Jordan Roy-Byrne, CMT

Copper

Copper for December delivery is down marginally to $3.49. The market has moved higher in recent days in line with the commodity sector, stocks and the Euro.

Yesterday, Bloomberg reported that there was talk that China was considering selling some of its Copper stockpiles. China of course isn’t just buying for today but it has been stockpiling for future needs. The market is also soft due to distressing news out of Germany. Factory orders there declined 2.2% in July from June. The forecast was for 0.6% growth. Furthermore, a Bloomberg survey expects data to show a stagnation in German exports in July.

Aside from US Dollar weakness, a continuing decline in copper inventories is buoying the metal. Inventories have consistently declined since February and are at their lowest level since late last autumn.

Sentimentrader.com shows public opinion on Copper as 52% bulls. This is close to the highest level in about two years. It tells you how negative the public has felt about Copper since the collapse of 2008. Copper is nearly 15% from its high yet half the public remains bearish.

Interestingly, traders and investors will need to consider the less bullish news as potentially bullish. We say this because if there are mounting doubts about the sustainability of the recovery or growing fears of a double dip, then policy makers may have to resort to extreme measures which of course would render hard assets more favorable regardless of economic conditions.

Turning to the weekly chart, we see that Copper has moved to resistance at $3.50. It now appears that $3.40 is initial support which has held this week and last.

Platinum

Platinum for October delivery is down by nearly $3/lb to $1,558/lb. The metal has rallied in the last few weeks after holding above $1,500/oz, which we noted as important support. However, Platinum doesn’t seem to be rising on its own merits. Rather, it has gained in sympathy with commodities, stocks and the Euro. When charted against commodities and base metals, Platinum continues to trend lower.

In strike news, Platinum production will likely decline as 8,000 miners at Northern Platinum will go on strike Monday. The workers are looking for higher wages. The company did not agree to the National Union of Mineworkers demand for a 15% wage increase.

Car sales in India trended higher in August despite price hikes. For the four major manufactures, sales were up from 26% to 45%. Ford sales were up a whopping 226%! Meanwhile car sales in China surged 56% in August. Sales in Europe remain sluggish while sales in the US are down due to the comparisons with the supercharged “cash for clunkers” sales in 2009.

Despite the red hot sales in emerging markets and the continuous threat of strikes, Platinum continues to underperform its peer group and the commodity sector. Seasonally, Platinum does tend to be weak this time. Also, we should note that Platinum more than doubled from its 2008 low. That gain far exceeded the gains in other metals and commodities. It’s natural for the market to be weak after a period of huge strength.

Turning to the chart we see that Platinum held $1,500 and rallied past the pivot point of $1,540. The next resistance is $1,580, while $1,540 figures to be support.

]]> http://www.thedailycommodities.com/2010/09/09/platinum-copper-update-2/feed/ 0 http://www.thedailycommodities.com/2010/09/08/1337/ http://www.thedailycommodities.com/2010/09/08/1337/#comments Wed, 08 Sep 2010 06:45:42 +0000 Matthew Bradbard http://www.thedailycommodities.com/?p=1337 Shortened Trading Week 9/7/10

With Labor Day and the Jewish holidays expect volatile moves this week. October Crude has finished lower the last two sessions but as a trader what I’m interested in is that prices have closed $1-1.50 off their intra-day lows. We expect the recent lows to hold and for prices to make their way north of $80 in the coming weeks…trade accordingly. What I also noticed is that even on a day like today when Crude ended lower check out the distillates; RBOB and heating oil may be the strength that drives Crude higher. Inside day in natural gas with prices marginally lower in today’s trade. Our suggestion continues to be scaling into November futures and to purchase November call spreads.

The 200 day MA appears to be acting as a pivot point in the indices; that level in the Dow is at 10340 and in the S&P at 1107. We feel there could be a touch more upside and then we will likely be getting clients short ES futures and options; look for trade recommendations later this week.

Sugar advanced further today hitting a 7 month high. Prices are overbought but the rising OI is not signaling a top just yet. Clients have a small put position in March 2011 and are carrying a loss. Cotton too continues higher hitting a 2 year high today, higher by nearly 2%. Some clients are also carrying a loss their via December 2010 puts. A new 13 year high in coffee today; clients have NO exposure.

