#$amj

There is not much love going around for the MLP sector these days. So far in 2017, the Alerian MLP Index (AMJ) has underperformed the S&P 500 by a whopping 27%. There are several potential reasons for the move:

* Large MLPs are projected to slow distribution growth in the coming years to focus on capital expenditures.

* The rise in crude oil is deemed to be fleeting and some are calling for peak shale production.

* Investors are focused on tax-loss selling as 2017 comes to a close.

Regardless of the reason for the drop in prices, the sector has become cheap relative to some standard benchmarks. Many analysts compare the yield of MLPs to the average yield in the junk bond market. The correlation is quite strong through the credit cycle as MLPs need to continually tap the market for new debt to fund expansion. As debt costs rise, growth prospects diminish. Also, many investors look to the MLP market for yield, so the sector is often compared to corporate bonds as an income alternative.

On this measure, the MLP sector is inexpensive. The Alerian MLP Infrastructure Index now yields 2.3% more than the Barclays High Yield Index- the most in the last 10 years.

MLPs were caught in the energy sector downdraft in 2015 as the price of oil plummeted and yields on energy-related issuers widened. However, the leverage in the sector has since declined and so have debt spreads. For example, the spread to US Treasuries on 10-year Kinder Morgan debt is now 114 bp, down from almost 500 bp at the end of 2015.

Image published June 18, 2015. © Valuentum Securities

The image above was taken from Valuentum’s President Brian Nelson’s article published on www.valuentum.com June 18. If you’re interested in learning more about how to identify mispricings in the stock market such as that with Kinder Morgan when it was trading at $40 per share (now ~$15), please consider becoming a member to www.valuentum.com. You’ll gain access to Brian Nelson and the Valuentum Team. Click here to subscribe today!

Updated December 11, 2015 for the “Leverage Across the MLP Space Is Not Contained!” section that follows.

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By The Valuentum Team, Edited December 16, 2015 at 1:06pm.

Revisiting the 10 Reasons Why Valuentum Thought Kinder Morgan’s Shares Would Collapse, released June 2015 when shares were trading at ~$40 each

1) The valuation paradigm has changed.

2) Kinder Morgan’s dividend growth endeavors will disappoint.

3) The company’s net debt load is $40+ billion.

4) The company is trading at 40+ forward earnings.

5) The natural reaction from shareholders will be skepticism and disbelief.

6) Kinder Morgan’s dividend is in part organic, in part financially-engineered.

7) The traditional “blind” use of the dividend discount model does not apply to Kinder Morgan.

8) The company’s implied leverage is 19 times after considering all cash, debt-like commitments, at least in the eyes of shareholders.

9) Bondholders will start to care. Equity holders will start to care. They will – and then it all unravels.

10) Highly-publicized insider purchases are not a sign of support, in the case of Kinder Morgan, but an admission of vulnerability.

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On June 11, Valuentum’s President Brian Nelson wrote ‘5 Reasons Why We Think Kinder Morgan’s Shares Will Collapse,” removing the company from Valuentum’s Dividend Growth Newsletter portfolio that day at $40 per share.

The piece was highlighted by Barron’s in ‘The Bear Case Against Kinder Morgan’ later that evening. The controversial call did not go unnoticed. Shares of Kinder Morgan (KMI) and most of the master limited partnership arena fell ~2% on the opening the following day. Credit Suisse’s John Edwards released a rebuttal to Valuentum’s “5 Reasons” piece point by point June 15, reiterating Credit Suisse’s Outperform rating and $52 price target at the time, quipping that his team had agreed that the ‘natural reaction from shareholders would be skepticism and disbelief.’

Valuentum’s President Brian Nelson then countered June 18 with ‘5 More Reasons Why We Think Kinder Morgan’s Shares Will Collapse’ defining how Valuentum’s thesis was separate and distinct from Barron’s and Hedgeye’s February 2014 piece, which focused primarily on the MLP and a questioning of the MLP’s measure of sustaining capital expenditures, something that the company had already refuted. Shares of Kinder Morgan, the corporate, had peaked at nearly $45 per share in April 2015, up from the low-$30s range in February 2014 when the Barron’s piece had been released.

