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Update For Closed End Fund Basket As Of 8/27/15

During this latest stock market meltdown, I have been in my foxhole waiting for the incoming to clear before raising my head up and crawling out to forage a little in stock land.

Shortly after venturing out to nibble here and there today, the Dark Force, sometimes referred to as High Frequency Traders and assorted scoundrels, took the VIX from around 24.7 to almost 30 as the SPX gave back almost all of its early morning gains. It was just another classic episode of market manipulation allowed by the SEC and the exchanges who profit greatly from it. The Old Geezer Stock Jocks certainly understand why the youngsters view the market as one rigged Barnum and Bailey Circus show. And sometimes that wise saying from W.C. Fields comes to mind: Never Give a Sucker an Even Break (1941) - IMDb That is how these wizards and Masters of Disaster view the individual investor trying to develop a nest egg for their families.

By the end of the day, the market had recovered all of the gains lost during that program selling tsunami that started around noon C.S.T.

I had limited myself to about $5K in purchases today.

I have discussed in recent comments here entering limit orders at the ask price for two stock ETFs last Monday. Both ETFs would down about 35% even though their net asset values were probably down around 5% early Monday morning. I could not figure out why the orders were not filled and now I know. I was screwed by the stock exchange who had called a halt in trading of those ETFs. When the ETFs were then allowed to trade again, the price had moved above my limit orders."Trading in Stocks, ETFs Was Halted More Than 1,200 Times Early Monday" - WSJ


I last updated the CEF basket strategy here: Update For Closed End Fund Basket Strategy As Of 8/14/15 - South Gent | Seeking Alpha

I have a lengthy discussion of leveraged bond CEF risks in the Appendix section to the preceding linked post. I will not be repeating a discussion of those risks here.

Prior to buying a single share in a leveraged bond CEF, it is important to fully understand the risks IMO.

I view the closed end portfolio to be a balanced worldwide portfolio within a larger portfolio that includes individual stock and bond selections.

I place an emphasis on income generation and own a number of CEFs that pay monthly dividends.

I will change the weightings in the CEF portfolio based on my opinions about the balance between risks and rewards.

Over the past several months, junk bonds have performed worse than investment grade bonds, but even investment grade corporate bonds have trended down in price over the past year.

This chart compares the one year performance of the SPDR Barclays High Yield Bond ETF Fund Price Today (NYSEARCA:JNK) with the iShares Investment Grade Corporate Bond ETF (NYSEARCA:LQD)

iShares Investment Grade Corporate Bond ETF (LQD) Interactive Chart

One major negative factor for the junk bond ETFs has been the collapse in junk E & P debt.

Funds priced in USDs that own emerging market debt have been whacked by the declines in those currencies.

The following chart highlights the negative impact from the USDs parabolic rise on two USD PRICED international bond funds: SPDR Barclays International Corporate Bond ETF (NYSEARCA:IBND) and Market Vectors Emerging Markets Local Currency Bond ETF (NYSEARCA:EMLC).

The SPDR Barclays International Corporate Bond ETF does not own EM bonds; but corporate bonds issued by corporations located in developed nations.

The EM "Local currency" bond ETF owns EM debt priced in local foreign currencies which carries with it currency conversion risk (e.g. the value in USDs of a Brazilian corporate bond priced in Brazilian Reals: USD/BRL Chart). As shown in that chart, 1 USD would buy about 1.58 BRLs in June 2011 and about 3.55 now. That shows a massive decline in the value of the BRL against the USD.

In an "external currency" EM bond fund, the bonds are not priced in their respective local currencies but in USDs for the most part and sometimes Euros or even British Pounds. That can enhance credit risk when the foreign issuer has revenues in its local currency, which is falling in value against the relevant external currency. The debt frequently becomes harder to pay in those circumstances depending on the severity of the decline, the overall growth or decline in revenues, and other economic factors.

I own a few shares in a EM external debt CEF which has tanked in value and I am reinvesting the monthly dividend: Western Asset Emerging Markets Debt Fund Inc. (NYSE:ESD)

Why bother with EM debt funds? I can only stomach their volatility in small doses. Over the past 15 years or so, EM debt has been the best performing bond category for several annual periods. So I have made some money in this category-but not recently and probably not in the foreseeable near future either.

