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MLP Week Thoughts: Pretty Pretty Pretty Good...

Almost everything globally that has a floating price was higher this week, MLPs included.  The few exceptions included: Silver (down 2%), Chinese stocks (Shanghai Index down 0.9%), natural gas (down 0.4%) and government bonds (TLT down 3.3%).  Everything else had a pretty pretty pretty good week...

The domestic stock market reacted positively to the 489 billion Euros worth of 3 year bank loans at 1% to 500+ banks that was announced by the ECB early in the week.  Then the market further rallied (on weak holiday volume) after the initial unemployment claims surprised in a positive way for the second straight week.  MLPs under-performed the S&P 500 this week, but are still far ahead going into the last 4 trading days of the year.

If MLPs have another week like last week again next week, the index will be at all time highs, last reached in late April of this year.  As I've noted before, the peak of the index means very little, considering it doesn't include distributions.  Looking back at how the MLP Index has performed compared with how that same Index has performed including distributions in the chart below, you can see how important distributions have been, accounting for more than 70% of the return of the Index from inception through Friday.  The Total Return Index is at all time highs currently, having surpassed the April 28th peak back in early December.

(click to embiggen)

Either way, the bottom line is, MLPs have performed very well lately, defying gravity and other risk assets.  It is becoming harder and harder to find MLPs that look cheap, particularly when looking at the large cap MLPs that have led the sector higher.  I generally have a fear of such heights and may be layering on some puts next week to protect against another pullback in 1Q 2012.  Despite the above chart of miraculous growth since 1996, it doesn't hurt to play defense when things get frothy (beyond the put premiums paid, which hurt a little)...

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