IDRs Can Threaten Your MLP Returns

The benefits Master Limited Partnerships, or MLPs, offer to your portfolio are obvious: They provide income, they have a relatively low correlation to stocks and a tendency to outperform the S&P 500, all while maintaining beneficial tax treatment. On the other hand, the dangers may require some digging to find. One of the major factors that can impact your returns is the MLP’s business structure. Although MLPs are publicly traded, they are structured as partnerships. For the most part, MLPs operate under the direction of a General Partner (GP) which, in many cases, owns a special class of equity in the MLP called General Partner Interest (GP Interest). This may sound innocent enough, but the General Partner Interest may entitle the GP to what are known as Incentive Distribution Rights, or IDRs.

Equities May Be The Best Way To Get Long Exposure To Nat Gas

Natural Gas prices have fallen to historic lows. New methods of extraction have led to large increases in supply, coupled with an unusually warm winter through much of North America which diminished demand. However, there is little reason to believe that prices will remain this low. The abnormally steep futures curve for Henry Hub Natural Gas futures contracts indicates the market is anticipating a rise in price and the level of natural gas being stored is significantly higher than it should be at this point in the seasonal cycle.

"Investment success requires sticking with positions made uncomfortable by the variance with popular opinion. Casual commitments invite casual reversal, exposing portfolio managers to the damaging whipsaw of buying high and selling low. Only with confidence created by a strong decision-making process can investors sell mania-induced excess and buy despair-driven value."

David Swensen

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"All money is a matter of belief."

Adam Smith

"When the weather changes and hurricanes hit, nobody believes that the laws of physics have changed. Similarly, I don’t believe that when the stock market goes into terrible gyrations its rules have changed. It’s the same stock market with the same mechanisms and the same people."

Benoit Mendelbrot

"It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest."

Adam Smith, Wealth of Nations

Robert Shiller in 2003 speaking of the possible future of risk management.

"Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it."

Warren Buffet


The U.S. has been under tremendous financial stress over the past number of years. There remains, however, reasons to be optimistic as the U.S. economy navigates through a series of shocks. As seen above, businesses have increased efficiency as GDP per hour worked accelerated through the recession and maintained momentum coming out of it. While many individuals are suffering economic hardship from excessive debt loads and persistently high unemployment, the benefits of overall economic strength and efficiency should eventually propagate throughout the country. 

The U.S. has been under tremendous financial stress over the past number of years. There remains, however, reasons to be optimistic as the U.S. economy navigates through a series of shocks. As seen above, businesses have increased efficiency as GDP per hour worked accelerated through the recession and maintained momentum coming out of it. While many individuals are suffering economic hardship from excessive debt loads and persistently high unemployment, the benefits of overall economic strength and efficiency should eventually propagate throughout the country. 

"I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody."

James Carville

During the debt ceiling talks, Democrats put forward plans that involved 3 dollars in cuts for every 1 dollar in revenue increases. With spending currently at ~25% of GDP and revenue at ~17% of GDP, spending and revenue would converge to ~19% of GDP under this plan.
The Tea Party position was that no revenue increases would be tolerated. To balance the budget in this manner, greater than 30% of Federal spending would have to be eliminated. This compares to trimming spending less than 25% by the 3:1 method, or a little over 15% if a 1:1 ratio were used.
Revenue would have to be increased approximately 11% under a 3:1 ratio or 22% under a 1:1 ratio.

During the debt ceiling talks, Democrats put forward plans that involved 3 dollars in cuts for every 1 dollar in revenue increases. With spending currently at ~25% of GDP and revenue at ~17% of GDP, spending and revenue would converge to ~19% of GDP under this plan.

The Tea Party position was that no revenue increases would be tolerated. To balance the budget in this manner, greater than 30% of Federal spending would have to be eliminated. This compares to trimming spending less than 25% by the 3:1 method, or a little over 15% if a 1:1 ratio were used.

Revenue would have to be increased approximately 11% under a 3:1 ratio or 22% under a 1:1 ratio.

Financial inequality has become a hot topic recently. More specifically, the tax code has come under fire for not being as progressive as many feel it should be. Capital gains tax has been outed as main culprit for letting top income earners pay at lower rates than middle class Americans. 
In the past 50+ years, this is the lowest the maximum rate for Capital Gains has ever been. While the effective rate is not the lowest it has ever been, it is bumping along the lower bounds of where it has been historically. Interestingly, the spread between the maximum rate and the effective rate has narrowed over time. However, with the given information, it is unclear whether this is a result of a flatter, less progressive tax system for capital gains, elimination of loopholes, or some other unknown mechanism. 
source data

Financial inequality has become a hot topic recently. More specifically, the tax code has come under fire for not being as progressive as many feel it should be. Capital gains tax has been outed as main culprit for letting top income earners pay at lower rates than middle class Americans. 

In the past 50+ years, this is the lowest the maximum rate for Capital Gains has ever been. While the effective rate is not the lowest it has ever been, it is bumping along the lower bounds of where it has been historically. Interestingly, the spread between the maximum rate and the effective rate has narrowed over time. However, with the given information, it is unclear whether this is a result of a flatter, less progressive tax system for capital gains, elimination of loopholes, or some other unknown mechanism. 

source data