Happy Friday!!!
Obamacare: A Comedy of Terrors
Jamie Dimon Knew About Madoff Ponzi Scheme
Ukrainian Parliament Negotiations
“He said cruelty was the devil’s own trade-mark, and if we saw any one who took pleasure in cruelty we might know who he belonged to, for the devil was a murderer from the beginning, and a tormentor to the end. On the other hand, where we saw people who loved their neighbors, and were kind to man and beast, we might know that was God’s mark.”
Anna Sewell
The Russians support the elected Ukraine government. The U.S. and EU are behind the protests and riots against a democratically elected government. Obama pontificates to the Ukraine government to stand down. When Americans peacefully protested the criminality of Wall Street bankers and their bought off government cronies, the GOVERNMENT responded by beating, macing, and imprisoning the protestors. Did Obama order the police thugs to stand down? Know your enemy.
It’s time to answer the “who, what, when, where, and why” of investing in master limited partnerships (MLPs)…
Andrey Dashkov, senior research analyst at Miller’s Money Forever, is the rare person who, when you asked for a hammer comes back with a hammer, nails, staples, and glue. In short, he often comes up with better solutions to tricky problems than I ever thought possible.
Since Andrey and I are on a nonstop mission to unearth the best opportunities for generating safe income, we have looked to MLPs more than once. Many Business Development Companies (BDCs) and Real Estate Investment Trusts (REITs) also fit the bill. Today, however, we are focusing exclusively on how MLPs can produce a healthy and steady income without exposing your nest egg to unwelcome risks.
By Andrey Dashkov
An MLP is an entity structured as a limited partnership instead of the traditional C-corporation. This allows the company to avoid corporate-level taxes. The limited partners pay most of the taxes, which means that MLPs are essentially pass-through entities.
In the United States, the net effective rate of corporate income tax is 40%. That means a corporation calculates its profit, pays the appropriate income tax to the government, and then pays dividends from what remains. With an MLP all the profits are passed through to the unit holders.
While a traditional corporation can choose to pay a dividend, an MLP does not have that option. In order to maintain their status, MLPs are required to generate at least 90% of their income from qualifying sources and distribute the major portion of that income. In most cases these sources include activities related to the production, processing, and distribution of energy commodities, including gas, oil, and coal.
The government gives a special treatment to these activities to encourage investment into the United States’ energy infrastructure.
Limited partners (LPs) own the company together with a general partner (GP). The GP takes care of the day-to-day operations, typically holds a 2% stake, and can usually receive incentive distribution rights (IDRs). LPs, called unit holders, (which we can become by buying shares of publicly traded MLPs) receive dividend-like cash distributions. LPs, unlike traditional shareholders, do not have voting rights.
There are many advantages to MLPs, including:
MLPs pay various yields that average 5-10%. Data for the Alerian Index, which tracks the top 50 MLPs, show that in Q2 2013 MLP yields varied from 3-12%, with an average of 6.5%.Besides the actual yield, MLP investors can count on distribution growth. Dividends per share of Alerian Index constituents grew at a compounded rate of 4.1% over the past five years.
Several factors hedge against inflation:
MLPs have a low correlation to other asset classes, including equity, debt, and commodities. However, for a short time they may correlate with any asset class or the market in general.
MLPs are less volatile than the broad market. Currently at 0.5, the average beta of Alerian Index, is quite conservative. This suggests that if the broad market goes down by 10%, we should expect the Alerian Index to drop by 5%. An individual company’s volatility may stray from the average, but in general MLPs should be much less volatile than the market as a whole.
Generally, the vast majority of MLPs operate in the energy sector, but usually do not own the underlying commodities; this is part of the reason for the decreased volatility. Their income generally consists of transportation fees. However, some MLPs can be exposed to commodity risk (coal, propane, and oil exploration and production MLPs, among others). Economy-wide consequences of a severe recession may impact the demand for energy commodities and, in turn, the profitability of transportation companies.
An MLP investor typically receives a tax shield of 80-90% of one’s annual cash distributions, which is a very nice feature. This defers tax payments until the unit (your share) is sold.
