the Numbers: Each of the market sectors are numbered and indicate at which point in the market cycle(s) the sector’s value may be maximized.

CEF Weekly Review: The 13 closed end fund (CEF) types on average were up 0.6% for the week ending 10/23/09.

On an aggregate, unweighted basis, the weekly average price change for 514 CEFs was up 0.7%.

The weighted 49 CEFs comprising the Claymore CEF Index registered an average decline of 0.2% for the week. The S&P 500, as measured by the SPDR S&P 500 ETF (SPY), registered a decline of 0.7%.
 
(Click Here for YTD CEF Performance. The table is based on a 272 CEF sample size as all the data fields are not available for the CEF universe.)

The Eqcome CEF Fear Index was neutral with prices and NAVs advancing approximately 0.7%. The CBOE Volatility Index (VIX), which typically moves inversely with the stock market, was volatile during the week and rose throughout Friday to close the week up 3.9%. (See “Market Perspective” below for more on the VIX)

CEF Weekly Fund Type Performance:  CEF fund types generated a unique array of price performance with equity and fixed-income fund types being interspersed. Most recently fund types have been bifurcated. Equity and fixed income have been bunching above and below the average in a mutually exclusive fashion. Whether this is an indication of investors’ confusion on the general direction of the markets or just a longer-term transition caught in snapshot form will be played out in future weeks.

Munis had recently lagged in weekly performance. NatlMuniBndFnds and SingleStMuniFnds advanced for the week taking slots two and three, respectively. Munis are generally considered a conservative investments and one that performs well in a risk adverse environment. However, book-ending Munis were LoanPartFnds on the topside and HiYldBndFnds on the bottom. It seems an odd mixture of investors’ risk assessment.

This may be a function of investors’ displeasure of receiving a return of almost nothing on their money market mutual funds and are seeking high yields without regard to the assets that generate it.

CEF Spread Changes: Changes in PrcNAVSprds generally follow the trend of price movement. This is typically the case when markets generate meaningful price changes. NAVs that increased more than share prices were most pronounced this week in SpecEqFnds and WrldEqFnds.

CEF Winners and Losers: One of the best performing CEFs for the week was PIMCO New York Municipal Income Fund III (PYN). PYN was up 7.5% on price appreciation and generated a positive PrcNAVSprd of 7.0%. PYN is trading at a 6.3% distribution yield (10.2% taxable equivalent yield) and at a premium of 7.1%. Other NY single state muni CEFs also performed well.

There was one exception, Blackrock NY Muni Bond Fund (BQH); it was off 3% for the week. BQH is trading at 6.4% distribution yield and at a 2.9% discount. The stock declined on Friday on higher than average volume. BQH typically declares its monthly distribution at the beginning of the distribution month.

One of the poorer performing CEFs during the week was First Trust Active Div Income (FAV). The stock’s downdraft was more than likely caused by it going ex-dividend earlier in the week on its quarterly $.46 per share distribution. 

Market Perspective: As it appears we may be at a stock market inflection point, there are a handful of reliable stock market sentiment indicators. One of them is the VIX. The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility implicit in the prices of near term index options (S&P 500 in the case of the VIX). The index is a leading barometer of investor sentiment and market volatility and is sometimes referred to as the stock market’s “fear gauge”.

The VIX has been flashing signals that the market is likely to move higher near-term as investors have embraced risk. Currently they are paying very little in the way of downside protection.

The chart below tracks the adjusted price movement of the S&P 500 and the inverted adjusted price movement of the VIX. (For the purpose of visual analysis, the VIX has been inverted as it has a tendency to move inversely with the stock market. Over the past 4 years the negative correlation has been approximately .84. As a consequence, a rising VIX would be depicted as falling on the chart below.)
The VIX is down from its peak “panic heights” of 80.86 on November 20, 2008 to its current valuation of 20. Despite the plunge, The VIX’s historical average has been 20.38 since its 1990. So a VIX below 20 is often interpreted as positive investors’ sentiment.

One particular note is that in the most recent stock market peak and collapse, the VIX was turning down (March of ’07) well before the peak of stock market in October of ’07. The VIX deserves investors’ attention—although, it is not recommended to be used as a sole indicator for market sentiment. It’s should be viewed in conjunction with other market sentiment indicators such as Dow Theory.

(Click here for next week’s economic calendar; click here for earnings announcements and estimates.)

ETFs: (Click Here for ETF YTD sector performance.)           

Insider Trading: There were some new insider purchases for Form 4 filings as of 10/22/09 of size.

