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  • Is BKN Worth The 3.1% PREMIUM Over NAV? In Short: NO !!

    Muni Closed End Funds (NYSEMKT:CEF) have rallied nicely from the tax selling before the end of 2013 during December.

    Some funds had been trading at discount to their Net Asset Values (NYSE:NAV) of around 10%, which is quite higher than the long term average.

    Many of the funds we saw trading at premium to NAV until the summer of 2013 turned south during the summer months and reversed course to end the year with a very steep NEGATIVE total return, spooked by the general malaise in the fixed income market following the Fed's infamous "Taper Tantrum" as well as some negative headlines emanating from Detroit and more importantly Puerto Rico (PR).

    December enabled investor to grab Muni CEF at yields in excess of 7% (TAX FREE) and as a bonus, to get them at very high historical discounts to their NAV.

    While some funds still trade at discounts to their NAV's (admittedly, smaller ones but still in excess of 5% discount), other funds, that were mentioned in publications and interviews like this one : blogs.barrons.com/focusonfunds/2013/12/17/kass-likes-muni-cefs-attractive-upside-and-limited-downside/, enjoyed a terrific rally that pushed them from undervalued terrain all the way to over-valued valuation with market prices exceeding NAV's handsomely.

    Herein lies the conundrum; BKN is one of those funds and my research tells me there is no fundamental reason for it to differ from other funds in the same arena managed by Blackrock, and for that matter, other funds managed by other well known and respectable fund management companies (Nuveen, Eaton Vance, Invesco etc.).

    At yesterday's close BKN was at a 3.15% PREMIUM to its NAV while yielding about 6.52%.

    Looking at its average valuation of the past 3 and 5 years BKN has been trading at Premiums of 2.35% and 2.02% on average, respectively.

    Looking at a few of the other Blackrock managed funds like BYM,MHD,MQT,BTA just to name a few we see a very stark difference in relative valuations vs. BKN:

    All of these funds (and many more by other managers, the list is too long to place here, but a screen of CEF will uncover those opportunities) offer much better fundamentals than BKN:

    1) Higher dividend payouts , to the tune of 7%-7.15% (vs. just 6.52% in BKN)

    2) Better pricing - those funds (and again, many others) trade at significant discounts to their NAV's to the tune of 5.5% to 7.7% DISCOUNTS.

    3) Much better relative valuations : While BKN trades ABOVE its 3 and 5 years average valuation, these funds trade WELL BELOW their 3 and 5 year average valuations to the tune of anywhere from 4% to 6.5% BELOW their average valuation.

    To sum it up - one can get about 0.60% better yield AND about 8.6% to 10..8% difference in Premium vs. Discount AND about 5% to 7.5% in Relative valuation by selling BKN and swapping into other Muni CEF's that are much more reasonably valued and would provide a much better return going forward should reversion to the mean occurs.

    The best part is that you are not changing even fund managers by staying with Blackrock managed funds (although you can choose other fund families with similar superior characteristics as well)

    Disclosure: I am short BKN.

    Additional disclosure: I am long a host of Muni CEF's some of which were highlighted in this post.

    Jan 14 3:57 PM | Link | 1 Comment
  • BKN-From Undervalued To Overvalued In One Week- Time To Sell And Swap To Better Values

    BKN was mentioned in a 12/17/13 Blogpost in Barron's as one of a few Closed End Funds (NYSEMKT:CEF) favored by Douglas Kass from Seabreeze Partners.blogs.barrons.com/focusonfunds/2013/12/17/kass-likes-muni-cefs-attractive-upside-and-limited-downside/

    I totally agree with the premises cited in that blogpost as I d believe the muni market has been pressed lower by a myriad of factors from general weakness in the bond market to headline negative news emanating from Detroit and Puerto Rico coupled with some tax selling due to a very weak year.

    However, in the course of the past weak, BNK has soared from a DISCOUNT of 8.48% on 12/16/13 to a PREMIUM of 4.15% at the close today completing a huge 13.13% rally in the course of just one week.

    Paradoxically enough the NAV on BKN has actually gone DOWN over the past week by 5 cents to $13.99.

