"Market Monitor"-Thomas Herzfeld, President of Thomas J. Herzfeld Advisor
Friday, December 26, 2008PAUL KANGAS: My guest market monitor this week is Thomas Herzfeld, president of Thomas J. Herzfeld Advisors, a firm specializing in closed ends funds. And Tom, welcome back to NIGHTLY BUSINESS REPORT.
THOMAS HERZFELD, PRESIDENT, THOMAS J. HERZFELD ADVISORS: Thank you Paul. Happy holidays.
KANGAS: And the same to you.
HERZFELD: Thank you.
KANGAS: As an expert in closed end funds, one of the top in the world, briefly explain to our viewers how these funds differ from other types.
HERZFELD: Closed end funds are almost the same as mutual funds, except they trade on the stock exchange like ordinary stocks. They can trade above or below their net asset value depending on supply and demand.
KANGAS: And they have a set number of shares outstanding?
HERZFELD: Yes.
KANGAS: Very good. Well we know how bad a year it's been for stocks in general, so can we assume closed end funds got caught in the carnage as well?
HERZFELD: Yes, they had an awful year, the worst I've seen in the 40- plus years I have been following them. Discounts (INAUDIBLE) values widened and their net asset values performed worse than the market because the funds are mostly leveraged.
KANGAS: Ah, that's one of the dangers of high leverage. A lot of these funds though are paying huge dividends, 20 percent and sometimes even more than that. So why have they fallen so sharply?
HERZFELD: Some of that yield was the result of leverage and the funds are de-leveraging. Another case is it was return of capital. The best way to buy a closed end fund is after they cut the dividend and there have been 60 dividend cuts in December.
KANGAS: And nasty ones, too. OK, so right now, you're looking at a market that's ready for buying. We'll get into that, but you think generally it's a good time?
HERZFELD: Closed end funds, the industry moves in five and 10-year cycles and we're at the beginning I think of a five or 10-year bull market in closed end funds.
KANGAS: On your last visit with us a year ago almost to the day, you recommended three closed end funds. Let's see how they've done, although we have a pretty good idea. But you trade these things in and out many times a year do you not?
HERZFELD: We're short-term traders.
KANGAS: Right. So the Clough Global Opportunities (GL) you gave to us in December, it was in a profitable position. Was it shortly after?
HERZFELD: I think last year's recommendations, if you sold them in January, which is usually our trades, buy in December, sell in January, you would have made money on last year.
KANGAS: You always tell me, if you're going to have me on the program, always do it in December. Why is that?
HERZFELD: At the end of the year, people take tax losses and since the share price is based on supply and demand, you have all the supply coming into the market, it widens their discounts. In January, the tax sellers are gone and the discounts snap back.
KANGAS: And that happened to the Dremen fund (DHG), which was another recommendation. It was up first and then down it went.
HERZFELD: The best year-end trade is buy in December, sell in January.
KANGAS: There was one other recommendation, also, last time, DWS (KMM) and that's down 31.7 percent, same story though.
HERZFELD: Yes. All of those are cheap by the way, but they're not this year's recommendation.
KANGAS: Well give us your general outlook for closed end fund performance in this New Year coming up.
HERZFELD: It's going to be a great year for closed end funds. They've been beaten down to the worst levels I've seen. The Herzfeld closed end average is at a 19 discount. That's the widest I can remember and I'm just looking forward to a very strong year.
KANGAS: Well, let's have some new recommendations Tom.
HERZFELD: One is an emerging market debt fund, Western Asset Emerging Market Debt Fund, ESD. It's a 13 percent yield and it's trading at a 17 percent discount to net asset value.
KANGAS: How well do you think that dividend is going to hold up?
HERZFELD: Should be good for at least three months. The next one I'm going to recommend just cut their dividend and I think that's going to be fine going forward.
KANGAS: Let's get to that next one that you would recommend buying now.
HERZFELD: You know we've been buying this one aggressively. Alpine Global Premiere Properties Fund (AWP). It's about an 11 percent yield after cutting the dividend and trading at a 30 percent discount to net asset value. The stock's trading at about 3 (ph). It came out last year at 20.
KANGAS: So what do they mainly invest in, these two?
HERZFELD: Well, of course, the first one, emerging market debts.
KANGAS: All over the world.
HERZFELD: Yeah. And alpine and property stocks globally. They're in Japan, in the U.S. (INAUDIBLE)
KANGAS: Well diversified. OK. Do you personally own any of these funds mentioned or have other disclosures to make about them?
HERZFELD: I own all the stocks I recommend when I come on this show and we own them for our accounts and we have been buying them aggressively recently.
KANGAS: So you're looking forward to a very strong January once the tax selling is out of the way.
HERZFELD: By the way, because I knew that you might be look at something longer than a January trade, both of these I think are going to be fine for the year.
KANGAS: OK, very good and very interesting. That's why you always like December here.
HERZFELD: Yeah.
KANGAS: All right. Tom, we're out of time, but I want to thank you for being with us once again.
HERZFELD: Thank you, Paul.
KANGAS: My guest Thomas Herzfeld, president of Herzfeld Advisors.
