Weekly CEF Market Report - July 11, 2021

Public Version

Jul 12, 2021

Macro Picture

The major equity indices were mixed on the week with the S&P up 0.4%, the Dow up 0.24%, and Nasdaq up 0.43%. But we had small caps down 1.1% along with MSCI EM, which was down 2.25%. A lot of the EM weakness can be attributed to China- who's crackdown on internet companies continues.

Here's a chart from Charlie Bilello:

Energy was the largest loser this week shedding 3.4%. Financials and Communication services were the other two sectors that lost money. Real estate and consumer discretionary were up 2.6% and 1.5%, respectively.

So value continues to pull back as rates continue to fall hitting five-month lows. Are we at the bottom though for rates? Hard to know but the steep decline early in the week was quickly bought and lasted but a few hours.

Economic data was also mixed with global PMI for June showed strength while the ISM services index slipped. The FOMC meeting minutes that came out on Wednesday didn't really create any reaction from market. The participants noted that they have not reached their goal of "substantial further progress" and suggested that the committee members are not in any hurry to begin tapering.

I still like value over growth here and think rates could inch back up. A lot of the recent drop is likely the Delta Variant scare. But what's interesting is you are not seeing a compliant move in utilities and other defensive equities. Typically, you see bonds and utilities highly correlated. In a "risk off" environment, bonds rise along with utilities (and other safe-haven equities or fall far less than the market).

That could mean that the move in the bond market is more technical than anything else and yields (along with the value trade) will resume this week.

Commentary

Discounts widened out small on the week with munis going from a small premium to -0.33% discount. Taxables were down a mere 5 bps. This makes sense given the rise in the Volatility Index ("VIX") this week from just under 15 to over 20, before ending around 16.2. This despite equities and bonds largely rallying on the week.

This shows that fear drives discounts more than anything. The fear of volatility- even if very short lived- can have a much larger effect than even positive price and NAVs. And I think that is what will ultimately drive discounts wider in CEFs; the fear that leverage costs will rise and the fear that spreads between CEF earnings and leverage cost drop (i.e. a flattening of the yield curve).

I spent a lot of time looking for needles in the haystack (hence the lack of many reports this week). I really wanted to find some place for investors to place some capital. Commish and I discussed this towards the end of last week and came up with a few ideas. I have a "Swap" article coming out in the next 24-48 hours that will also have some ideas for sells ---> buys based on relative value.

The relative value concept is one I have been discussing. A variation of it is buying the "higher yielding, wider discounted, better NAV performer strategy" (if people have a good name for this strategy I'm all ears!). Relative value looks for funds that have been widening in discount in the last 1-, 3-, 6- months while the rest of the sector is tightening.

Of course, in the last six months, few funds have seen widening so it mostly comes down, which funds have not participated in the rally. Nine out of ten of those "laggard" funds have a reason why they have not participated. Most likely it comes down to the distribution has been cut at least once. In other cases, fund performance has downright stunk.

But every once in a while we can find a fund that has relatively good performance, has not cut the distribution, and looks okay from a value perspective.

My top pick today would be..............

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