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The Recent Turmoil in Master Limited Partnerships

Last update on: Jul 19 2021

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The last month has been fairly quiet in the markets. The S&P 500 is down about 1%. Long-term bonds are up 1.30%, and gold is up about 3%. Oil is up more than 2%.

But there has been a lot of action in master limited partnerships (MLPs). The major index of MLPs, which we own in some of the portfolios through the JPMorgan Alerian MLP ETN (AMJ), was down 9.50% in the last four weeks and 3.25% in the last week as of Tuesday.

Plains All American Pipeline (PAA), a major midstream MLP that accounts for about 5% of the index, caused most of the decline. PAA used too much leverage during the boom period and now is paying the price. In announcing its second-quarter earnings, PAA said it soon would institute its second distribution reduction of the year. Since most investors buy MLPs for their distributions, the markets didn’t react favorably. PAA declined 23% after the Aug. 7 announcement before finding a bottom.

However, PAA and a few other MLPs appear to be isolated problems. I don’t expect this problem to spread to the rest of the sector. Most of the larger MLPs in the index declined only a few percentage points, while PAA was in free fall. The stability in the price of oil, plus the resumption of a lot of shale oil production, has increased the activity in the pipelines and storage tanks operated by the MLPs.

I expect PAA’s price will stop declining. It increased about 2% Monday and another 1% Tuesday. The second distribution reduction is designed to ensure the company meets its goals without issuing new equity, selling additional assets, or taking other extreme measures. From its new base, the distribution should increase steadily in the next few years.

As a precaution, in the September issue of Retirement Watch, I’m recommending selling AMJ only if it closes below $25.07. I don’t expect that to happen unless there’s additional bad news from the sector. The ETN is up sharply so far this week. In the meantime, the yield has increased, and AMJ is a good opportunity for investors who were hesitant to buy at higher prices.

The Data

Manufacturing remains strong in the mid-Atlantic region, according to the Richmond Fed’s Manufacturing Index. It held steady at a very strong 14. The employment component of the report was especially strong, reporting more employees, more hours worked and higher wages.

On the other hand, the PMI Composite mid-month flash index said that manufacturing was down a little for the first half of the month, but that the service sector was significantly higher. That means higher overall growth.

Housing prices took a break, according to the FHFA House Price Index. Prices rose only 0.1% for the month for a 6.5% 12-month increase. Some moderation in home prices should be expected, since they’ve been rising faster than incomes for a while.

New home sales declined unexpectedly and were well below recent numbers. They also didn’t support the optimism home builders displayed in recent surveys. But the headline number doesn’t tell the full story. This is a volatile number from month to month. The previous two months’ sales were revised higher by 33,000 units. The three-month average still is near recent highs. Also, prices are up 6.3% for 12 months. So, it looks like overall new homes are contributing to growth. Also, housing sales were strong in 2016. It would be difficult to repeat those levels each year.

Existing home sales also were a disappointment. Last month’s number was revised a little lower, and this month’s number was even lower to mark the lowest level of the year. Realtors blamed the decrease on a lack of homes for sale and higher prices. The median price is 6.2% higher than a year ago.

Consumer Sentiment, as measured by the University of Michigan, jumped to 97.6 from 93.4. That far exceeded expectations and reversed a couple of months of declines. Only the immediate post-election surveys were higher in recent years. But the report warned that most of the survey was conducted before the recent violence in Charlottesville, Virginia, and sentiment might have declined after that.

New unemployment claims increased only 2,000 for the week, leaving the weekly number and four-week average near historic lows.

The Markets

This was another week of declines in most major stock indexes. The S&P 500 declined 0.95% and now is down 0.95% for the four weeks ended with Wednesday’s close. The Dow Jones Industrial Average declined 0.93% for the week but still is up 1.36% for four weeks. The Russell 2000 fell 0.98% and is down 4.51% for four weeks. The All-Country World Index declined 0.34% for the week and 0.42% for four weeks. Emerging market equities bucked the trend, gaining 1.47% for the week and 1.56% for four weeks.

Long-term treasuries rose 1.05% for the week. Investment-grade bonds gained 0.30%. Treasury Inflation-Protected Securities (TIPS) gained 0.30% and high-yield bonds fell 0.10%.

The dollar declined 0.39%.

Energy-based commodities gained 1.50% for the week. Broader-based commodities added 0.97%. Gold gained 1.06%.

Bob’s News & Updates

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