At a time when Treasury yields have been nonexistent, MLP investors have been able to get high payouts that are viewed as quasi-dividends, due to some payouts representing income and some representing return of capital. The question to ask now is whether the risk-reward is there for new investors at the current prices. The unit prices of many key MLPs have been hit hard along with stocks in the past few weeks, and we wanted to take a risk-reward look for summer 2012. This sector could get a recovery, or it could face additional pressure like we saw in 2011.

If investors have been involved in the MLP sector since before, during or right after the great panic selling of 2008 and 2009, they are up huge if they held on. In many cases they have doubled their money or more. And as far as they are concerned they have been getting 5% to 8% in payouts each year (again, some income and some return of capital). The problem is that the prices here have become choppy and the MLP structures often have had secondary offerings on top of secondary offerings. Those secondary offerings have provided growth and acquisition capital, but some investors have started to worry that these secondary offerings may be the biggest contribution to the never-ending payout increases that have been seen in this sector.

MLPs in the energy space often attract the same sort of investors who would buy utility shares and preferred shares of banks, but they also overlap with REIT investors who look for above-market yields. This sector has enjoyed large price gains in the unit (share) prices, and investors are looking for any safe investments that have high payouts, compared to the world of no-returns in CDs and Treasuries. A wave of secondary offerings from many MLPs came before and during the recent market sell-off.

24/7 Wall St. has evaluated some of the top MLP investments to see how much implied upside remains in this sector. We have taken price performance as far as the sell-off from recent highs, as well as issues like the payout ratios (implied yield-equivalent) and the consensus price targets from Thomson Reuters. We have evaluated the following MLPs: Enterprise Products Partners LP (NYSE: EPD), Kinder Morgan Energy Partners LP (NYSE: KMP), Plains All American Pipeline LP (NYSE: PAA), ONEOK Partners LP (NYSE: OKS), Energy Transfer Partners LP (NYSE: ETP) and Enbridge Energy Partners LP (NYSE: EEP). These MLPs mentioned and covered here are some of the ones we track and keep on our watch list in the sector. These have market caps above $8 billion, they have a history of increased payouts each quarter, for the most part, and generally speaking these MLPs are all believed to have good management teams.

Investors have made a bundle here in this sector. MLPs are not really all that correlated to the price of oil because these are the partnerships (general and limited) for pipelines, terminals, and other facilities involved in the oil and gas sector in America. MLPs must derive 90% of their income from real estate, natural resources and commodities. The issuing of K-1 statements can make the structure more complicated, but the payouts often make that worth it for many investors seeking higher streams of cash flow.

We also have evaluated some of the key ETFs and closed-end funds in this sector. Be advise that just the three vehicles we have tracked in funds and ETFs have a combined market value of more than $11 billion.

Today’s $35 billion note auction had a bid-to-cover ratio of 3.95, indicating that nearly 4-times the bids came in than were accepted.  The yield came in at a whopping 0.30%, and that is before income tax.

Indirect bids came in mostly in-line with the prior ranges as the level was 33.5%.  The direct bid level was a bit low at 9%.

The FOMC keeps this zero-rate policy alive and well and banks can hardly bother to invest for two years into Treasury notes that pay 0.3%.

When we see this, we wonder even if more about whether or not the recent note that junk bonds may be sold off too much has even more merit.  S&P said today that the speculative-grade spread was now 678 basis points over Treasury yields.  That spread was listed as 671 basis on Monday, 662 basis points on Friday, and 653 basis points on Thursday.

At the current time the yield curve is as follows:

• 3-Month 0.04%
• 6-Month 0.12%
• 2-Year 0.29+%
• 3-Year 0.41%
• 5-Year 0.77%
• 10-Year 1.79%
• 30-Year 2.89%

JON C. OGG

The question here is simple… Are junk bonds being sold off by too much?

In many cases the high yield junk bond sector is like investing in equities.  Unlike Treasury bonds, for now at least, junk bonds carry credit risks that the bond market does not.  The difference is that you can easily find dividend yields of 7%, 8%, and even higher.

iShares iBoxx $ High Yield Corporate Bond (AMEX: HYG)- was down 1.4% at $87.59 against a 52-week $77.90 to $92.67.  The indicated yield here is 7.25% based on the last payment.

SPDR Barclays Capital High Yield Bond (AMEX: JNK) was down 1.3% at $38.19 against a 52-week range of $34.09 to $40.89.  It had a 7.2% indicated yield based on its last payment.