Treasuries were higher today likely due to the news out of Europe on their recent stress test results. Some clients are positioned short thinking the recent highs will serve as an interim top. Our target in 10-yr notes is 121’00 and 126’00 in 30-yr bonds.

Bloodbath in livestock today with the entire complex pork bellies to feeder cattle lean hogs to live cattle were all lower by 1.7-2.0% today. December live cattle broke the 20 day MA today for the first time in 3 months. We’re suggesting bearish plays to clients with a target of 96 cents.

Gold prices are within 1% of their record high. My opinion if your not currently long remain on the sidelines; our clients have NO exposure long or short. $20 appears to be acting as stiff resistance in December silver. We remain cautiously long with most clients via futures or December call spreads. On a $1 correction in the futures we would be looking to -re-establish longs in December futures and/or March 2011 options for clients.

Continue to buy dips in corn and wheat. For specific plays in KCBOT or CBOT wheat or corn do not hesitate to contact us. The breakout higher in oats could signal another leg higher in the grain complex. Though we rarely trade oats we do follow this market and so should you. With four Central Bank meetings this week (BOJ, RBA, BoE, BoC) sit on your hands in this sector until next week.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.

Matthew Bradbard
MB Wealth Corp.
(954) 929-9898
(954) 929-9993 fax
matt@mbwealth.com
www.MBwealth.com

Please do not place any trade orders via email as they will not be executed.

Trading in commodity futures and options involves substantial risk of loss. Past performance is not indicative of future results.

Our website is filled with resources to help the most novice or savviest trader. Come look at what the markets are doing in our charts & quotes section, or look up contract symbols and more in our tools section. The education segment includes a glossary and our special reports sector has access to all our archived commentaries and specialty articles published by Matthew Bradbard.

Thanks to all of you who checked in to ask about my wellbeing during the extended absence over the last two weeks. Everything is indeed fine. The only issue being a flat-out, cross-country marketing trip for Sunward Resources, our big focus around the Notela shop these days.

That’s now in the proverbial can. On with the analysis.

And there’s certainly been no shortage of news to analyze lately. One of the biggest items being the Federal Reserve’s announcement that the agency will restart its buying of U.S. Treasury securities.

We haven’t seen this game for a while. In the wake of the financial crisis, the Fed stepped into the Treasuries market in an attempt to keep interest rates low. Between April and October of 2009, the Fed bought $300 billion worth of U.S. government bonds, notes and bills.

Then they stopped. At the time the word was things were now secure in the bond markets. Private buyers were stepping in, eliminating the need for government intervention.

We went nearly 10 months without any significant Fed bond monkeying. (In the meantime, the agency forayed into the mortgage-backed securities market, buying $1.1 trillion in MBS.)

But it appears the good times are back off again in the bond market. Over the last three weeks, the Fed has made good on its promise and snapped up $9 billion in new government bond purchases. As the chart below shows, the trend is once again marching upward.

The interesting question is: why?

A year ago when the Fed intervened in bonds, yields were running high. The 2-year security stood near 1% yield. The 10-year was 3.8%.

Today, the 2-year bond is half that level. The 10-year yield is 30% lower.

Given that credit flows are still stunted in the U.S., the Fed probably wouldn’t mind seeing yields lower still. But this isn’t the main reason the agency is taking the drastic step of direct bond market tinkering.

A more likely explanation is a covert bailout of the financial community.

Over the last two years, a lot of investment money has flowed into U.S. government bonds. So far this fiscal year, the American public has purchased $1.15 trillion worth of Treasuries. In Fiscal 2009, public purchases totaled a whopping $1.75 trillion.

Much of this was safe-haven buying, as investors looked to wait out the economic storm that touched off late in 2008. With things today looking (somewhat) better on the world economic stage, some Treasuries holders are now selling and moving back into stocks, commodities and other higher-return investments.

An increase in such selling would almost certainly send bond prices lower (and therefore yields higher). Something the Fed doesn’t want to see. To compensate, they are stepping in with increased buying to absorb any paper hitting the market.

This is a new step in America’s money “shell game”. Initially, the government leant money directly to troubled financial institutions. Those institutions in turn leant the money back to the government, by buying Treasuries. Now the government (via the Fed) is encouraging money to flow back again to the private sector by giving them fresh cash for their bonds.

