Weekly CEF Market Report - July 18, 2021
Weekly CEF Market Report - July 18, 2021
Public
Macro Picture
The markets finished the week lower but not before reaching new highs on Wednesday. Small caps underperformed again and have been weaker against large caps for five consecutive weeks. The lower results followed the start of earnings season further fueling "growth" fears.
The bigger news was the second big inflation surprise to the upside with CPI rising 0.9% in the m/m period and 5.4% for y/y. That was roughly twice the consensus estimates and the fastest 12-month increase in the core rate (+4.5%) since 1991.
Again, surging used-car prices were again responsible for a large portion of the increase along with re-opening trade industries (hotel, leisure, etc). Food prices increased 0.8% in the month, and gasoline prices rose 2.5%. On Monday, the NY Fed reported that year-ahead inflation expectations had reached 4.8%, the highest on record in data going back to 2013.
Retail sales also did well rising 0.6% in June with expectations for a 0.4% decline. And University of Michigan preliminary gauge of consumer sentiment fell back to its lowest level since February.
The yield on the 10-yr jumped on some of the news this week but continued lower for the week.
Commentary
Discounts ended the week wider with taxable bonds moving down from 1.13% from 1.4% the week prior and 0.43% a month ago. Muni bond discounts widened out as well going to -0.76% from -0.33% and a small premium two weeks ago. Equity discounts continued to tighten and ended at -4.9%, their tightest levels in over a decade.
Only three sectors ended in the green for the week on NAVs (Asian equity, EM equity, and finance). The worst sector for NAV was MLPs, again, down over 4.7% with price down 5.3%. Now down four weeks in a row for a monster total loss.
The perpetual discount tightening environment was never going to last forever. A correction was likely given the rich valuations and the magnitude of the increase. There is some underlying weakness in the markets in certain sectors and even individual names. A 'rolling bear' to some extent underlying certain aspects of the CEF market. But we are talking about 3-4% declines, not declines of 20% or more that we are seeing in the equity markets.
The declines in the 10-yr treasury boosted some NAVs in longer-duration securities but discounts haven't followed suit. There is a natural ceiling to how high discounts (or in this case premiums) will reach.
The couple of funds that have corrected in the last week were….
Yield Hunting Premium Members received a full list of funds in each sector- which funds we like here, and which to avoid...
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2) George Spritzer - Another career financial guru who runs a registered investment advisor with a specialization in closed-end funds for individuals. George uses the following investment strategies: 1) Opportunistic Closed-end fund investing: Buy CEFs at larger than normal discounts to NAV and sell them when the discounts narrow. 2) Exploit special situations: tender offers, fund terminations, fund activism, rights offerings etc.
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