1. REVISED CLOSED END FUNDS TABLE-MORE ABOUT EOI AND ETW: I have added a few names to the CEF table since I last copied it, so I have the new information in the preceding table. The two new CEFs increase my exposure to Asia and Latin America. I have not entered the cost information for these CEF positions, because there is just too much of it to bother with figuring out an average weighted cost number or to enter all of the purchases. My brokerage firm keeps track of it, including the gains and losses on reinvested dividends.
ETW and EOI went ex dividend earlier in the week. ETW pays quarterly and EOI monthly. Both are selling as of the close yesterday at small premiums to their net asset values. Eaton Vance Investment Managers - Closed-End Funds Consequently both of those CEFs are certainly not candidates for additional buys, and I have also stopped reinvesting dividends for both of them. The general strategy for CEFs is to sell or trim them when there is a significant narrowing of the discount, or a movement into a premium price. This has now happened for both of these CEFs.
ETW is already in the doghouse with unacceptably large return of capital distributions, and could be sold at any time now. I view a dividend supported in significant part by a return of capital unfavorably.
A return of capital is a dividend illusion. For ETW, the classification of significant portion of the dividends paid in both 2008 and 2009 as returns of capital creates in my view an artificial gain, in that the cost basis adjustment for my position just adds to my capital gains tax liability when I decide to sell the remaining shares. That is the main consideration for keeping ETW now, its sell would create an artificially large gain.
I am currently reinvesting dividends only for ADX, SWZ, and JQC. For some positions, I have never reinvested the dividends, using them as cash flow generators. I have stopped reinvesting others due in part to the narrowing of the discount to net asset value.
I have also just figured out, literally at 6:30 A.M. this morning, that my brokerage company has been adjusting my tax basis to reflect returns of capital. I am very grateful for that service which will at least save me some grunt work in the future. Unfortunately, this also means that I have overpaid my taxes by a few hundred dollars in prior years since I started to use this particular brokerage firm. In effect, I have made the adjustment twice for the tax years 2006-2008 thereby increasing my tax liability. LB is in the penalty box-big time- this morning for failing to catch that the adjustment had already been made by the broker.
2. Sold LTs LNDC and LQF and Bought 75 of the CEF LDF (see Disclaimer): This is what happens when the Old Geezer is at the helm of the trading desk. Possibly, Headknocker needs to bring the RB back as the HT. LB did not say that. The LB does its best to explain the reasons given by the OG for his trades, even though those reasons given by that addled, rattled and aged brain often defy the structure or logic comprehensible to the LB.
These three trades were called an exchange by the Old Geezer. He was buying what amounts to a lottery ticket CEF and funding some of the cost with the proceeds realized from two LT sales. What can the LB say about that, except that it makes no sense. How did the OG select 75 shares and not a 100 or 200, the LB inquired, and will not repeat the answer since it is too embarrassing for the LB. In fact, LB wants to emphasize again that the OG is an embarrassment to the LB, somehow, someway, the LB wished the Lord would dissociate it from that Old Goat, send him back to the Old Folks home to play checkers and engage in that philosophizing babble.
LNDC was bought at at $6.2. I did check the earnings estimates. The consensus is 31 cents in the F/Y ending May 2010 and 39 cents for F/Y 2011. I sold the shares at $7.37 or close to 19 times the F/Y 2011 estimate and 23.77 times this year's estimate.
For Lions Gate, the OG just got tired of it. Icahn is offering $6 for the entire company and I sold my 50 shares at $5.92.
For Lions Gate, the OG just got tired of it. Icahn is offering $6 for the entire company and I sold my 50 shares at $5.92.
