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MLPs: MLP Weekly Update; 2009 Looks to End on a High Note 2009-12-23

Posted At : January 6, 2010 11:18 AM

Energy: Master Limited Partnerships

MLP Weekly Update; 2009 Looks to End on a High Note


After a robust 2009, (the Alerian MLP Index has returned 74% year-to-date as of Dec. 21, 2009), our outlook is for approximately 11% total return for the group as a whole to our $293 target on the Alerian MLP Index (AMZ-$282.57), although valuations may actually overshoot given the scarcity of high yielding instruments with low risk in the market place.

Key Points

* We continue to recommend that investors overweight the group. Our target is $293 on the AMZ, which we derive from an equal-weighted blend of a spread-to-U.S. Treasuries valuation (3%) and a long-term average yield (7.9%). Our target implies ~12.3% total return potential. Year-to-date, MLPs have strongly outperformed (+51%) the S&P 500 (+25%). For 2010, we continue to recommend that aggressive investors overweight higher beta, smaller cap, commodity-sensitive names into the economic recovery.

* Index Change. At market close on Friday, Dec. 18, 2009, MLPs experienced a 2%-3% dip attributed by most market watchers to an index rebalancing by Dow Jones that excluded MLPs. We believe the dip on sell imbalances at market close(corrected rapidly on Monday morning) may have been exacerbated in some cases by option expirations. The underlying issue with MLPs being excluded from indices is, in our view, a function of some portfolio managers complaining about index-matching given constraints on K-1 receipt. Most of the other reasons, provided by Dow Jones and Wilshire previously, don’t hold water, in our opinion.

Regards -Keith Springer

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