A cautious outlook as earnings season begins

This has been an outstanding year for MLPs. After starting at a depressed 176, the Alerian MLP Index shot up to 226 & is near its 2009 high of 233. Meanwhile REITs, another prominent high yield sector, have spent a lot of the year fighting it out in the trenches. Much of the gains from the Mar-Apr rally have been lost in the last 6 weeks. The Barclays Capital High Yld Bond ETF has a record similar to the MLP index & its record understates those for many individual junk bond funds. Investors have pursued high yields, but have been discriminating to a degree. REITs have been left behind. Meanwhile, Treasuries have bounced around quite a bit (shown in the last chart). The yield on the 10 year Treasury bond soared from 2½% to 4% last month, followed by a pullback to 3.30%.

The disconnect between the sectors bothers me. As stated before, I think the REIT chart story is more representative of what is & will be happening in the markets. Gloomy comments about business at retail mall stores is hurting REITs. Those problems will be shared by junk bonds. Last week, there were comments about increasing defaults on junk bonds. However, MLP business is fuzzier. They pay distributions from distributable cash flow & that is not defined on a per unit basis, so we don't fully understand how well they are covering distributions which have generally held up & risen in 2009. Meanwhile money has been flowing into Treasuries in the last month despite record borrowings by the gov. As earnings season unfolds, we will learn more about how the economy is treating these sectors (especially MLPs).


Alerian MLP Index --- YTD




Dow Jones REIT Index --- YTD




Barclays Capital Hi Yld Bond ETF - YTD




10-Year Treasury Yield Index -- YTD





Dow appears to be supporting my cautious approach to the markets. After a tremendous run, it stalled at 8.8K, only to fall back about 8%. The 8K floor (& ceiling) has been in play for almost a year & looks to be tested again, maybe this week, to see if it will be reversed back to a ceiling.

Dow Jones Industrials --- YTD