MassMutual Corporate Investors (MCI) saw two insiders (Trustees) add to their positions in MCI. Donald Glickman added 8,000 shares at 25.54 per share for a total outlay of $203,600. He now owns 13,600 shares. Michael H. Brown was a buyer of an additional 1,500 shares for a total outlay of $37,350 and brings his share total to 5,000.

MCI has little institutional ownership (6%) and insider holdings (1%). The CEF invests in convertible debt oriented securities. It trades at a 6.7% premium with an 8.65% distribution yield.

Van Kampen Muni Opportunity Trust (VMO) saw the exercise and sale of 18,000 shares my Merrill Lynch. The advisor, Van Kampen Investments, Inc, is scheduled to be sold to INVESCO Ltd. Both BofA and Merrill were active in exercising and selling positions in several CEFs.

Karpus Management (Karpus), an activist CEF investor, was energetic in two Putnam CEFs. Karpus continued to add to its position in Putnam Muni Opportunity Trust (PMO). Karpus added another 18,800 shares for a total purchase of $211,723 for the month. Karpus has accumulated 5,315,388 shares of PMO which represents 12.4% ownership. Its average cost per share is around $10.80 per share. The current price is $11.11 per share. The current distribution yield is 7.16% and it is trading at a 5.93% discount.

Karpus was also active this week in Investment Grade Municipal Income Fund (PPM), another Putnam advised fund. It added another 3,600 at an average price of $13.71 per share for a total expenditure of $49,356. It now owns directly 27,549 shares. Karpus has constructive control of approximately 11% of the shares outstanding.

PPM has attracted other activist investors as insiders. Western Investment owns approximately 6%. After initially resisting calls for liquidation, the board of PMM has recommended a proposal to liquidate and dissolve the Fund. The stock trades at a 4.2% discount to NAV.

Directors and officers continuing to add to their earlier positions this month were Bernard J. Korman, director, in New American High Income Fund (HYB) and Paul L. Brennan, V.P. & Assistant Secretary for Nuveen Dividend Advantage Muni Fund III (NZF). CEF Distribution Announcements This Week: The following is a link to a table of CEF distribution announcements announced this week. The list is not intended to be inclusive. While reasonable care was taken in its construction, please confirm its accuracy independently prior to making an investment decision based on this table.  (Click Here for Weekly CEF Distribution Announcements)

CEF Focus for the Week: In last week’s review we considered munis might see a bounce off several weeks of poor performance. The stock pick in that group was less prophetic. That pick, Putnam Managed Municipal Income Trust (PMM) declined in price. Rats!

PMM may still deserve investors’ attention. PMM’s distribution yield is 7.2% (tax-free equivalent of 11.0%) and is selling at a 6.8% discount. The stock trades on average 127,298 shares daily based on a three month average. Its portfolio holdings are national and its portfolio is valued at $634 million making it large enough for portfolio diversification.

Consider it food for discussion.

CEF Weekly Review: The 13 closed end fund (CEF) types on average were down 0.8% for the week ending 10/16/09. On an aggregate, unweighted basis, the weekly average price change for 618 CEFs was down 1.6%.

The weighted 49 CEFs comprising the Claymore CEF Index registered an average advance of 1.0% for the week.

The S&P 500, as measured by the SPDR S&P 500 ETF (SPY), registered an increase of 1.5%.

(Click Here for YTD CEF Performance. The table is based on a 275 CEF sample size as all the data fields are not available for the CEF universe.)

The Eqcome CEF Fear Index moved into negative territory (greater perceived risk) as share prices declined (-1.6%) greater than NAVs (-1.2%). The CBOE Volatility Index (VIX), which typically moves inversely with the stock market, while rising earlier in the week, resumed its downward trajectory ending down 7.3% for the week.

The VIX acted in a fashion contrary to the assessment here last week of a likely increase in volatility. This was based on the perception that the stock market would gyrate in response to discrete earnings announcements and option costs would rise.

However, investors appeared non-plus. Investors appear more confident near-term that the stock rally will likely continue. Some distortion for the week may have been due to option expirations. 

CEF Weekly Fund Type Performance: CEF fund type weekly performance was bifurcated with equities advancing and fixed-income declining. Both muni bond fund type (national and single state) losses accelerated this week to add to last week’s poor performance.

The decline in the muni ETF, iShare S&P national Muni Bond (MUB), for the week was a moderate 0.3%. This is compared to a 4.2% decline in the NatlMuniBndFnds CEF fund type. This could be a function of the leverage employed by the CEFs or the perceived lower quality of the CEF holdings. In either case, this divergence warrants investors’ attention. If investors “turn on” equities, this group is usually the beneficiary.

