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The Rebalancing will result in a smaller, but still large yield. However, the discount to book value will make CEFL more compelling. Leveraged income and carry plays such as MORL and CEFL have underperformed what might have expected given the 10-year treasury bond at 1.80% and Federal Funds still at 0.25%. This underperformance is because, among other reasons, those who said the spike in interest rates was imminent three years ago are even more vocal and convinced it is imminent now. The UBS ETRACS Monthly Pay 2x Leveraged Closed-End Fund ETN (NYSEARCA: CEFL ) underwent a rebalancing at the end of 2014. The first monthly dividend based on the new composition of the index upon which CEFL is based, will be paid in February 2015. The dividend will be based on those components that had ex-dividend dates in January 2015. Of the 30 index components, 29 now pay monthly. Only MORGAN STANLEY EMERGING MARKETS DOMESTIC DEBT FUND INC (NYSE: EDD ) now pays quarterly dividends in January, April, October and July. Thus, it will not be included in the February 2015 CEFL monthly dividend calculation. Additionally, some of the monthly paying components do not have ex-dates in January 2015. These are PRUDENTIAL GL SH DUR HI YLD (NYSE: GHY ), ING Global Equity Dividend & Premium Opportunity Fund (NYSE: IGD ) and PRUDENTIAL SHORT DURATION HIGH YIELD (NYSE: ISD ) . Thus, they also are not included in the February 2015 CEFL monthly dividend calculation even though they have pay dates in February 2015. Those components that have not declared dividends but pay regular monthly dividends are included using the most recent dividend they declared. My calculation using the 26 components expected to have ex-dividend dates in January 2015 is for a February 2015 dividend of $0.2721. This would be the smallest monthly dividend since the February 2014 of $0.2461. In February 2014 there were more quarterly payers in the index than now. The rebalancing is the major reason for the smaller monthly dividends. PIMCO High Income Fund (NYSE: PHK ), one of the highest yielding components has been removed. Some people may be quite happy with this since PHK had such a high premium to book value. The rebalancing is done by a formula and thus any investor complaints about PHK played no part in its’ removal. It could even be considered a case of “be careful what you wish for”. Removal of PHK did significantly improve the discount to book value for CEFL as a whole, but also reduced the dividend. I generally do not do much in-depth analysis of the components in the leveraged ETNs I follow. I take much more of a “top-down” approach rather than a “bottoms-up” approach. Not that there is anything wrong with than a “bottoms-up” approach. It is a matter of how I began to first look at mREITs, then ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (NYSEARCA: MORL ) and then CEFL as a high yielding diversifier for MORL that also met my top-down Macro outlook. A few years ago I became convinced that short-term rates were likely to remain low for an extended period (see my article: Federal Reserve Actually Propping Up Interest Rates: What This Means For mREITs ), and I concluded that agency inverse floaters would be the ideal investment vehicle to take advantage of that scenario. I was told by dealers in agency securities that there were very few agency inverse floaters around anymore and that you would not want the ones that were. I wanted an investment with negligible credit risk and no margin call risk that would profit from an extended environment of very low short-term interest rates. As agency inverse-floaters and swaps paying-floating and receiving-fixed were not available to me as a retail investor, I concluded that mREITs and MORL were the next best thing to profit from a continuation of the carry generated by very low short-term rates. This was explained in: Are mREITS The New Inverse Floaters? A few years ago there were many who were very bearish on mREITs based on their view that the period of low interest rates would soon be ending. If I had asked even the most bearish person on mREITs three years ago what would happen if in 2015 the rate of the 10-year treasury bond were to be 1.80% and Federal Funds were still to be 0.25%, they certainly would have said something to the effect that: “well then of course you will make a fortune in mREITs and similar leveraged income and carry plays, but that rate scenario is impossible”. We are now have the 10-year treasury bond at 1.80% and Federal Funds are still at 0.25%. A large part of the underperformance of leveraged income and carry plays such as MORL and CEFL relative to what one might have expected given the accuracy of my interest rate outlook, is due to a number of factors. Most significant is that mREITs and closed-end funds have gone from premiums over book value to large discounts. This is because, among other reasons, those who said the spike in interest rates was imminent three years ago are even more vocal and convinced it is imminent now. My previous procedure was to take my monthly prediction of the next dividend to be paid by a leveraged ETN such as CEFL and then add the two prior months to get a projected quarterly figure. This would smooth out any “small month” – “big month” effects due to some components paying monthly and some quarterly. Then I would annualize that figure on