J P Morgan has a comparison chart in its latest quarterly market update. Either EM Local Currency or External Currency bonds have outperformed other categories in 5 out of the last 10 years.

EM Debt priced in USDs has been the overall best category over the past 10 years with EM Debt priced in LM currencies coming in third. That quarterly publication is worth a review for its details on just about everything. I can not link it here but it can be found and downloaded here: J.P. Morgan Funds - Guide to the Markets

The discounts to net asset values for leveraged bond CEFs have continued to expand far beyond their respective 3 and 5 year averages.

I have some examples of that discount expansion using numbers from 8/26/15. I will include a few that I own to show how the discount expansions have added to the overall decline in market values.

Current Discount/Average 5 Year Discount:

GDO: -14.26% / -7.21%

ERC: -17% / -8.91%

FAX: -18.63%/ -5.66%

BHK: -11.88%/ -6.77%

FAM: - 18.52%/ -5.82%

Sourced: CEF Connect

Except for BHK, the other funds own to varying decrees foreign bonds. The First Trust/Aberdeen Global Opportunity Income Fund (NYSE:FAM) owns only foreign bonds with a significant EM exposure: SEC Filed Shareholder Report Period Ending 3/31/15 FAM has been a horrific performer as a consequence. My position in that CEF is insignificant; and I may even add 50 shares at some point later this year, thinking that maybe it can not get much worse than the already horrific performance numbers.

I would add that even the 5 year average discount numbers have been juiced by the above average discount numbers for the past two years. Individuals investing in bond CEFs apparently never recovered from the trauma inflicted by these securities in 2013.

This basket is currently weighted in bond CEFs. That may change with a continued decline in stocks:

The bond weighting was a drag today as bond funds had a very subdued day. I have a significant weighting in this portfolio in the Swiss Helvetia fund that barely budged as Swiss stocks gain only fractionally:

TLT: $122.00 +0.07 (+0.06%)

LQD: $115.14 +0.11 (+0.10%)

JNK: $36.97 +0.21 (+0.57%)

S & P 500 1,987.66 +47.15 (+2.43%)

EWL: $32.13 +0.10 (+0.31%): iShares MSCI Switzerland Capped ETF

EM local currency bond ETFs outperformed other categories:

EMLC: $17.94 +0.15 (+0.84%): Market Vectors Emerging Markets Local Currency Bond ETF

EBND: $25.12 +0.26 (+1.05%): SPDR Barclays Emerging Markets Local Currency Bond ETF

An ETF that owns EM debt priced in USDs is the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEARCA:EMB). That was the best category:

EMB: $107.88 +1.54 (+1.45%)

1. Added 50 GDO at $16.19: GDO is a leveraged CEF that owns global bonds.

Quote: Western Asset Global Corp Defined Opportunity Fund (NYSE:GDO)

This purchase brings my share count up to 1075+ shares held in two accounts. One of those accounts is a ROTH IRA.

The current dividend is paid monthly at $.1125 per share or $1.35 annually. Assuming a continuation of that penny rate and a $16.19 per share total cost, the dividend yield is about 8.34%.

Last Ex Dividend Date: 8/19/15

Legg Mason Partners Fund Advisor, LLC Announces Distributions for Certain Closed End Funds Pursuant to their Managed Distribution Policy

The 1075 currently shares would generate $1,451.25 annually assuming a continuation of that penny rate which is in no way assured.

In fact, the sponsor cut the penny rate to $.1125 from $.116 last August to better align the payout with income generation.

I am reinvesting the dividend and will likely continue doing so for as long as the discount exceeds both the 3 and 5 year average discounts. The actual annual dividend amount will increase through that dividend reinvestment.

Snapshot of Trade:

Data From Date of Trade (8/27/15):

Closing Net Asset Value Per Share: $18.98

Closing Market Price: $16.24

Discount at MP of $16.24: -14.44%

Average Discounts as of 8/26:

1 Year: - 10.91%

3 Years: - 8.62%

5 Years: - 7.21%

Sourced: CEFConnect

GDO Page at Morningstar (rated 5 stars, no analyst coverage)

The Western Asset Global Corp Defined Opportunity Fund (GDO) is a leveraged world closed end bond fund. GDO will liquidate on or about 12/2/2024.