The quasi-LT bought in their place was a CEF called the Latin American Discovery Fund. It is discussed some in this article. When the words Latin America and investment are mentioned together, it does cause the OG to cringe, a few goose bumps form, a chill runs through the lean body causing the OG's hand to tremble, the addled brain is filled with anxiety, and most important of all, a glaring motion picture appears of Hugo Chavez giving one of his four hour sermons. The OG has a long history, sort of like that Richard guy on "Lost", and remembers the many occasions where gringos were singed buying bonds or stocks in that area of the world. Nonetheless, after reviewing my CEF portfolio, I was underweighted L.A. and decided to increase my exposure a tad with a 75 share purchase of this Morgan Stanley CEF at $17. Given the volatility and risk, OG is placing this 75 shares in the 2010 Speculative Strategy.
The MS web page with NAV information is the same as APF. Daily Prices - United States : Individual Investor - Morgan Stanley Investment Management The close on the 22nd was $16.88 with a $18.19 net asset value. That is the only information available to me at the time of the trade yesterday. The discount to NAV at the close on March 22 was therefore 7.2%. The WSJ does have this one listed in the "World Equity" section of its closed end fund data section. This shows that the NAV as of the 23rd increased to $18.41 from the prior closing net asset value of 18.19. The market close yesterday was $17.06. So the discount as of yesterday's close rose slightly to 7.33%.
The net expense ratio is 1.34% : Fund Details The fund details at the CEF association web site can be found at CEFA. This one will be very volatile. It was up almost 100% the past year.
Shareholder reports can be found at the MS web page referenced above or at the SEC. Here is the link to the last filed report with the SEC: www.sec.gov There is a large concentration of stocks in Brazil with a 70.8% weight as of 12/31/2009. The next highest is the 19.4% weighting in Mexico.
3. VOLATILITY INDEXES: The volatility indexes for the DJIA, the Nasdaq 100 and the S & P 500 are moving comfortably below 20 now. The Nasdaq volatility index, ^VXN , is showing what I would characterize as a favorable confirmation of the moves made by the more stable DJIA and S & P 500 indexes. The VIX closed yesterday at 16.52. The most stable index in the Vix Asset Allocation model is the DJIA volatility index, ^VXD. It crossed the 15 threshold yesterday, falling .51 to 14.68, possibly in the process of forming a Phase 2 Stable Vix Pattern. Vix Asset Allocation Model Explained Simply With as Few Words as Possible
I have not discussed the DJIA volatility index much. The most extensive discussion can be found in a 2008 post: Further Discussion of Volatility and Asset Allocation
The laggard is the the volatility index for the Russell 2000 that closed yesterday at 21.34. ^RVX The RVX was also the first to flash a Trigger Event prior to the onset of the bear market that is now dated as starting in October 2007. The VIX Trigger Event was in August 2007.
Needless to say, I did not hear back from the WSJ journalist who wrote a misinformed article about the VIX. WSJ ARTICLE on the VIX as a Predictive Indicator of the Market's Future Direction Historical VIX Patterns Generally, I would view most financial journalists as lacking an understanding about the issues that are the subject of their columns.
It is also interesting that I never hear back from journalists after pointing something out that would be of interest to their readers. I wrote an email to Bary at Barron's in October 2008 explaining that many Barron's readers would have an interest in Trust Certificates, which were then yielding in many cases 3 to 5% more than the underlying bonds and the bonds were starting to sell at historically large spreads to treasuries. I was right but I never heard back, nor was anything ever said in Barron's about that opportunity. I was trying to trying to share something that I know for a mass audience but I am at least grateful that nothing was published about this opportunity back then. This was as I say typical for financial journalists.
