“Bonded Trusts — Bailout Loophole Creates Massive Windfall”

By Travis Johnson, Stock Gumshoe, October 20, 2008

Today’s investment teaser ad comes to us from the fine folks at Stansberry & Associates — this time it’s from Tom Dyson, for his 12% Letter … which, as you might imagine, is aimed at dividend income.

And it is, at least, more honestly named than the “25% Cash Machine” that another publishing house offers for similar types of investments.

We’ve looked at a number of Dyson’s picks over the years, and he often comes up with interesting ones, nearly always with above-average dividend yields … with, of course, an interesting little story to go along with them. Numbers don’t always sell subscriptions, after all, but a good copywriter can make almost anything sound sexy.

And in this market, I suppose, you needn’t go far to make a little steady income from dividends sound sexy — now that we’re all terrified of growth and high PEs and bank stocks … and in some cases, I’m sure, wondering whether you can use a Starbucks coffee bag to bury your cash in the backyard, or does it really have to be a can?

Today, Dyson spins the tale by inventing a term for this investment: Bonded Trusts.

Sound familiar? Well, yes, it does sound kind of familiar — but not because it’s used in investing circles, more because it sounds like the kind of thing lawyers probably talk about … and because, in the back of your brain, you’re probably thinking that the Wall Street fat cats have been making money off of something sneaky like this that you’ve never really heard of. And you want in. Especially if it includes the words “bond” and “trust,” both of which sound a bit more promising than “stocks” at the moment.

But no, rest assured, there are no real secrets in this “bonded trust” world — or at least, not in the investments that Dyson is teasing with that phrase today. And if there are secrets, well, the Gumshoe is on the case, so they needn’t remain secret for long.

Let’s dig in a bit, shall we?

The spin, as it so often is these days, is about the bailout/rescue plan, and about a way that you can get your own bailout.

Here’s the pitch:

“You see, this Wall Street-Washington slumber party has created a once-in-a-lifetime opportunity for folks like you and me as well…

A loophole you can exploit to re-claim nearly all of that $700 billion.

I’m talking about a unique kind of investment, written into the tax code, specifically designed to pay out regular cash distributions – every four weeks – far into the foreseeable future…

All subsidized in a very big way by the government’s so-called “plan.” And all required by law to make these payments.

With the rest of the market in free-fall, it might surprise you that such an opportunity is possible. You might even find it hard to believe. And I don’t blame you.

As MSN Money reports: If you’ve never heard of this unique investment, ‘join the club… this little cash cow [has gotten] lost in the shuffle.’

Even The Wall Street Journal says ‘they look too good to be true’…”

So … are you excited about finding your loophole?

Well, I can blow off a little of that head of steam for you as we get started — Dyson here is talking not about anything new and sexy, or really about anything that’s all that particularly related to the banking sector or the financial rescue plan(s).

He’s talking about Master Limited Partnerships (MLPs)

Sound familiar? Yes, these investments are favored by several of the big newsletter publishers these days, and by many pundits as well. Heck, even Jim Cramer got on board a few of them in his recent conversion to dividend-loving depressive (on the downswing from growth-loving manic).

I’ve even written about them a few times recently — I think the last one was just a week or two ago, when I wrote about Graham Summers and his “Reagan Stimulus Dividends” that he called the “greatest income investments of all time.”

Are you getting our free Daily Update
"reveal" emails? If not,
just click here...

Tom Dyson has written about these many times in the past too, of course, and his colleagues at Stansberry have made the rounds, too, particularly with what they called the American Oil Pension over a year and a half ago.

And they’re fine investments — I don’t like to give too much opinion in this space, since it implies that I know more than others … I probably don’t, and my portfolio has been clobbered at least as badly as most of yours, I assume. But it’s hard to argue with the fact that pipeline MLPs are a ridiculously good buy right now. Not as absurdly good as they were a couple weeks ago when absolutely everything was being sold, no matter what, but no one ever should count on catching the “bottom” and they’re certainly worth looking at for many investors.

As with most teases of this type, Dyson also tells us that he’s picked out the best portfolio of these stocks for you, and he teases us with a few of the details of one of those stocks. Well, I guess you’d call them “units” in this case, since they’re partnership shares and not common equity. Still, they trade exactly the same way as stocks, albeit with somewhat more complex tax implications, so I will probably keep calling them “stocks.”

Anyway, here’s how he teases us about one of these investments:

“One Bonded Trust I want to tell you about today is issued by one of the largest oil and natural gas distributors in the country. This company owns a vast network of pipelines, storage facilities and processing plants throughout the US.

“Again, hard assets.

“The company was founded in 1992 and made its first quarterly cash payout in October of that year. Since then, it has never missed a single payout. In fact, its payouts have increased 35 times.”

Now, you may have noticed a certain lack of clues floating around in those paragraphs — I noticed that, too. So the Thinkolator had to chug quite a bit in coming up with a solution, and it’s not possible to be 100% certain without doing a lot more work, but I’m fairly sure now that this is …

Kinder Morgan Energy Partners (KMP)

Kinder Morgan is the Big Daddy of MLPs — the general partner, Kinder Morgan, Inc., used to be publicly traded, too, but isn’t anymore (it’s now a private company called Knight), but they still have two pipeline partnerships that trade publicly, and KMP is the bigger and older one. If you’re unfamiliar with the terms, the general partner is the firm that runs the pipelines and gets a management fee, and sometimes a sweetened regular payout, and the limited partners are the shareholders/unitholders like you and I, who are part owners but don’t do any work and collect a monthly or quarterly dividend.

KMP has indeed raised it’s payout roughly 35 times since they were launched in 1992, and they did pay their first dividend in October of that year.

