If the market averages 10% per year, and the CLM premium stays at 75%, I figure the longs end up just getting their own money back. The 12% or so yield is matched by a 12% or so reduction in market price as the NAV declines (assuming the 75% premium stays the same). In this senario, the short breaks even as well if you do not account for rebates or negative rebates.
However, the short actually makes or looses money depending on whether he is paid interest on the proceeds from the short sale (rebate) or has to pay the lender of the CLM shares (negative rebate). This leads to my question for investmentman. What is your experience with regard to negative rebates and your CLM short position? Some have argued that Renaissance Technoligies Hedge Fund may be making a profit by going long CLM and collecting a large negative rebate by lending out their shares.
This must correct down significantly. The more it goes up, the more i'm convinced. I won't even go into fundamentals, as those have been discussed already, but from the supply/demand standpoint - i can't find a single reason to buy this, and I can name many reasons to sell it.
There are infinitely many stocks out there that dominate this one from the risk/reward standpoint for any income investor who wants to go "long" US equities. If given a choice between this fund (which has been underperforming S&P500) with this premium and any S&P500 ETF, no matter how you slice the data, a rational person would always chose the latter. So if everyone was 100% rational - there would be no buyers for this stock.
On the other hand, investors who are currently holding this - you would think they would come to their senses and cash in on their profits. The real truth is that they were VERY lucky in the past, and they should thank the good lord for the fortunes, and get out before they get torched.
re:"The 12% or so yield is matched by a 12% or so reduction in market price as the NAV declines".. The problem with this theory is that it does not apply to CLM. The price has been escalating significantly over the last couple of years even tho the NAV has been declining. The long term shorts and longs will eventually lose out but the traders will make money every month on the swings in market price. So keep buying and/or shorting. It puts money in my pocket..(:>)
I totally agree with you. If you are skillful enough to play the swings you can obviously make a lot of money. My analysis has to do with long term longs and shorts. It applies as a hypothetical to those who do not believe anyone can accurately predict the swings. Many investors do not believe in trading swings, so I was talking about long term fundamentals.