The tax payment schedule for an MLP is illustrated below. Assume you bought one unit of an MLP for $20 and sold it after five years for $22, having received $2 annually in years 1-5. Assuming your ordinary income tax is 35%, and the long-term (LT) capital gains are taxed at 15%, you can see the breakdown.
Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
Purchase price | $20.00 | |||||
Distribution per unit | $2.00 | $2.00 | $2.00 | $2.00 | $2.00 | |
Income per unit | $2.00 | $2.00 | $2.00 | $2.00 | $2.00 | |
Depeciation expense | $1.60 | $1.60 | $1.60 | $1.60 | $1.60 | |
Cost basis | $20.00 | $18.40 | $16.80 | $15.20 | $13.60 | $12.00 |
Sale price | $22.00 | |||||
Taxes: | ||||||
Earnings per unit
|
$0.40 | $0.40 | $0.40 | $0.40 | $0.40 | |
Depreciation recapture
|
$8.00 | |||||
Amount subject to ordinary tax rates | $0.40 | $0.40 | $0.40 | $0.40 | $8.40 | |
Ordinary tax rates
|
35% | 35% | 35% | 35% | 35% | |
Taxes owed at ordinary rates | 0.14 | 0.14 | 0.14 | 0.14 | 2.94 | |
Amount subject to LT capital gains | $2.00 | |||||
LT capital gains rate
|
15% | |||||
Taxes owed at ordinary rates | $0.30 | |||||
Total taxes owed | $0.14 | $0.14 | $0.14 | $0.14 | $3.24 | |
Source: Credit Suisse |
During periods of economic uncertainty, MLPs remain a solid source of income. In 2008-2009, 78% of all energy MLPs either maintained or increased their distributions. In comparison, 85% of real estate investment trusts (REITs) either cut or suspended dividend payments.
Now, a note of caution is in order. Despite the excellent income track record, MLP share prices stumbled as they became more correlated to the general market. However, the investors who held them through the difficult times saw the share price rise again. MLPs returned to January 2008 levels in early 2010; the S&P 500 did not do the same until 2013.
The same plunge could happen again if a severe economic crisis hits. As we said, MLPs may move with a falling market. The fact that more investors are aware of MLPs now than a decade or two ago adds to this risk. As investors have searched for yield, MLPs have become more mainstream; however, they are by no means your average S&P 500 stock.
Also, there are two immediately positive outcomes to the higher investor awareness of MLPs: higher liquidity and access to more capital. In the Money Forever portfolio we look for the best and safest available and then protect our downside with protective stop losses.
With any investment offering a reward, there is a corresponding risk. Here are the key risks of MLPs.
Risk #1: Economic downturns. If the US economy is hit by a severe economic crisis that drives the demand for energy products down, MLPs will take a blow. Like a trucking business that transports products for which the demand is going down, if less product is shipped through a pipeline owned by an MLP, their revenue may decrease.
This, however, is where some investors may get confused. If a pipeline MLP has a contract with an energy company, the price of the transported product may increase or decrease, but at the same time, the MLP may have a fixed-fee arrangement with the energy company. So, if the volume flowing through the pipeline remains steady, its revenue should not fluctuate.
Risk #2: Access to capital and interest rates. As a general rule, MLPs return 100% of their distributable cash flow (DCF), less a reserve determined by the general partner, to the unit holders. Unlike real estate investment trusts that must give away a certain share of their cash flow every quarter, MLP distributions are governed by individual partnership agreements, so the terms vary.
However, the majority of cash an MLP earns will be distributed, so it’s only natural that they turn to issuing debt or equity to finance growth projects. When their interest costs rise MLPs that need capital right away will be at a disadvantage. We prefer companies with enough internally generated capital to finance growth, and no major ongoing projects that require billion-dollar loans and thereby run the risk of being underfunded or funded at an unfavorable interest rate. We also prefer companies with fixed-rate debt to floating rate.
Risk #3: Management and execution. Management should have a track record of successful investment in new assets and cash generation to finance distributions.
We also look for companies that have 5- to 10-year capital plans as part of the write-up, and a history of following those plans. They tend to fare better when it comes to keeping capital costs under control.