And if you’re looking to build a portfolio of MLPs, Kinder Morgan is certainly one of the big ones that you should look at — there are dozens of these companies, but only a few that are of comparable size, and if you’re an individual investor and can only buy a few of these it’s comforting to buy those that don’t depend on a single property or pipeline.

That stability and size come at a price — KMP yields slightly less than some of its competitors, though the current dividend yield is just a hair under 8% so it’s hard to complain. Some of the other big MLPs, like Enterprise Product Partners (EPD) or Boardwalk Pipeline Partners (BWP) yield closer to 9% or even a bit more, though not many still have the 10-11% yields that we saw two weeks ago. A Barron’s article last week quoted Seth Glickenhaus as recommending those two plus Energy Transfer Partners (ETP), and OneOk (OKS) and El Paso Pipeline (EPB) were also noted as picks from other analysts. It’s hard to argue against that list as a good starting point for investigation — see the MLP listings at QuantumOnline.com if you’d like more tickers to research. That same Barron’s article quoted Citibank as seeing a huge move ahead for pipeline MLPs in the next year, with 63% returns possible for the group.

They’ve already gotten 10-20% returns from those v-shaped lows of a couple weeks ago, and I have no idea whether they’ll take another hit in the near future, but you could probably do much worse than look into a basket of MLPs if you value stability and income.

And I should also note that there are two exchange traded baskets for MLPs — there’s an ETN from Bearlinx with the ticker BSR, and there are some closed end funds that might be worth a look. Several Tortoise Capital Advisors MLP funds are available, and there’s another one called the MLP and Strategic Equity Fund (ticker MTP). Both of those have some hair on them and neither is an ETF — the ETN is a note, not a fund, so it’s guaranteed by Bear Stearns (now J.P. Morgan, I assume), not by any underlying assets, and the MTP fund bets on future market moves with forward contracts to try to boost returns. It also trades at a premium at the moment, which is currently quite unusual for closed end funds. Any one of those funds might be worth looking at if you’re not one of those who likes dealing with K-1 tax forms or the recordkeeping required of MLP holders (as I wrote in the Reagan article linked in the next paragraph, MLPs started as tax shelters and are still tax-advantaged, largely because you can defer some taxes until you sell your shares, but there is extra recordkeeping and tax form work required).

If you’re interested in reading up more on MLPs, I shared some additional comments when I wrote about the Reagan Stimulus Dividends a little while back.

And if you want to know a bit more about the sector, here’s a little more of Tom Dyson’s sell language:

“The beauty of these assets is that they’re virtually risk-free… for two very important reasons:

“1. Once built, there’s nothing else to do. You just sit back and collect the cash.

“Take an oil pipeline, for example…

“After you’ve built the pipeline, the revenue is almost all income. It doesn’t matter what’s happening on Wall Street or Capitol Hill.

“Your pipeline will never go away. And it’ll crank out dividends for the next 100 years.

“2. Once built, it’s virtually impossible for another company to come in and steal that business. They’re virtual monopolies.

“Think about it: It makes no sense to build a pipeline right next to one that already exists. It makes no sense to build a railroad line between two cities when there already is one.

“That makes Bonded Trusts not only “cash cows,” as MSN says… but also, perhaps, the safest place you can put your money in the entire world. “

Again, that’s a pretty solid bull case for MLP investing, especially in those partnership that own long-lived fixed assets (as opposed to the many other kinds of riskier MLPs out there, from asset managers to oil and gas explorers).

There is, of course, a bear case, too. There is no guarantee that MLP yields will be able to keep up with inflation, or that any individual MLP won’t have serious problems that require big capital investment and/or big lawsuit settlements for leaks or spills. And most of them carry quite a bit of debt — normally that’s not a big deal, because it’s easy to borrow money for income-producing, long lived assets. But “normal” isn’t necessarily normal anymore. And I suppose we should remember that any company, whether it’s an MLP or a regular public company, can crash and burn — a nice little reminder of that is the fact that Kinder Morgan’s pipeline partnership was actually born from the ashes of Enron, which had a pipeline business under their umbrella.

Much of the weakness in the share price of MLPs this year has come along with both the fall in the market when investors sold everything — and many MLPs are predominantly owned by individual investors — but it has also come from the falling prices of oil and gas.

In theory, the price of natural gas shouldn’t impact a pipeline company — they charge a toll, often a regulated toll set in long term contracts, for transporting the gas, they don’t typically buy or sell much of the stuff themselves. But in practice, the shares often fall alongside falling energy prices, regardless of how irrational that might be in any individual case.

There is a kernel of genuine worry if you believe that oil and gas prices will be long-term decliners, down to historic lows: oil and gas companies will be less pliable, and less likely to sign long term contracts at higher rates for pipeline access, if they’re unable to make a profit. They may try to squeeze their contractors, and pipelines are one of those contracts. The supply and demand of pipeline access to and from various areas of the country should be the main driver of their long term health and profitability, but certainly that dynamic is not completely independent of the price of the commodity they’re transporting.



This site uses Akismet to reduce spam. Learn how your comment data is processed.

Inline Feedbacks
View all comments
October 20, 2008 10:59 am

I like Calumet symbol CLMT, bought some at like 13, more at 9, now it seems to be recovering. It seems to me that with crude weakening, that specialty refiners should do well. Good dividend yield on this one as well, however chasing yields can be dangerous – buy a yield only if the company is sound. Also, CLMT had some large insider buying a few months back.

Add a Topic
October 20, 2008 11:03 am

My wife and I hold stock in KMP. [We also held some BWP and EPD, but we sold those off to concentrate on KMP. Our tax preparer charges extra for processing the MLPs.] KMP has been good to us. The runup a couple of years ago wasn’t as great as some other energy stocks, but the recent dive hasn’t been as bad. And those distributions are music to my ears (and bank account).


Add a Topic