| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| More |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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Master Limited Partnerships: Buy Large, Liquid MLPs |
The following is an excerpt from a recent research report on MLPs buy Citigroup Global Markets.
Master Limited Partnerships (MLPs)
Rationalizing an Irrational Environment:
Buy Large Liquid MLPs, They're Inexpensive
John K. Tysseland, Citigroup, August 9, 2007
After they held up well this year vs.REITS & Utilities, recent trading has been gruesome for MLPs…as the other sectors have rebounded.
Buy Quality We believe MLPs with investment-grade credit ratings and the largest market capitalizations are currently the most attractive, following continued unit price weakness. Specifically, we believe investors should focus on BPL, ETP, EPD, OKS, MMP, NS, and TPP.
Possible Cross-Hedging by Institutions As more institutional investors now own small, less-liquid MLPs, in a down market they may hedge them by shorting larger MLPs.
Increased Options Trading Could Be Another Factor Many MLPs have many more open put option contracts than open call contracts. This large put-to-call ratio could exaggerate a downward move as the writers of the put contracts try to hedge their position by short-selling the actual MLP unit.
Word of Caution While investment-grade MLPs appear attractive on a valuation basis, these factors have the potential to exert further pressure on some MLPs in the near term.
MLPs Down 7% in Recent Days
The Citi MLP Index (ticker: CITIMLP) has held up extraordinarily well versus some other sectors year to date. The last six trading sessions, however, have been gruesome, with the index down 7% while the other sectors have rebounded. We do not believe this weakness is based on fundamentals. Indeed, most MLPs have reported better-than-expected second quarter results. Initially we believed this group was due for a slight pullback as other defensive sectors came under pressure over the last few weeks. Interestingly, MLPs have only seen a significant pullback over the last few days while other sectors have started to rebound. So why have MLPs traded so differently?
We believe some investors are concerned about the impact a distressed credit market might have on MLPs. Because MLPs pay out the majority of their cash flows in the form of distributions to unitholders, partnerships are regularly raising capital to fund accretive growth projects or potential acquisitions.
Therefore, widening credit spreads would reduce the potential return on any prospective project or acquisition, thus also reducing the distribution growth outlook. This would be especially true for MLPs with credit ratings that are below investment grade, as in their case spreads have widened even more over the last few weeks. However, MLPs with investment-grade credit ratings are down more than non-investment-grade MLPs. Intuitively, this does not make since, especially since investment-grade MLPs have the largest market capitalizations and are more liquid. It seems the less liquid, non-investment-grade MLPs would have underperformed in the most recent pull back. Only after looking at the evolution of the MLP sector did we begin to understand what may explain recent unit price movements.
Historically, MLPs have been dominated by individual investors but they have begun to gain much more attention from institutional investors over the last 12– 18 months. In addition, more MLPs now have options listed on the CBOE (Chicago Board of Options Exchange). We believe a combination of these two factors has increased the selling pressure on the larger investment-grade MLPs over the last few trading sessions, while having less effect on the smaller, noninvestment-grade MLPs. As a result, we believe the larger MLPs with investment-grade credit ratings have the most attractive valuations and longterm upside.
Institutions Hedging Illiquid MLP Exposure Has Pressured Quality MLPs Because MLPs tend to be less liquid than average corporate stocks, institutional investors typically find it difficult to trade MLPs in the open market without affecting the unit price. To gain exposure to MLPs, an increasing number of institutions are participating in PIPE (Private Investment In Public Equity) transactions to help fund growth projects. So far in 2007, MLPs have raised nearly $7.5 billion of equity capital, of which 65% has been through private transactions. This is up from 30% in 2006. Taking our analysis further, 85% of the equity that has been raised through these private transactions in 2007 has been for non-investment-grade MLPs. The point is that an increased number of institutional investors now have relatively large positions in small, less-liquid MLPs. In a down market, institutions may hedge these illiquid MLP investments by shorting larger, more liquid MLPs since the correlation of returns for these two categories has been relatively high historically although in the last six trading days this correlation has broken down dramatically (please see original note for supporting tables)
To further support our hypothesis, we looked at the evolution of the short interest ratio of these two categories of MLPs. The short interest ratio for investment-grade MLPs jumped nearly 57.0% in the last month versus that for non-investment-grade MLPs (up only 22.0%). Along with the correlation statistics above, we believe this provides compelling evidence that institutions have increasingly resorted to short sales of investment-grade MLPs to hedge their positions in non-investment-grade MLPs. As a result, we believe the investment-grade MLPs now present more compelling valuations.
Open Interest of Put Options: Another Reason for Downward Pressure As MLPs have become more widely held, they have had more option contracts listed on the CBOE generally on the larger market-cap MLPs. (The top 12 market-cap MLPs now have listed options.) Also, many MLPs have substantially more open put option contracts relative to open call contracts. This large put-to-call ratio will exaggerate a downward move as writers of the put contracts try to hedge by short-selling the actual MLP unit. Downside is further exacerbated by the high volumes of open interest put contracts relative to the average daily volume of the underlying MLP. The bottom line is that, given the current open interest of options on several MLPs, any decline in unit prices will likely be exaggerated. Therefore, while the investment-grade MLPs appear attractive on a valuation basis, these factors have the potential to exert further pressure on MLPs in the near term.
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| Stuff to look at |
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S&P Commentary and Newsletters: S&P
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| BondsOnline Advisor |
Income Security Recommendation January 2013 Issue.
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