Risk #4: Sustainability of cash distributions. The above three risks boil down to whether or not an MLP will be able to churn out cash for its unit holders. The distributions should be sustainable, and should grow year after year. The primary reason for buying an MLP is income. We need to make sure the cash keeps coming in.
A company’s track record of cash payments is a good, but not perfect, indicator of how it will perform in the future. Variable-rate distributions tend to, well, vary more significantly than those of traditional MLPs. Distributions in the midstream sector tend to be more predictable; natural gas pipelines and storage generate the most stable cash flows while refining/upstream MLPs do so to a lesser extent. We carefully consider these factors when evaluating our investment options.
When Ben Bernanke uttered the word “taper” on June 19, the markets jittered. Even the traditionally defensive sectors such as utilities took a hit.
MLPs were not immune to the potential implications of the Fed easing up on its bond-purchase program which many believe is helping the US economy. The market panicked, and MLPs dropped in price. Readers will note the index dropped in the middle of 2013. The drop was less steep than those in either the broad market or the utilities sector and MLPs rebounded—in less than a week, while it took approximately three weeks for both the S&P 500 and XLU to get back to their June 18 levels.
When evaluating a potential candidate, a prudent investor will see how they have performed during times of market volatility. Sometimes trading a bit of yield for much less volatility is a smart move.
We do not recommend putting MLPs in an IRA account. By placing an MLP in a tax-deferred account, you may lose part of the tax advantage the MLP structure provides. In an IRA account, unrelated business taxable income (UBTI) of over $1,000 is subject to federal income tax. If you earn more than $1,000 annually from an MLP’s cash distributions and other sources of UBTI, the excess will be taxable. This becomes more likely over time, since most MLPs increase their cash distributions.
In summary, an MLP gives us a couple of advantages from a tax perspective. There is more money to pay out in dividends. Unlike a traditional corporate dividend, which is paid after a corporation pays income taxes, MLPs do not pay corporate income taxes. An MLP’s income is taxed only once, when the dividends are received.
Initially, when you buy an MLP, only 10 to 20 percent of the MLP distribution is considered taxable income. The rest of the distribution is considered return of capital and isn’t subject to tax when you receive the dividend. Basically you put off paying some taxes for the short term. When you eventually sell your MLP, the tax is adjusted so the net amount of taxes is the same. The formula is technical, but the information you receive from your broker can be given to a competent CPA and you should be fine.
You can see why MLPs have become so popular in a yield-starved environment. While they have attracted a lot of investors, there are still some great opportunities for those willing to do their homework.
Dennis and I added our favorite MLP to the Money Forever portfolio in October, and we are chomping at the bit to share it with you… But, because of the special relationship we share with our paid subscribers, you’ll need to sign up to for a premium subscription at no-risk to your pocketbook to find out what it is. Subscribe to our regular monthly newsletter and take a peek at the MLP we recommended, along with our entire portfolio. If, after 90 days, you decide it’s not right for you, we’ll return 100% of your money without a fuss. Click here to get started.
My f$%king blood pressure is off the f%$king charts this morning. I don’t have time to write this, but I will anyway.
When some low IQ middle aged dumbass woman realizes she shouldn’t be driving her minivan through the EZ Pass EXPRESS LANE of Interstate 476, the response is NOT to stop. You f$#ked up and you will be getting a ticket in the mail. Killing the 50 drivers behind you going 65 miles per hour is NOT the solution to being a dimwitted a$$hole.
I understand that most middle aged woman are distracted by who will be kicked off American Idol tonight, but when your mental retardation almost gets me killed, I’ve got a real f$#ing problem. How stupid can a person be to actually stop in the EZ Pass Express lane during morning rush hour with dozens of cars right behind her? All it would have taken was one other distracted driver and the pile-up would have been epic. I would have made the evening news as a statistic. The reporter would have had to tell everyone the blue pile of debris was once a Honda Insight.
