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CET: An Out Of Step Old Timer That’s On Sale

Central Securities Corp. is one of the oldest closed-end funds around. It sticks to a value focus, which has kept it out of sync with the broader market of late. But with an around 20% discount, it might be worth a look for patient investors. Central Securities Corp. (NYSEMKT: CET ) is one of those closed-end funds, or CEFs, that kind of gets lost in the crowd. It hasn’t been a standout performer lately and what it does is, well, kind of boring. But for a long-term investor seeking a value fund it might be just the kind of boring you’ll like since it’s trading at an around 20% discount. Value versus growth There are two broad camps in the investing world, value and growth. There’s a lot of wiggle room in there, but it can be interesting to compare the two broad-based approaches. For example, since the bottom of the market was reached during the deep 2007 to 2009 recession, the Vanguard Growth ETF (NYSEARCA: VUG ) had handily outdistanced the Vanguard Value ETF (NYSEARCA: VTV ). VUG data by YCharts That’s not so surprising in hindsight, but it provides an important backdrop for research. If you are looking at a growth-focused CEF and comparing it to the market, it will probably look good. If you are looking at a value-focused CEF, well, not so much. Which is where Central Securities comes in. CET is a value fund and, perhaps, worse, it likes to own securities for a long time-which means it isn’t likely to switch into today’s hot stocks to follow the lemmings or to window dress its portfolio. In other words, when Central Securities is out of step with the market, it can look like a lousy investment option. But long-term performance suggests it isn’t. For example, the CEF’s trailing annualized 25-year return through December 2014 was around 12% compared to 9.5% for the S&P 500 Index, according to the fund. It held a similar, though not quite as large, edge over the trailing 20-year period, too. Over shorter periods, however, it has generally lagged. For example, over the trailing 1-, 3-, 5-, 10-, and 15-year periods through October Central Securities lags the broader market. The shortfall narrows materially the further back you go. For example, over the trailing 15 years, Central Securities’ annualized net asset value total return, which includes reinvestment of distributions, was roughly 4%. Over that same span the S&P’s total return was 4.5% or so. Over the trailing year through October, however, Central Securities was down roughly 1% while the S&P was up about 5%. Percentage wise, that’s a huge rift. But the backdrop is critical. VUG and VTV offer up a similar disparity. So, in some ways, Central Securities is doing what you’d expect. Moreover, leading into 2000, roughly 15 years ago, the market has been dominated by cycles of boom and bust. We are currently in an up cycle, in my opinion, highlighted once again by tech darlings sporting extreme valuations. In other words, not much has changed since the turn of the century. And that’s left a closed-end fund like Central Securities out of step. The long, long term But the thing to keep in mind about Central Securities is that it’s been in business since 1929. So it doesn’t think in days, months, or years. It thinks in decades… or longer. For example, three of its top-10 positions were purchased in the 1980s and one was bought in the 1990s. Yet another was added in 2000. That doesn’t mean it won’t buy and sell stocks when it sees opportunities, but when it buys a company it often holds for a long time (the other half of the top 10 were purchased in 2007 or later). Such long holding periods are not the norm in the fund world. So, almost by design, Central Securities is out of step. According to the fund : Our approach is to own companies that we know and understand, which we believe reduces risk. We also consider the integrity of management to be of paramount importance. We try to find new investments available at a reasonable price in relation to probable and potential intrinsic value over a period of years into the future and then hold them through the inevitable market ups and downs. If you think that sounds like something you’d expect out of Warren Buffett’s mouth, you’d be right. So why now? The interesting thing about Central Securities right now is its nearly 20% discount to net asset value. That’s fairly wide for this fund, which has a 10-year average discount closer to 16%, according to the Closed-End Fund Association-a level at which it traded when I last looked at the fund earlier this year. If you look back over the fund’s history on a quarterly basis 20% is a relatively infrequent number to see. Which helps explain why the fund repurchased roughly 775,000 shares through the first nine months of the year. The average price on those purchases was around $21. Central Securities’ shares have recently been trading hands below $20. If you are looking for a value-focused fund with a long-term history of success, this might be a good option for you. Just be prepared to hold for a long time and to handle being out of step with the market for sometimes lengthy periods. But when value comes back into favor, which history suggests it will, this fund’s willingness to stick to its knitting should shine through. The caveats But that doesn’t mean it’s right for everyone. For starters, if you are an income investor, the fund only pays semi-annually. And the distribution has varied greatly over time. So you can’t really count on Central Securities for income. It does have a lot of unrealized capital gains in the portfolio, which isn’t surprising given its penchant for owning stocks for long periods of time. However, that doesn’t mean it will sell them just to fund a distribution, only that it could do so if it wanted. Another wrinkle here is that the CEF’s largest holding is The Plymouth Rock Company, a non-traded insurance company. That one position makes up nearly 20% of the portfolio. That means management is pricing a huge chunk of the portfolio by itself. It has a system in place for that, but Central Securities does not own a diversified portfolio. It’s worth noting that The Plymouth Rock Company has been actively buying back its shares. Central Securities, for example, sold 6,000 shares in the third quarter, leaving it with over 28,400 shares worth a total of $109 million at the end of the quarter. CET has a massive unrealized gain in this one investment, since the initial cost was only about $700,000. Which helps explain why Central Securities has pretty much told The Plymouth Rock Company that it is willing to sell, but only a little at a time and only if the price is right. So this issue is likely to get smaller as time goes on. (A shout out to Papaone for digging that nugget out of a Plymouth Rock report.) Whether or not a concentrated portfolio and difficult to gauge dividends are reasons to bypass Central Securities is really going to be based on your investment preferences. But I would say conservative income-focused investors would probably be best off looking elsewhere if you are trying to replace a paycheck. However, Central Securities is well worth a deep dive if you are looking for a value-focused fund that has proven it won’t change its stripes and see the income it throws off as a side benefit and not the main show.