Additionally, you can see some investors hedging their equity bets with the OtherFnds (a preponderance of buy/write option funds) and ConvtSecFnds appearing in the “plus” column.

CEF Spread Changes: Changes in PrcNAVSprds generally follow the trend of price movement. This is typically the case when markets generate meaningful price changes. Bucking the trend this week was ConvtSecFnds. While the average share price advanced, NAV advanced at an even greater rate. On the flipside, despite munis’ plunge this week, the decline in NAVs was less than half as bad.

I continue to express concern regarding HiYldBndFnds CEFs. According to Merrill Lynch Master II High yield Index, junk bonds returned 50.2% YTD. This is compared to a 20% advance in the S&P 500. Many of the broker/dealers who purchased junk bonds at the depths of the market are beginning to pare their positions. This could potentially cause a decline in valuations for the balance of the year.

There is concern that retail investors will be seduced by the high yields and forget about the potential for defaults in junk bonds—which is a lagging phenomenon. Remember, there have been 99 bank failures so far this year—so, we know there are credit problems out there and it’s not all real estate related.

Individual CEF PrcNAVSprd Changes: The largest PrcNAVSprd was for Gabelli Utility Trust (GUT). GUT generated a positive spread of 13.6%. The spread was generated by a 3.3% increase in the share price and a 10.3% decline in its NAV. While GUT went ex-dividend during the week on a $.06 per share monthly distribution, its NAV dropped by $.35 per share. GUT is trading at a seemingly high premium of 63.5% with a distribution yield of 8.8%. Its peer group of utility CEFs in my database (four excluding GUT) is trading at par and is yielding 7.6%.

(A positive spread between the change in price and NAV could be viewed unfavorably subject to other metrics. This is because the stock has advanced greater than its underlying NAV. All things equal, they should move in tandem. The opposite would also be true.)

Putnam Managed Municipal Income Trust (PMM) posted the lowest PrcNAVSprd at a negative 8.9% while its price slipped 8.1% for the week. PMM recently announced its monthly distribution of $.0402 per share which goes ex-dividend October 21^st. The distribution yield is 7.1% (tax-free equivalent of 10.9%) and it is selling at a 5.7% discount. The stock trades on average 127,298 shares daily based on a three month average.

Market Perspective: The investment markets received mixed messages this week. Some earnings reports inspired while others disappointed. Consumer confidence dropped greater than expected while oil kept creeping upwards—mostly on speculation. Gold eased from its recent advance and the dollar bounced off its lows. While equities shrugged ahead, it was mostly reflexive. I continue to remain constructive on the equities market because I don’t subscribe to a double dip recession. It now becomes a valuation issue. (Click here for next week’s economic calendar; click here for earnings announcements and estimates.)

ETFs: (Click Here for ETF YTD sector performance.)

Insider Trading: There was only scattered buying and some selling for Form 4 (insider) filings for the period ending 10/15/09. There was little to indicate any discernable trend in the underlying CEFs.

Tri-Continental Corp (TY) director, Leroy Richie, appeared to exercise 5,500 shares and sold 5,700 shares at about the same price—little conviction here. Mark Edward Bradley, Treasurer of Pioneer Muni High Income Advantage Trust (MAV), established an initial position of 3,250 shares at a price of $12.30 per share.

Insider transaction for the month of October ’09:

CEF Distribution Announcements This Week: The following is a link to a table of CEF distribution announcements announced this week. The list is not intended to be inclusive. While reasonable care was taken in its construction, please confirm its accuracy independently prior to making an investment decision based on this table.

(Click Here for Weekly CEF Distribution Announcements)

CEF Focus for the Week: Being a contrarian at heart, consider the muni bond fund types. The sector has taken a recent beating over the past couple of weeks and may have created some buying opportunities.

Putnam Managed Municipal Income Trust (PMM) seems attractive at this level (see section Individual CEF PrcNAVSprd Changes). The Distribution yield is 7.1% (tax-free equivalent of 10.9%) and is selling at a 5.7% discount. The stock trades on average 127,298 shares daily based on a three month average. Its portfolio holdings are national and its portfolio is valued at $634 million making it large enough for portfolio diversification. (PMM has a stock rating of “5” from Joe Eqcome and “3” from Morningstar—for whatever that’s worth)

Consider it food for discussion.

Joe Eqcome (Disclosures: Long SPY & GLD and a diverse portfolio of CEFs including PMM)