PIMCO High Income Fund (NYSE: PHK) was down 0.9% at $12.64 against a 52-week range of $10.52 to $14.88 and its yield was about 8.3% based on the last dividend.

Other closed-end funds were down 3% and more on Thursday:

Invesco High Yield Investments Fund, Inc. (NYSE: MSY) was down close to 3% at $6.07 against a 52-week range of $5.25 to $6.83 and with an 8.8% yield.

Western Asset High Income Opportunity Fund Inc. (NYSE: HIO) was down over 3% at $6.11 against a 52-week range of $5.34 to $6.58 with a yield of close to 8.4%.

BlackRock Corporate High Yield Fund V, Inc. (NYSE: HYV) fell by over 3.3% down to $12.02 against a 52-week range of $10.10 to $13.13 with a yield of 8.6%.

When you get a free fall on these you often cannot ever catch the ultimate bottom all at once.  In fact, the performance of these during the recession and during certain times of panic selling as we have seen in each of the last two summers has been dismal.  The trick is the timing.  Rewards usually await for those who catch junk bonds after they start to bottom out.

JON C. OGG

The bids came to 33.8% as indirect bids, usually foreign demand. Direct bids were tallied up at 15.4% for the highest long bond direct participation in 2012. The bid-to-cover ratio came in well at 2.73. Some 63.8% of the bids were at the high for this 3.00% coupon.

Rick Santelli on CNBC gave this one an “A-” rating” but we would rate it better considering that bond yields hit a near-term low just on Wednesday. Here is another reason that we think this was a stellar auction.  Imagine loaning $10,000.00 to Uncle Sam at roughly 3%, which you get taxed on by the way, for a period of thirty years.  Over the entire life of the thirty years you only get $9,000.00 in interest.  This is called a flight to safety and had the auction come on a day that was not the first day in six sessions where stocks were heading south.

The DJIA may be up 64 points on last look at just under 12,900 but it needs to be mentioned that the DJIA was trading up at 13,300 as recently as May 3.

JON C. OGG

What has changed in the last two weeks is Europe.  Two weeks ago it was not expected that France was going to suddenly issue a citizen-wide veto of the austerity measures.  Now that Sarkozy has effectively lost to Hollande in French elections, France is taking a socialist step and is effectively boycotting its austerity measures.

The move in France followed an inability for the Dutch to reach a budgetary agreement, and now we have Spain back in trouble.  To add insult to injury, the new Greek politicos are just wanting to break the agreed-to austerity measures that allowed it to avoid default (as if you should be surprised there!).  Now we have Ireland even calling anti-austerity sounds with an implied return of Sinn Fein in the public.

So, back to bonds… The 10-Year Treasury Note is now yielding 1.81%.  If you go back and review the charts, the 1.80% acted as a yield floor in February of 2012 and in December of 2011.  In September and October of 2011 the floor was closer to 1.70% as an absolute low, but when that came off the 10-year note yield rose 30 basis points in just over a week. The 10-Year note was yielding 2.20% as recently as April 5, 2012 and had risen to 2.40% as recently as March 20, 2012 (after having risen 40 basis points in just 9 trading sessions).

Now we have a 30-Year Treasury “Long Bond” yield back at almost 3%.  For the “Long Bond” yields to be back at the real lows it has to drop to about 2.90% and ultimately about 2.80% as the floor in September, October, and again in December of 2012. The 30-Year yield was at 3.40% as recently as April 4, 2012.

Credit Suisse just lowered its S&P 500 target to 1,450 from 1,470 this morning and it has increased the odds that both Greece leaves the Euro and also that the Euro could dissolve entirely.

iShares Barclays 20+ Year Treasury Bond (AMEX: TLT) has risen almost $10.00 per share since March 20, 2012 and that shows just how much interest has been there from what are normally equity investors who are preferring to Buy exchange-traded Treasury debt products.  Its yield is currently about 2.85%.

Junk bonds have lost their luster again, and it was only a week or so ago that the index was hitting a new high.  SPDR Barclays Capital High Yield Bond (AMEX: JNK) recently peaked above $40.00 and it is now at $39.50.  Investors have also turned away from the high-payout MLP sector as the JPMorgan Alerian MLP Index ETN (AMEX: AMJ) product recently peaked at almost $42.00 and it is now under $38.70 despite what is a high ‘yield equivalent’ for investors.

