MLPs Staging An Unimpressive Bounce

Joseph Cioffi |

From the standpoint of bounces this one has been fairly anemic in nature. The MLP index raced down to the 350 level and has managed a bounce back up to 365 in a three-day rally last week. But that rally has already hit a wall and while the rest of the market is trying to recover from Monday’s debacle, the chart here to me is still a screaming sell until proven otherwise.

Alerian MLP Index 6-12-2012

There are two realities that market players and MLP players must come to deal with. First off is Europe remains a big problem as the can keeps getting kicked down the road. However, that road is now ever closer coming to the end, which is along the side of a huge cliff. And when you look out over the cliff, it's very difficult to see the bottom. Positive MLP fundamentals aside, the world hinges on the fate of the Euro and the prospect of another Lehman times 10 in the form of a sovereign default.

The second reality is the U.S. economy is clearly stalling and could be teetering into another recession. Both prospects combine for a not-so-pretty prospect. And with yield spreads in MLPs now up around 500 basis points, this is not the time to just haphazardly buy new positions. What makes this rally different from the other rallies since last October is energy.

Note that crude is hovering just above 80 dollars and Brent crude, which is reflective of the world oil price is now below $100 for the first time since last September. These are deflationary signals and deflation of asset prices and commodities coupled with deflation of bond yields may put some MLPs in the precarious position when it comes time to go to the credit markets for their normal refinancing. I am not suggesting that anyone is in trouble here, but I am suggesting that it may become more problematic if we start having another round of bank problems. At least the MLP bull market still has prices high enough where equity can be readily sold in the market place. Many companies have done secondaries on a regular basis and so far that particular well has not dried up.

As far as a strategy goes one should be using this time to make up a shopping list. Pullbacks of some of the better performers like Plains All American (PAA), Enterprise (EPD) and a few others has brought these MLPs back to attractive areas. But with all the market uncertainty don’t be surprised if we see a break below 350 on the MLP index and even more attractive prices in the weeks to come. All of this assumes of course that Europe doesn’t completely pull the entire rug out from under us.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


Symbol Name Price Change % Volume
EPD Enterprise Products Partners L.P. 26.75 -0.32 -1.18 5,174,843
PAA Plains All American Pipeline L.P. 32.45 -0.19 -0.58 2,116,560


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