Here’s the big takeaway. Normally, all these flows of funds should move interest rates up and down. Significantly. But the government is orchestrating things, using the national balance sheet to mute any interest rate signals. The reason things look relatively orderly in the bond markets even as we go through massive cycling of dollars.

An important note for anyone expecting the bond market to provide a signal of impending financial troubles. This “early warning system” may be broken.

Here’s to listening for the right chimes,

Dave Forest
dforest@piercepoints.com

Copyright 2010 Resource Publishers Inc.

Note:

The information provided in this newsletter is based on the independent research of Dave Forest and Notela Resource Advisors Ltd. and is intended solely for informative purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade any securities or commodities named herein. Information contained in this newsletter is obtained from sources believed to be reliable, but is in no way assured. All materials and related graphics provided in this newsletter and any other materials which are referenced herein are provided “as is” without warranty of any kind, either express or implied. No assurance of any kind is implied or possible where projections of future conditions are attempted. Readers using the information contained herein are solely responsible for verifying the accuracy thereof and for their own actions and investment decisions. Neither Dave Forest nor Notela Resource Advisors Ltd., make any representations about the suitability of the information delivered in this newsletter or any other materials that are referenced herein for any purpose whatsoever. The information contained in this newsletter does not constitute investment advice and neither Dave Forest nor Notela Resource Advisors Ltd. are registered with any securities regulatory authority to provide investment advice. Readers are cautioned to consult with a qualified registered securities adviser prior to making any investment decisions. The information contained in this newsletter has not been reviewed or authorized by any of the companies mentioned herein.

The Energy Report: Today we’re talking with Ethan Bellamy, an analyst with Wunderlich Securities. Ethan, please tell us about yourself and your coverage sector.

Ethan Bellamy: I started out as a junior analyst covering cable and media at Stifel Nicolaus and Co. Then I got a job covering MLPs before I was lured to the buy side at Lehman Brothers, which was a shorter-lived experience than I would’ve hoped. I’ve been with Wunderlich for two years. My coverage list is a gathering of direct MLPs and closed-end MLP funds. I cover about 15 names, everything from propane to coal to the closed-end funds to oil and gas production to pipelines. I’ve either owned, shorted or written research on just about every MLP out there.

TER: That’s quite a range of MLP experience. Ethan, we’ve seen about a 25% increase in dollar volume flowing into MLPs this quarter versus the same quarter last year. What’s driving that increase and what sort of names are those dollars headed toward?

EB: Fund flows into MLPs can really be attributed to a bullish “perfect storm” phenomenon. First, you have the launch of two de novo MLP closed-end funds at more than $1 billion each. We also had two follow on offerings in existing MLP closed-end funds, Kayne Anderson MLP Investment Company (NYSE:KYN) and Fiduciary/Claymore MLP Opportunity Fund (NYSE:FMO), which raised another $260 million. All four of those vehicles have to rapidly put that money to work in order to pay their distributions. That’s been the primary driver of fund flows into the large- and mid-cap MLPs that we’ve seen since mid-May. We’re now coming to the end of the three-month window in which those two big initial public offerings of closed-end funds have been put to work. I wouldn’t be surprised to see a short-term period of MLP underperformance as that capital deployment subsides.

The “perfect storm” is being further enhanced by the big macroeconomic trend we’re seeing in U.S. Treasuries. The benchmark 10-year T-Bills just hit 2.5%. That means risk-free yields are really offering very little income, so investors are forced to look elsewhere.

We’re also seeing significant fear of rising personal income tax rates for 2011 if Congress allows the Bush tax cuts to expire. With the additional taxes for “Obama Care,” most people recognize that the cash from the “helicopter” stimulus plan we’ve had has to be paid by somebody. That somebody is going to be wage earners in the next two decades through higher taxes. On a relative basis, MLPs offer a tax-deferred income stream that looks a lot like municipal bonds; a municipal bond is tax exempt and MLPs are tax deferred until you sell. That looks pretty attractive to people considering the likelihood of higher taxes in the future.

TER: You’re basically saying other investment vehicles could see more taxes, and thus it’s better to be in MLPs because they likely won’t be subject to the same taxes as other investments.

