pageok
pageok
pageok
Closed-End Funds Update:

I've been blogging about the crazy action in closed-end funds, mutual funds that sell on the exchanges and have a fixed number of shares. Because the funds are thinly traded and held mostly by individual investors, they can sell at large discounts or premiums to their underlying net asset value, depending on investors' optimism or pessimism.

In normal times, the average closed-end funds sells at about a 5% discount. On Oct. 10, the median fund was selling at an almost 30% discount, a historically unprecedented discount, and evidence that individual investors were in a selling panic. Some individual state municipal bond funds fell to greater than a 50% discount during the day on Friday.

A week later, with the markets calmer, less that 15% of CEFs are selling at even a 20% discount. Some of the state municipal bond funds that had completely crashed are now selling at premiums (see BPS, for example).

The discounts are still higher than usual, as one might expect given the turmoil on Wall Street. (Also, CEFs in any event tend to sell at relatively high discounts from October to December, and their discounts narrow, predictably, in January.) But absent a further shock to the system (such as a major international bank failing, or a major terrorist attack) the action in closed-end funds suggests that irrational pessimism reached a zenith on October 10th, and that is very likely to wind up being the market bottom.

American Psikhushka (mail):
The discounts are still higher than usual, as one might expect given the turmoil on Wall Street. (Also, CEFs in any event tend to sell at relatively high discounts from October to December, and their discounts narrow, predictably, in January.) But absent a further shock to the system (such as a major international bank failing, or a major terrorist attack) the action in closed-end funds suggests that irrational pessimism reached a zenith on October 10th, and that is very likely to wind up being the market bottom.

Possibly. But there are still a lot of things that could happen that are unknowable. If you haven't already, you might want to check out Taleb's books and other writings - "Fooled by Randomness", "The Black Swan", etc.
10.19.2008 12:53pm
Cold Warrior:
I am not prone to panic, but even I:

1. Back in March got out of ALL CEFs that employ leverage boost return;

2. Sold all muni bond funds (even the ones that don't use leverage) a right around October 10.

I fully believe that the likelihood is that both categories of funds do just fine in the long run. But there is a very real risk -- still -- of a collapse in both. Leveraged funds are still susceptible to the availability of short-term credit, and we can't be certain that we've seen the end of that crisis. Muni bond funds are subject to some of the same risks, plus insured funds could still be hit hard by the failure of Ambac or other muni bond insurers.

Although returns are attractive (taxable equivalent yields on one of the state funds I just sold are approaching 8%), but I felt I just couldn't take the risk of serious capital loss at this time.

And I suspect millions of other investors did exactly the same thing, thereby explaining the huge discounts ...
10.19.2008 6:29pm
wm13:
Either October 10 was the bottom or we are having a dead cat bounce. If you know which, and are willing to bet everything on it--and I mean everything, like mortgaging your house--you will never need to work for money again.
10.19.2008 7:42pm
Splunge:
If you know which, and are willing to bet everything on it--and I mean everything, like mortgaging your house--you will never need to work for money again.

Ha ha, don't count on it. That would make you an evil speculator, man, practically living off the labor of serfs, and the New Regime would be sure to take your ill-gotten wealth away so as to distribute it to those worthy but not especially smart or daring yeomen in the "middle class" who bet the wrong way, or wouldn't bet at all.
10.19.2008 8:52pm
American Psikhushka (mail):
Splunge-

Ha ha, don't count on it. That would make you an evil speculator, man, practically living off the labor of serfs, and the New Regime would be sure to take your ill-gotten wealth away so as to distribute it to those worthy but not especially smart or daring yeomen in the "middle class" who bet the wrong way, or wouldn't bet at all.

But don't you know, Splunge, that stock speculators provide a very valuable social function? Note this even includes short sellers.(Although naked shorting is pretty shady.)

Of course if you were motivated by jealousy, greed, racism, hate, and some crackpot economic theories you might not even bother to learn enough about economics to realize that your socialist, communist, redistributionist, etc. actions were a sure recipe to drive the economy into the ground, cause and prolong economic stagnation and depression, increase poverty, increase unemployment, decrease the standard of living, and make little puppies and kittens cry.

(I suspect you might have been facetious in your remark. If so please disregard this response. Perhaps others will benefit from reading it.)
10.20.2008 3:28am
Splunge:
I suspect you might have been facetious in your remark

Er, yes.
10.20.2008 4:05am