Natural gas has been in an exhaustingly long bear market and you can see on this chart that at least the unrelenting downside that was the trade from November to January has stopped going down and appears to be building some sort of base in here.
We continue to straddle the bottom here around $2.20, but one has to wonder whether this can hold at all. Nothing fundamentally has changed in the last two months in terms of the economy. The slow recovery continues but its not enough to move prices off these 12-year lows.
MLPs who run gas from A to B continue to make money, which they will be able to do with natural gas at $2 or at $12. But one has to wonder what happens to nat gas-dominant MLPs if these prices on the commodity continue to implode. In the end, its about demand and if demand continues to fall, you have to wonder whether these MLPs will be able to continue to grow their distributions. However, there are two thing that are working in the favor of MLPs. Gas MLPs who either bought existing pipelines or built new ones did so at low prices. Raising capital at low rates has not been a problem. If demand ever comes back, the toll roads that pipelines are could be quite profitable. And even with demand at the low end here in the U.S., the gas can always be shipped to Canada or China or beyond where the appetite for gas is large. Then of course there is the liquids market, which has taken MLPs like Cheniere Energy (LNG), (CQP) and Plains All American (PAA) up to new highs, or at least not too far from new highs.
The MLP index meanwhile is lagging since its February top at 410. We have been sloping downward thanks to a recent move up in the 10-year to 2.40 percent. So far the damage here has been small and contained. But keep an open eye as this was the leadership group in the market that bottomed three months before everything else did. If MLPs have topped, it may spell trouble for the overall stock market a few months from now.
This is the time of year where MLPs send out their K-1s and everyone scrambles to get their tax returns completed. Its that UBIT, or unrelated business income tax, that everyone seems to worry about because anything over $1,100 means you pay taxes. For the most part it is never a problem, which is why I have advocated putting MLPs in IRAs even though you may be liable for a small tax on UBIT. It’s a pain in the rear end but most brokerage houses will do the math and paperwork for you. I have never had to pay tax on my IRA accounts. And even if I did, what stock group has almost tripled in the last three years? Wouldn’t you trade a little paper work for that kind of performance?
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