This Nasty ETF Indicator Is Flashing Again (MOO, RJA, JJG, JJA, GRU, FUE, AMJ, MLPN, MLPI, MLPL)

In early 2007, investors were reading news stories about hundreds of new ethanol plants… enormous demand for grain in China… and rice shortages in Thailand.
 
Potash and farm-equipment stocks were soaring. The world’s most widely published investment gurus – like Jim Rogers and Marc Faber – were touting agriculture and farmland as their favorite investments.
 
In short, agriculture was quickly becoming one of the most sought-after new investments in America. But you couldn’t speculate directly on agriculture unless you had a futures account.
 
Wall Street stepped in and issued new exchange-traded funds (ETFs) to fill the gap in the market and supply investors with the “one-click” agriculture investments they were demanding. Between September 2007 and January 2008, six new agriculture ETFs launched…
 
In late February 2008, the agriculture bubble popped. Nine months later, these ETFs were down an average 45%.
 
Fund Symbol Return
Market Vectors Agribusiness (NYSE:MOO) -53%
ELEMENTS Rogers Agriculture (NYSE:RJA) -43%
iPath DJ-UBS Grains (NYSE:JJG) -45%
iPath DJ-UBS Agriculture (NYSE:JJA) -44%
ELEMENTS MLCX Grains (NYSE:GRU) -46%
ELEMENTS MLCX Biofuels (NYSE:FUE) -39%
  Average -45%
 
The same thing happened with commodity ETFs just before the commodity bubble popped in 2008. It happened with short-selling ETFs just as the stock market was about to bounce in 2009. And it happened with currency ETFs just as the dollar was about to soar.
 
Wall Street lives on the fees it generates selling investments to the public. When the retail public falls in love with an investment idea, Wall Street cranks out products it can sell them. The more popular the investment, the more products Wall Street creates.
 
Whenever you see Wall Street creating lots of new investment products to sell to the public – especially ETFs – you know investors must love the idea… and prices might be forming a bubble. You should be extremely wary of buying or holding stocks in these sectors. Chances are, they’re about to enter a severe correction.
 
So what’s the hottest new ETF sector right now? It’s master limited partnerships…
 
A master limited partnership (MLP) is a special business structure available to a small number of firms trading on the stock market. Right now, there are 91 companies in the sector. MLPs treat their shareholders as partners in a business instead of owners of a corporation. This way, they avoid corporate tax. Many different businesses can qualify for MLP status… including real estate businesses, shipping lines, and money-management businesses. But the biggest companies in the MLP sector are all pipeline businesses.
 
Master limited partnerships are safe, recession-proof businesses that generate stable earnings and pay high dividend yields. These characteristics make them very popular with investors… especially right now when everyone’s looking for safe income stocks.
 
Over the last year, the money-management industry has obliged investors by introducing four new ETFs focused on MLPs, including a double-long MLP fund. This month, two more firms filed papers to float new ETF products, which will bring the total to six. 
 
Fund Symbol IPO Date
JPMorgan Alerian MLP (NYSE:AMJ) Jun 2, 2009
Credit Suisse Cushing 30 MLP (NYSE:MLPN) Apr 14, 2010
E-TRACS Alerian MLP
(NYSE:MLPI) Apr 14, 2010
E-TRACS 2x Long Alerian MLP
(NYSE:MLPL) Jul 7, 2009
ALPS MLP Fund   Coming Soon
Market Vectors MLP Fund   Coming Soon
 
The fact that Wall Street has introduced so many MLP investments is a huge warning sign that the MLP sector has become too popular and could be about to enter a correction. I prefer to buy MLPs when they yield over 10%. Right now they yield 6% on average.
 
So even though MLPs are one of my favorite income investments, I recommend you avoid the MLP sector for now… and focus on safer, less popular income investments like preferred stocks and safe stocks that relentlessly raise their dividends
 
If you own MLPs, don’t sell them now. The industry is in such a strong uptrend, MLPs could easily rise another 25% to 50% from here. But I recommend you use a trailing stop loss. In my newsletter, we’re using a 15% trailing stop loss. This way, we’ll capture any additional upside, without risking the profits we’ve made so far.
 

Tom Dyson is a contributing editor, with Dr. Steve Sjuggerud, of DailyWealth. There’s not another financial writer with a more proven contrarian view. Tom made his first trade age 12. The stock returned 300% in less than 9 months. Since then, Tom has worked on a bond trading desk at Salomon brothers, qualified to the Chartered Institute of Management Accountants – one of the UK’s top accounting certifications – and traveled all over the world looking at investments. Tom writes the 12% Letter, a monthly newsletter dedicated to finding the best income ideas in the market, and Penny Trends, a trading service that analyzes small stocks moving in strong price trends. Click here to learn more.

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