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  • PHK - A case of reversion to the norm? And not a moment too soon! 2 comments
    Jun 10, 2011 12:29 PM | about stocks: PHK

    PHK - which has traded persistently at a very high premium to its NAV over the past 2+ years has been crashing over the past few days (rumors of a Merrill Lynch analyst rating the fund an underperform or a sell surfaced on message boards - I did not see or read such report but would not be surprised if it indeed had been written and distributed - it has been long overdue).
    As many PHK followers (both shorts and longs) have pointed out in the past,
    the huge premium over NAV started out late 08-early 09.
    Take a look at this graph which depicts the Premium/Discount valuation of PHK vs. its NAV.
    For its first 5+ years PHK traded like any other closed end fund within +- 5%-10% of its NAV.
    History tells us it will revert to the norm, as all "Bubbly" closed end funds and for that matter other inflated assets (like internet stocks, financial stocks, tulips etc) had done in the past.
    The amount of energy expanded by people who buy or hold an asset that is clearly inflated by 40-50%, to justify their position is amazing..which reminds me how people invested in Bernie Madoff's funds would go at length to idolize him and offer convoluted explanations to his (bogus) results - even though NO ONE (including the best minds in finance) could understand how he gets those returns...or the amount of research justifying the lofty bubble valuations of internet stocks before the collapse for that matter.
    There can be New Paradigms in our world but it is probably impossible to create a New Paradigm in the liquid , arbitrageable world of investments - we all learnt very early that money machines DO NOT exist!
    The reality is:
    This is an Income / Bond fund (or supposed to be so) with a Net Asset Value of 9.14 as of last night but which pays a steady dividend that currently translates to roughly 16% a year on its NAV.
    Now, anyone with a clue to today's world knows 16% is NOT achievable - even with JUNK..Junk bonds would give you at most 9-10% and that is stretching it to very risky issues.
    However, PHK's portfolio has long been anchored with investment grade or cross over issues like AIG, Citi etc.
    PHK is not even leveraged that much to account for the extra yield (only about 25-27% leverage).
    So yes, they keep paying the dividend and yes it has been stable ever since inception BUT my opinion is that as the sun would rise tomorrow PHK would revert to the norm and go back to trade as a regular closed end fund within a reasonable deviation from its NAV.
    I don't purport to know when this will happen but after 2 1/2 years of excessive premiums I would venture to say it will happen sooner rater than later and until then the question that needs to be posed is: "Why has it taken it so long and why was it able to sustain its lofty premium for so long?" and not : " Why is it going down now" !
    For all the poor souls who would be caught holding this hot potato, remember a wise man's words (Paraphrased): " I do not touch investments I do not understand " - Warren Buffet .
     Now if any of you can understand how a fund generates 16% on its investments WITHOUT bearing a huge amount of risk (Like swaps, options, futures or distressed securities) - we would worship a clear explanation.
    Until then, collect your dividends but rest assured your money is placed at VERY RISKY hands -and , your money is placed in a VERY INFLATED investment.

    And to all you guys who claim they are indifferent to the price of the fund as long as it keeps distributing its dividend - look in the mirror when this thing tanks and wipes away years and years of dividend payments in a very short time, look in your children and/or spouses eyes when they realize your net worth has shrunk dramatically and explain to them that it really doesn't matter because the fund keeps paying - but if you need the funds all of a sudden to buy a house, marry a child, pay for college or buy food , you will need the principle (capital) not the income.
    That is assuming the fund would keep paying (and it won't because it can not earn this rate over the long term).

    Consider other High Yield funds who pay about 2% lower in income BUT are much closer to their NAV.Does the extra 2% in income pay for the volatility and the risk involved in holding/buying such a risky inflated asset?

    You live by the sword and you die by the sword!

    As an aside, Joe Eqcome's articles from almost 2 years ago on Seeking Alpha state beautifully and in a very logical and articulate manner the case to short or sell if you are long PHK - his reasoning is still valid and I recommend you read him carefully.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in PHK over the next 72 hours.

    Stocks: PHK
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Comments (2)
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  • mile hi mike
    , contributor
    Comments (13) | Send Message
    Thanks for your insight on PHK
    There was talk of Pimco having large exposure to Lehman Bros. bond issues, have you heard anything about that?
    Can you steer me to anything that will show true NAV vs price?
    24 Jun 2011, 08:09 AM Reply Like
  • NYer1
    , contributor
    Comments (3071) | Send Message
    Author’s reply » I read that talk as well but don't believe it has anything to do with PHK.
    NAV is being published daily after 6PM , check ticker symbol XPHKX.
    As such one can see that PHK's NAV has been stagnating and drifting lower over the past few months and as a matter of fact is at the same level it was at around 9 months ago.
    Other Closed End HY bond funds' NAVs with a lower but more manageable distribution rate (and thus less of a premium to their NAV) have done better by 2-3-4% or more over the same period.
    I strongly believe PHK stable distribution policy is not supported by returns on its NAV and it is only a question of time before PHK collapses to closer values to its NAV as history has shown us will other cases of richly valued Closed End Funds.
    25 Jun 2011, 04:54 AM Reply Like
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