EB: There are taxes on MLPs but they are deferred until the time of sale; you recapture that depreciation expense upon sale. But in the interim you’re getting an 80%–100% tax-deferred distribution stream, so your net present value with the investment is a lot higher.

TER: Ethan, I’m not sure most investors know the key differences between the closed-end funds and the open-end funds. Can you explain the basic differences?

EB: At the simplest level, closed-end funds are fixed pools of capital that trade on exchanges. You can have a secondary offering that will grow the pool of capital; otherwise it’s fixed. You buy a share in that pool that is traded on an exchange. You can have premiums or discounts to the net asset value (NAV) of that closed-end fund based on how the shares are trading. With an open-end fund, it’s a variable pool of capital that grows when you buy into it and declines when you redeem your shares. That’s typically done daily through the fund manager.

In a closed-end fund you can have a discount of premium to NAV, while with an open-end vehicle you’re buying or redeeming at the NAV every day. It’s just basically two separate types of vehicles, both of which are popular.

TER: A couple of other MLP vehicles have launched recently. SteelPath has launched several MLP mutual funds—SteelPath MLP Alpha Fund (NYSE:MLPAX), SteelPath MLP Income Fund (NYSE:MLPDX), SteelPath MLP Select 40 Fund (NYSE:MLPFX)—and the Alerian MLP ETF (NYSE:AMLP) launched this week. Do you expect those to draw significant investment dollars away from closed-end funds?

EB: I expect less cannibalization of existing funds than new money that may like the ETF structure better for whatever reason. There’s a reason no one has done an ETF in the MLP sector until now. That reason is the churn of a product like that with daily liquidity can add a tax burden.

These funds in the MLP space are different from a lot of other asset classes because they’re structured as taxable investment companies that do not benefit from the same tax benefits of registered investment companies. That’s intentional so that you get around the K-1 tax forms. Typically, you get 1099 tax forms by buying all these products. But you can have a tax burden. With the open-end funds and with the ETF, there’s a chance that they’re going to underperform the underlying index because of a tracking error created by taxes. I would encourage everyone to go read the prospectus before they go piling into the ETF thinking it’s going to produce the returns that the index is likely to produce. I think it’s similar to how the United States Oil Fund L.P. (NYSE:USO) or the United States Gasoline Fund, L.P. (NYSE:UGA) have underperformed the commodities that they’re supposed to track, because there are specific structural features in the fund that may cause them to underperform. That might not be readily apparent to the casual observer.

With respect to the SteelPath open-end mutual funds, which are discrete and separate from the new ETF, I’m told by my industry sources that those were done on a reverse inquiry rather than on spec. Hopefully, they’ll be predominantly low churn and held by registered investment advisors who are buying big positions that they’ll hold for the long term. Otherwise that could create some additional volatility in the market that could be negative. For example, if there are redemptions that require the selling of a big position at the market close, that could create some volatility. Still, I think you have to hand it to Gabriel Hammond and Kenny Feng at Alerian and SteelPath for their aggressive entrepreneurialism in MLP products. They’ve certainly not been shy about creating an avenue for investment in the group that was unavailable to most consumers. Although I’m a fan of the closed-end funds, there are some people who are never going to be able to get over the premiums-to-GAAP NAV that some of the closed-end funds exhibit.

TER: MLP ownership seems to be transitioning from retail to institutional investors. What do you think its ultimate result will be?

EB: I think and I hope that the ultimate result will be something similar to what’s occurred with Real Estate Income Trusts (REITs), where as the asset class expanded and became more institutionalized, more specific management vehicles were set up to invest in the space and valuations and liquidity improved. Ultimately, it became a stalwart investment class. I think that’s occurring with MLPs and it’s likely to continue on an incremental basis over time.

The sea change we’ve seen lately is that the combination of returns and improved liquidity has made the sector too difficult to ignore. Ultimately capital is going to flow where it is best treated. MLPs certainly offer pretty significant value propositions for an investor. The other benefit is that the bigger and more entrenched the MLP sector gets, the less likely it is that something dramatic happens with the MLP tax structure. For example, no one questions the tax benefits of REITs because they are globalized, have been around for a while and the structure is in place.