Oil ETFs To Watch As Crude Slips To Below $40 Again

U.S. crude again trickled to below $40 per barrel on Wednesday following the bearish inventory storage report from EIA that has deepened global supply glut and amid fresh fears that the world’s largest oil producers will not cut production when they meet on Friday. The prospect of interest rates hike and the resultant surge in dollar added to the woes. As such, U.S. crude plunged 4.6% on the day while Brent slumped 4.2% to the nearly seven-year low. The inventory data showed that U.S. crude stockpiles unexpectedly rose by 1.2 million barrels in the week (ending November 27). This marks the tenth consecutive week of increase in crude supplies. Total inventory was 489.4 million barrels, which is near the highest level in at least 80 years. As the Organization of the Petroleum Exporting Countries (OPEC) is due to meet on Friday, the market is not expecting the members to arrest production. Instead they are expected to pump oil vigorously to protect their market share. If this happens, crude will continue to be in a free-fall territory like it was last year when OPEC had decided not to cut production. However, Saudi Arabia and its Persian Gulf allies are willing to cut back if other producers like Iran, Iraq, and Russia join them in the mission. In fact, at the meet, Saudi Arabia may propose a cut of 1 million barrels per day in the OPEC output to strike a balance in the oil markets. Outlook Remains Bleak The current fundamentals are not in favor of oil with rising output and waning demand. This is especially true as OPEC is pumping record oil since Saudi Arabia and other big producers are focusing on market share. Iran is looking to boost its production once the Tehran sanctions are lifted. Meanwhile, oil production in the U.S. has been on the rise and is hovering around its record level. On the other hand, demand for oil across the globe looks tepid given slower growth in most developed and developing economies. In particular, persistent weakness in the world’s biggest consumer of energy – China – will continue to weigh on the demand outlook. Notably, manufacturing activity in China shrunk for the fourth straight month in November to a 3-year low. The International Monetary Fund recently cut its global growth forecast for this year and the next by 0.2% each. This is the fourth cut in 12 months with big reductions in oil-dependent economies, such as Canada, Brazil, Venezuela, Russia and Saudi Arabia. That being said, the International Energy Agency (IEA) expects the global oil supply glut to persist through 2016 as worldwide demand will soften next year to 1.2 million barrels a day after climbing to five-year high of 1.8 million barrels this year. ETFs to Watch Given the bearish fundamentals and the OPEC meeting tomorrow, investors should keep a close eye on oil and the related ETFs. Below we have highlighted some of the popular ones, which could see large movements ahead of the OPEC decision: United States Oil Fund (NYSEARCA: USO ) This is the most popular and liquid ETF in the oil space with AUM of over $2.5 billion and average daily volume of over 25.7 million shares. The fund seeks to match the performance of the spot price of WTI. The ETF has 0.45% in expense ratio and lost 3.6% in the Wednesday trading session. iPath S&P GSCI Crude Oil Index ETN (NYSEARCA: OIL ) This is an ETN option for oil investors and delivers returns through an unleveraged investment in the WTI crude oil futures contract. The product follows the S&P GSCI Crude Oil Total Return Index, a subset of the S&P GSCI Commodity Index. The note has amassed $813.3 million in AUM and trades in solid volume of roughly 3.7 million shares a day. Expense ratio came in at 0.75% and the note was down 3.3% on the day. PowerShares DB Oil Fund (NYSEARCA: DBO ) This product also provides exposure to crude oil through WTI futures contracts and follows the DBIQ Optimum Yield Crude Oil Index Excess Return. The fund sees solid average daily volume of around 311,000 shares and AUM of $477.9 million. It charges an expense ratio of 78 bps and lost 2.9% in Wednesday’s trading session. United States Brent Oil Fund (NYSEARCA: BNO ) This fund provides direct exposure to the spot price of Brent crude oil on a daily basis through future contracts. It has amassed $82.7 million in its asset base and trades in a moderate volume of roughly 109,000 shares a day. The ETF charges 75 bps in annual fees and expenses. BNO lost 3.7% on the day. Original post .