Barron’s said Nelson was back as the “Kinder Morgan Bear: 5 More Reasons to Worry,” released June 19.

Unlike the traditional “short case,” which searches for a “fire” within a company’s accounting or some other tragic situation, Nelson’s 10 reasons, published in June 2015, were based purely on a valuation and credit assessment of the corporate, which he felt was severely misaligned in the context of the entity’s fundamentals. The Kinder Morgan MLP units, formerly trading under the symbol KMP, the security which Barron’s and Hedgeye’s February 2014 piece had primarily focused on, had since been retired after the closing of the deal November 2014. KMP unitholders benefited from a 12% premium the day of the deal announcement.

Nelson then publicly released his $29 per share fair value estimate of Kinder Morgan on June 30, “Kinder Morgan’s Fair Value: $29 Per Share, with shares of the third-largest energy company in North America trading in the high $30s.” On Kinder Morgan’s second-quarter conference call July 15, investors continued to confuse Mr. Nelson’s 10 reasons with the previous thesis on the MLP outlined in 2014, with an investment management firm proclaiming that shares were being punished by “the timely or untimely resurrection of what I thought was a wholly discredited bear attack by a tabloid claiming that your investment grade debt is not serviceable.” Mr. Nelson's thesis was genuine and unique.

Valuentum agrees that the “short thesis” published on February 2014 by Barron’s had been “discredited” once Kinder Morgan had rolled up its MLP structure. After all, the security KMP had ceased to exist. Nelson’s thesis had only focused on the Kinder Morgan corporate, the ticker symbol KMI, shares of which were trading at $37.50 in mid-July. Nelson then took the show on the road, presenting his concerns about Kinder Morgan and MLPs, in general, at the AAII chapters in Cleveland, Silicon Valley, Milwaukee, and Madison in the subsequent months, hoping to help investors avoid any further collapse in shares that was to come.

As his concerns grew, Nelson then published, “Warning: The Master Limited Partnership Model May Not Survive” in late September and shared it with Barron’s as a follow up to the Kinder Morgan call, published as “Why the MLP Business Model May Be a Goner.” By September 29, shares of Kinder Morgan, the corporate, had collapsed to ~$26 each. Shares of the Alerian MLP ETF (AMLP) had collapsed from $16.15 per share on June 11 to $11.51 over the same time frame.

Nelson thesis was then validated. On October 22, Kinder Morgan revised lower its dividend growth plans and detailed how it would engage in sophisticated financing needs to stay afloat. Shares of the corporate fell even further. Credit Suisse’s John Edwards downgraded the rating of Kinder Morgan from Outperform to Neutral and reduced the price target to $39 per share, noting “in the 13 years of following KMI, we don’t recall management having to reduce guidance…ever.” That day, Nelson reiterated the low end of his fair value estimate range for shares of $23 each. 

Even more downgrades followed.

Argus subsequently cut Kinder Morgan’s price target to $35 per share from $50 per share November 10, still rating the company a “buy.” (The rating was subsequently lowered to hold shortly thereafter.) On December 2, Moody's then downgraded Kinder Morgan's credit rating outlook, an integral part of Mr. Nelson's thesis and what he described as "the circular flow of unsubstantiated support" on Kinder Morgan’s shares, the corporate, trading under the symbol KMI. Even more downgrades followed. Shares of Kinder Morgan are now exchanging hands in the mid-teens, at the low end of Valuentum's fair value range, updated following Kinder Morgan’s 75% cut in the dividend just this week -- something that was unimaginable by most market participants. 

Note: Moody’s revised Kinder Morgan’s credit outlook to stable after the dividend cut, but still-collapsing energy resource pricing, and net leverage approaching 7x on an annualized reported basis (see calculation below) does not warrant investment-grade marks, in our view.

Leverage Across the MLP Space is Not Contained!