I would anticipate that the discount will shrink as the liquidation date approaches, but there is no way to know now what the net asset value per share will be in 2023 and 2024. Shrink from what number?

Some bonds that have fallen in value below par value may recover and pay off at maturity. Others bought at a premium to par by the fund will lose that premium on the maturity date. Some bonds may default or be called early by the issuer at a premium price. Interest rates may be above where they are now that would permit the fund to reinvest the proceeds of maturing bonds into shorter term ones with higher YTMs bought at discounts to par value, and a large number of other permutations of that kind of scenario. When looking at the fund's portfolio, the investor will see a number of bonds maturing in the 2017 to 2020 time frame.

Last SEC Filed Shareholder Report: Western Asset Global Corporate Defined Opportunity Fund Inc.

This gives the fund one of the characteristics of an individual bond, the promise to return an investor's money at a time certain.

However, unlike an individual bond, there is no promise to pay a fixed sum (i.e. par value). The investor in GDO will simply receive their pro-rata share of the liquidation proceeds, which may be more or less than the current net asset value per share. The current discount to net asset value does provide some cushion in the event I elect to hold until the liquidation date.

Credit Quality: While the fund is weighted in investment grade bonds, it has a substantial exposure to junk rated securities, mostly rated BB or B. The fund may invest up to 35% in fixed income securities rated below investment grade.

I would emphasize the duration number of 4.42 years and the weighting being in B to BBB rated bonds with a decent allocation to "A" or better. With junk bonds being under pressure for the past year, the junk weighting has probably been a drag on overall performance.

Duration | Vanguard

Blackrock Understand Duration in Bond CEFs

Duration-What an Interest Rate Hike Could Do to Your Bond Portfolio |

GDO's discount to net asset value per share was -4.13% on 5/14/13 and had increased to -10.46% by 12/31/13. The ten year treasury closed out 2013 at a 3.04% yield, up from 1.66% as of 5/1/13. Daily Treasury Yield Curve Rates The rise in rates would cause the bonds owned by GDO to decline in value.

The increase in the discount accompanied by a decline in the NAV per share is what I call the Double Whammy. The Twofer is when the discount narrows after the purchase as the NAV per share increases. The Twofer has been hard to realize since May 2013.

Even though rates have declined during 2014 with the ten year closing that year at 2.17%, the discounts for bond CEFs remained at late 2013 levels. GDO closed at a -10.71% discount to its net asset value per share on 12/30/14, higher than the 12/31/13 discount. The discount did fall slightly the next day to -9.79%. By 2/2/2015, the ten year treasury had fallen to a 1.68% yield and GDO closed that day at a -10.82% discount.

The fund is leveraged using reverse repurchase agreements. The weighted average interest rate was .76% for the six months ending 4/30/15.

This fund owns bonds priced in foreign currencies which exposes it to currency risk. The fund does do some hedging of that risk.

Last SEC Filed Shareholder Report: Western Asset Global Corporate Defined Opportunity Fund Inc. (Period ending 4/30/15; no ROC support for dividends paid in 2014, 2012, 2011, and 2010 with 1 cent ROC in 2013, see page 23; net realized gain for six months was reported at $10.435+M at page 21 and that was due to foreign currency transactions at page 20 which may come from currency hedges; unrealized gain at $10+M)

My last purchase was discussed here: Closed End Bond Funds: Added 100 GDO At $17.79 - South Gent | Seeking Alpha

2. Added 50 BTZ ROTH IRA at $12.4:

Snapshot of Trade:

Closing Price Day of Trade: BTZ: $12.41 -0.03 (-0.24%): BlackRock Credit Allocation Inc

Net asset value per share increased by 3 cents per share from the prior trading day. Consequently, the discount widened from -14.38% to -14.77%.

