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June 3, 2011

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Week Thoughts: MLP Correction Resumes

MLPs were down 1.2% this week (S&P 500 was down 2.3%), after 2 consecutive weeks of slight gains.  At around 363 on the MLP index, we remain 7.0% lower than the April 28th peak.  During that time, the 10-Year US Treasury interest rate has tightened 30 basis points from 3.3% down to 3%.  So MLPs, which are yielding around 6.8% (compared with around 5.9% in late April), are now trading at a spread to the 10-Year of around 380 basis points, compared with around 260 basis points in late April.  The current number seems more sustainable as does the current valuation.  Clearly fund flows into MLPs are not consistent enough to support yields approaching REIT levels.

Part of the fund flow disruption was certainly a result of distribution capture strategies and tax scares, but as evident this week, equity offerings play their part.  BWP priced a $176 million equity deal last Friday morning, and NRGY priced a $325 million equity offering this Wednesday.  For holders of those two names prior to earnings season, the price action around the equity deals just added insult to injury, after bad earnings already took down both from their lofty peaks.
NRGY closed at $40.85 on May 2, and closed today at $35.49, a decline of 13.1%, including 3.8% this week (there was a distribution in May not reflected here, which helped a little).  BWP closed on April 29th at $33.47 and today closed at $28.58, a 14.6% decline (again, distribution not reflected).
Many MLPs were beaten down despite no news, notably NKA which was down 4.4% on the week.  There were a few bright spots, KMI was up 1.8%, and is nearly back to its IPO price.  TLLP received several more glowing recommendations from research analysts after their quiet period, and was likewise up 1.8% this week.
Time to head home and attack my lawn, after 2 weekends of travelling, plus rain and sun, the grass is nearly 3 feet high… My neighbors (mostly retirees with immaculate yards) have started giving me dirty looks.  Be safe everyone, if a tornado can hit in Western Massachusetts, it can hit you…
 
Disclosure: The information in this article is not meant to be financial advice, we are not your financial advisor and I am posting my comments for informational purposes only. Long NRGY, BWP, KMI.

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