The Securities and Exchange Commission performs a vital function when it comes to truth in reporting, helping investors sort through what’s true and what’s not. The Form 10-K (annual) and Form 10-Q (quarterly) can be used to compare what a company’s reported, actual net leverage is to what management says it is – in their presentation slide deck or on some of the more popular business channels. Investors in midstream equities have long been “pitched” the idea that leverage is contained, but from our perspective, it is not. Bondholders deserve to know the actual, reported net leverage of companies in the midstream space because they won’t hear it from management, at least it seems.

Let’s take Kinder Morgan (KMI), as an example. In its slide deck presentations and in most communications, the midstream giant notes that its leverage as measured by net debt to EBITDA is under 6 times. However, a close examination of the company’s Form 10-K and Form 10-Q suggests that such a measure is far from reality. Through the first nine months of the year, Kinder Morgan has generated ~$2.7 billion in operating income and ~$1.73 billion in depreciation and amortization, amounting to roughly ~$4.43 billion in EBITDA through the first nine months of the year. Generously, let’s annualize that measure to arrive at annualized reported EBITDA of ~$5.9 billion. At the end of 2014, Kinder Morgan had total short and long-term debt of $43 billion and at the end of the third quarter of 2015, it registered total short and long-term debt of $44.6 billion. Kinder Morgan’s cash is negligible.

Kinder Morgan is more than 7.6x leveraged on the basis of its total short and long-term debt load at the end of the third quarter, relative to its annualized EBITDA mark for this year. If we were to back out the company’s loss on impairments and dispositions of assets, we could assume ~$6.54 billion in annualized EBITDA, but that’s quite the optimistic case, in our view, in light of still-collapsing energy-resource pricing. Importantly, even if we give credit for these “one-time items,” which may end up recurring in nature, Kinder Morgan is still 6.8x leveraged ($44.6/$6.54). We understand that the executive team and the credit rating agencies are doing some non-GAAP “massaging” with the numbers, but bondholders should know the truth. We encourage all stakeholders to look at the data that we are looking at in Kinder Morgan’s Form 10-Q, which can be downloaded here (pdf).

The situation with Energy Transfer Equity (ETE) is even worse. We were letting this issue go to rest, until we noticed that Energy Transfer Equity had stated emphatically that its measure of net debt to EBITDA was 4.5x, a level it believes to be “sacrosanct.” We were in disbelief. The SEC requires that companies disclose their financials for a reason, and we pay very close attention to what’s submitted in the 10-K and 10-Q far and above what we see in slide deck presentations or hear on television. In the nine months ended September 30, Energy Transfer Equity’s operating income was $2.16 billion, while depreciation and amortization was $1.53 billion, good for $3.69 billion in EBITDA, or $4.92 billion in EBITDA on an annualized basis.

The company noted short and long-term debt of $36.3 billion and cash and cash equivalents of $1 billion, resulting in a net debt position of $35.3 billion. Please download its 10-Q here (pdf). By our calculations, Energy Transfer Equity is nearly 7.2x leveraged ($35.3/$4.92). Say what you will just how far the company should be rated in “junk status,” but we think there may be a large number of investors that believe Energy Transfer Equity is ~4.5x leveraged. This just simply isn’t true, in our view. The SEC filings tell a completely different story. [A subsequent conversation with the executive team confirmed that even after a number of adjustments, ETE is at least more than 6x leveraged.]

We encourage management teams in the midstream space to disclose actual, reported measures of leverage and non-GAAP free cash flow, as measured by cash flow from operations less all capital spending. The degree of “misinformation,” in our view, has become egregious. Investors should continue to use a wide variety of information in the investment-decision making process, but the SEC filings are a great place to find the most accurate and unbiased information.

Kinder Morgan is ~6.8x leveraged. Energy Transfer Equity is nearly 7.2x leveraged, and this is before its tie-up with Williams Co (WMB). Please be careful out there. The bondholders will eventually care when they get a hint of the recent SEC filings. There’s too much non-GAAP “massaging” going on. Pasted below is the link to the video that implies Energy Transfer Equity’s leverage is 4.5x: http://video.cnbc.com/gallery/?video=3000464044 

Please stick to the SEC filings. They are there to protect investors.