I know it was a woman because I eventually pulled up beside her. She was clearly another ignorant brain dead drone, one of millions inhabiting this country. Her vote is equal to mine. But I’m guessing she couldn’t figure out the complex voting booth. How an idiot like this hasn’t already won a Darwin Award by electrocuting herself or drowning in the bathtub is a mystery to me.
To add insult to injury, she was in the wrong lane to get on the Schuylkill Expressway and virtually stopped in her lane again while cutting off an SUV in front of me. It would be fitting if she met her end doing this with an 18 wheeler behind her traveling at 80 mph. One can only hope.
If someone from the PA Dept of Transportation is reading this, I’d appreciate it if you quadrupled the fine for the shrew that went through the EZ Pass Express Lane illegally at 6:50 am this morning while imperiling the lives of dozens. Of course, I’d much rather slap the bitch silly.
OK. I got that out of my system. Now onto multiple budget meetings. No one better ask for any money. Later in the trek a good driving song came on the radio and slightly mellowed me out. Enjoy
“This state of affairs, incidentally, has nothing to do with the fact that the people are divided, but rather, is to be explained by loss of confidence in the so-called system. In order to maintain the system, the empowered ones begin to act as rulers and resort to force. They substitute force for the assent of the people. That is the turning point.”
Hannah Arendt
Guest Post by Sott.net
Now they are back to the true and tried formula of claiming that terrorists might try to attack airplanes using explosives in their shoes. This will of course give the Department of Homeland Security the opportunity to subject people to additional pat downs and other useless security measures.
Below is a blurb from a NBC report describing the situation. They claim that “very recent intelligence” indicated a potential shoe bomb plot. If that were really the case it is funny how they fully admit that they can’t provide any specifics including who, what, where or when. What sort of so-called intelligence is this any way?
It sounds like this whole thing is made up.
The Department of Homeland Security has advised airlines of a potential new security threat, urging them to pay extra attention to flights from overseas to the United States.
Several officials familiar with the advisory say “very recent intelligence” considered credible warns of possible attempts to attack passenger jets using explosives concealed in shoes. As a result, officials say, airlines will be playing extra attention to passenger shoes on flights to the US from overseas. Those passengers may also experience increased scrutiny in pat downs and full-body screening.
The bulletin to airlines urges screeners to use the explosive trace detection swabs to check shoes that are worn and in carry-on bags.
The officials say the threat information was not specific to any particular airline, country, or time. There is no indication of a specific plot, they say. But after assessing the information, the Department of Homeland Security advised airlines earlier today of the possible threat and urged greater security scrutiny on U.S.-bound flights.
This proves yet again that the Department of Homeland Security is a domestic terrorist organization. They continue to terrorize people by making up fake terror plots in order to justify their useless existence.
If there were a real war on terror the Department of Homeland Security would have been abolished years ago because for over a decade they have terrorized the American people with their ridiculous fear mongering and police state tactics much more so than any alleged Islamic terrorist group.
Via Mike Krieger of Liberty Blitzkrieg blog,
The following quote written on a piece of cardboard from the ongoing protests in Venezuela basically summarizes how the oligarchs, or the 0.01%, and their political henchmen rule in all countries around the world at the moment. Then they cry like little welfare babies when people criticize their behavior.
Powerful stuff:
Submitted by Ben Tanner
Emergency preparedness is something that two people in a relationship should do together. This is because if you have two people handling all of the details, equally together as one, it is twice the work being done. Having two people doing emergency preparedness together means planning ahead together and being in sync successfully if any form of 911 emergency does strike the area that you are living in.
It doesn’t matter what the type of emergency is either, as there are various scenarios. What matters the most is having all of your prepping steps ready to meet any emergency that may strike unannounced. This is because by having your emergency preparedness done ahead of time. You are ensuring yourself, as well as your significant other, a much better chance of being able to survive any emergency that may take place without any advance warning.
How to get your significant other on board with prepping for any emergency? First of all, before you get your significant other involved in any real plan to do emergency preparedness, you should do something in advance first. What is this something in advance? You need to personally determine what type of events can take place in your community.