Recent Sells: Item # 2 Sold 100 of 520+ BTZ at $13.65 (3/28/15 Post); Item # 8 Sold IRA: 210+BTZ at $13.62 (3/17/14 Post); Item # 4 Sold 361+BTZ at $13.45-Taxable Account (10/21/14 Post) (profit snapshot=+116.91) Snapshots of earlier profits, totaling $413.8, can be found in Item # 3 Added 50 BTZ at $12.35 (8/31/13 Post)(discount then at -14.87%)

Total Net Realized Gains to Date: $530.71

Data on Date of Trade:

Closing Net Asset Value Per Share: $14.56

Closing Market Price: $12.41

Discount: -14.77%

Average Discounts:

1 Year: -12.68%

3 Years: 11.59%

5 Years: 11.37%

I last discussed this CEF here: Added 100 Of The Leveraged Bond CEF BlackRock Credit Allocation Income Trust (NYSE:BTZ) At $13.25-Roth IRA - South Gent | Seeking Alpha

CEFConnect Page for BTZ

Sponsor's Website: Credit Allocation Income Trust-BTZ

Effective Duration as of 7/31/15: 5.75 years; Bond Fund Duration-Impact of Interest Rate Changes- Vanguard

Dividend: Paid Monthly at the Current Rate of $.0805 per share

Dividend Yield at a Total Cost Per Share of $12.4= 7.79%

Last Monthly Ex Dividend Date: 8/12

Credit Quality:

Close on 8/27/15: BTZ: 12.26 +0.06 (+0.49%); NAV at $14.41-Discount at -14.92% (NAV rose from $14.34 on 8/26/15)

3. Averaged Down Roth IRA: Added 50 THQ at $18.65

In the Roth IRA, I had recently bought 50 shares THQ at $19.81 and another 100 shares in a taxable account. I discussed those recent purchases in my last CEF update.

The market declined over 3% on the day that I bought this odd lot. The shares continued to plummet last Monday closing at $17.71 and at $17.65 last Tuesday. THQ Historical Prices The price has recovered some since that swan dive, closing at $18.31 today (8/27/15)

Trade Snapshot:

Closing Price 8/21/15: THQ: $18.70 -0.46 (-2.40%)

THQ has closed at $19.67 on 8/19/15. THQ Historical Prices

On 8/18/15, this CEF went ex dividend for its monthly distribution of $.113 per share. I will receive that dividend on the first 150 shares bought.

This CEF is supporting its monthly dividend distribution through realized capital gains. When and if those dry up, the dividend will have to reduced or significantly supported with a return of capital.

Data From Date of Trade:

Closing Market Price: $18.7

Closing Net Asset Value Per Share: $20.59

Discount: -9.18

Average Discount:

1 Year: -5.8%

There is no 3 or 5 year data since THQ is a new fund.

Sourced: CEFConnect

8/21/15 Price Action of Some Major Holdings As of 3/31/15:

GILD: 105.33 -7.06 (-6.28%)

BIIB: 295.64 -14.26 (-4.60%)

CELG: 119.05 -5.91 (-4.73%)

BAX: 38.28 -1.33 (-3.36%)

VTR: 59.60 -0.95 (-1.57%)

Earlier that day, I noted that the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) was close to unchanged. In fact it had risen to a high of $353.74, exceeding its prior day's closing price of $350.92. As the day wore on, and the frenzied selling picked up, IBB closed down $10.98 or -3.13% and only four cents above its intra-day low of $339.8.

8/27/15: IBB: $350.91 +9.16 (+2.68%)

THQ closed today with a net asset value per share at $20.75 and a discount of -11.76% based on a closing market price of $18.31. So the NAV per share closed higher today than when I purchased at $18.65 and the market price is lower. The discount has expanded from -9.18 (8/21) to -11.76% (8/27/15). Welcome to CEF land!

Since I recently discussed this CEF, I have nothing further to add to my prior discussion contained in the last CEF update and my comments to that post.

4. Added 50 RMT at $8.05: This was another purchase made today.

Trade Snapshot:

Quote: Royce Micro-Cap Trust (NYSE:RMT)

I discussed buying a 100 share in this recent Update: Update On Closed End Fund Basket Strategy As Of 7/28/15 - South Gent | Seeking Alpha

That buy at $8.63 was made when the discount had expanded t0 -15.39% with the 3 year average discount then at -11.62%.

