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  • Two out of Three Ain't Bad - another ROC anouncement by PHK 0 comments
    Dec 13, 2011 9:40 AM | about stocks: PHK

    On Dec. 1 2011 Pimco released another Section 19 anouncement declaring that the most recent distribution paid to holders on Dec. 1 included $0.03319 in Return of Capital (NYSE:ROC). www.allianzinvestors.com/Regulatory/Exte...
    That means that some 27.2% of the total distribution of $0.121875 returned capital to shareholders due to the fund's inability to earn enough income to fund that distribution.
    This is the second ROC anouncement in 3 months and in my view it re-affirms my assertions in my previous posts here that PHK can not and does not earn enough income to fund its stable distribution rate of $0.121875 a month.
    Over the past 3 months PHK's shareholders recieved 2 ROC payments as part of their distributions (about 18.2% of the total distributions the last 3 months were ROC) that essentially paid back to them their own capital at 100% while the fund itself has traded at premiums of close to 70% above that rate.
    Anyone who bought into PHK and paid 170%, got back 100%, anyone who got a distribution and re-invested it basically bought back PHK at 170% while using funds paid for him at 100%.

    PHK needs to earn about 20.4% a year on its current NAV of $7.16 a share (NAV low for the past 27 months or so) just to cover that outsized and outrageous distribution rate.
    Even a leveraged portfolio of very low grade High Yield bonds can not earn this much in today's environment - let alone PHK's portfolio which includes a very high allocation to investment grade paper as well as higher rated junk paper in the B to BB ratings area.
    It stands to reason that PHK has been boosting its earnings over the past few years by using leveraged derivatives like Credit Default Swaps (CDS), futures and options on a host of individual issuers, indices and macro indicators in order to prevent the distribution rate from being  cut to a more reasonable level, in line with its peers in the leveraged High Yield universe.
    As of last night PHK stands out in the 100th Percentile of its peer group for the past year, 9 months, 6 months, 3 months and 1 month based on Morningstar's analysis of its NAV's performancehttp://performance.morningstar.com/funds/cef/total-returns.action?t=PHK&region=USA&culture=en-us  - not a strong showing to justify the market's idolization of its management team (and a big part of the reason some investors insist the Huge Premium is justified).
    PHK still sports a great return for the past 3 years (I discussed how that came to pass in previous posts) but stands at the dismal 72 Percentile for the past 5 years.

    When we examine PHK's current premium of 69% to its dwindling NAV (NAV has declined steadily since the spring of 2011 - to the lowest level in 27 months or so ) - it is not hard to imagine PHK's market price performance would "catch up" with its NAV sooner rather than later.
    My strategy has not changed, keep a core short position while waiting to see a longer string of ROC announcements that would eventually FORCE PHK board of directors to reduce the distribution rate to a more reasonable rate (probably 8 to 9 cents a share per month) - thus causing the fund to collapse back to a value close to its NAV - and trade the volatility using spikes in PHK's price to short some more while covering excess positions when PHK's volatility shows its uglier side and the price drops nicely.
    I have also been hedging my short positions by being long other High Yield and Muni  closed end funds to minimize the carry cost of the short (pay for the dividends) - the hedging has been working very well as peers have outperformed PHK over the past 6-8 months handily.

    Stocks: PHK
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