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Magellan Midstream Partners LP Message Board

  • drewpf drewpf Mar 19, 2006 8:17 AM Flag

    Why shorting MLPs don't work

    The problem seems to be that the math doesn't work.Not with an assumed rise in the Fed funds of 1/2% over the rest of the year. If rates were to rise as stated ,then MMP, with a price of $31.40 and a 7% payout, would most likely drop in price . The math equivalent to the 1/2% rise in rates would drive MMP's payout to 7.5% and the price to $29.46 The difference betwwen $31.40 and $29.46 is $1.94, an amount that wouldn't even cover the distribution ($2.21)a short would have to pay out of his own pocket for the privilege to short MMP.Now , there are some flaws in the reality of this .The first being that I've assumed the Fed has only 2 1/4 point raises left . In fact there could be more if the economy gets too strong .The second assumes an absolute math correlation between interest rates and the price of MMP. In fact , while there is an inverse relationship it's not absolute(market forces , business conditions ,and crazy GP management ripping off the MLP holders(I think I paraphrased the last one fairly, but I'm sure if I've misstated I'll hear about it)) . And I neglected to factor in quarterly distribution increases which would lessen the price declines from higher Fed rates.To make money shorting MMP , rates would have to exceed a 1% rise . Even then it would take at least a year, and the shorter would be PAYING 7% to cover the distribution of the units borrowed.With the math not adding up, the only rationale for shorting this investment would be crazy GP management ripping off the MLP holders.

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    • Certainly does. Muchas gracias

    • Fact:
      Cow got that message from cmpmelling, not from Chart.

      I don't think trying to sell at peaks and buy at dips is a horrible strategy if you want to try to time the market and you have the time to track your positions. You need to make sure you understand any tax implications before you attempt this sort of thing though, I imagine. I'm not a seasoned vet and my tax bracket is mighty low, so the old timers will have to advise you in that department.

      In general, chart has noticed that MLP's tend to rise before ex-div and sell off afterwards. That won't necessarily coincide with 52 week lows and highs. The most important thing you can take away from chart is his love for distribution growers. That's key. So if you don't feel like you're much of a market timer, there's nothing wrong with buy and hold.

      Hope that clears things up a little for all involved.

    • Thanks for helping the mentally challenged investor [me] I too would really like to stick to long term plans as I do not have the time to monitor daily flucuations of the market. I am thinking of starting an investment service, I will pick stocks to buy and everty one else can short them. I seemed to have developed a knack for buying stocks a day before they nose dive. Thank God my family does not have to subsist on my stock picks! Thanks Cow

    • cow4rye asked chartny: "Just to clarify, buy the stock at [ex-date]. When the price dips down toward the 52 week low, buy another block. When price goes up a significant amount, then sell . . "

      I have been reading chartny's posts for over two years. How someone can get THAT impression of what chart is saying . . . I have no idea how someone can get that impression.

      Here is my impression of the gospel of MLPs according to chartny: [1] Buy the distribution increasers - those with a 5 year record [which is one of my minor disagreements with chart - the 5 year requirement - but that is nitpicking - chart has a winning strategy] [2] hold as long as the distributions are going up faster than inflation; [3] sell if the distributions slow to the sub-inflation growth level; [4] when you have to sell a slow growing MLP - sell just prior to the ex-date; [5] when you buy, buy after ex-date.

      This is a simple and beautiful plan.

      Cow4rye, a wise man knows what he knows, and knows what he does not know. Asking for clarification is a sign of wisdom - knowing what you do not know. But cow4rye, you may want to re-read the posts that gave you the wrong impression - because I think you misinterpreted them - and contaminated your mind with a few bad notions. Hid yourself of them now. I know you can do it. For the most part, we MLP-ers are a buy and hold bunch.

      Distribution growth is the key. Distribution growth does not come by accident, but via management skill. There is inertia in distribution growth.

    • Just to clarify fora dumb a--,me. Buy the stock at "x", thewn follow the price on Yahoo finance. When the price dips down toward the 52 week low, buy another block. When price goes up a significant amount, then sell the block bought on the dip.

    • That's good advice Chart to that 68 year old and not retired yet.Definitely buy the dips on these dividend payers like the MLP's.After a little sell off they may not move for months, but the divy's keep rolling in.Keep your core position,buy the dip.When the charts say that the current buying spree has topped out,sell your second position.You may collect some divy's along the way.Then do it all over again.It works.

    • I understood you to say you lived in Tucson -- my reference was to Tucson being more pleasing than Phoenix, grin.

    • Me three.And I've tried to make him see the errors of his ways .

    • Schick,

      "Billy Jo is a good humorous read as well. He gets a bit tiresome but I find him entertaining."

      You know, me too!!!!


    • Occasionally tour up there. Will let you know the next time I will be up.

      Never heard the words asthetic and Phoenix used together before! I moved there in 1959. It was much nicer then. Lived near 20th and Missouri before ther freeway tore up the neighborhood.


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