TER: You like a number of closed-end MLP funds, but you also like a number of individual MLPs. Are investors best served by directly owning MLPs or owning units in a closed-end fund or a combination thereof? What’s a good mix?

EB: There’s something for everybody here. It really depends on whether you are deploying taxable or non-taxable funds. Meaning, are you buying in a taxable account or are you buying in an IRA or a 401K or Keogh Plan? You can buy MLPs directly in an IRA or another non-taxable account, but at certain thresholds those will generate unrelated taxable income on the income received, not necessarily on the distributions received. There is no prohibition against buying MLPs directly and holding them in an IRA. It just can present some additional taxes that may not be warranted. The most efficient thing you can do is buy MLPs directly and receive the benefits in a taxable account. But if you want to deploy capital in the MLP space and you don’t want to directly track investments, and you’re worried about generating unrelated taxable income, then you might want to choose a closed-end fund or an exchange-traded note (ETN), which produces a 1099 tax form. A closed-end fund basically gives you a diversified portfolio of MLPs, so you get some portfolio diversification benefits, as well.

TER: You have buy ratings on the closed-end funds Energy Income & Growth Fund (NYSE:FEN) and Tortoise North American Energy Corp. (NYSE:TYN). Tell us about those.

EB: Energy Income and Growth Fund is sub-advised by Energy Income Partners, which is led by a guy named Jim Murchie, whom I consider the Warren Buffett of MLPs. He’s value biased, very conservative. Jim picked up sub-advisory of the fund before the credit crisis, reoriented the portfolio toward very conservative investments and had a very conservative cash flow payout ratio. When the credit crisis hit and most MLP managers were forced to sell assets to maintain compliance with leverage limitations, he was forced to sell less. He was able to maintain his distribution without trimming it, whereas most of his peers were forced to cut. And FEN was the first fund to raise distributions since the credit crisis.

If you’re looking for a very conservative way to play MLPs, you can take advantage of Jim’s strategy, which he calls “selling pickaxes to the miners.”

TER: And TYN?

EB: I like that name. TYN is a little smaller and has a little more commodity price sensitivity than some of the other funds. This is one of four funds now managed by Tortoise Advisors. I like this name particularly because they’ve got almost 10% of their capital allocated to two upstream MLPs I like a lot—Linn Energy, LLC (NASDAQ:LINE) and EV Energy Partners, L.P. (NASDAQ:EVEP). From time to time these funds trade differently on price to NAV. We have our own proprietary method for calculating price-to-adjusted NAV, where we basically adjust the net present value of deferred tax assets and liabilities to come up with a better representation of NAV than the nominal NAV that’s reported under GAAP. But generally speaking, this is one that I think has pretty good distribution growth prospects because of its commodity price sensitivity.

TER: You said you like Linn Energy and EV Energy. Why do you like those names?

EB: The upstream MLP subsector I think has the single biggest secular growth story in MLPs. LINE and EVEP are somewhat controversial vehicles. Many of the traditional MLP asset managers look askance at them because of the history of the MLP sector. The first MLP was Apache in 1981. Thereafter many of the first MLPs were oil and gas entities that were under-hedged and over-levered and ultimately failed when oil and gas prices stayed low throughout the 1980s. These new breeds of upstream MLPs, which started with LINN Energy in 2006, are better because management realized they have to retain a significant portion of cash flow in order to reinvest it. They’ve also hedged strongly and, more importantly, they have a huge secular growth opportunity. They’re the most efficient way in terms of tax structure to hold producing oil, gas and natural gas liquids assets that don’t have much development upside because you don’t pay corporate entity taxation. That way you avoid the double taxation of corporate dividends. That’s the case with all MLPs but, specifically, with oil and gas assets that you’re basically just trying to milk over time; it’s a very efficient structure. We see about $250 billion of proved, developed, producing reserves in the United States potentially flowing into these upstream MLPs over the next decade. They have the potential to be as big as the rest of the MLP sector combined.

TER: What are some other companies that stand to benefit from that transition of assets?

