Tracking Recent Turmoil in Master Limited Partnerships

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The most recent month has shown that caution is warranted for investors as the market slipped a bit.

Specifically, the S&P 500 dipped about 1%. In contrast, long-term bonds rose 1.30% and gold jumped about 3%, as oil climbed more than 2%.

But there has been a lot of action in master limited partnerships (MLPs) that is worth updating.

The major index of MLPs, which we own in some of the portfolios through the J.P. Morgan Alerian MLP ETN (AMJ), was down 9.50% in the last four weeks and 3.25% in the last week as of Aug. 22.

Plains All American Pipeline (PAA), a major midstream MLP that accounted for about 5% of the index, caused most of the decline. PAA used too much leverage during the boom period and now is paying a price.

When announcing its second-quarter earnings, PAA said it soon would institute its second distribution cut of 2017. Since many investors likely buy MLPs for distribution payments, the markets didn’t react favorably. PAA declined 23% after the Aug. 7 announcement before finding a bottom.

But 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.

It would not surprise me, in the least, if PAA’s price stopped dropping. Indeed, PAA’s share price jumped about 2% on Monday, Aug. 21, and another 1% on Tuesday, Aug. 22.

The second distribution reduction is designed to ensure it 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 recommended selling AMJ only if it closes below $25.07. It had not happened through Aug. 30 and I don’t expect that to occur, unless there’s additional bad news from the sector.

The ETN recently has been on the ascent. In the meantime, the yield has increased, and AMJ is a good opportunity for investors who were hesitant to buy at higher prices.

As for the latest economic data, manufacturing showed strength 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.

But the PMI Composite mid-month flash index showed manufacturing was down a little for the first half of the month but the service sector is significantly higher. That means higher overall economic 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.

Sales for the previous two months 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 and also marked 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. In the wake of those violent protests, 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.

Other people who are not working are retirees, who may leave a lot of money on the table by not carefully considering how and when to take their Social Security benefits. Avoid that mistake by educating yourself about the choices. Start with my special report, Secrets to Boosting Social Security Benefits.

Finally, please help make my book an award winner. The revised edition of “The New Rules of Retirement” is nominated for Best Retirement Book by Senior Homes. The highest online vote-getter will be the winner. To vote, click here. Then, scroll down the page until you see “The New Rules of Retirement.” Click the “Vote” bar underneath.

Thank you.

Until next time,

Robert Carlson

Robert Carlson is editor of the monthly newsletter, Retirement Watch. In it, he provides independent, objective research covering all the financial issues of retirement and retirement planning. Carlson also is Chairman of the Board of Trustees of the Fairfax County Employees’ Retirement System and the founder of  Carlson Wealth Advisors, L.L.C.

 

Robert Carlson is editor of the monthly newsletter, Retirement Watch. In it, he provides independent, objective research covering all the financial issues of retirement and retirement planning. Carlson also is Chairman of the Board of Trustees of the Fairfax County Employees’ Retirement System and the founder of Carlson Wealth Advisors, L.L.C.