4. St. Joe (owed)(JOE): I was going to make a decision on whether to keep my shares of JOE, bought at $15.69 on 3/18/2009, after the expiration of the one year holding period for long term capital gains. I have decided to keep it for now after reading this article about a possible technical breakout on the upside brewing: Technical Setups
5. Emerson (owned)(Dividend Growth Strategy): Emerson (EMR) reported yesterday that its trailing 3 month order rate turned positive in February: march8k This was the first positive turn since October 2008: Reuters
6. Call Warrants and Trust Certificates: Until last Monday, the call warrant provision in the prospectuses of Trust Certificates was out of sight, out of mind. I knew that there was a call warrant which, if exercised, would result in the redemption of the TC at par value plus accrued interest. In other words, the same result for the TC holder as if the underlying bond was called by its issuer. On Monday, I opened up my bond portfolio at YF, and saw the symbol "CL" was next to XFL, a TC with a senior bond issued by Verizon. I then looked back up the list and saw that no "CL" was next to the other TC, PJL, which I also owned containing the same VZ bond. I thought that was strange. Verizon had not called the underlying bond. I quickly discovered that the owner of the call warrant for XFL had exercised the call warrant. Alert on Verizon TC XFL
I checked my account this morning and found that XFL had indeed been called and I have received the $25 par value plus accrued interest tallied at $59.84 per 100 shares.
This actually made sense to me after thinking about it for a few seconds. The underlying bond was selling at close to a 20% premium to its par value. The call warrant could be exercised and the bonds sold for a quick profit at no risk to the warrant owner. Since this was the first occasion to my knowledge where this has happened, I wanted to summarize the implications for those of us who regularly invest in this niche market.
First, the mere existence of the call warrant will place a lid on a "premium" price of the TC in certain contexts. If the TC and the underlying bond have roughly the same coupon, and the underlying bond is selling at a significant premium to par value, a rational market for the TC would still have the TC priced at a much lower premium to its par value, around par value plus accrued interest. So when the investor is considering the possibility of paying a premium for a TC, the percentage premium of the underlying bond and the existence of the call warrant need to be assessed, which will restrain me from buying at much of a premium in those type of cases. I always check the Finra data on the underlying bond before placing an order for a TC: LINKS TO FINRA INFORMATION ON UNDERLYING BONDS IN TRUST CERTIFICATES
Second, even in a long term bull market for bonds, where the underlying bonds accelerate to substantial premiums on their par value, the price of the TCs may stall at a much smaller premium. I would consider the potential profit restraint on the shares when making an investment.
So far, I have only bought a few TCs at a premium. The latest purchase was an add of 100 shares of DKF at 25.87. This TC has a 8% coupon whereas the underlying bond is lower at 7%. The underlying bond is currently selling at about a 9% premium to its par value. FINRA The TC DKF does have a call warrant, referenced under the section of the prospectus labelled "swap agreement". www.sec.gov This one is about to go ex interest for its semi-annual payment.
Within the past week, I have had two exchange trade bonds called, EHL and XFL, and the redemption will cause a long term capital gain to be realized on both positions. It does leave me in a predicament, however, because the available alternatives in bond land are non-existent now for me at least. Maybe I will find something, otherwise those funds will be used to buy common stocks. I also had a smaller position in EHL in the Roth which I have also sold.
7. Fears OverBlown about HealthCare bill?: The U.S.: This article from US News summarizes the five most overblown fears of the new healthcare law. I suspect that Robert Schlesinger, writing for U S News and World Report, will be correct in his assessment that the GOP has hurt itself long term, though I expect it will have short term gains as a result of their united opposition to this legislation.
8. MEDTRONIC (Owned): There was a favorable article about MDT in the Heard column in the WSJ.
9. Newsweek Cover Story on the Afghan National Police: I really did not want to know how much the U.S. has spent training the Afghan police force since 2002. I could not avoid the number after fetching my Newsweek from the mailbox since it was taunting me, spitting the number directly into my face. SIX BILLION DOLLARS. And, the story documents that the U.S. has just about wasted every dime of it.
10. Atlantic Power (owned): This Canadian independent energy producer has fallen sharply the past two days. The analyst at BMO Capital markets downgraded it to underperform from neutral. I found a copy of the report, which isn't much, mostly just an opinion that the shares were fully valued. The report is at page 6 of this document found at scribd. I own 200 shares bought entirely for the income in Canadian dollars generated by the good monthly dividend.
11. Portugal: The European markets are falling this morning apparently due to the Fitch downgrade of Portugal's debt rating to AA- from AA. NYT You have got to be kidding.
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