Diary of a Financier

Opening Pair Trade: Long PAA, Short EPD

In Capital Markets on Mon 7 Mar 2011 at 14:41
  • Barron’s did a bullish feature on MLPs.
  • Opening pair: Long PAA, short EPD on technicals.
  • EPD target @ 1st support $39.75, buy stop @ $44.35.

I love fading Barron’s.  I hardly even read the publication, but I saw it on My Yahoo! yesterday, and I had to read this article on MLPs:

Yes, there are risks. MLP unit prices are on the high side right now, and payouts could suffer as interest rates and borrowing costs rise. Still, some of the sharpest investors in the field are expecting double-digit total returns for some time to come.

“If you look at where MLPs are trading relative to similarly risked assets, we think the yield is attractive,” says Terry Matlack, co-founder of Tortoise Capital Advisors, which manages MLP closed-end funds. “The sector continued to grow distributions through the teeth of the economic downturn.”

ANY FURTHER IMPROVEMENT in the economy would help MLPs by lifting demand for energy. Plus, a recent federal tariff increase has brought about clarity on pipelines’ pricing in the coming years, says Kyri Loupis, who directs MLP strategy within Goldman Sachs’ investment-management division. He holds several pipeline players, including Plains All American Pipeline (ticker: PAA), Magellan Midstream Partners (MMP) and El Paso Pipeline Partners (EPD).

I find that funny, because Josh Brown posted last week, regarding Floating Rate Bank Loans as the new vogue, MLPs as old hat.  (That got me worried, because first, I agree on the MLP front, but also, since October 2010, we’ve been finding our yield in Bank Loans.  The latter is a great asset class, just do your due diligence and don’t crowd our trade!)

So I punched up some tickers last night, read some 10-Ks, and studied some charts.  In the end, I’ve gone long Plains All American (PAA), short Enterprise Products Partners (EPD) as of today.  The charts say it all:

PAA daily- maintaining uptrend, we'll see how long it runs.

EPD daily- failed resistance, now submitting to bearish indicator trends. It will fill the 12/1/10 gap down between $42-41, with my taget at support around $39.75.

The trade hinges upon a bearish relative & absolute outlook for EPD, for which I have a preliminary target at first support $39.75 with a hard buy stop at $44.35.

–Romeo

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