Where to Play Defense

 | Jun 04, 2012 | 9:38 AM EDT
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It's awful, I know it. Don't tell me again. You get to the point in the day when you're looking for any excuse to turn off your screens and go to the beach, the movies, the sofa -- anywhere but in front of the slowly grinding disaster. 

I'm with you.  I've gotten really close to cashing in all of my well crafted open positions and just placing it all in Seadrill (SDRL) and Encana (ECA) (both dividend payers I am absolutely convinced can support their payouts) and setting the alarm to wake me again in 2013. 

But maybe there's more to be done. Everyone wants defense, I get it. No beta, no growth stories just defense. One group is playing out just like in 2008, which made for the best trade in 2009 and 2010, the master limited partnerships. 

These are the toll booths of energy, the pipelines and storage tanks that are the necessary transport infrastructure for energy, both for oil and natural gas. Rates for these pipelines -- the tolls that are charged -- are not often based upon the price of the underlying commodity, so whether oil prices go up or down, or natural gas stays under $3 mmBtu forever, it shouldn't make any difference to the profitability of the MLP's. Only demand and flow rates should have any effect.

Energy prices shouldn't matter, but they do. When oil goes into free fall, as it has in the last month, the energy MLP's get hit, hard. There's absolutely no reason for it, but there is historical precedence for it as the MLP's dropped massively in 2008, with some of them at the bottom yielding well over 10%, 11%, even 14%. 

Such an opportunity won't ever come again, in my opinion, and happily so. We were looking at a true economic abyss when those yields were reached and getting back there again would test the limits of our global system in a way we don't want to see.

But if you wanted defense, you can't do any better than the MLPs. They have the added massive benefit of being non-grata holdings for many of the hedge funders because of their tax treatment, too, and I love holding stocks that keep the wiseguys out and let the retail investor play on an even field. Their charters require them to pay out the majority of earnings as distributions to shareholders, so there is little financial finagling. What they make, they pass on to you.

Not all MLPs are created equally, of course, and a spread of them will serve you well as opposed to choosing just one or two. I'll get a lot of emails on my choice of MLPs, but here's my grouping, by no means the last word on which ones to hold: Kinder Morgan Energy Partners (KMP), Enbridge Energy Partners (EEP), Transmontaigne Partners (TLP), Energy Transfer Partners (ETP), Enterprise Products Partners (EPD) and I'll add Linn Energy (LINE), which isn't totally an MLP. All have gotten blasted in the last month and all are yielding well over 5%

It's awful, I know it. It may be time to play total defense with the MLPs and set the alarm to wake up when this is all over. 

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