Headline Risk

[dan_s]

It will be very tough for us to make any money in the market this summer.

The market is reacting to every headline that comes out of Europe. In the U.S., we must endure the most negative presidential campaigns in history, which is only going to fuel more gloom and doom. The good news is that oil prices seem to have settled in and natural gas prices are much better than I'd hoped for (but I expect them to dip again in Q3).
The companies in our Sweet 16 are doing quite well. They had strong 1st quarter results and they continue to increase production and proven reserves. 2nd quarter results are going to be good, especially from our Bakken companies.
This sure "feels" like 2010 all over again.
Two years ago the S-16 had a very strong rally into year-end, ending the year up 72%.
Midstream MLPs look very attractive at current prices, with annual yields of 5% to 8% (tax deferred).
Dan

The Mess in Europe (by Elliott Gue)

Simply put, Europe is a mess. Greece's chronic woes now dominate the front pages, with the country at risk of getting forced out of the euro if it elects an anti-austerity government on June 17. The current odds of a Greek euro exit on InTrade.com stand at about 40 percent by the end of 2012 and 60 percent by the end of next year.

Nonetheless, the euro debt contagion is prompting EU leaders to take additional steps to alleviate the crisis. In particular, Germany's opposition to such measures such as euro-area bond issues may be weakening. I'm also encouraged to see Italian 10-year bond yields still well under 6 percent, a sign that the market has growing confidence in efforts undertaken by Mario Monti's technocratic government to bring the nation's budget into balance.

The looming fiscal cliff in the US remains a headwind for stocks. If Congress does nothing before the end of the year, the country will face the biggest fiscal contraction since World War II. The list of fiscal adjustments includes both tax increases and spending cuts. There's unlikely to be much movement on a compromise until after the November elections, but the odds are high that the US government will remain divided regardless of whether Barack Obama or Mitt Romney wins, with different parties controlling Congress and the presidency. A grand bargain is likely before year-end or in early 2013, to postpone some or all of the scheduled fiscal tightening.

Stocks will probably continue lower this summer, but none of these aforementioned drivers are deathblows for the economy. I continue to regard this sell-off as a nasty correction within a broader uptrend, not the beginning of a new bear market. I'm sticking with my view that the US economy will grow at a lackluster 2 percent to 3 percent pace over the next 12 months, just as it has over the past year.

Longer-term investors should regard this sell-off as a golden opportunity to buy stocks at attractive prices. My favorite buys during market downturns are high-yield groups such as master limited partnerships (MLPs). Keep in mind, MLPs aren't immune to broader market selling. Indeed, one of the topics at this week's MLP Investor Conference in Greenwich, CT was the fact that many MLPs have actually fallen faster than the broader market over the past few weeks. That's because markets are in "risk-off” mode, meaning that investors are reallocating money out of all stocks and commodities in favor of US government bonds and cash, regardless of underlying fundamentals.

In many cases, the recent sell-off offers investors the opportunity to buy MLPs at yields 1 percent to 3 percent higher than was possible just a month or two ago. Investors looking to enter the MLP arena should consider dividing their intended investment into three or more tranches, investing one tranche of capital now and using further declines in the broader market to add to their positions. Over the past few years, high-yield groups such as MLPs have been faster to recover than the broader market.