Thursday, November 17, 2011

CPI/Earnings: Edgen Murray, Sunstone Hotel/Added 100 of the Stock CEF EOI at 10.27

The WSJ claims that the trailing P/E on the Russell 2000 index is over 47.  WSJ

The market took a nose dive yesterday after Fitch released a report highlighting the possible contagion effect of the European sovereign debt crisis on U.S. financial institutions.  CNBC  WSJ   CNBC Video Fast Money  This was hardly new news.

Moody's downgraded the credit ratings of 10 German banks yesterday.

As noted in a WSJ article, ten year bonds from the Netherlands, France, Austria and Finland have increased their spreads compared to German 10 years, suggesting that the contagion effect is spreading to more fiscally sound nations.

I will periodically pull up a long term chart of the Nikkei 225 and wonder how that fits into Professor Jeremy Siegel's thesis. NIKKEI 225 Index Chart The index is currently below where it was in 1984, which seems like a long time ago. Japan is after all the world's second largest economy. While no one can predict the future, I suspect the S & P 500 will be hovering at 1998 levels again, at some point before 2014.  To Professor Siegel: Time for a Re-Think The Roller Coaster Ride of the Long Term Secular Bear Market

Reuters also reported yesterday afternoon that the Super Committee is in a stalemate. A failure to reach an agreement on what is a relatively small reduction in budget deficits would emphatically confirm the inability of Congress to deal with the U.S. fiscal crisis.

The ECB seems to be in a losing battle to keep bond rates from rising on Italy's sovereign debt.  (see discussion on yesterday's events in the Even with aggressive buying by the ECB, the Italian 10 year bond rose slightly in yield. IT 10Y Govt Bond Benchmark The ECB was also reportedly buying Spain's debt yesterday and the 10YR_ESP Bond also rose slightly in yield notwithstanding that intervention.

The Supreme Court has agreed to hear an important privacy case involving the use of a GPS device, attached surreptitiously to a vehicle, to track the movements of an individual. In the case before the court, a warrant was secured initially to track the vehicle but it expired before police placed the device on the suspect's car. Washington Post The suspect was a drug dealer who was later convicted based partly on evidence secured by that warrantless tracking. His conviction was overturned by the U.S. Court of Appeals for the District of Columbia, who held that the extended use of such a device required a warrant. Other appellate courts had held that no warrant was required, relying on the Supreme Court's 1983 decision in United States v. Knotts, where the Court held that individuals had no reasonable expectation of privacy while traveling in their vehicles on public roads. In the Knotts case, a beeper had been placed in a can that allowed the police to track a vehicle.  

The case was recently argued before the Supreme Court: argument_transcripts/10-1259.pdf

GDP increased by .2% in the both the 17 and 27 nation Euro areas in the third quarter, compared to the second quarter. .PDF I view this data with some suspicion. Spain, for example, is shown as having positive GDP numbers. I suspect Europe will be in a recession by the first quarter of 2012, notwithstanding any contrary data reported by the European statistical agency.  (see comments by economist in this Reuters article).

The Z.E.W. institute reported that its economic sentiment indicator for Germany declined for the ninth straight month, falling 6.9 points to a negative 55.2 points. The average reading is a plus 25 for this index.  ZEW Press Release.

CPI fell .1% in October on a seasonally adjusted basis. Core CPI was up .1%.  Over the past year, CPI increased 3.5% before seasonal adjustment. Consumer Price Index Summary

I attempted to double down again yesterday on a triple stock short ETF but I narrowly missed my limit price during a market rally. I have recently bought 1 triple short and two double short stock ETFs as hedges. Due to the tracking problems inherent with these securities, I will generally not hold them for long and will sell them before the end of 2011.

1. Edgen Murray (own 1 bond: FINRA): Edgen Murray, a private company, filed a SEC Form 10-Q for the third quarter earlier this week. The company reported a net loss of 4.429 million on revenues of $244.838 million. Depreciation and amortization expense for the quarter was $5.296 million. Net interest expense was $15.051 million. I own one 2015 senior secured note (see page 9 for a description of long term debt)  Sales backlog at the end of the last quarter was $412 million, up from $168 million as of 9/30/2010. (see page 26).

2. Sunstone Hotel (own equity preferred SHOPRA and SHOPRD only): Sunstone reported a loss of 24 million or 20 cents per share on $212.3 million in revenues for the third quarter. SEC Filed Press Release Comparable hotel RevPar increased 8.6% to $129.07 million. Adjusted Funds From Operations increased 67.6% to $23.7 million. The SEC Form 10-Q for the Q/E 9/30/11 shows $159.974 million in cash and $63.767 million in restricted cash. Long term debt totaled $1.342 billion. Total assets were listed at $3.209556 billion. This report is discussed at the Motley Fool. An earnings call Earnings Call Transcript is available for review at Seeking Alpha. 

3. Added 100 EOI at $10.266 Last Tuesday (see Disclaimer): I have been attempting to dig myself out of a hole on this stock CEF, but have so far only dug a deeper hole. There is some truth to the cliche that one needs to quit digging under such circumstances.  One problem with EOI is that the discount to net asset value has been expanding some since my last purchase at $12.78. Bought 100 of the CEF EOI at $12.78 That purchase was made in September 2010 when this CEF was selling at near its net asset value. The fund closed at discount to net asset value of 15.25% on 11/15/11. I mentioned in that post that I was attempting to dig myself out of a small hole and succeeded in making the hole deeper with that purchase.

Since that purchase in September 2010, the fund cut its monthly dividend from $.1164 per share to $.0919. Eaton Vance Closed-End Enhanced Equity Income Funds Declare Monthly Distributions. That may account for some of the expansion in the discount. Since the dividend has been supported by a return of capital, viewed as a negative, it would not be surprising to see another reduction, unless the fund can start generating capital gains sufficient to cover the current payout.

The return of capital information can be found at Morningstar, which assigns an unsatisfactory two star rating on this fund. Morningstar refers to the fund's managers as unimpressive and characterizes the return of capital as destructive. The portfolio as of 6/30/11 does not look inspired but it is not incompetent in my opinion either. (see holdings at Eaton Vance Enhanced Equity Income Fund) The total cost at that time was $448+ million and the value was over $538 million.

Sponsor's webpage: Enhanced Equity Income Fund | Eaton Vance
Closed-End Fund Association page on EOI.

This is an article from Wells Fargo Advisors on the return of capital issue: .pdf

The fund uses a buy-write strategy. The Eaton Vance CEFs that use the buy-write option strategy have had disappointing results. This has led to the wide discounts to net asset value, as investors dump the shares. One columnist argues that this creates opportunities for new investors. Forbes (mentioning EXG at page 2) Maybe he will be proved right, but I suspect that the managers of these EV funds will need to prove themselves first or maybe EV will find new managers.

This is not an important or material position for me. I decided to stay with it and change my distribution option from cash to reinvestment for a year or two, provided the discount to net asset value stays over 10%.  

This purchase was made with cash flow received last Tuesday. I now own 414.411 shares of EOI.  I changed the distribution option to reinvestment for the 314.411 share position held in a taxable account.

EOI closed at $10.27 yesterday, down 6 cents for the day. 

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