Is your area prone to hurricanes, tornadoes, and other forms of natural disasters such as earthquakes, wildfires, mud slides? The list goes on. Once, you have determined what events usually plague your locale, then you should build an emergency preparation plan around these kind of debilitating occurrences. Some people also prepare for nuclear war, or other man-made disasters too. Therefore, this can be incorporated into your particular emergency preparedness plan, as well.
The Hook:
The next step is to give your significant one category of the emergency preparedness plan to take care of specifically. One area that is crucial is for food storage and emergency food. You can dispense this key part of the plan to him or her.
You shouldn’t overwhelm others with the whole plan. Giving them a small part of the plan can introduce them the whole vision and picture. If you try to unload all the problems that can happen, they will be less likely to participate.
Then you can go ahead and take another category, which does include getting an emergency kit together. Getting your significant on board with prepping for any emergency allows both of you to get the emergency preparedness work done a lot faster as a team. It is something totally different with just one person doing it. However, when two people are involved in the process, it is not as time consuming and endless a task to handle.
Important:
If your significant other does choose to do the emergency food storage supplies task make sure that he or she only buys items that can withstand the test of time and are designed to for emergency food storage.
For instance, freeze dried food is ideal for long time storage, and is great to serve as part of an emergency preparedness food survival preparation. Some other items that are very good for an emergency food checklist include bottled water, food bars that have a shelf life of five years, as well as trail mix, nuts, raisins, are just an example of the many that are available. You should also include some water purification tablets too. When you make up your disaster emergency kit. It should include a flashlight and extra batteries, a battery-operated radio, a cell phone with chargers, inverter or solar charger, a first aid kit, a dust mask, a manual can opener, garbage bags with ties, moist towelettes, amid some of the things to put into it.
A great source for these items is www.foodstorehouse.com
Once you’ve got them onboard, the sky’s the limit. Your relationship can be strengthened as you are both focused on a common goal. And one last thing, remember to have fun!
Janet Yellen, the new Fed chair, has her admirers and her detractors. One unabashed admirer is my good friend David Zervos, Jefferies’ chief market strategist, who during the past several months has taken to hollering “Dammit Janet, I love you!” He was at it again yesterday:
Last week was certainly a week for the lovers. Q’s broke to new cyclical highs, spoos moved to within just a few points of all time record highs, and Friday was St. Valentine’s day! It was all about LOVE, LOVE and LOVE! But for those folks still hiding out in the HATER camp – those who probably spent Friday evening watching Blue Valentine, War of the Roses or Scenes from Marriage – last week must have felt more like a St Valentine’s day massacre. These folks, and their econometrically deceitful overlay charts of 1927-1929 vs 2012-2014, were shredded by our new goddess of pleasure, beauty, love and of course easy money – Janet “Aphrodite” Yellen. She gave the haters a taste of the Hippolyos treatment!! And once again it was a triumph of love over hate!!
Janet delivered the perfect message for markets. Her focus on underemployment was unquestionable. Her commitment to eradicate joblessness via the power of monetary policy was also unwavering. And for anyone who thought she would be hawkish, or even middle of the road, this speech was a wake up call. The reality is that we are dealing with a die-hard Keynesian dove! It’s really not that complicated.
That said some folks seem to think the rally was mostly a function of the data. Weak ISM, payrolls, retail sales and IP were apparently the drivers of a 5 percent rally off the lows. Pullease!! That is preposterous. The reality is the market was jittery (and downright freaky) into the Fed chairmanship transition. Risk was pared back by folks who began to incorrectly price in a surprise from Janet! And leverage induced illiquidity created an overshoot to the downside. Weak hands sold, and all the usual haters came out of their bunkers to once again warn of impending doom. But as per the norm, their day in the sun was short-lived. The dust has settled and the haters lost again! Love is in the air my friends, and we owe a great deal of thanks to our new goddess of easy money. Dammit Janet, I love you! Good luck trading.
Take note of this phrase: “the new Goddess of Easy Money.” It is now in the lexicon. I wonder how many virgins will be sacrificed to this new deity. (Just kidding, Janet!)
