On Demand

IRA Friendly: Bullish Energy Play $AMJ

I saw a headline this week that really caught my eye: "Saudis Cut Oil Output to Lowest in a Year."
Generally, Saudi Arabia cuts its oil output for one and only reason: demand has slackened due to a weak economy, causing the price to fall. But then, that was before "fracking."

The Saudi move to cut supplies has little to do with demand, as growth has been lackluster for most of 2012. This time, it has everything to do with supply. U.S. domestic oil production rose by 760,000 barrels per day this year--the biggest increase since records began being kept in 1859. And this is just oil; I've said nothing at all about natural gas, of which the United States now produces far more than it can use.

And in an unrelated story, Fed Chairman Ben Bernanke gave the markets a jolt this week by announcing that "QE Infinity" will be even larger than originally planned. Rather than "only" buying $40 billion in mortgage securities per month, the Fed would also be buying $45 billion in Treasuries. That's $85 billion per month in new cash being dumped into the system.

Oh, and Bernanke also plans to keep short-term rates at zero until he sees the unemployment rate dipbelow 6.5%.

I bring up these two seemingly unrelated points for a reason. The combination of higher volumes of domestic oil and gas being pumped and the loosest monetary policy in history should make mid-stream master limited partnerships one of the safest bets for 2013. The fundamentals for domestic energy haven't been this good in decades. And as yield-sensitive investments, MLPs are a no-brainer in a world of zero interest rates.

Even better, we have a chance to buy them on the cheap. The whole sector has taken a beating after the election due to fears of higher taxes coming. Investors who have owned MLPs for years--and who had large unrealized capital gains--have decided to take their medicine today rather than wait for the inevitable.

Well, the end of the year is approaching fast, and the tax-loss selling should have mostly run its course.
Action to take: Buy the JPMorgan Alerian MLP Index ETN (NYSE: AMJ). Alternatively, if you are buying with the intention of holding for a while, assemble a portfolio of individual MLPs.

As with dividend paying stocks, there is often a trade-off between high current yield and prospects for growth. Higher yielding MLPs often times have low expected distribution growth. So keep that in mind when researching the sector. And if you would prefer a "one stop shop," then AMJ is a decent option that also happens to be "IRA friendly."

Though this is website dedicated mostly to shorter-term trading, my recommended time horizon on these is longer-term. I recommend holding MLPs for the duration of Bernanke's "QE Infinity." That means holding these until either the unemployment rate shows meaningful improvement or until inflation starts to creep up. For risk management, consider something along the lines of a 15-20% trailing stop.

Disclosures: Sizemore Capital is long AMJ in its Strategic Growth Allocation.

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About the Author


Charles Lewis Sizemore, CFA, founder and editor of Macro Trend Investor (formerly The Sizemore Investment Letter), is dedicated to finding superior investments backed by powerful macro trends—before you hear about them on the nightly news or read about them in the newspaper or on the Internet. He has been a frequent guest on Bloomberg TV and Fox Business News, has been quoted in Barron’s Magazine, The Wall Street Journal,and The Washington Post and is a frequent contributor to Forbes Moneybuilder, GuruFocus, MarketWatch and InvestorPlace.com.

Charles is the co-author of Boom or Bust: Understanding and Profiting from a Changing Consumer Economy (iUniverse, 2008); and worked alongside best-selling financial author and economic strategist Harry S. Dent, Jr. in creating original research on the effects of changing global demographics on asset returns and economic growth. He also serves as the Chief Investment Officer of Sizemore Capital Management LLC,  a registered investment advisor.

His academic and real-life experience has given him a unique approach to investing: combining his insights into global macro trends with in-depth investor research. And he has developed a reputation for taking complex issues, recognizing long-term investment strategies, and then finding the hidden investing opportunities that he shares with investors.

Charles holds a master’s degree in Finance and Accounting from the London School of Economics in the United Kingdom and a Bachelor of Business Administration in Finance with an International Emphasis from Texas Christian University in Fort Worth, Texas, where he graduated Magna Cum Laude and as a Phi Beta Kappa scholar.

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