EB: LINE, EVEP, Legacy Reserves, L.P. (NASDAQ:LGCY), Vanguard Natural Resources, LLC (NYSE:VNR) and BreitBurn Energy Partners, L.P. (NASDAQ:BBEP) are definitely going to be able to tap into that $250 billion pool of existing assets that I talked about. The onus is really on these partnerships not to overpay for the assets. If they can buy them on the right terms, then the world is their oyster. The one caveat for investors that I would throw out there is that there is some lingering uncertainty about the liquidity and cost of commodity derivatives after the passage of the Dodd-Frank Financial Reform Bill. There’s a nominal exclusion in the legislation for end-users, but the major swap dealers may still have to collateralize some of these transactions, which would raise the costs of derivatives. At this point it’s still I think unclear how this is going to shake out. It’s important to point out that MLPs are large users of derivatives. If something were to come out of the Dodd-Frank legislation that was draconian with respect to derivatives, it would definitely impact the MLP sector.

TER: Let’s head back to some other closed-end funds you like.

EB: The other funds I like include Kayne Anderson MLP Investment, Tortoise Energy Capital Corp. (NYSE:TYY) and Tortoise Energy Infrastructure Corp. (NYSE:TYG). Basically, these should perform in line with the Tortoise MLP Index (TMLP). They are generally a good way to access the sector. You’re buying predominantly the large- and mid-cap MLPs via these funds. They have reasonable expense ratios. They have a reasonable track record. We look to enter and exit these based on price to NAV.

TER: What are some individual MLP names you like besides LINE and EVEP?

EB: Just to be clear, I don’t cover those. Those are owned by TYN. The two upstream MLPs that I like and follow formally are Legacy Reserves, L.P. (NASDAQ:LGCY) and Vanguard Natural Resources. I’ve been following Legacy since its IPO in 2007. I just took a tour of their new properties they bought in Wyoming. Their roots are in the Permian Basin in West Texas; they’re based in Midland, Texas. They just squeeze as much blood from the turnip as they can when they get assets. Sometimes the assets have not been maximized either by a small producer that maybe couldn’t afford an engineer, or they were an afterthought to a larger producer that had bigger development capital projects to go after. Legacy will go in and maximize an asset. They are in there buying things as small as $2 million apiece and up to $100 million plus. Last year was a bit dicey for Legacy when oil prices cratered and it looked like private equity firm Apollo Management L.P. might come in and buy them on a discounted basis. Apollo would’ve pulled off the best deep value trade of the year if they were able to buy Legacy. But oil prices recovered and Legacy was able to walk away from the deal. Since that time they’ve been able to produce more distributable cash flow, and continue their growth-through-acquisition story. I anticipate that they’ll be able to restart distribution growth very soon. We have them growing their distributions by about 5% in 2011.

TER: And Vanguard?

EB: Vanguard, which also went public in 2007, really started out as an Appalachian gas producer but it has since morphed to 50/50 gas and liquids. They stood out as robust for a small cap, particularly in 2009, by having a solid hedge book that carried them through a period of very low commodity prices. You know, in my career I’d never seen a more obvious invalidation of Efficient Market Theory given Vanguard’s hedge book. I basically stood up in 2009 and said: “Vanguard is really super cheap for no reason. Go buy it.” It returned more than 300% in 2009 on what I would consider a march back to fair value. I don’t expect to see that kind of mispricing on an asset again in my lifetime. Now it’s tracked to a more reasonable valuation range. I really like it as a growth story. I think the stage is set for them to post high single-digit distribution growth via acquisitions in the next few years. Both Legacy and VNR, along with some of the other peers I mentioned earlier, should also be able to take advantage of that $250 billion shift in assets that I talked about before.

TER: Vanguard made about a 22% gain above your estimates on commodity derivatives in the last quarter, correct?

EB: Well, the main things we look at are margins and distributions. Vanguard has been tracking pretty closely to where we think cash flow and distributions are. Although GAAP earnings are certainly relevant, they’re much less relevant for MLP investors because typically we’re looking at non-GAAP distributable cash flow as the true benchmark for profitability.

TER: Vanguard produces oil and gas and it’s hedged, but to what extent?

EB: I believe they’re 80% hedged through 2011 on gas and about 50% hedged on oil through 2013.

TER: What are they hedged at in gas?

EB: They’re hedged at about $8 through 2011.