The banking sector surged in the first quarter but it has pulled back substantially.  The Financial Select Sector SPDR (AMEX: XLF) peaked at $16.20 and it is now down at almost $14.90 for what is getting closer to a 10% correction.  The highly volatile and leveraged Direxion Daily Financial Bull 3X Shares (AMEX: FAS) peaked around $110.00 per share at the end of March and start of April and it is now challenging the $94.00 price.  Banks and financials are back out of favor, mostly due to fears about Europe dragging them down.

The real question is whether or not this is the signal of the next recession or whether this is a trade for the “Sell in May and go away!” theme that investors are more worried about.  All growth indicators from non-farm payrolls, purchasing managers, and manufacturing and services activity readings are pointing so far to what is just slower and slower growth.

In the United States, Q1-2012 GDP was up at only +2.2% as government spending was down by 3% in the quarter.  Europe is in all but a deep ‘official recession’ per most of its latest economic reports.  The growth in China and Brazil has seen a tempering throughout this year as well, with other key emerging markets like India and others in South America still seeing slower and slower growth.

The good news against the recession argument is that economists after the last earnings season still seem to be calling for positive growth in U.S. GDP in the second quarter at least as of now.  If that holds true and if the U.S. can avoid getting pulled down by Europe, then perhaps the U.S. will avoid an official recession even if this current growth is rather pathetic.  We also have an election and it is a near certainty that both Presidential candidates are likely going to say whatever they can get away with to win the election in November.

If Q2 does not show negative on the GDP front in the United States, then technically no recession can be declared until early in 2013.  That would coincide with what Ben Bernanke has warned about the financial cliff facing the United States at the end of 2012 and it is when the new tax structure takes place.

The market is definitely voicing concern here.  Is that a recession warning?  It depends upon your own outlook and upon your own interpretations.  It must also be noted that the current drop in stock prices is getting to be where stocks are getting close to ‘oversold’ on the short-term charts even if the fundamentals are of concern.

As a final reminder, stop kidding yourself about the notion of a double dip recession.  We have enjoyed close to three-years of positive economic growth.  If a recession comes again soon, it will just be ‘the next recession’ since a double dip recession has to occur with a couple or a few quarters of the prior recession.

JON C. OGG

SPDR Gold Shares (AMEX: GLD) is down 1.6% at $156.50 and challenging the absolute lows not seen since April 4, 2012.  Royal Gold, Inc. (NASDAQ: RGLD) has not held up since earnings and its shares are down almost 4% at $57.84 on the day against a 52-week range of $55.00 to $83.87.  Eldorado Gold Corporation (NYSE: EGO) is performing the worst of our tracked gold names with a drop of 5.3% at $12.14, and be advised that is a new 52-week low as the prior range was $12.44 to $22.12 over the last 52-weeks.

iShares Silver Trust (AMEX: SLV), the ETF tracking the true’ Devil’s Metal of silver, is down 2.2% at $28.56.  Silver Wheaton Corporation (NYSE: SLW) can always be counted on for volatility and its shares are down almost 3% at $26.65 against a 52-week range of $25.84 to $42.50. Hecla Mining Co. (NYSE: HL) remains very troubled and very challenged and shares are down again after earnings as revenue and earnings fell hard, despite it maintaining its normal dividend and announcing up to 20 million shares for a buyback plan with proceeds over the next 24 months.  Hecla shares are at a new 52-week low of $3.82 against a prior 52-week range of $3.87 to $8.82.

iPath DJ-UBS Copper Total Return Sub-Index ETN (AMEX: JJC) is down with copper as the anti-growth trade seems to still be winning.  Shares are down 2.1% at $47.00 against a 52-week range of $38.99 to $59.06.  Southern Copper Corp. (NYSE: SCCO) is down 2.2% at $31.50.  This is a drop due to the slowing growth of the emerging world on top of a slower Europe.

Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX) remains challenged and its shares are down 2.5% at $35.48 against a 52-week range of $28.85 to $56.78.

With the S&P 500 Index down 0.6% at $1360.00, the go-to assets for risk-on and for hiding out are not working.  With stocks lower it looks like investors are flocking to the safe haven of bonds for the “Sell in May and go away!” theme.  The 30-Year Treasury yield of 3.03% looks to be the lowest long bond yield since February 28, 2012.  The 10-Year Treasury is now yielding just under 1.85% and that appears to be the lows not seen since the start of this last February.