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May everyone have a wonderful holiday season! Give the gift of a Valuentum membership today. Subscribe here. 

Pipelines - Oil & Gas: BPL, BWP, DPM, ENB, EPD, ETP, EVEP, HEP, KMI, MMP, NS, PAA, SE, SEP, WES

This article or report and any links within are for information purposes only and should not be considered a solicitation to buy or sell any security. Valuentum is not responsible for any errors or omissions or for results obtained from the use of this article and accepts no liability for how readers may choose to utilize the content. Assumptions, opinions, and estimates are based on our judgment as of the date of the article and are subject to change without notice. For more information about Valuentum and the products and services it offers, please contact us at [email protected].

It is no secret that the energy sector has been under tremendous pressure over the last several months. It’s hard to imagine that the fundamentals could get much worse:

* The domestic supply overhang of crude oil has brought prices back down to their March lows. Crude oil futures are down nearly 30% over the last 6 weeks.

* Leading global economic indicators point to a further slowdown in Emerging Markets which will further dampen commodity demand.

* The deal with Iran, if approved, will just add to global supply worries.

These weak fundamentals are reflected in asset prices that are sensitive to the energy sector. For example, energy stocks that focus on oil and gas exploration and production are down 32% over the last year. Moreover, even the larger fully-integrated behemoths of the industry, while performing slightly better, have still posted negative returns to the tune of 27%. 

The credit market has also repriced risk for energy assets. The option-adjusted spread of high yield bonds in the energy sector to US treasuries for is now at a staggering 1000 basis points. Indeed, some of the smaller players in the industry have already sought bankruptcy protection as the credit markets have slammed shut on all but the most credit-worthy issuers.

Market re-pricings of this magnitude are often associated with opportunities to comb through the wreckage in an attempt to find securities or sub-sectors that have been unjustly punished. The MLP sector might be one of those sectors.

MLPs (Master Limited Partnerships) have been subject to significant selling pressure in the last three months. For example, the Alerian MLP Index, is down 24% since the beginning of May. The chart below shows the decline of AMJ, the MLP ETN that tracks the Alerian MLP Index:

The MLP sector is often described as the “toll road” for energy assets. Profitability for infrastructure MLPs is largely determined by the volume of oil and gas passing through the value chain rather than on the price of oil or gas. So why have these companies performed so poorly?

* The MLP sector has served as a bond substitute for some investors during the Fed’s zero interest rate policy that began in 2009. As investors gravitate away from fixed-income type securities, in anticipation of an end to this policy, the sector has fallen out of favor.

* The correlation between MLPs and the high yield market is quite strong. MLPs have historically done well when high yield spreads have contracted and relatively poorly when spreads have widened. High yield credit spreads have risen almost 100 bps over the last three months.

* The liquidity of the MLP sector compared to other energy stocks is poor, to say the least. The current environment is one in which liquidity premiums are rising. We are witnessing rising premiums across all asset classes, and the lack of liquidity in the MLP sector is accelerating the price slide.

* While operating as the “toll road” for the energy sector, the fundamentals for MLPs are also turning negative. One of the attractive attributes of the asset class has been the dividend growth rates that investors have enjoyed in the past. Dividend growth rates for the sector have typically been 6-8% per year. A reduction in the availability of credit to the energy sector, including MLPs, will likely lead to a slowdown in M&A activity and capital expenditures, both of which are drivers of MLPs’ ability to expand their operations.

With all of these negative drivers, what could possibly go right for the sector? Support can be found in two areas: selling capitulation from current owners and relatively cheap valuations that could attract long-term, value-oriented investors to the asset class.

