Barrons - MLP's

In the past two years, Barron’s has been writing critical stories about the MLP space. During the past year, the Alerian MLP index, a proxy for this sector, has dropped 45%.

In a feature story in Barron’s this past weekend, Kevin Kaiser, a managing director at Hedgeye Risk Management and an early critic of the MLP business, argues that the worst isn’t over for these stocks.

He contends that companies in this overly-leveraged sector will be forced into dividend or distribution cuts in the coming year, just as pipeline stock Kinder Morgan ( KMI ) was forced to cut its distributions by three-quarters in December.

Writing on the Reformed Broker Website, money manager and financial writer Joshua Brown argues that the decline in MLP stocks is a cautionary tale about a risky investment that was wrongly sold by money managers and retail brokers as a “bond alternative” that was largely impervious to the vagaries of energy prices.

These problematic financial advisors, he writes, “replaced the Treasury slots of their fixed income holdings with garbage so they could promise clients (and prospective clients) a current income higher than what the guy down the street was offering.”

He concludes: “If you’re an advisor who won business over the last few years by out-delivering on current yield in your proposals, your time of reckoning has come. Because all fixed income must be looked at from a total return perspective, not merely quoted in terms of the trailing 12-month’s dividend yield.”

Now we separate the Pros from the Pretenders

Posted February 8, 2016 by Joshua M Brown

40+ Wall Street analysts cover AAPL. Find Out What The Other 1,200 Think.

Today’s MLP of the Day – Energy Transfer Partners LP, ticker symbol ETE. In a tersely-worded 8K, the company announced the replacement of their CFO. I don’t know anything about the company, but the investors in the name are clearly shooting first here and getting the hell out of dodge. Shareholders in this and many other MLPS are now learning an abject lesson in portfolio construction and the true nature of risk-reward tradeoffs in fixed income.

For a 4.5% income stream in ETE during the salad days of MLPs, investors endured almost complete wipeout of their principal.

We’re seeing portfolios come in to us lately loaded with securities that carried high yields at the time of purchase, but that also carried extreme risk – a foreign concept during the QE years when anything could be financed and refinanced at will.

The pros knew not to construct income portfolios laden with “bond alternatives” or, at a minimum, to keep these holdings small and compartmentalized. The pretenders replaced the Treasury slots of their fixed income holdings with garbage so they could promise clients (and prospective clients) a current income higher than what the guy down the street was offering.

And now we separate the pros from the pretenders, as the potential risks become actual risks, and, in many cases, permanent losses.

If you’re an advisor who won business over the last few years by out-delivering on current yield in your proposals, your time of reckoning has come. Because all fixed income must be looked at from a total return perspective, not merely quoted in terms of the trailing 12-month’s dividend yield.