MLPs

Trading ideas: I have a vague idea that MLPs are going down. I heard someone on a podcast, or caught some Twitter post saying that these were a tax-driven structure that would not survive a downturn. My understanding is that they are bit like REITs for pipelines. Obviously, I just need to find out a bit more about them. AMLP is a big ETF of these things. I collected together a Koyfin dashboard of ETFs here. I struggle with Koyfin to click through to research. With a dividend yield of ~15%, and a P/E of ~8 MPLX looks good value, but with a 1-year return of -30% maybe the stock does not come without risk. It’s cheap now, and had an up day yesterday (up 6%) so shorting would be a risky proposition.

This is the bull case. If you google “fraud mlp” you get a lot of hits. It seems that a lot of MLPs are destined to convert to corporations. They do seem to be a very complex sort of security, but they are a lot cheaper now than they were and, possibly, energy is poised for a pullback. My conclusion, for the moment, is that they should be avoided as an investment, either on the long or the short side.

If anyone has a view, DM me, @stevehem.

Market comment

The Fed announced it’d start buying individual corporate bonds yesterday (rather than paying fat fees to BlackRock to assemble them into ETFs, which would be given a free credit insurance by the Treasury). This provoked a bounce. Then, overnight, Trump announced another $1Trn in infrastructure spending. As far as Trump and his cronies go, they certainly believe doing whatever it takes (in terms of spending tax dollars) to get him re-elected. But, as Kevin Muir always says, we’re here to guess what will happen, not what we think should happen.

My tentative response was to get as delta neutral as possible, with respect to equities, while writing a few tiny calls on the more insane penny stocks. You can see a list here but many of these don’t have options as they they are not really companies.

My feeling is that with so much dollar printing, real assets and non-dollar currencies should do well, but picking the right ones might be tricky. Silver and gold have not yet taken off. At some point, I think they might, but patience is a virtue.

Vix

I occasionally go long the VIX futures, via puts. It has worked, but with the Fed fire brigade, it’s difficult to pull this off. Any sign of the market getting twitchy and a new Fed facility is announced. I sold a single fix put (actually, a put on a nearby VIX future but …). This uses up a lot of collateral, but with an IV of 127% it seemed safe(ish). With J Powell & S Mnuchin appointed as the leaders of the VIX-killers, maybe I’ll live to regret this.

Bonds

Bonds normally are negatively correlated with SPX and this relationship has held even over the last crazy six months. I cannot help but wonder whether at some point the Fed will lose control of the yield curve. I know that the BoJ has carried it off, but the Yen is not the dollar and the USA is running a big current account deficit. We shall see.

SPACs

You probably don’t want to know what these are. If you really don’t want to take my advice, join r/SPACs.

End of day

As far as I can see now (19:20 BST), we’ve had a 100% risk-on day. Every equity market on the planet, with the exception of Brazil, is up. Commods (except precious metals) are up. I don’t understand Brazil. Bonds are down, at least Treasuries, but not by much, which indicates that the smart money is not convinced that the pandemic is over. I don’t understand how J Powell can boost stock prices in Tokyo, but a rising tide lifts all boats, I guess.

My call selling is not a disaster, but is yet to pay off in spades. It’s very expensive in terms of capital, so I am not inclined to scale it up.

That’s all, folks!