On the first point, there are some signs that the longs are beginning to capitulate. After a 5% decline on Tuesday, on very heavy volume, AMJ opened down another 3% Wednesday morning on abnormally high volume. However, by the end of the day, AMJ had almost fully recovered in price. That price recovery held for the remainder of the week, despite pressure on the broader market. Last week’s price action is shown in the chart below:

Capitulation from the longs is a positive sign for the asset class. It is too early to tell whether or not last week’s activity fully exhausted the sellers, but it was certainly a step in the right direction.

The second pillar of support can be found in MLP valuations. The asset class is the cheapest it has been since the financial crisis. Below is a chart that shows the historical yield spread of the Alerian MLP Index relative to US Government 10 year notes:

The Alerian MLP index currently yields 530 bps more than US Government 10 year notes. This is 154 bps more than the average for the last 5 years.

Given the high correlation between MLP performance and the high yield debt market, it also makes sense to look at MLP yields relative to high yield spreads:

The Alerian MLP index currently yields 75 bps more than the Barclays HY Index. This is 135 bps more than the average for the last 5 years. 

The valuation of the sector is compelling, but valuation alone is not a reason to jump into the asset class. This appears to be a classic case where high levels of uncertainty, coupled with deteriorating fundamentals and a lack of liquidity, are creating a value opportunity for long-term investors. However, most investors have learned the hard way that catching the proverbial falling knife often leads to short-term pain until the forced sellers are finished. 

The MLP asset class, along with other assets in the energy sector, have not rewarded investors with anything but losses recently. Investors don’t get any stars for bravery, and most will chose to observe the carnage from the viewing gallery. Waiting for a bottom is a sound capital preservation strategy. But when that bottom does form, the MLP sector may be one of the sectors to rebound the quickest.

Here is a sobering statistic for you: While the S&P 500 has generated annualized returns of 9.9% over the past 20 years—and a boring old asset allocation of 60% stocks and 40% bonds has managed to return a solid 8.7%—the average investor has eked out a measly 2.5%. 

Inflation has averaged 2.4% over the past 20 years, meaning that in real terms the average investor has returned pretty close to zero. And this during one of the best periods in this history of the U.S. stock market.

Source: JPMorgan

How are returns that bad even possible? If the Efficient Market Hypothesis is to be believed, investors should roughly track the S&P 500 over time, not underperform it by 75%. 

There are a myriad of answers, including everything from overtrading to underdiversification, but the biggest contributing factor is peformance chasing. Investors don't park their cash in the stocks or sectors promising the best value. They jump on whatever is trendy in a perpetual case of closing the barn door after the horse has already bolted.

Late last year, veteran financial writer Mark Hulbert crunched the numbers and found that following the investment newsletter portfolio that performed best during the previous calendar year resulted in annual losses of more than 17% per year. Not just underperformance, mind you, but actual losses. 

In looking at mutual fund performance, the numbers get a little better but are still remarkably bad. In a study done by Vanguard, a strategy of buying the top-performing large blend mutual funds over a rolling three-year period underperformed a naive buy-and-hold strategy by 34%. And while the numbers varied slightly across mutual fund market caps and styles (small-cap value, mid-cap growth, etc.), a naive buy-and-hold approach outperforms across all. Though we see these words so often we become blind to them, experience proves them true: "Past performance is no guarantee of future results." To be more accurate, the data here more or less guarantees that past performance is a guarantee of future results...it just so happens that the future performance in question turns out to be terrible. 

So, what are we to do about this? Buy an S&P 500 Index Fund, hold it forever, and wash our hands of the entire investing process? 

Well, we could do that. But there are better ways to skin this cat. 

Take a second look at the chart at the top of this article. You'll notice that a 60/40 portfolio of stocks and bonds came awfully close to matching the performance of the S&P 500, but what you don't see here is that it did so while taking far less risk. This is the essence of asset allocation: Essentially sprinkling "a little of everything" into a portfolio and regularly rebalancing with the understanding that there will be years when some pieces of the portfolio perform very well and others perform very poorly. 

There is an important catch that a lot of people seem to forget these days: Asset allocation works well when the constituent parts all have reasonably high expected rates of return and--importantly--returns that are not highly correlated.