The stock chart from stockcharts.com below on the “GLD” should show you just how bad the gold charts are looking.  If those old lows do not hold, some technicians are going to be calling for a firmer end in the gold trade while other chartists will be telling you a major bounce is coming.

JON C. OGG

S&P’s downgrade took the long-term and short-term ratings down to BBB+/A2 from A/A-1 and today’s review reflects a view of significant risks to Spain’s economic growth and budgetary performance.  The review also cites a deterioration in the budget deficit trajectory from 2011 to 2015.  If you think that the banks are safe guess again: S&P sees a higher chance that Spain will have to throw in additional support to the Spanish banking sector.  There is even the call that GDP in 2012 will contract in real terms by 1.5% this year and will contract 0.5% in 2013.

Today’s downgrade has a caveat and that os that S&P could revise the negative outlook to Stable if the risks to external financing conditions begin to subside.  The question to ask is how that can happen right now… It also noted that Spain’s new government has been implementing a comprehensive set of structural reforms.

And the flip-side on that negative outlook again is that another downgrade could come up general government debt goes to above 80% of GDP during the period of 2012 to 2014.

Banco Santander, S.A. (NYSE: STD) closed down 2.6% at $6.35 in New York and shares are down another 2% at $6.22 in the after-hours session.  The 52-week low for the ADR is $6.08.

Banco Bilbao Vizcaya Argentaria, S.A. (NYSE: BBVA) closed down 1.4% at $6.83 today on its ADR in New York and the after-hours session is light but shares are indicated down under $6.80.  The 52-week low is $6.43.

Will Spain allow the employees of S&P to ever eat paella again?

JON C. OGG

S&P noted that its board of directors is currently reviewing its financial agreements between McClendon and certain third parties.  S&P has noted that the turmoil coming from the latest corporate developments could hamper the company’s ability to meet the massive external funding requirements due to a weak operating cash flow currently and due to the continued aggressive capital spending plans.

S&P cut the corporate credit and senior unsecured debt issue ratings on Chesapeake down to ‘BB’ from ‘BB+’.  The ratings agency also cut the ratings on two different affiliates: Chesapeake Oilfield Operating LLC and Chesapeake Midstream  Partners L.P.  (NYSE: CHKM).  All of these ratings are being placed on CreditWatch with negative implications as well.

This is one of those corporate blunder of mega proportion.  The company has disclosed this practice, but most investors did not know it because they did not read the disclosures.   It may seem like a miracle if McClendon ultimately gets to hold on to his power here, but we would note that Chesapeake is more immune to outside influence by shareholders than most companies.  That being said, the only way that investors may get to vote is by selling their shares.

Chesapeake’s common stock is trading down about 3.3% at $17.53 on the day against a 52-week range of $17.03 to $35.75.

JON C. OGG

Ben Bernanke has pledged over and over that unless something changes he intends to keep the rates ‘exceptionally low’ through the end of 2014.  There have been many interpretations of what that means, but yesterday Bernanke in his press conference indicated that exceptionally low means close to today’s rates.

Maybe investors are trusting that Bernanke means his 2014 timeline, or maybe they are just still seeking safety over risk.  With all of the deficits and with all of the political shenanigans it is amazing just how little borrowers demand from the United States.

JON C. OGG

Today’s news is that 9 of 17 officials see rates at or below 1.0% through the end of 2014.  That is not a promise not to raise rates, but that is indicative of exceptionally low remaining at 1% or under for that ‘extended period.’  It is also worth noting that 7 Fed officials rather than the prior number of 5 Fed officials see rate hikes starting in 2014.

GDP is being put in a range of 2.4% to 2.9% in 2012, 2.7% to 3.1% in 2013 , and 3.1% to 3.6% in 2014.  Longer-run GDP growth is being put at 2.3% To 2.6%.  This is a slight economic downgrade but the unemployment rate is being talked down on the flip-side.

The Fed sees unemployment coming back into a range of 5.2% to 6.0% in the longer-run with the following unemployment targets now: 7.8% to 8.0% in 2012; 7.3% to 7.7% in 2013; and 6.7% to 7.4% in 2014.

The Federal Reserve is also putting longer-term inflation around 2.0%, but Cor-inflation is being targeted as follows: 1.8% to 2.0% in 2012; 1.7% to 2.0% in 2013; and 1.8% to 2.0% in 2014.

Remember, the Federal Reserve and FOMC have the dual-mandate of helping to keep the economy at full employment while keeping a cap on inflation.

JON C. OGG