Closed - End Fund Puzzle

[Paul Davidson <pdavidso@xxxxxxxxxxxxxxxxxx>]

Barkley invokes a strange argument

-- namely that the "true fundamental" underlying the speculative nominal
market value of closed end fund shares is the speculative nominal
market value of the shares of stock the fund holds (
(and he forgets -- (1) the expectations of the fund shareholders as to
how clever the fund manager will be in getting into and
 out of stocks to reap unexpected capital
gains in the future and (2) fund shareholders expectations about how present
and prospective shareholders  expect the managers to reap unexpected
capital gains.)

It is hard to believe that speculation about speculation
about speculation, etc. represents a "true fundamental".


And in fact, as a former holder in many closed end trusts traded on the
NYSE exchange, I can attest to the fact that while the value of
closed-end shares rarely equal the nominal market value of the
underlying assets (minus management fees, etc), they have a propensity
to change significantly and unexpected their values relative to the
market value underlying assets. A case in point is Salomon Brothers Fund
(NYSE) which
took an almost 9 per cent increase in nominal value (while the
underlying
assets values remaind basically unchanged over a month period. This month
period encompassed approximately 10 days before MONEY magazine highlighted
the fund as a "recommended Buy" to three weeks after MONEY magazine hit
the news stands. The true fundamental in this case is the "hype" of MONEY
magazine. Because it must sell another issue next month -- the focus of
the hype will change -- even when the true fundamental does not.
	
	Speculation about speculation is a very strange vision of a "true
fundamental".

	My best illustration that liquid securities traded on exchanges
have no "true fundamental" such as the "real marginal product of capital"
involves postage stamps. A former colleague of mine had a VERY valuable
postage stamp collection and he traded stamps on a reasonably organized
market. (It was so valuable that he had to keep it in a bank vault and
hence it was very in convenient to see -- as a pastime -on rainy Sunday
afternoons. Consequently its utility for visual pleasure was very small
relative to its carrying costs. )

Now what sets the value of a used postage stamp in such a market?
The true fundamental is only what people think others will be willing to
pay in the near future. (In the case of postage stamps there is no
nominal cash flow due to quasi-contractual dividends or contractual
interest payments plus principle redemption -- to provide some nominal
anchor to the nominal market value of objects of speculation.)  To talk
about true fundamentals involving liquid assets that are held primarily
for their liquidity (resalability) in markets organized by a market
maker who does Not guarantee an unchanged spot resalable price over time
-- is really straining both credulity and  language.

Next thing Barkley will tell us, that Purchasing Power Parity (PPP) is the
true fundamental for the US dollar exchange rate -- although I think you
will find it hard to indicate any period between 1973 and 1995 when the
Dollar was close to PPP. Why is the dollar have a long period when it iss
undervalued (recent years) and a long period when it was overvalued (Early
Reagan years)?


My message for the day -- but let me vote with Trond on the overall
question of limitations.

Paul D.