a compounded basis. That procedure may not now be appropriate for CEFL at this point in time. The composition of the index has changed significantly. Also, adding up the February 2015, the January 2015 and the December 2015 months would a bias the yield upward since it would include the year-end special dividends paid by some of the closed-end funds. Thus, to get a better measure of the annualized compounded yield I took all of the components and determined a average monthly dividend for each including the quarterly payer EDD and those that pay monthly but did not have ex-dates in January 2015. This results in a monthly average dividend rate of $0.3147. This actually may be too conservative since it assumes there will be no special additional dividends during the entire year. Using the average monthly dividend method this results in an annual payout of $3.78 for a simple yield of 17.3% and a compounded annualized yield of 18.8% with CEFL as $21.80. Using the prior method of adding the projected $0.2721 February dividend to the two prior months would result in an annual payout of $4.69 for a simple yield of 21.5% and a compounded annualized yield of 23.8% with CEFL as $21.80. That also would be biased upwards by the year-end special dividends paid by some of the closed-end funds. See: CEFL January Dividend Gives Yield Of 23% for a listing of the CEFL components that paid special year-end dividends and a description of how the contribution to the monthly dividend from each component is calculated. If someone thought that over the next five years interest rates and economic conditions would remain relatively stable and thus CEFL would continue to yield 18.8% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $236,305 in five years. More interestingly, for those investing for future income, the income from the initial $100,000 would increase from the $18,800 initial annual rate to $44,425 annually. The table below shows the price as of January 16, 2015, ex-date, pay date, dividend, imputed value and the imputed number of shares for all of the 30 CEFL components. CEFL components as of January 16, 2015 Weight Price ex-div pay date dividend frequency value $mil imputed shares dividends Alpine Global Premier Properties Fund AWP 4.51 6.76 1/21/2015 1/30/2015 0.05 Top of Form m Bottom of Form 16682549 2467833 123392 MFS Charter Income Trust MCR 4.44 8.67 1/13/2015 1/30/2015 0.05 m -.002 16423618 1894304 85244 GAMCO Global Gold Natural Resources & Income Trust GGN 4.39 7.43 3/13/2015 3/24/2015 0.07 m -.02 from2014 16238667 2185554 152989 Clough Global Opportunities Fund GLO 4.38 12.21 4/15/2015 4/30/2015 0.1 m +.005 from2014 16201677 1326919 132692 FIRST TRUST INTERMEDIATE DUR FPF 4.34 22.08 12/29/2014 1/15/2015 0.16 m ex in dec 16053716 727070 118149 MORGAN STANLEY EMERGING MARK EDD 4.32 10.57 12/17/2014 1/15/2015 0.25 q 15979736 1511801 377950 DOUBLELINE INCOME SOLUTIONS DSL 4.28 19.51 1/14/2015 1/30/2015 0.15 m 15831776 811470 121720 BLACKROCK CORPORATE HIGH YIE HYT 4.24 11.3 12/29/2014 1/9/2015 0.08 m 15683815 1387948 104790 Eaton Vance Limited Duration Income Fund EVV 4.23 14.01 1/8/2015 1/20/2015 0.1 m 15646825 1116833 113582 PRUDENTIAL GL SH DUR HI YLD GHY 4.17 16.26 2/19/2015 2/27/2015 0.13 m no ex in jan 15424884 948640 118580 PIMCO Dynamic Credit Income Fund PCI 4.09 20.35 1/8/2015 2/2/2015 0.16 m big ext paid jan 15128963 743438 116199 Western Asset Emerging Markets Debt Fund ESD 4.08 15.86 2/18/2015 2/27/2015 0.12 m 15091973 951575 109431 Eaton Vance Tax-Managed Global Diversified Equity Income Fund EXG 4.04 9.33 1/21/2015 1/30/2015 0.08 m 14944013 1601716 130220 Alpine Total Dynamic Dividend AOD 4.04 8.58 1/21/2015 1/30/2015 0.06 m 14944013 1741726 98408 ING Global Equity Dividend & Premium Opportunity Fund IGD 4.04 8.18 2/2/2015 2/17/2015 0.08 m no ex in jan 14944013 1826896 138844 Eaton Vance Tax-Managed Diversified Equity Income Fund ETY 3.75 11.13 1/21/2015 1/31/2015 0.08 m 13871299 1246298 105063 BlackRock International Growth and Income Trust BGY 3.58 6.75 1/13/2015 1/30/2015 0.05 m 13242467 1961847 96130 ABERDEEN ASIA-PAC INCOME FD FAX 3.49 5.68 1/21/2015 1/30/2015 0.04 m 12909555 2272809 79548 PRUDENTIAL SHORT DURATION HI ISD 3.32 16.37 2/19/2015 2/27/2015 0.12 m no ex in jan 12280723 750197 91899 Calamos Global Dynamic Income Fund CHW 3.2 8.64 12/29/2014 1/6/2015 0.07 m not decl 11836842 1370005 95900 MFS Multimarket Income Trust MMT 2.91 6.31 1/13/2015 1/30/2015 0.03 m 10764128 1705884 54588 BLACKSTONE/GSO STRATEGIC C BGB 2.69 16.15 2/18/2015 2/27/2015 0.11 m 9950345 616120 64693 Allianzgi Convertible & Income Fund NCV 2.52 8.84 1/8/2015 2/2/2015 0.09 m 9321513 1054470 94902 WESTERN ASSET HIGH INC FD II HIX 2.25 8.1 2/18/2015 2/27/2015 0.07 m 8322779 1027504 70898 Blackrock Multi-Sector Income BIT 1.92 17.19 12/29/2014 1/9/2015 0.12 m not decl 7102105 413153 48215 WELLS FARGO ADVANTAGE MULTI-SECTOR ERC 1.75 13.63 1/12/2015 2/2/2015 0.1 m 6473273 474928 45926 Allianzgi Convertible & Income Fund II NCZ 1.63 8.24 1/8/2015 2/2/2015 0.09 m 6029391 731722 62196 Wells Fargo Advantage Income Opportunities Fund EAD 1.35 8.8 1/12/2015 2/2/2015 0.07 m 4993668 567462 38587 Nuveen Preferred Income Opportunities Fund JPC 1.14 9.52 1/13/2015 2/2/2015 0.06 m 4216875 442949 28039 Invesco Dynamic Credit Opportunities Fund VTA 0.91 11.62 1/12/2015 1/30/2015 0.08 m 3366102 289682 21726 Scalper1 News
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