In 2007, MLPs were coming off a long advance taking the Alerian MLP Index to a record 342.14 on July 13. Then the index drifted lower for more than a year (along with the stock market) until the fall of 2008 when just about all securities plunged with the Lehman collapse. On November 21, the index reached its low of 152.68. Then it rebounded and fell back three months later, but the low held. From there the index marched forward with only a few setbacks. On October 5, 2010, the index went over 343, setting a new record, but selling in the last hour took the index down and the index failed to close at a new record. Yesterday, October 6, left no doubt. The index blasted through to a new record of 344.08!
While it was climbing, two other major groups also reached records. Gold has been hot all year, rising to new record levels in the 1340s (with intra day highs over 1350). Treasuries are also attracting a lot of buying. The annual yield on the 2 year Treasury note just fell to a record low of 0.38%. The yield on the 10 year Treasury bond is 2.40%, not far from the record lows reached in January 2009. It's difficult to reconcile how MLPs with business risk and safe haven securities can reach records simultaneously.
Last week UBS Investment announced a new exchange traded note (ETN), the UBS E-TRACS 1X Monthly Short Alerian MLP Infrastructure Total Return Index, designed to provide short exposure to the Master Limited Partnership (MLPs) market by tracking the inverse performance of the Alerian MLP Infrastructure Total Return Index. Obviously this is only for very aggressive investors who want to bet on the MLP index going down. In its few days of trading, its cumulative volume was less than 8000 shares. But it illustrates the popularity of new funds investing in MLPs which have been a factor in the Alerian MLP Index reaching its new record.
The MLP index has risen 125% off its low less than 2 years ago. The comparable index including reinvested income has even bigger gains. This year I've been concerned that such a rapid advance needs a major pullback. But the index kept rising. In the last 12 months the index had 4 pullbacks (or pauses for the fans) with more buying taking the index even higher. Fundamentals for the MLPs remain pretty much the same, ample financing is available for new capital projects (largely pipelines and storage terminals). Growth has generally brought higher distributions for unit holders. With a yield on the MLP index only 6½% (low by historical standards) and plunging yields on (what are viewed as) risk free Treasuries, further value increases bringing even lower yields will be more difficult to achieve and vulnerable to a major decline.
Disclosure: No positions