MLPs Extend Gains But May Be Reaching a Critical Point

Joseph Cioffi |

I guess I should go on vacation more often. Master Limited Partnerships held the 350-360 level and seem to be benefiting from money coming in at the beginning of the new quarter coupled with the 10-year yield sinking back to 1.50 percent. Also, we have seen a tradeable bottom in natural gas, which has put some legs in the index. We are up nine days in a row and have not seen an up move like this since last December. The index is also above its support line moving averages, which gives hope that we could make a run for 400 on the index once again.

Alerian MLP Index 7-10-12(Click to enlarge)

But you may have to forgive me for not getting all excited here. Yes, we have had a nice bounce, but with what back drop. Nothing seems to be improving as far as the economy goes. The stock market has essentially gone nowhere this year. Investors continue to crowd in anything that pays a dividend or a distribution. Frankly, the trade is looking very crowded here. Europe continues to loom large. And I can’t help but get the eerie feeling that we are at some sort of critical juncture here.

One thing we should pay particular attention to is the earnings and distribution increases that will be announced shortly. Keep an eye on whether the usual 2 percent quarter-to-quarter increases continue and whether companies show coverage ratios in excess of their payouts. In other words, are they taking in at least $1.10 of cash for every $1.00 they pay out? As long as they can continue to essentially manufacture cash, MLPs will at least hold up better than the overall market.

Nat Gas 7-9-12(Click to enlarge)

One change over the last few weeks has been the rally in natural gas, which has moved back to $3 and seems to have put in some sort of tradeable bottom around $2. This should be supportive to some MLPs that are sensitive to nat gas prices, although most of these MLPs are hedged. And finally, watch the 10-year as we may be on the verge to take out all-time lows in yield, especially if some flight to safety trade develops as the summer moves on.

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Companies

Symbol Name Price Change % Volume
ENB.PR.J:CA Enbridge Inc. cumulative redeemable preference sha 17.31 0.21 1.23 12,000

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