TER: With gas prices around $5 that’s not a bad thing. Another thing that we wanted to talk about is that a number of the MLP indexes have vastly outperformed the bond market and certainly the S&P by large margins over the last decade. A $1,000 investment in the Cushing 30 MLP Index in December 2001 would be worth almost $5,000 now, whereas the same investment in Merrill’s High Yield Bond Index would be worth just under $2,000. Why is the Cushing 30 dramatically outperforming its peers?

EB: I think the best way to talk about these is to talk about all the indexes that we watch and how they differ from one another.

The three indexes that I would point investors to would be the Alerian MLP Index (NYSE:AMZ), the Tortoise MLP Index and the Cushing 30 MLP Index (NYSE:MLPX). They will tell you what the large caps are doing via the AMZ; what a typical portfolio should be doing via the TMLP; and what a high-beta aggressive growth strategy would be doing via the MLPX.

The Cushing 30 is equal weighted, so it’s going to give you more pop and more beta when the smaller cap names are performing well. In an environment where MLPs are going up, you’d expect the high beta names to be going up a lot more and the MLPX to be outperforming.

TMLP is more market cap weighted like the AMZ, but it has position limits on the large caps so it’s not dominated by Kinder Morgan Energy Partners, L.P. (NYSE:KMP) and Enterprise Products Partners, L.P. (NYSE:EPD) the way the Alerian MLP Index is. It looks more like what you would actually own as an investor. If an investor were to ask: “Hey what’s a proxy for a reasonable MLP portfolio?” I would tell them to look at the TMLP. You’ve seen all these indexes move up pretty rapidly on the strength of the capital deployment from those two IPOs—north of $1 billion.

TER: Do you have some parting thoughts on the MLP sector?

EB: I think in the near term there’s some risk that you’ll see a reversion toward the S&P 500, but long term I think it’s pretty easy to be constructive on the MLP space. I think that we’re going to see an inflationary environment essentially created by fiat money and big budget deficits. I don’t think there’s a really easy solution for the Fed to do anything but inflate our way out of the debt that we’ve created. In that type of environment, an MLP should do very well over the long term. Moreover, I think there’s no way around higher personal income taxes. Frankly, most investors should be buying these for the long term because that’s where the real benefit is, deferring as far out into the future as possible the taxes that will be due.

Ethan Bellamy specializes in the analysis of Master Limited Partnerships. Previously, he was the director of research for the Lehman Brothers MLP Opportunity Fund where he was responsible for fundamental analysis and due diligence in public, PIPE and pre-IPO investments in natural resources. Prior to joining Lehman Brothers, Ethan was a senior analyst covering MLPs at Stifel Nicolaus where his coverage included oil and natural gas production, gathering and transportation; propane distribution; marine shipping; coal mining; and MLP-oriented closed-end funds. Ethan previously worked as a journalist for various local and national media and taught writing and journalism at the University of Colorado at Boulder for two years. He was a doctoral student focusing on energy policy at the University of Colorado at Denver, with a focus on energy infrastructure and renewable energy policy. He holds an MA from the University of Colorado at Boulder and a BA from Clemson University. Ethan is an avid snowboarder and telemark skier, and has hiked both the Pacific Crest and Appalachian National Scenic Trails in their entirety.

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DISCLOSURE:
1) Brian Sylvester of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report or The Gold Report: Vanguard Natural Resources.
3) Ethan Bellamy: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: Vanguard Natural Resources, Tortoise North American Energy, Tortoise Energy Capital, Tortoise Energy Infrastructure, Legacy Reserves, Kayne Anderson and Energy Income & Growth Fund.

This investment research is provided to Wunderlich Securities, Inc. under licenses from various third-party Investment Research Providers. Please direct any questions regarding this information to the author of the article and not to the Investment Research Provider, its analysts or other representatives.

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Here is the chart for crude oil. There has not been much excitement for crude oil in 2010. The price has been consolidating since November 2009 like the other commodities, such as gold and silver. The demand for crude oil is low due to seasonal maintenance on oil refineries, so I expect oil to test the $70 support level if no other incident occurs that will spike the oil price. If you are a day trader, then you should have been taking advantage of the chart pattern for the past year.  The resistance and support level is keeping a tight lid on the price.

