The Alerian MLP Index Approaches Its Record High

by: Avi Morris

The Alerian MLP Index has been charging forward to levels not seen since its plunge from record highs in the middle of 2007. Ten years ago the index was still at 100 (its starting point at the end off 1995). It marched forward for over 7 years (including the market sell-off at the beginning of this decade) reaching 342 in July 2007. Then it plunged 60 in just 3 weeks. During the plunge, on Aug 1, it closed at 321, the last time it was above its present value - 315.

The index has been on the rise again since the November 2008 lows. Last month it wavered at 300 before continuing to rise. This month it stalled around 310 before it passed that barrier Tuesday (April 20). Now at 315, it's only 27 away from its record. The comparable index including reinvested income is already at a record level of 848 (versus 750 when the main index topped out at 342). The MLP index has an outstanding record in a decade which has been brutal for many stocks. The comparable MLP index including reinvested income has grown 6 fold from 140.

Higher index levels bring lower yields. The current yield on the index dropped to 6.8%, about 300 basis points above the yield on the 10-year Treasury bond. When the index reached its high in 2007, the yield on the index sank to under 5.4% while the yield on the 10 year Treasury bond had risen to 5¼%, reducing the spread to near zero. Then the index plunged and Treasury bonds rose in price. In all fairness other factors contributed to the dramatic drop in MLPs. Lehman and other big holders of MLPs probably went through the first phase of the financial meltdown (the sub prime crisis), causing MLPs to be sold indiscriminately.

The businesses MLPs operate are doing well which has allowed them to raise billions of dollars in debt and equity, even in recent months. Few companies can make that statement! As long as the stock markets keep rising, MLPs can take the index higher. But when the markets hit the next big bump in the road, all securities will feel it. Without a major correction, this bull market could take a nasty fall.

Disclosure: No positions

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