Weekly CEF Market Report - June 6, 2021
Weekly CEF Market Report - June 6, 2021
Macro Picture
US markets edged higher this week as investors continue to watch inflation gauges and expectations. It was a shortened trading week and volumes were extremely low. Energy again did well as oil prices reached their highest levels in almost two years. Overall, the S&P 500 was up 0.6% on the week. International did better than domestic with the EAFE up 1% and EM up 2%.
We saw a return to meme stock craziness, mostly in AMC Entertainment (AMC).
The big news on the week was the jobs report which again came in lighter than expectations. The US added 559K total jobs in May, below forecasts of 650-700K. On the positive side, the employment-to-population ratio—considered by some to be more important to Fed officials—ticked higher, and the unemployment rate fell more than expected, from 6.1% to 5.8%. Average hourly earnings rose 0.5%, above consensus and indicative of a tighter labor market.
On the news, stocks rose and interest rates fell, suggesting a dovish result allowing the Fed more time to keep rates this low.
Real estate continues to do well and perform better than most other sectors. It was up another 3% on the week and is up over 5% in the last month. YTD, it is up (+23%) and is now the third best performing sector behind energy (+48%) and financials (+31%).
Commentary
Discounts continue to tighten and taxables reached their highest levels in the last 8.5 years at an average of 0.86% Munis widened about 12 bps on the week back out to 1.23%. The spread between the two is 2.1%, which is the widest in a few weeks. At these levels, there is very little upside left in the taxable space. I think we have about 2-3 points left in the muni space. Historically, the muni CEF space trades tighter than the taxable space. It is only during periods of "rising rates" does that reverse.
Equity CEFs are powering tighter nearing the -5% mark. That is about -1.5% tighter than just two weeks ago.
In terms of sectors, energy and MLP funds continue to be the top dogs. In fact, MLP funds are up on average 8% in the last month in price and nearly 6% in NAV. Energy funds are not far behind. That trounces any other sector.
Convertibles and health/biotech are the worst performers with NAVs down about 2%. In terms of price, the rich preferreds sector lost nearly a point but continue to sport a z-score (valuation) of +2.1, a very high level. The cheapest sectors (using z-score) are Finance (FGB)(FINS)(BANX)(DYFN), Latin American Equity, taxable munis, and dividend equity. The most expensive are convertibles, preferreds, global real estate, and covered calls.
I'm constantly watching a few different things in this very rich market. For one, I have "dream sells" on nearly every CEF position I own. I update the limit price of them every few days depending on the NAV movement.
Blackrock Inv Quality Muni (BKN) finally corrected as there was zero reason for it to be at a nearly 20% premium. It is still over +8% premium which is closer to its fair value given the 4.5% tax-free yield but I still would avoid it and focus on the discounted alternatives with similar NAV performance.
It appears our muni report fixed the issue with Federated Premier Muni Inc (FMN) as CEFConnect finally corrected the error on their website. The shares sold off and the fund lost its very small premium and fell back towards fair value at a -3% discount. This one is very low volume. For those with small positions, I would consider swapping to VFL or VCF (also low volumers).
So What's Left?
I screened the taxable CEF universe by sector and fund- looking for CEFs that still have a -5% or wider discount AND a yield greater than 7% (even if not earned). There are 21 funds remaining. If I had done this at the start of the year, there likely would have been over 75.
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