NRG: A Green Done Undone By Coal

CEO David W. Crane resigned and the market cheered. Some may have thought it was a green dream undone. The blame belongs to coal and natural gas, not to solar. The resignation of David Crane as NRG (NYSE: NRG ) CEO sent the stock up, and fossil fuel advocates celebrated the demise of a green energy pioneer. The opposite is the case. Crane was undone by a $1 billion bet made on coal, specifically the Petra Nova “clean coal” project outside Houston, which is also taking down about $167 million in Department of Energy money. Crane had offloaded half of the project to a Japanese company, and a story early this year said the plant was operating normally, but a link to it on the NRG site no longer works. The idea of Petra Nova was to find a market for carbon dioxide. Instead of treating it as a pollutant and releasing it into the atmosphere, Petra Nova captures it and ships it via pipeline for injection into oil and gas wells. The carbon dioxide is meant to displace oil and natural gas in the formations, sequestering it from the atmosphere, but pushing valuable hydrocarbons to the surface. It’s a clever idea, but as oil and gas prices have declined it’s as uneconomic as coal itself. As Crane himself indicated in a recent conference call the rest of the company is running smoothly. Crane predicted the company would generate $3 billion to $3.2 billion in Earnings Before Interest, Taxes, Depreciation and Amortization, and $1 billion to $1.2 billion in free cash flow, during 2016. That would mean the company, whose present market cap is $3.3 billion, is now worth barely more than next year’s EBITDA, and less than three times expected free cash flow. The company isn’t out of the financial woods. There was $20.9 billion in debt supporting $31 billion in assets at the end of September. NRG’s plan is to shrink that balance sheet by $1.4 billion over the 2016 fiscal year, and Crane was confident in his call that the “retail” segment of the business would let it do just that. Investors don’t believe that, in part, because of the continued low price of natural gas but also, in part, because of the holes coal has blown in the balance sheet. The stock is down 63% for the year and, before Crane’s resignation, it showed no signs of recovery. Chief operating officer Mauricio Gutierrez is a Crane protégé and, like him, based in Princeton, NJ. Nothing is expected to change under his leadership. Crane, meanwhile, is now free to seek what might, literally, be greener pastures.