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August 30, 2012

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Labor Day and MLPs

Labor Day is ostensible a holiday to celebrate American labor, dedicated to the social and economic achievements of American Workers.  It was first made a federal holiday in 1894, back when factory workers and farmers represented around 60% of the total employed persons in the U.S. (according to 1900 census), and back in the days of the massive trusts (e.g. Standard Oil) and juggernauts like U.S. Steel that were often at odds with their workers. Labor Day was meant to be a day of parades and celebrations of the “strength and spirit of corps of the trade and labor organizations” (according to the first proposal of the holiday).

 (great railroad strike in 1877)

Back then, the labor movement was in full swing, union participation was high, and strikes were commonplace.  There was building opposition to massive companies, the profits they earned and oppression of the labor class, not unlike the gripes of the middle class of America today.  Labor was much differently distributed 110 years ago than it is today.  Service and professional occupations represented less than 25% of all jobs in 1900.

In 2010, the census shows a much different breakdown, with only 21% of all employed persons working in what most would consider similar occupations (farming, fishing, forestry, construction, installation, maintenance, production, transportation). Farming occupations now only represent 0.7% of the total employed population.
We now have more attorneys (1.04mm), accountants (1.6mm), customer service reps (1.9mm), retail cashiers (3.1mm), retail salespeople (3.3mm), waiters (2.1mm) and child care workers than farmers (0.987mm) and software engineers (1.026mm).  There is no specific breakout of bankers and money managers, but there are probably too many of us as well.  Interestingly, there are only 1.4mm active-duty military personnel as of 2010, down from 3.0mm in 1970 and 2.0mm in 1990.  Active-duty military now represents a smaller percentage of the population than at any time since before World War I.
Clearly, as we have grown to become the most developed nation in the world, we have shifted to a service economy.  Our perception of Labor Day has also shifted.  It is now the symbolic end of the summer, backyard barbecues, the beginning of the football season (which has become almost its own religion in the U.S., but that’s another story – Go Patriots!) and the start of the school year.  Oh, and you can’t wear white pants after Labor Day, although that’s pretty much a year round rule for me…
For Wall Street, the week before Labor Day is as quiet as the week after Christmas.  There are no equity deals, few press releases and few people at their desks.  If you follow the old adage of sell in May, go away, I guess after Labor Day is when you come back and re-deploy your capital.  In the MLP space in recent years, with the exception of 2008, the time period between Labor Day and the end of the year has been very good to investors.  Each of the last 3 years, the MLP Index has produced total returns of more than 10% from labor until New Year’s.  As shown below, last year was particularly good to MLPs after Labor Day, when virtually all of the MLP Index’s 13.8% total return came after Labor Day.

However, the gains don’t come immediately.  For instance last year, MLPs were down more than 4% for the month of September, before rallying.  Weakness immediately following Labor Day is normal and intuitive for MLPs.
In the absence of incremental equity supply from MLP offerings, the MLP Index typically does well the week prior to Labor Day.  Immediately after Labor Day, MLPs typically have a slow start, down on average 0.3% since 2000 as shown in the chart above.   I believe this is directly correlated to equity offerings or the expectation of equity offerings weighing on the sector.  So far this week, MLPs are slightly higher than last Friday, in-line with the historical data.  If that holds tomorrow, expect MLPs to be down a bit next week.
Through today, the MLP Index has produced total return of 5.7%.  With the equity issuance calendar very full as we enter the final few months of the year, it will be interesting if MLPs continue their recent trend of post Labor Day strength.  The long-term tailwinds for the MLP sector remain: there is growing need for energy infrastructure around emerging shale plays and medium term opportunities to open up bottleneck.  But short term commodity price dislocations, sudden broader stock market scares, weather disruptions, interest rate spikes and medium term weak economic data can all wreak havoc on MLPs in the short term.  Either way, enjoy the calm while it lasts.

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