Asset allocation is going to look a little different today than it did in years past because we are in a very different interest rate environment. I think you can make a very good case for eliminating most bonds altogether or at least for replacing a traditional long-only bond allocation with a tactically-managed one. This is what I have done in portfolios that I manage for clients. And for those clients that qualify, I've been incorporating low-volatility, absolute-returns strategies into the mix. 

For a simple and easy-to-execute asset allocation, consider something along the lines of the following ETF allocation: 

Domestic U.S. Stocks (45%)

17% Cambria Shareholder Yield ETF (SYLD)

11% iShares Select Dividend ETF (DVY)

11% Vanguard Dividend Appreciation ETF (VIG)

6% iShares Core S&P Small Cap ETF (IJR)

International Stocks (21%)

7.5% Cambria Foreign Shareholder Yield ETF (FYLD)

7.5% PowerShares International Dividend Achievers ETF (PID)

3% EG Shares Emerging Markets Consumer ETF (ECON)

3% Cambria Global Value ETF (GVAL)

Real Estate / Infrastructure (24%)

12% Vanguard REIT ETF (VNQ)

12% JP Morgan Alerian MLP ETN (AMJ)

Fixed Income / Cash (10%)

5% PIMCO Total Return Active ETF (BOND)

4% iShares TIPS Bond (TIP)

1% Cash

There is nothing sacred about any of these specific ETF positions. I chose them because I believed them to be a solid proxy for the risk/return exposure I was looking for, but I periodically swap out ETF positions when newer, better alternatives come along. The takeaway is that, while the specific vehicles may change, the asset classes remain pretty constant. 

For another perspective, check out The Gone Fishin' Portfolio. Alex Green chooses a few asset classes that I would avoid--such as gold miners--but his recommendations are solid and simple to implement. And if you really enjoy digging into asset allocation strategies, check out Meb Faber's latest, Global Asset Allocation. It's a short read and worth many times over the $3 price tag. 

There a million different ways to allocate a portfolio well, but most poorly-allocated ones have one point in common: They chase whatever has been recently hot.

Don't do that.

Disclosures: Long AMJ, BOND, DVY, ECON, FYLD, GVAL, IJR, PID, SYLD, TIP, VIG, VNQ

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

Behind the Numbers–one of my favorite research services–had some interesting comments on the MLP sector in today’s Thursday Thoughts.

For an asset class once known for stable dividends backed by recurring revenues from long term contracts, MLPs have turned into investment divas – strong performers with lots of volatility. The Alerian MLP Index [tracked most closely by the JP Morgan Alerian MLP ETN (AMJ)] outperformed the S&P 500 in 2009, 2010, and 2011 – and despite the huge move in the broad market last year, came close to matching the S&P 500 in 2013 (27.59% vs. 32.38%). The MLP index is still ahead of the S&P 500 year to date after rebounding from a massive sell-off in October. Still, AMZ is below levels of the late summer and early fall.

Much of the blame for the sell-off has been attributed to the sinking oil price. Most MLPs operate in the energy sector, and depending on their business model, can be adversely affected when oil prices are hammered by some 20%…

But many MLPs, some of the largest in fact, operate pipelines with little direct exposure to energy prices. Instead, these operators earn fees based on the volume of gas flowing through their pipes.

We will be the first to admit that results can vary widely even for volume-driven pipeline companies. As with any industry, these managements may make good or bad acquisitions, spend too aggressively or too timidly on capex, or find their existing infrastructure too far from the latest large shale play. The accompanying table, however, lists the largest 20 MLPs by market cap. For the vast majority of these, fee based transactions drive their operations [NOTE: According to Enterprise Products Partners, EPD gets approximately 85% of its gross operating margin from fee-based contracts; the table below understates EPD's fee-based income by a wide margin]:

Source: Behind the Numbers

Charles here: Behind the Numbers included one MLP in particular–Carl Icahn’s holding company Icahn Enterprises LP (IEP) that is not at all a pipeline MLP, though it does have indirect exposure to energy prices via some of its portfolio holdings, such asCVR Energy (CVI).  It also has exposure to energy via its ownership interest in Icahn’s hedge fund, which in turn has large positions in  Chesapeake Energy (CHK) and other energy-related companies.  Icahn, incidentally, had a terrible third quarter, driven, in his own words, “by a meaningful decrease in the value of our core energy investments.”  For my recent comments on Icahn–and what he’s doing right–see Why Carl Icahn is (Kinda) Right About Apple.

