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Nasty MLP ETF Indicator Flashing Investor Warning Signal Again

Companies / Exchange Traded Funds Jul 27, 2010 - 08:02 AM GMT

By: DailyWealth

Companies

Best Financial Markets Analysis ArticleTom Dyson writes: In early 2007, investors were reading news stories about hundreds of new ethanol plants... enormous demand for grain in China... and rice shortages in Thailand.

Potash and farm-equipment stocks were soaring. The world's most widely published investment gurus – like Jim Rogers and Marc Faber – were touting agriculture and farmland as their favorite investments.



In short, agriculture was quickly becoming one of the most sought-after new investments in America. But you couldn't speculate directly on agriculture unless you had a futures account.

Wall Street stepped in and issued new exchange-traded funds (ETFs) to fill the gap in the market and supply investors with the "one-click" agriculture investments they were demanding. Between September 2007 and January 2008, six new agriculture ETFs launched...

In late February 2008, the agriculture bubble popped. Nine months later, these ETFs were down an average 45%.
 
Fund Symbol Return
Market Vectors Agribusiness MOO -53%
ELEMENTS Rogers Agriculture RJA -43%
iPath DJ-UBS Grains JJG -45%
iPath DJ-UBS Agriculture JJA -44%
ELEMENTS MLCX Grains GRU -46%
ELEMENTS MLCX Biofuels FUE -39%
  Average -45%

The same thing happened with commodity ETFs just before the commodity bubble popped in 2008. It happened with short-selling ETFs just as the stock market was about to bounce in 2009. And it happened with currency ETFs just as the dollar was about to soar.

Wall Street lives on the fees it generates selling investments to the public. When the retail public falls in love with an investment idea, Wall Street cranks out products it can sell them. The more popular the investment, the more products Wall Street creates.

Whenever you see Wall Street creating lots of new investment products to sell to the public – especially ETFs – you know investors must love the idea... and prices might be forming a bubble. You should be extremely wary of buying or holding stocks in these sectors. Chances are, they're about to enter a severe correction.

So what's the hottest new ETF sector right now? It's master limited partnerships...

A master limited partnership (MLP) is a special business structure available to a small number of firms trading on the stock market. Right now, there are 91 companies in the sector. MLPs treat their shareholders as partners in a business instead of owners of a corporation. This way, they avoid corporate tax. Many different businesses can qualify for MLP status... including real estate businesses, shipping lines, and money-management businesses. But the biggest companies in the MLP sector are all pipeline businesses.

Master limited partnerships are safe, recession-proof businesses that generate stable earnings and pay high dividend yields. These characteristics make them very popular with investors... especially right now when everyone's looking for safe income stocks.

Over the last year, the money-management industry has obliged investors by introducing four new ETFs focused on MLPs, including a double-long MLP fund. This month, two more firms filed papers to float new ETF products, which will bring the total to six.

firms filed papers to float new ETF products, which will bring the total to six. 
 
Fund Symbol IPO Date
JPMorgan Alerian MLP AMJ Jun 2, 2009
Credit Suisse Cushing 30 MLP MLPN Apr 14, 2010
E-TRACS Alerian MLP
MLPI Apr 14, 2010
E-TRACS 2x Long Alerian MLP
MLPL Jul 7, 2009
ALPS MLP Fund   Coming Soon
Market Vectors MLP Fund   Coming Soon

 

The fact that Wall Street has introduced so many MLP investments is a huge warning sign that the MLP sector has become too popular and could be about to enter a correction. I prefer to buy MLPs when they yield over 10%. Right now they yield 6% on average.

So even though MLPs are one of my favorite income investments, I recommend you avoid the MLP sector for now... and focus on safer, less popular income investments like preferred stocks and safe stocks that relentlessly raise their dividends.

If you own MLPs, don't sell them now. The industry is in such a strong uptrend, MLPs could easily rise another 25% to 50% from here. But I recommend you use a trailing stop loss. In my newsletter, we're using a 15% trailing stop loss. This way, we'll capture any additional upside, without risking the profits we've made so far.

Good investing,

Tom

P.S. There are still great places to pick up safe high yields. For instance, we've told you about virtual banks yielding more than 15%... and safe bonds that trade on the stock market. These unique ideas make up what I call my "Black Market Income" system. You can avoid conventional Wall Street scams and learn about this system here.

http://www.dailywealth.com

The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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