A record amount of money will be spent this year on energy infrastructure, such as the proposed controversial Keystone pipeline, according to a Credit Suisse report released Wednesday. And that could benefit companies inJPMorgan Alerian MLP Index ETN ( AMJ ), leading them to outperform this year.
Capital spending in 2012 totaled about $30 billion, according to Credit Suisse. Its analyst believes that record could be topped in 2013 at $33 billion or even more. After underperforming the market last year for the first time in 12 years, MLPs could be a "catch up" trade, in which big money rotates out of winners and into lower-priced laggards, says Credit Suisse.
"With comprehensive tax reform off the table, we believe that tax fears will weigh less on MLPs, and while we are still positive on the oily infrastructure MLP trade, this trade is getting a bit crowded," Credit Suisse analysts wrote. "With that in mind, we think that some of the smaller-cap names and/or higher beta names such as MLP refiners or one-off newer issues may be positioned to outperform in 2013."
In warning about risks of the trade, Credit Suisse wrote: "But weak NGL (natural gas liquids) prices, massive equity issuance ($24.5 billion and 75 issues, not counting at-the-market programs), a steep change in capital spending, and worries over possible tax law changes weighed on the sector."
AMJ returned 3.89% last year vs. 15.99% for the SPDR S&P 500 (SPY). But the largest exchange traded product tracking MLPs has been outperforming recently. So far this week, AMJ added 1.09%, while the SPY shed 0.29%. AMJ gained 5.36% the past month vs. 2.93% for SPY.
Structured as an exchange traded note, AMJ is actually a debt note that's designed to produce returns of the underlying index without actually holding the stocks. Its value could be affected by JPMorgan's credit rating and ability to pay its debts. AMJ yields 5.35%.
Above The Line
AMJ broke above both the 50- and 200-day moving averages last week, confirming a fresh uptrend and trading near a new 52-week high. But it still has a rather weak IBD Relative Strength Rating of 42, indicating its price action lags 57% of the market.
But its strong B+ Accumulation-Distribution Rating, on an A-to-E scale, shows institutions are heavily buying more shares than selling.
AMLP returned 1.92% in 2012, 0.31% so far this week and 3.26% the past month.
It tracks the same index as AMJ, but actually holds the underlying stocks. Its performance lags AMJ because it's structured as a corporation that pays an income tax, which cuts into the fund's returns.
It was designed this way because legally MLPs can only account for 25% of assets of a mutual fund or ETF under the Investment Company Act of 1940. AMLP yields 6.24%. AMLP has a chart pattern similar to AMJ's but a weaker 32 RS and B- Acc-Dis Ratings combination.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.