Returning to Behind the Numbers,

The other new phenomenon in play here is all the new ETFs and mutual funds set up that focus on MLPs and the MLP index. When people start to sell those products, the selling hits all the MLPs, even those with very little oil price exposure. That is especially true of those tracking an index. Having $1 billion in assets fall to $800 million means all positions have to be sold by 20% to maintain the index weightings. There is no quality decision made. Other MLP companies like Linn Energy are very directly exposed to lower commodity pricing (short term hedges aside) because they are an exploration company. When people get spooked about LINN and sell their ETF or Mutual Fund, it leads to a bloodbath for all the stocks in the index. The result is the better companies sell at lower prices for awhile. Even after the rapid sell-off over a few days, many of the low-commodity exposure MLPs have still continued to post great returns.

Incidentally, while investors were pouring out of MLPs during the rout last quarter, some of the company insiders were buying aggressively.

I would agree that the drop in energy prices is not much of a risk for most popular MLPs.  The risk I would be far more concerned about given the relatively modest yields that MLPs offer compared to their historical averages is that of rising bond yields.

I should be clear: I do not see bond yields rising significantly over the next several years.  My forecast is for the 10-year Treasury to bounce around in a range of about 2.2% to 3.2% over the next 5 years with an average around 2.6%.  But if I am wrong here and yields aggressively rise over a short time horizon, then MLPs–along with REITs, BDCs and other income-oriented investments–will take a hit.

Bottom line: If you invest in MLPs, don’t sweat falling energy prices.  But keep an eye on bond yields.

SPY options and VIX options dominated volumes once again, though the CBOE put/call ratio fell back down to 1.05 from Friday’s 5 year high of 1.54.

1.  SPY – The S&P 500 found intraday resistance near 1900, and that will be an important spot to watch going forward.  The Oct 190 puts were the most active line, trading over 280k on the session.  Buyer of 105k of the Nov 160/150 put spread for 0.27 was also a large trade.

2.  VIX – Trader sold 146,000 of the Nov 20 calls at 2.55 to close in the morning.  That call was initially opened for 0.83, so that’s a large profit on either a hedge or a speculative position.  VIX futures were weak for most of the session after that sale, but found a bid into the close for the 4th straight day.  VIX implied volatility is trading near a 5 year high:

VIX 30 day implied volatility, courtesy of Bloomberg

3.  PBR – PBR remains very volatile, with 10 day realized volatility near 100.  Buyer of around 35k of the Nov 20/22 call spread for 0.60.  PBR and EWZ options have been very active in the past month on election speculation in Brazil.

4.  AAL – The stock bounced 10% after selling off hard on Ebola affecting travel in the past week.  Buyer of around 16k of the Nov 38 call for 0.45 in the morning.  AAL was last trading above $38 in early September.

5.  MU – MU touched its 200 day ma in the past week for the first time since late 2012.  Buyer of 6500 x 13000 of the Jan15 31/37 1×2 call spread for $0.79, looking for a cheap way to add leverage to the upside on a bounce.

6.  AMJ – The MLP index neared a 1 year low, as the AMJ chart illustrates the concept of escalator up / elevator down:

AMJ daily chart, courtesy of Bloomberg

Trader rolled down put protection, selling around 7500 of the Nov 48 puts at 3.60 to close to buy around 15k of the Nov 44 puts for 1.95 to open.

Thorns in the Market...

Roses for Today...

And the All Time New Highs...