I am not sure this country should follow the advice of a man that has lost over $2 billion so far this year. But then again, some of the nation’s most powerful men have lost far more than that in just the past few weeks.

If you spend any time watching your living room television set, you have seen T. Boone Pickens discussing his proposed energy plan. The 80-year old has spent over $58 million of his own money to tell the nation it must lose its dependence on foreign oil.

What the white-haired oil barren does not tell you is that his money is not where his mouth his. While Pickens was telling you and I to fund his $100-billion idea, the fund he manages, BP Capital, was invested heavily in crude. And thanks to Pickens’ investing decisions, the fund has dropped in value by over 60% so far this year.

It is no wonder the investing firm’s phones are ringing off their hooks with folks looking to pull their money out of the fund. About half of BP Capital’s investors want out of their positions. Their capital withdraw has taken the fund’s size down to just $400 million.

It is a strong blow to the oil maverick’s ego.

Pickens promises to make the $2 billion back, but it is going to be much, much harder now that he has less funding to work with.

Should have known better

Investing in the energy business is a hard racket. After all, it is one of the most cyclical industries out there. But with decades of experience and several boom-to-bust cycles under his belt, one would expect Pickens to be able to avoid his current situation.

With so much negativity surrounding the investor and his picks, it will be hard for folks to get onboard with his newly proposed plans. As oil prices drop with the slowing economy, expensive prospects like wind, geothermal, and solar power are going to look far less attractive than they did when Pickens started his campaign.

While Pickens is pushing his alternative-energy agenda on the mainstream networks, his philanthropy is much more indicative of the investor’s true thoughts.

Instead of adding more money to his energy investments, Pickens is donating it to his beloved Oklahoma State and its football team. He just wrote a $65 million check earmarked to help finish the school’s football stadium.

Plus, Pickens said he would be returning the $125 million he managed in a hedge fund for the school. When he started the investment, it was worth $165 million.

Oh well, it is the thought that counts.

Source: T. Boone Pickens shows his cards

Today, 88 businesses qualify for this exemption under the government’s rules. They are all publicly traded. The government calls these stocks “master limited partnerships” (MLPs) or “publicly traded partnerships” (PTPs).

Eighty-five percent of MLPs are in the energy business. Two-thirds of these energy companies operate pipelines. The rest run miscellaneous “midstream” energy businesses – things like refining, compressing, pumping, and field gathering. Only 15% of MLPs are outside the energy sector.

You likely know several MLPs already. Kinder Morgan used to be part of Enron. It’s an MLP. And though you’ve probably heard of Blackstone Group and its private-equity operations, you may not know Blackstone is also structured as an MLP. Carl Icahn’s business – Icahn Enterprises – is an MLP, too. (For a full list of MLPs, see the website of the National Association of Publicly Traded Partnerships at www.naptp.org.)

I like MLPs as an investment. One of the secrets of income investing is avoiding tax. When you avoid tax, you generate higher returns without taking on more risk. Besides, MLPs invest in infrastructure. The population of the United States grows every year. Population growth supports 8% average annual MLP market growth.

But here’s the thing: I think MLPs are going to beat almost all other income investments over the next two years for another reason altogether:

Canada.

The income-trust market in Canada is almost identical to the MLP sector in the United States. Canadian income trusts pay no tax, they distribute all their earnings in dividends, and they operate mostly in the commodity and energy sectors.

In other words, MLPs compete directly with Canadian income trusts for investment.

Millions of income investors, pension funds, retirees, and other dividend hogs have enjoyed these trusts’ high dividends over the last 20 years.

But on October 31, 2006, the Canadian government changed the law. It ended the Canadian income-trust structure. Existing trusts have until January 1, 2011 to convert back to corporations, begin paying corporate taxes again, and cut their dividends.

MLPs are the perfect substitute. Yield hogs will turn their attention to MLPs as the 2011 deadline approaches.

Right now, MLPs are paying 7.4%. A 10-year Treasury note pays only 4%. The “spread,” or difference, is 3.4%. This spread is the largest it’s been in five years. That means MLPs are as cheap as they’ve been since 2003.

North American Pipeline MLP Yields Versus
10-Year Treasury Bonds

If nothing changes, MLPs will keep generating 7.4% dividend yields. Add that to 8% industry growth, and we’ll make total annual returns of 16% – matching returns of the last 18 years.

But when you take into account the demise of the Canadian income trusts… I think MLP investors could easily see 25% annual returns over the next couple of years.

Good investing,

Tom

P.S. I’ve found the best way to invest in MLPs. It’s a basket of these investments, it pays a 6.5% dividend yield… and you can buy it at a discount to its net asset value. Here’s something else: You won’t have to worry about tax paperwork associated with MLPs because the SEC considers this investment a regular stock for tax purposes…

I recently published a report on this investment for readers of my advisory The 12% Letter. Click here to learn more about The 12% Letter.

Source: Canada’s Loss Will Make These U.S. Stocks Soar