Now, David is not above having a bit of fun in his always-entertaining commentaries, but for a somewhat more substantial take on the opening of the Yellen era, I suggest we turn to John Hussman. I wouldn’t call John a Yellen detractor, exactly, but he is certainly inclined to take the Fed down a notch or three. Check out these zingers:
While we all would like to see greater job creation and economic growth, there is little demonstrated cause-and-effect relationship between the Fed’s actions and the outcomes it seeks, other than provoking speculation in risk-assets by depriving investors of safe yield….
[T]he “dual mandate” of the Federal Reserve is much like charging the National Weather Service to balance the frequency of sunshine versus rainfall….
The FOMC should be slow to conclude that monetary policy is what ended the credit crisis…. The philosophy seems to be “If an unprecedented amount of ineffective intervention is not sufficient, one must always do more.”
At present, U.S. equity valuations are about double their norms, based on historically reliable measures.
The primary beneficiary of QE has been equity prices, where valuations are strenuously elevated. QE essentially robs the elderly and risk-averse of income, and encourages a speculative reach for yield.
I think John would agree with me that the current economic theory driving our monetary policy is both inadequate and outdated. Is it any wonder that he concludes that monetary policy as it is practiced today is simply part of the problem? It is as if we are trying to fly a 747 using the knowledge and skills we learned while driving a car, and all the while looking in the rearview mirror. (Do those things have rearview mirrors?)
You can find John’s “Weekly Market Comment” and other valuable analysis at the Hussman Funds website.
This weekend I will be writing about some of the recent analysis concerning income inequality. I’ve actually been thinking a lot about it in conjunction with the rise of the Age of Transformation. I think about it a lot, most personally in terms of my own seven kids. I’m not so concerned about income inequality as I am about income opportunity. It seems to me that we have an education system that was designed to meet the needs of the US and the Second Industrial Revolution that was grown atop the industrial British Empire.
We are simply not preparing most of our children for the challenges that lie ahead. Many of course are going to do quite well, but that will be in spite of the educational process, not because of it. The complete higher-academic and bureaucratic capture of the educational process is as much at the root of income inequality as the other usual suspects are. There is more than one cause, and another root is the manipulation of capitalism and free markets by vested interests.
But that’s all too serious, because now it’s time to hit the send button and think hard about an Italian dinner and the Miami Heat being in town. Even if Lebron James is on the other team, he is simply a pleasure to watch. Lebron, you should’ve come to Dallas to play with Dirk!
Your getting ready to sit courtside analyst,
John Mauldin, Editor
Outside the Box[email protected]
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The following are a few observations regarding Dr. Yellen’s testimony to Congress. The objective is to broaden the discourse with alternative views and evidence, not to disparage FOMC members. We should all hope that Dr. Yellen does well in what can be expected to be a challenging position in the coming years.
The chart below shows how these measures are related with actual subsequent 10-year total returns in the S&P 500. The specific calculations are detailed in a variety of prior weekly comments (the price / revenue and Tobin’s Q models are straightforward variants of the others).
The primary beneficiary of QE has been equity prices, where valuations are strenuously elevated. QE essentially robs the elderly and risk-averse of income, and encourages a speculative reach for yield. Importantly, one should not equate elevated stock prices with aggregate “wealth” (as higher current prices are associated with lower future returns, but little change in long-term cash flows or final purchasing power). Rather, the effect of QE is to give investors the illusion that they are wealthier than they really are. It is certainly possible for any individual investor to realize wealth from an overvalued security by selling it, but this requires another investor to buy that overvalued security. The wealth of the seller is obtained by redistributing that wealth from the buyer. The constant hope is to encourage a trickle-down effect on spending that, in any event, is unsupported by a century of economic evidence.
The risks of continuing the recent policy course have accelerated far beyond the potential for benefit. The Fed is right to wind it down, and as it does so, the FOMC should focus on addressing the potential fallout from speculative losses that to a large degree are now unavoidable. Ultimately, the U.S. economy will be best served by a return to capital markets that allocate scarce savings toward productive investment rather than speculative activity. The transition to that environment will pose cyclical challenges, but is well worth achieving if the U.S. economy is to escape the grip of what is now more than 15 years of Fed-enabled capital misallocation.
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