Closed end funds....

Closed end funds, which sold off sharply in 2008 have in many cases rallied significantly the last few months as investors, attracted by the large discounts and high yields begin to buy back into the sector.

Below are a few that are worth considering:

TSI - managed by Jeffrey Gundlach, who also runs one of the top performing open ended bond funds. TSI benefited in late 2008 because of their relatively large holdings in agency (FNM, FRE, GNM) bonds, which rose in value when Treasury and the Fed began buying MBS directly. This allowed TSI to declare a special dividend of .08 in addition to the regular dividend of .075.

NCV - Invests in convertible debt, dividends were suspended in late '08 but were resumed recently at a monthly rate of .09.

NBH - Some of the Neuberger Berman muni funds look attractive, this one is the national muni fund, NBW for example is the state specific fund for CA. These are intermediate term, and durations are around 4-5 years, and means that much of the portfolio matures in a relatively short time, allowing reinvesting of matured bonds into more attractive securities. This is in contrast to many bond funds which have very long maturities, up to 20-30 years, which means they are locked into bonds that may not be as attractive as others, and limits the ability of the fund to redeploy assets into other securities.

SLM Preferred Stock A

I added a post about preferred stocks some time ago and thought it worthwhile to revisit them. SLM has several outstanding, including 'A' and 'B' shares. The major difference is that 'A' pays a fixed rate, while 'B' is floating, based on LIBOR. The drop in LIBOR the last few months makes the 'A's more attractive, at a price of around $30, the effective return is almost 12%, and the dividend is qualifed, meaning it's taxed at a rate of only 15%. A good tax loss strategy to consider last year if you owned the 'B' was to buy the 'A's to maintain a position, and sell the 'B'. It probably would've worked out since the 'A's have rallied sharply over the last few months from the low 20's, and were as low as $18.75 at one point.

SLM has been able to line up financing and is expected to get support from the Treasury/Fed. Results and estimates suggest SLM should be able to remain cash flow positive, meaning common stock dividends should be maintained, which in turn implies the preferred stock dividends will continue to be declared.

Recent turmoil....what to do??

Events of the past few weeks have been unprecedented, and understandably make any investor very nervous....here are some ideas.......

• Initiate or add to positions in Berkshire Hathaway. There is simply no one better than Warren Buffett to navigate the next few years successfully. Berkshire's balance sheet at this point is better than the government's, and as the only AAA-rated company with significant liquidity, Buffett is in his element and can cherrypick assets like the recent buy of Constellation Energy, which was purchased for at a significant discount to book value.
• Gold stocks or ETF's should be a good hedge against a drop in the dollar, as the recent rescues will involve running the printing presses flat out. Some stocks include: Barrick Gold (ABX), AUY, Goldfields (GFI), Goldcorp (GG), Lihir Gold (LIHR), GSS, Newmont Mining (NEM), and an interesting ETF is GDX. Mining stocks moved significantly lower this summer when gold prices dropped (more on a % basis), but have since recovered. It is for this reason that mining stocks look somewhat more attractive than gold itself, which can be purchased thru the GLD ETF. Note that buying the GLD ETF is considered the same as owning a collectible, so the long term tax rate is higher, 28% vs. 15%. Finally, South African gold stocks are somewhat less attractive than those located elsewhere such as Canada or Indonesia, the reason is that production has been constrained the last year because of lack of power.
  

Otter Tail Corp. (OTTR)

Otter Tail is a utility but has made numerous investments in other fields, most recently in wind energy thru a subsidiary called DMI Industries, which manufactures wind towers. The stock is down 25% recently to about $30, but yields 4% with a good history of increasing dividends. OTTR completed a stock offering last week and is expected to invest in DMI.

Bill Gates thru his investment vehicle, Cascade Investment, owns almost 9%.

Master Limited Partnerships (MLP)

• Created in 1986
• Enterprises engaged in certain businesses, i.e. natural resources, energy, pipelines...designed to encourage infrastructure investment
• Investors are limited partners, allows use of depreciation to reduce taxable liability. Dividends are essentially tax free until MLP is sold.
  

http://www.dailywealth.com/archive/2008/jun/2008_jun_13.asp

They are not subject to swings in commodity prices, since business is based on pipeline usage and volume, and also tend to be recession-resistant, as domestic use of energy is always increasing. The best known MLP's are Enterprise Production Partners (EPD) and Kinder-Morgan (KMP), both yield over 7%, but stock prices have also done well over the last 10 years. Total return has far outpaced performance of the SP500.

Atlantic Power Corp (ATPWF or ATP-UN.TO)

Atlantic Power is an interesting company involved in the power generation business. It consists of what is known as a stapled unit, which is comprised of an underlying interest in sub debt and an underlying interest in common stock; these are known as an Income Deposit Security (IDS), or other similar type names like Income Participating Security (IPS).

Earnings were announced today and were very strong. Cash flow available for dividend distributions increased over 500%. Currently, APC distributes $0.0884 per month, for a current yield of over 13%.

Recently, APC also announced a buyback program to repurchase up to 8% of the public float of outstanding IPS's.

Ralcorp Holdings (RAH)

One trend that I think we will see is a reduction in expenditures by a stressed consumer on expenses such as casual dining. This should be beneficial for grocery stores, WalMart, and Costco, but also for Ralcorp, which is one of the leaders in private-label food brands.

In addition to cutting back on casual dining, consumers can also be expected to look for alternatives to name brands. Ralcorp is in a unique position to take advantage of this trend, and is a way for the investor to participate and also avoid the competitive grocery sector.

Safeway recently reported their latest quarterly earnings, which were below expectations, and noted that one reason was because sales of private-label goods was higher than expected.

P/E is modest at just 14, and stock is down about 20% over the last year, probably because of higher than expected input/commodity expenses, but these costs will eventually be passed on via higher prices and the current price of $54 appears to be a good entry point for the investor to take advantage of what looks to be a long term trend.