The last base went on for nearly two years! If you look at the chart in August 2005 to July 2007, the oil price was between $60 to $80 before going to nearly $140. This base could last another  year assuming all  other factors remain the same. That mean no new wars emerging in the Middle East and the demand does not increase dramatically. However, I’m not confident that the current environment will remain constant. Israel and US are prepping to strike another oil producing country, which is Iran. The US relies on Iran for oil so if we go to war, then I expect oil price to increase.

The chart for BP is somewhat in the air right now. I set the resistance level at $41 and the support level at $34. In the long run, I do not think BP will survive from the oil spill. They are getting sued from left to right and they do not have enough assets to cover the law suits. Read Jason Burack’s article on BP chance of survival. It is a MUST READ.The price has been trading in a range lately and I expect it to continue to do so unless a current event changes the investors’ mood on BP. An example would be hurricanes or the cap blows off, oil begins to gush into the ocean again or a market crash. The investors should play this stock base on current event. However, I do not advise buy and hold strategy for this stock. There is too much uncertainties. Here is more articles on BP from Kent Moors. Moors consulted BP in the past so he has inside sources within the firm.

BP’s Got Money Problems

Is BP Dealing Away Its Future?

Until next time…Good night and good luck.

One road to wealth is to only own those assets for which the price is rising. That seems to be a rule that equity investors have forgotten. In any event, a great market technician once suggested only looking at those things with prices making new 52-week highs. His reasoning was that for the price of something to rise it must eventually make a new high. Well, based on the above chart, that technician would be all over Agri-Food commodities and associated investments. Our Agri-Food Price Index recently made a new high!

Recent embargo of grain exports by Russia due to problems with their wheat crops has served to highlight the tenuous nature of the world’s Agri-Food situation. Cessation of Russian exports did not cause prices to rise.  It just helped to uncap them. The fundamental Agri-Food shortage facing the world did not suddenly arise. It has been building for years.

List of countries that cannot feed their people is not a short one. Included in it are all the nations of the Middle East, Egypt, India, China, Philippines, etc. With prosperity beginning to arise in China and on its way in India, these two nations will increasingly turn to global markets to feed their citizens. They have no choice, as they lack the land and all-important water to feed their people. In the global game of Agri-Food, those nations that bid the highest will get the food.

If one reads the commentaries or listens to traders, the discussion still drones on about absolute size of grain reserves in the world. And yes, they are sizable. That view, however, focuses on a meaningless metric. Gasoline stocks today are many times the size that existed when this author was a teenage driver.  We are not, however, paying 19 cents a gallon for gasoline. For what matters is not the size of the reserves, but those reserves relative to consumption.

In our first chart this week, above, is plotted the days of consumption held in global reserves for the Big Four, corn, soybeans, wheat, and rice. They all fall into a range of 60-95 days. If no production of these grains occurred, in less than 60 days no corn would be available. In the case of rice, in less than 80 days none would be found.

Numbers in that chart do not portray a picture of overwhelming bounty. Such is the reason that global grain markets responded to the Russian announcement. At the same time, the world has really not yet come to know the impact of the floods on Pakistani rice production. That country is the number three exporter of rice.

NEW 90-WEEK HIGH ABOUT TO HAPPEN?

When Agri-Food is short in supply anywhere, the world turns to North America. Per the latest USDA report, U.S. wheat export sales are running 60+% ahead of a year ago. For rice, the same number rounds to being up 30%. Those sales are tightening the prices of all grains, such as corn in the above chart.

Corn has not yet risen to a new 90-week high, but it is well on its way to doing so. China, long a net importer of soybeans, is now moving to becoming a net importer of corn. That importation takes two forms, physical corn and dry distillers grain. Latter is a byproduct of ethanol production. Essence of the problem for China is that it lacks the water to grow sufficient corn. Importing corn is the importation of “virtual water.”

When corn is $11 a bushel, who will benefit from it? Will your wealth? Two good ways exist to participate in the tightening of the global Agri-Food markets. One is through stocks of those companies that serve the global Agri-Food market. Second is through investment in Agri-Land. For those that might think in terms of the latter, our 4th Annual U.S. Agricultural Land As An Investment Portfolio Consideration – 2010 will soon be available at our web site. This report is the definitive annual study of the returns earned on U.S. agricultural land.