Small caps will generally tank more the S & P 500 during market meltdowns. I did not see RMT's collapse last Monday to an intra-day low of $7.5: RMT Historical Prices

This last odd lot buy reduced my average cost per share to $8.55.

I liquidated RMT during 2014, realizing a share capital gain of $2,207.79 in addition to the dividend payments. Some of the dividends were taken in cash.

Item # 2 Sold 433+ RMT at $12.76-Average Cost Per Share $7.91 (snapshot of profit=+$2,057.88 including profits for all shares bought with reinvested dividends)

Earlier in 2014, I sold 126 RMT shares bought only with dividends and realized a $149.91 profit on those shares. Item # 6 Sold Taxable Account: 126 RMT at $12.6 (7/12/14 Post)

I will frequently harvest profits in shares bought with dividends in order to improve the dividend yield of those distributions. Many investors may prefer to leave matters alone.

Snapshots of my recent RMT trading history can be found in the Appendix to that prior Update.

I thought that small caps were overpriced when I liquidated RMT last year, and the market apparently came around to that opinion. I liquidated my position on 12/5/14. The total return from 12/4/14 through the close on 8/27/15 was -19.98% with the dividends paid in cash. DRIP Returns Calculator

The total return annualized return was 32.06% between 3/9/2009 through 12/5/14. Just to emphasize a point, a large part of that excellent return was just making up the loss suffered in 2008.

{The Lord Giveth, and the Lord Taketh Away, Job 1:21. And see Ecclesiastes 3 as wells;and for those heathens who do not have a bible as well as the card carrying members of the Twitter Generation who do not read anything more than 140 words, the stock market wisdom embodied in ECC3 can be received simply by listening to The Byrds rendition of Pete Seeger's lyrics that coped those bible verses}

RMT Dividend History

Royce Micro Cap Trust (RMT) Total Returns (e.g.: down 46.1% in 2008 and up 50.14% in 2013: those number highlight both potential risk and rewards)

SEC Filings for Royce Micro-Cap Trust

Data as of 8/27/15:

Closing Market Price: $8.07

Closing Net Asset Value Per Share: $9.55

Discount: -15.5

CEFConnect Page for RMT

Rationale: U.S. small caps are U.S. centric businesses that generally thrive or decline with the U.S. economy that is doing much better than the foreign ones. The correction in price since I liquidated my position makes this CEF slightly more attractive. I will be reinvesting the dividend for as long as the discount remains above 10%.


A. GDO Round Trip Trades:

I would note that my last purchase price was significantly below all of the purchases listed below and all of those shares have been sold at higher prices.

Item # 1 Bought 100 of the CEF GDO at $18.6 March 2010; Bought 70 of the CEF GDO in Regular IRA at $18.61 March 2010; Bought 200 of the CEF GDO at 18.63 and 18.53 (100 in Roth and 100 Taxable Account respectively) March 2010; Bought 200 of the CEF GDO at 18.63 and 18.53 (100 in Roth and 100 Taxable Account respectively) March 2010; Bought 100 GDO at $18.57 April 2010; Bought Back 50 shares of GDO at 17.8 in the Roth IRA previously sold at $19.24 December 2010; Bought 100 Shares of GDO at $18.9 November 2012; Item # 7 Bought 100 GDO at $17.79-Regular IRA (11/14/13 Post); Item # 7 Bought: 50 GDO at $18.03 (11/19/13 Post);

Sold 100 GDO at $18.72 January 2012; Item # 2 Sold 200 GDO at $19.18 June 2012; Item # 1 Sold Remaining GDO in Taxable Account at $19.69 July 2012; Sold 100 GDO at $20.79 December 2012; Item # 4 Sold 120 GDO at $20.73 (February 2013);

Item # 2 Sold 102+ GDO at $18.79-Regular IRA (July 2014)(some snapshots of realized GDO trading gains totaling $701.62 can be found in that July 2014 post)

My current unrealized loss in GDO exceeds my prior realized gains by about $900. I am however near break-even with the dividends.

Disclaimer: I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals and situational risks. I can only make that kind of assessment for myself and family members.

Disclosure: I am/we are long GDO, THQ, BTZ, RMT.