Following 2009, the best year for the Alerian MLP Index, this year has been much tougher. The index began 2010 at 286 and had to wait until March before breaking 300, but it wasn't until April that it was able to decisively go over, reaching a peak of 319. Then came May, payback time. The index was caught up in a major market sell-off, dropping to 280 (down 6 YTD) by Friday, April 21. May has been a brutal month for the stock market. The sell-off was prompted by the financial crisis in Greece which had billions in borrowings due on May 19. The eurozone group came up with a trillion dollar bailout fund to shore up finances of marginal members in the zone. But last week was dreadful until a rally in the last half hour of trading on Friday (not considered meaningful in the longer term).
The sell off came from frightened investors selling just about every investment to buy Treasuries, "safe" investments. The yield on the 10-year Treasury bond had pushed up to 4% by early April. Then Treasuries rallied. The yield on the Treasury bond plunged to 3.2% by Friday, the lowest since the depressing period early last year, despite indications that the Treasury will be needing over $1 trillion annually for the foreseeable future. The VIX, volatility index and sometimes known as the fear index, shot up to 40 (doubling in May). These are troubling times.
Fundamentals for MLPs remain intact. MLPs are building more miles of pipelines to move energy around the US and Canada because demand is strong for this service. Financing is available for new capital investments. However, over the short term, MLPs will be influenced by the vicissitudes in the stock markets and they are negative. European financial problems are not going away soon. The €, a proxy for European financial problems, dropped to 4 year lows of $1.26 (and there is talk it may plunge further to parity or $1.00).
Risk aversion is back in vogue, selling will continue until investors are ready to embrace riskier investments (such as MLPs). The spread (added rewards for extra risk) of the yield for MLPs over the yield on the 10-year Treasury jumped from 300 basis points a few weeks ago to 470 basis points currently and could be heading higher. MLP believers should view this as an opportunity to establish buying points for MLPs they like. A good way is to budget a target yield on a favored MLP and use that to arrive at a buying price. These troubled times could be with us for weeks, even months.
Disclosure: No position