Josh Brown Breaks Down a Market "Myth"


Over the past decade, master limited partnerships have become one of the fastest growing asset classes. In a zero interest investment world, MLPs provide stable cash flows, attractive yields, and various tax-related benefits. MLPs are typically tied to energy and the commodities sector.


Halftime Report trader Josh Brown is raising some red flags on MLPs.

"They're not bonds," he says. "They're highly susceptible to the price of oil and financial conditions."

MLPs are facing steep declines in commodities prices. This year, WTI crude oil is down 30% and copper is down 27%. Freeport-McMorRan announced Tuesday that is suspending its dividend and reducing production.

"These companies have a ton of debt, they need to roll it constantly," he warns. "They cannot grow their distributions and payouts. When the credit market closes off to them and you have a commodities free-fall, MLPs are not going to act like bonds."

Brown adds that investors should know the risks associated with MLPs.

"You are not getting 8% yields when treasuries are 2% unless you're taking four times the amount of risk," he notes. "A 7% or 8% yield is great but if you have to endure a 40% crash while you're waiting for the price of the stock to recover, you basically give up five years worth of income payments. The days of this entire sector rising because people want yield are over."


"Why are these weird products so popular? They're a creature of QE. In 2007, the entire assets under management of every public MLP was about $100 billion dollars. By the middle of 2014, it was $500 billion dollars. We all know why - it's a chase for yield," said Brown.

Desk Divided on MLPs

Steve Weiss says to focus on companies with strong balance sheets. "There are bargains which is why I'm looking at them and we've never looked at MLPs for our fund before. There will be values with the right MLPs," adds Weiss.

Jon Najarian likes Magellan Midstream and Enterprise Products Partners.

"I don't think you buy MLPs until they cut their dividends," said Pete Najarian. "Look at Kinder Morgan. Shares are back today after selling off last night. This is the catalyst, the flush you wait for."

By CNBC Producer Patricia Martell. Follow her on Twitter @patriciamartell