Pinocchio is the title of a children’s fantasy novel by Carlo Collodi, the pen name of Carlo Lorenzini, a Florentine author who lived during the 19th century. The main character, Pinocchio, is a marionette who gains wisdom through a series of misadventures that lead him to becoming a real human as the reward for his good deeds. Originally published in a serial form between 1881 and 1882, the book has been translated into as many as 260 languages worldwide, thus reaching every corner of the earth.
Nearly everyone knows the adventures of Pinocchio, also thanks to the Disney film version, which have become as proverbial as the characters that accompany him; from the Talking Cricket to the Fox and the Cat, from the Turquoise-haired Fairy to the Fire-Eater, from Geppetto to Candlewick. These are characters we loved in our childhood and whose teachings stay with us throughout our lives.
There is one passage in the book that is personally dear to me because it is linked to the memory of my father. In the sixteenth chapter, the Turquoise-haired Fairy recovers the body of poor Pinocchio from an ambush and hanging by the Fox and Cat. The Fairy puts him to bed and calls three doctors to find out whether he is dead or alive. The three doctors are a Crow, an Owl and the Talking Cricket.
The Crow, stepping forward first, feels Pinocchio’s pulse, then his nose and finally his little toe. After feeling these, he solemnly utters these words: “To my mind, this Marionette is dead and gone; but if, by any evil chance, he were not, then that would be a sure sign that he is still alive!”
“’I am sorry,’ said the Owl, ‘to have to contradict the Crow, my famous friend and colleague. To my mind this Marionette is alive; but if, by any evil chance, he were not, then that would be a sure sign that he is wholly dead!’”
As a child, whenever I was sick, my father invariably pronounced aloud the two opposing diagnoses of the Crow and the Owl, and then left me in bed while walking away laughing.
Today I still seem to hear my father laughing heartily behind my back when I read forecasts of economic and financial market trends amid pronouncements of imminent recessions, unstoppable collapses, or on how to secure one’s savings by selling everything before it’s too late.
“The Marionette is dead and gone; but if, by any evil chance, he were not, then that would be a sure sign that he is still alive…” Crows, owls and talking crickets have been competing for months to diagnose the market’s imminent demise, as in the case of poor Pinocchio, and in the meantime many stocks have silently risen, temporarily recovering from lows.
Even the dollar, despite various “Cassandras” announcing its imminent and inexorable end, has slowly climbed to 20-year highs against the euro. A recent Financial Times article, dated August 28, announced that “A post-dollar world is coming.” So, as I am expecting to see the dollars in my account evaporate, I took the opportunity in August to do a healthy reset of my portfolio by getting rid of some of the ballast accumulated over the past few years.
The reset I am talking about involves some positions in my two secondary portfolios, Giotto and Masaccio. The former consisting of ETFs and ETNs, the latter being a “tactical” portfolio with a mixture of BDCs and some CEFs. As a tactical portfolio, I decided to use Masaccio as needed; for example, to offset any losses on other positions or losses suffered in prior years.
In August I made the decision to get rid of all three ETNs in Giotto, namely:
I also decided to sell the stock of SuRo Capital Corp (SSSS), which was in Masaccio.
I used the gains from the following securities to close the accounts at breakeven and even managed to make a small profit.
The following sections describe the decisions I made during this reset.
Several times, in previous articles, I have pointed out that (according to the Italian tax system) the presence of GLDI, SLVO, and USOI in my Giotto portfolio was aimed solely and exclusively at using their dividends to avail myself of prior losses. In fact, I was aware that all three of these ETNs were not horses to bet on for a long ride.
The following graph shows their performance since launch.
This is a screenshot from the Morningstar website that illustrates the comparative trend of all three securities. As you can see, at the end of August 2022, GLDI’s loss was around 63%, while SLVO and USOI were down over 80% from their launch price. These numbers say a lot about the performance of all three ETNs over the years.
I bought these ETNs in the summer of 2020, at a time when all three were more or less in a sideways phase, because I figured they might come in handy for the purpose I explained. Having exploited this intent, I thought the time had come to liquidate them without waiting for further declines that might have made their losses unacceptable.
The following table shows the differentials between load and market prices at the moment I decided to sell them.
The rise of the dollar’s exchange rate from the time of purchase mitigated these losses. In the case of USOI, it even allowed me to close the trade with a good gain.
In addition to these three ETNs, I also decided to sell SSSS (from Masaccio Portfolio,) which is suffering greatly at the moment, as can be seen from the following graph of its performance.
Next, I decided to liquidate AB, ARCC, CCAP and GDV:CA. These were all stocks in my Masaccio portfolio that gained, overall, from the time of purchase, also thanks to the rise of dollar.
The following table shows the final gain/loss from these five names at the time I liquidated them.
Of course, the weights were different from one to another, but the capital growth plus the dollar’s rise in the exchange rate against the euro allowed me the margin to close the trade at a profit.
The reason I decided to liquidate AB, ARCC, CCAP and GDV:CA, as a sacrifice to “clean up” the portfolio, is mainly a fiscal one.
