Are MLPS Holding the Bottom?

Joseph Cioffi  |

After the recent trip down to 350 on the MLP index, we have seen a bounce up to just under 370, which one would consider a normal bounce within the context of the downtrend. A few disturbing items continue to stand out for the group, which leaves one to wonder whether we have seen a sea change.

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The top in February looks to be “the” top versus “a” top. The decline for the most part has been reasonably orderly and while initially it was diverging from the rest of the tape, it is now apparently moving in line with the rest of the market. Still it remains a problem that yield spreads against the 10-year remain stubbornly high, over 500 basis points among the best MLPs out there. We are at the polar opposite of where we were in December of 2009 when the index made a double bottom around 150-160 and took off to a three-year gain of well over 100 percent. MLPS are tied to the market, which is tied to Europe which is tied to the European banks, which are tied to the European sovereign debt. It is the last element here that continues to run the show and could be the coil that eventually causes the entire spring to unravel. For now though it’s a bear market bounce and we will enjoy it while it lasts.

We are approaching the end of June, which means end of quarter and first half. Since MLPs are down for 2012, I would look for some end of quarter pressure as portfolios do their phony mark ups or mark downs. The selling will be offset by the attractive 6-percent-plus distributions that most MLPs offer holders. Couple this with the time of year where corporate developments are at a trickle and you have the ingredients for people to think of the shore and the pool and not much else.

One recent development that makes for interesting debate is the nat gas chart, which apparently has put in some sort of bottom around $2.

This is the weekly chart of nat gas, which has been rallying of late and is challenging that first resistance around $2.75. We have seen these tradeable bottoms before and while we are watching this rather carefully for a longer-term sea change, we have seen this play out before and the bear market here has ultimately growled to live another day. We need to see this chart change some more in terms of definable uptrend before we can get excited about anything other than a bear market rally.

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