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Charles Sizemore
Charles Sizemore
Articles (507)  | Author's Website |

MLPs: The Ultimate Asset Class for 2013

December 14, 2012 | About:

I saw a headline this week that really caught my eye: “Saudis Cut Oil Output to Lowest in a Year.”

Generally, Saudi Arabia cuts its oil output for one and only reason: demand has slackened due to a weak economy, causing the price to fall. But then, that was before “fracking.”

The Saudi move to cut supplies has little to do with demand, as growth has been lackluster for most of 2012. This time, it has everything to do with supply. U.S. domestic oil production rose by 760,000 barrels per day this year—the biggest increase since records began being kept in 1859. And this is just oil; I’ve said nothing at all about natural gas, of which the United States now produces far more than it can use.

Bernanke.jpgAnd in an unrelated story, Fed Chairman Ben Bernanke gave the markets a jolt this week by announcing that “QE Infinity” will be even larger than originally planned. Rather than “only” buying $40 billion in mortgage securities per month, the Fed would also be buying $45 billion in Treasuries. That’s $85 billion per month in new cash being dumped into the system.

Oh, and Bernanke also plans to keep short-term rates at zero until he sees the unemployment rate dip below 6.5%.

I bring up these two seemingly unrelated points for a reason. The combination of higher volumes of domestic oil and gas being pumped and the loosest monetary policy in history should make mid-stream master limited partnerships one of the safest bets for 2013. The fundamentals for domestic energy haven’t been this good in decades. And as yield-sensitive investments, MLPs are a no-brainer in a world of zero interest rates.

Even better, we have a chance to buy them on the cheap. The whole sector has taken a beating after the election due to fears of higher taxes coming. Investors who have owned MLPs for years—and who had large unrealized capital gains—have decided to take their medicine today rather than wait for the inevitable.

Well, the end of the year is approaching fast, and the tax-loss selling should have mostly run its course.

Action to take: Buy the JPMorgan Alerian MLP Index ETN (AMJ). Alternatively, if you are buying with the intention of holding for a while, assemble a portfolio of individual MLPs.

As with dividend paying stocks, there is often a trade-off between high current yield and prospects for growth. Higher yielding MLPs often times have low expected distribution growth. So keep that in mind when researching the sector. And if you would prefer a “one stop shop,” then AMJ is a decent option that also happens to be IRA friendly.

Though this is website dedicated mostly to shorter-term trading, my recommended time horizon on these is longer-term. I recommend holding MLPs for the duration of Bernanke’s “QE Infinity.” That means holding until either the unemployment rate shows meaningful improvement or until inflation starts to creep up. For risk management, consider something along the lines of a 15-20% trailing stop.

Disclosures: Sizemore Capital is long AMJ

About the author:

Charles Sizemore
Charles Lewis Sizemore, CFA is the chief investment officer of Sizemore Capital Management. Please contact our offices today for a portfolio consultation.

Mr. Sizemore has been a repeat guest on Fox Business News, quoted in Barron’s Magazine and the Wall Street Journal, and published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures and Options Magazine, and The Daily Reckoning.

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