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.