Short Term Still Bumpy for MLPs

Nov. 4.08 | About: Kinder Morgan (KMP)

October was the worst month ever for stock markets, and that applies to stock markets around the world. The Dow Jones Industrials fell 15%, saved by an even worse decline after recovery in the last couple of weeks. Overseas markets did even worse, where declines of 25-30% were common. MLPs, as with many other groups, experienced similar sharp declines followed by rebounds in the last couple of weeks.

Below is a brief track record of the Alerian MLP Index for this current decade. The long term is an important consideration when evaluating MLPs. Growth has been excellent and not subject to wilder price swings occurring in many other securities. The Alerian MLP Index (AMZ) shows excellent growth while the AMZX index is the same index with reinvested income:

The decline in 2008 through the end of August was serious, taking AMZ down almost 70 points below the 342 peak in July, 2007. However the September-October market decline proved far worse in a shorter span of time. By October 10, AMZ had declined another 110 to 163, in just a few weeks, On the Columbus Day rally, AMZ rose 35 (22%) and the next day another 8, record changes for just 2 days. Since then, AMZ has worked its way up to 222. It looks like it wants to remain in the 200+ zone where it is trying to build a base. The unusually severe sell-off was probably aggravated by the demise of Lehman. The bank was big on MLPs and heavily invested in their securities. Those holdings may have been sold off rapidly (panic selling) during the liquidation period.

The businesses of MLPs remain the same as 2 years ago when the AMZ began a 70 point advance to the record level of 342 (which took 9 months). Pipelines are long term assets requiring long term financing. Plans for capital expenditures (many companies have billion dollar projects) remain in place. In the last 2 weeks, Q3 earnings were announced and Q4 distributions declared. Earnings and cash flow were generally favorable. Kinder Morgan (NYSE:KMP), the largest MLP, increased its distribution to another record level, as did many others.

The short term may be bumpy as these securities will be buffeted by stock market fluctuations. Any dips caused by market fluctuations and possibly year end tax loss selling should be thought of as providing buying opportunities. Even after the recent rebound, the AMZ index has a yield of 9.7% (almost 600 basis points above the Treasury bond rate) making it easier to take a waiting period before stock markets resume an upward trend.

Stock position: None.