For a foreigner, in fact, the US tax rate on AB is 37%: added to this is the 26% Italian tax on the so-called “net frontier,” which brings the total levy on its dividend to 53.38%! On ARCC and CCAP the total levy on dividends for an Italian investor is 37.10%, while on GDV:CA it reaches 44.5%. So I held them in my portfolio as long as it was convenient for me, and then I set up this reset operation.
I don’t know if I’ll buy these names again, despite the very high tax levy. Most of all I like ARCC, because of its long track record, and CCAP, because of both its performance and the steep discount to NAV. In case their price goes down, I will decide what to do.
In any case, one thing I would like to emphasize is my absolute lack of malice in carrying out this operation. Cleaning up the portfolio and starting again with a selection of more solid, balanced, and compelling names was an end in itself, even though some of them still limp along.
I have no ambition to time the market, as well as I am not interested in beating any benchmarks or jumping in and out of the market like a flea.
Let’s examine the new composition of my entire portfolio after being “lightened” by the removal of 8 names.
The Cupolone Income Portfolio (named after Brunelleschi’s Florentine dome) is my strategic, primary investment portfolio. It contains the following sixteen CEFs and is unchanged since my last article.
The Giotto Income Portfolio (named after the fourteenth-century Florentine painter and architect) currently includes the following four ETFs that adopt a covered-call strategy.
The Masaccio Income Portfolio (named in honor of the Florentine painter who initiated the Renaissance) remains a small “tactical” portfolio that today contains only two CEFs, one of which, RVT, has quarterly distributions.
With the cash generated from the sale of the 8 names I increased my positions in JEPI, QYLD, RYLD and XYLD on the one hand, and those in RVT and XFLT on the other; all at a lower price than my load price. No buying on the “historical” CEFs in Cupolone Income Portfolio because I don’t like to mediate upward, and I avoid doing that if possible.
I am happy with the choices I made and with the current composition of my portfolio. It now has 22 securities with a total return of 9.56% (for the load prices and return of each security please refer to the article “My 10% Income Portfolio–Yield on Cost”). Nevertheless, there are some weaknesses in all my three income portfolios.
CGO is a CEF whose investment sector is Global Allocation. The top ten stocks in the fund include Microsoft (MSFT), Alphabet (GOOG) (GOOGL), Apple (AAPL), Amazon (AMZN), Coca-Cola (KO) and Bank of America (BAC). Even though its loss since launch amounts to more than 25 percent, I have no particular reason to be concerned at the moment and remain confident about the reasons that prompted me to include it in my portfolio at the time.
As for the four fixed-income funds (GOF and the three PIMCO ones) in Cupolone, I reaffirm my confidence in their management. Although, I see the positions of GOF and PDI as shaky given their double-digit distributions that seem to me increasingly untenable in the current market environment. We shall see. With GOF, I have reduced my position a great deal but have no reason to liquidate it altogether.
Two GlobalX ETFs, QYLD and RYLD, show trends similar to CGO.
Launched at the end of 2013, QYLD tracks an index that holds NASDAQ 100 stocks and sells call options on those stocks to earn income. As we can see, its trend is downward, and 2022 has certainly not been kind to it, given also the very sharp decline in its benchmark index. I continue to have confidence in this ETF, despite the dissenting opinions of so many authors, even here on SA, who, much like Pinocchio’s doctors, dispute the diagnosis for this name.
The latest to launch of the Global X covered call funds, RYLD applies the covered call strategy to the Russell 2000 Index. After the market collapse of March 2020, RYLD promptly recovered and today is suffering from the overall market performance. Again, I have confidence in its future and long-term recovery.
XFLT is a CEF focused on CLO debt and CLO equity. Even though its loss since launch amounts to almost 30 percent, its well regarded management makes me confident at the moment on the future prospects for this fund.
How to conclude? I am no longer used to making “reckless” trades to disassemble, reassemble or rebalance the names in my portfolio, but I must admit that in this case I am very satisfied. I devoted the entire month of August to planning a way out of the four securities in my portfolio that were worse off. And in the end, I managed to find balance, moreover making a profit (also abetted by the rise of the dollar).
I currently have 22 securities that, overall, I continue to believe in. And, if I can, I will increase some positions should the opportunity arise. As always, I am in no hurry. If this should occur in the near term, all the better, although the euro/dollar exchange rate right now would not be favorable to me; if the euro were to rise, I would immediately go into a loss.
Regarding everything else (markets, inflation, Fed, recession risks, energy crisis, Ukraine, etc.), I harken back to what the Talking Cricket said when asked by the Fairy: “I say that a wise doctor, when he does not know what he is talking about, should know enough to keep his mouth shut.”
This article was written by
Disclosure: I/we have a beneficial long position in the shares of BST,CCD,CGO,EOS,ETO,EVT,GOF,HTD,PCN,PDI,PDT,PTY,RQI,SPE,UTF,UTG,JEPI,QYLD,RYLD,XYLD,RVT,XFLT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.