    The current 4.15% premium is higher than the average premium of the past 5 years which stands at 1.87%.

    Thus, I look at this move as an extreme reaction to the above mentioned post and Mr. Kass' observations and believe a swap opportunity exists here to go out of BKN and into other Muni CEF's who are still trading at attractive DISCOUNTS both on an absolute level as well as on a relative level vs. their 5 year average.

    A few of the names that come to mind are BYM, NAD and VGM.

    There are other funds that can serve that purpose as well giving you higher yields with better valuation vs. BKN.

    This scenario presents two courses of action:

    1) For BKN holders : SELL BKN and buy a different discounted CEF

    2) For arbitrageurs : Sell short BKN and buy a different discounted CEF

    I believe the above strategies would do well over the next few months as people (perhaps even Mr. Kass himself) would realize that BKN does not present a good value anymore , especially compared to other funds who yield higher yields and are attractively discounted vs. their NAV's.

    Disclosure: I am short BKN.

    Dec 25 3:41 AM | Link | Comment!
  • TOTAL RETURN DESTRUCTION BY PREMIUM - The PHK TEST CASE!

    Since PHK zoomed to unrealistic (as well as un-sustainable premiums) some 3 years ago , the choir on the Yahoo Message Board, as well as a few members here on Seeking Alpha, has insisted PHK is a great investment.
    This has been a MYTH over the past 3 years and can clearly be shown by looking at comparable total returns of alternative funds across several different asset classes (not just within the HY arena).
    Below are a few data points of total return performance - I even included JNK which is not using ANY leverage to drive the point home.
    The after tax performance of ALL CEF's mentioned below is even BETTER vs. PHK's because a big part of their total return has been by capital appreciation which is subject to a MUCH LOWER tax rate than the ordinary income the PHK distributions are subject to (no capital appreciation for PHK over the past 3 years - again, it's the PREMIUM to NAV!).
    To add insult to injury take a look at the total returns of TAX FREE muni bond CEF's over the same time frames.
    We are talkig TAX FREE INCOME here (worth perhaps 65% to 70% more than taxable income to people at high tax brackets) - with some capital appreciation as well.
    Drum roll please....:

    1 YEAR :
    PHK + 4.67%
    JNK + 15.60 % - UN-LEVERAGED HY ETF!
    FHY + 24.17% - Leveraged HY fund that pays what it earns and was at a nice discount 3 years ago.
    JQC +35.16% - MUCH more conservative portfolio with hardly any duration risk vs. PHK!
    ERC + 18.79% - Diversified bond fund with about HALF the volatility of PHK!
    NAD +21.31% - National TAX FREE CEF, yes TAX FREEINCOME + capital appreciation.
    NXK +17.51% - NY RAX FREE CEF, yes, TRIPLE TAX FREE INCOME for NY residents!

    18 months:
    PHK +8.12%
    JNK +15.68%
    FHY +24.60%
    JQC +24.29%
    ERC +16.71%
    NAD +36.30%
    NXK +29.75%

    2 YEARS:
    PHK +13.54%
    JNK +20.77%
    FHY +46.15%
    JQC +35.57%
    ERC +24.15%
    NAD +42.58%
    NXK +37%

    30 months:
    PHK +32.63%
    JNK +34.51% (no leverage here, remember?)
    FHY +61.32%
    JQC +58.11%
    ERC +35.51%
    NAD +37.36%
    NXK +31.68% (seems like in line with PHK right? Now try and figure out what was the AFTER TAX return on both funds!)

    3 YEARS:
    PHK 40.96%
    JNK +37.60%
    FHY +68.98%
    JQC +75.22%
    ERC +42.67%
    NAD +48.83% (TAX FREE INCOME)
    NXK _43.05% (TAX FREE INCOME)

    Now, why would a fund that pays such a high distribution LAG so badly other CEF's from all different sectors, all the while being managed by such a hot shot manager?
    Drum roll again please.......:
    IT"S THE PREMIUM!!!

    Disclosure: I am short PHK.

    Dec 12 7:45 PM | Link | Comment!
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