8/26/2013 8:15 PM ET|
A good time to buy MLPs
A modest tapering of the Fed's stimulus could come next month and produce a temporary rally in a variety of income vehicles.
I think this is a good time to buy -- selectively -- income-producing MLPs (master limited partnerships). I'm less enthusiastic about REITs (real estate investment trusts); there are good buys in the sector, but you have to be even more selective than with MLPs.
I'm going to explain how you go about being selective in buying MLPs and REITs.
On Sept. 18, I think the Federal Reserve will begin to reduce its monthly purchases of Treasury and mortgage-backed securities. About 65% of economists surveyed by Bloomberg on Aug. 21 agree with that opinion.
The consensus is that the taper will begin with a reduction in the $85 billion in monthly purchases to something like $75 billion or $70 billion. My suspicion is that a reduction of that magnitude won't have much effect on the financial markets. In fact, my suspicion is that the reaction will be "That's what we were worried about?" and that we'll get at least a temporary rally in bonds, dividend-paying stocks and other income vehicles (with the accent on "temporary" -- remember that the markets also have to cope with the threat of a government shutdown in September over the federal budget, as well as a potential debt ceiling crisis in October).
If my suspicion is correct, right now is a good time to pick up shares of dividend-paying companies and units of MLPs and REITs. After the drubbing dealt out to income assets in the last month, it's relatively easy to find dividend stocks that pay 5.24%, as Teco Energy (TE) did at the Aug. 23 close or MLPs paying 5.72%, as Oneok Partners (OKS) did on that date.
But I'd like to have more than suspicion in my corner before buying anything in the income sector now. Yes, it stands to reason that a taper to $75 billion from $85 billion won't be a
big deal and that income assets are now oversold, but I wouldn't mind buttressing that suspicion with as many other advantages as I can find.
Fortunately, I can find two that suggest where the biggest and safest bargains in the income sector lie.
First, I'd like to see income assets for which the price has been driven downward by more than just fear of the taper. For example, part of the reason I recently added Teco Energy to my Dividend Income Portfolio is that the company's coal subsidiary has been hit hard by falling demand and lower prices, providing a second negative trend in addition to the more general fear of a Fed taper.
Second, I'm looking for stocks with a second or third negative trend playing against them if -- and only if -- I think that trend is likely to reverse soon. So I looked to buy Teco Energy because the company is planning to sell its Teco Coal unit. That sale would remove one of the problems depressing Teco Energy shares and give the stock a very good chance of rising, even if my suspicion on the market reaction to a taper turns out to be wrong or overstated.
In other words, I'm looking for income assets with their own specific reasons for appreciation rather than just trusting to a hope that a rising tide will lift all boats.
(Article continues below video)
So why buy?
I think the natural-gas boom in the United States has made for especially attractive hunting in the energy MLP sector. And within that sector, I'd target MLP pipeline companies with big exposure to natural gas liquids.
You're probably familiar with the way that the boom in natural gas from shale -- following on slack demand resulting from the global financial crisis -- has driven down the price of natural gas in the United States. Natural gas prices, which had touched $13 per million BTU (British thermal units) in June 2008, plunged to $2 per million BTU in 2012 before beginning a recovery that put September futures at $3.54 per million BTU as of Aug. 23.
With producers not making money at that level, they cut back on natural gas exploration and production and increased production of natural gas liquids, such as ethane, propane and butane, that were in demand from the chemical industry. At Chesapeake Energy (CHK), natural gas production was flat in the second quarter, but production of liquids -- oil and natural gas liquids -- climbed, making liquids 25% of production in the quarter, up from 21% in the second quarter of 2012. (Chesapeake Energy is a member of my Jubak's Picks Portfolio.)
As you might imagine, this wholesale shift in the sector has resulted in a surge in supply of natural gas liquids and a drop in price. Natural gas liquids, which sold for better than $40 a barrel in December 2012, dropped to $33 in June. That resulted in pain not just for producers, but also for pipeline companies. While some companies were relatively sheltered from the price drop because a majority of their natural-gas-liquid transmission business consisted of fixed fee contracts that don't rise or fall with the price of gas, no pipeline company totally escaped. For example, second-quarter results at Oneok Partners were hit by "ethane rejection." The price of ethane had dropped so far that it no longer paid to separate ethane from other liquids at the field, so the resulting liquids shipped through the pipelines were a less-valuable mixture of liquids rather than purer and more-valuable ethane or propane or whatever.
In the first quarter of 2013, spreads between ethane and propane basically collapsed at Oneok to just a penny a gallon. That led to a huge miss, as earnings came in at 42 cents a unit instead of the 58 cents projected by Wall Street analysts. In the second quarter, a rebound in ethane/propane spreads to 6 cents a gallon contributed to an 8-cents-a-unit earnings surprise. (Oneok is a member of my Dividend Income Portfolio.)
So how does all this bad news about natural gas liquids equate to a reason to buy specific energy MLPs?
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"If you think those worries are overblown". Yeah, as if 99.99% of the readers of these words have a clue about the real estate, economic, and political conditions in Singapore and China!
An MLP!!! Peter Lynch has said buy what you know right? Can we sustain $4.00 a gallon, and consumer confidence keep rising? Syria fears? Time to buy BA or GE for the time being. Get your oil plays in now, because everyone just made a ton of money with the price fluctuation as of recent. I think a stern talking too is all that will happen but who knows with this Syria wacko, but i am not for sure. Get the factories going and quit relying on imports. JOBS = recovery, GDP = recovery. A chance to change now! Corporations and shareholders alike want to see profits while everyone without a job wants to see a paycheck. Toyota can do it and still make a profit. Others as well!
Mandatory requirement for Corporations to keep manufacturing of their products at 25% in the US.
It all changes when we come together as a whole!! Wishful thinking!! Meanwhile, I will take my profits as necessary and "Hope and Change". Not a chance!
These market shills just never stop, do they? Well....that is what they know; trying to get 'the pigeons' to sustain the unsustainable by investing in a dying, shrinking economy or 'non-economy' as the case may be. Ever the optimists, these shills are banking on past history that a 'recovery' will come along at some point. Sorry....ain gonna happen. There is no comparison, no historical data to use here. They believe, as all cornucopian's do, that growth can and will continue, which is fine if you have unlimited cheap oil and resources to plunder. $106 a barrel for oil will not work and oil companies are not going to go after the hard to get, expensive, low output volumes that are left for any less. It's not 'profitable'.
A term to become very familiar with: compressive contraction.
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