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Saturday, February 7, 2009

MLPs Performed Well in January ( Avi Morris ) Madmoneyfund Reader

The stock market got off to a very bad start in 2009. The Dow has been in a trading range (roughly 8-9000) for the last 3 months. But January was the worst January in history. The Dow dropped almost 800 to close at 8001. For those who look to the first week and first month as indicators, they each had major declines signaling another down year.

The Alerian MLP Index started the year with a big gain on the first day & worked its way upward during the month. The index jumped 12 points on the first trading day followed by modest gains into the 190-200 zone where it remained. Last week, it went over 200 and is hovering there trying to establish 200 as a new floor. In the first month:

Dow Jones --- down..9%
MLP Index --- up...14%
The MLP index currently yields almost 11%, an enormous 800 basis points above the Treasury bond rate (200 basis points has been considered an ordinary spread). It has benefited from investors seeking high yield securities. Junk bond funds shot up 50+% from their overly depressed lows 2 months ago. Those yields are still at extraordinary levels, 15-20%.

The last 2 weeks have been very important for MLPs. This is when earnings are announced, guidance is given & quarterly distributions are set. With a number of MLPs selling in single digits, there was worry about many distribution cuts. Subsequent selling in those units could bleed to MLPs which are doing better. So far, distribution news has been fairly good, cuts have been limited. MLPs which have maintained or increased distributions have performed well.

Their businesses might be more heavily impacted by recessionary forces in the economy. It's difficult to forecast because they pay distributions from cash flow (as they define it), different than paying dividends from EPS. Also, very low prices for oil and other energy products could hurt. That's hard to anticipate since they do not own energy products, but a weak economy should hurt MLPs. Financing is available for the strongest. Kinder Morgan (KMP) is the largest MLP with an outstanding growth record of distribution increases. A few weeks ago they raised almost $1 billion by selling debt and units. For Q1, they raised the distribution to an annualized rate of $4.20. But their guidance for the year indicated $4.20 would be paid in 2009, implying no further increases during the year even though record payments in 2009 will be higher than in the prior year.

After an impressive January, the MLP Index is fighting to remain over 200. However continued weak markets could even drag down MLPs
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