Notes from Berlin

Design for Obama

2009-12-04T12:14:00.037+01:00

This article was originally published in German by Der Freitag on December 4, 2009.

I voted for Obama, I donated to his campaign, and in spite of significant disappointments, I’ve got no regrets. And yet it’s hard not feel a twinge of sadness and even irritation when flipping through the collection of Obama election posters that Taschen Verlag has just published. The campaign enthusiasm that made the book possible has dissipated; the Democratic congressional majorities are weakened by internal bickering, and Obama, by continuing past policies such as rendition and the ban on gays in the military, has imbued the campaign slogans of “Hope” and “Change” with lamentable irony. And yet the collection is also a reminder of one of Obama’s most important strengths: his ability to appeal to people of disparate ethnic and economic backgrounds by emphasizing different aspects of his own identity. And in fact two of the posters (e.g., "He Listens", right) in Design for Obama show the candidate in outline, without facial features, reminding me of the time he told an Iowa audience that he was “an imperfect vessel for your hopes and dreams.”

In the summer before the election, a graphic design student named Aaron Perry-Zucker founded a website, designforobama.org, as an outlet for amateurs and professionals to submit poster ideas for the Obama campaign. According to Perry-Zucker, at one point the site was receiving dozens of posters a day. Spike Lee heard about the project, and helped connect Perry-Zucker to Taschen. Design for Obama features over 200 of “the best” submissions.

The book’s inside cover features 180 of the posters in miniature: a sea of Obama faces next to recurring texts - “Hope,” and “Change,” and “Yes We Can.” There's Obama as latter day JFK, Obama as Superman ("Man of Hope," Robt Seda-Schreiber, left), or, more inanely, Obama as rock star or basketball player. It would be easy to mock many of them for sentimentality or naïveté or to criticize the heroic depictions of Obama. And in fact one American critic, Michael J. Lewis, has belittled images of Obama by labeling them “devotional art,” to which one can only respond: Yes, and what of it? In 2004, hardly any artists were moved to heroic depictions of John Kerry, and grassroots leftist organizations produced material that criticized Bush mercilessly while failing to muster enthusiasm for his opponent. Performance activists like Billionaires for Bush staged mock demonstrations, artists such as Richard Serra and James Rosenquist contributed anti-Bush work to a special election issue of ArtForum, and MoveOn.org ran an anti-Bush video contest. If John Kerry had been able to inspire even a little sentimental devotion, he may well have won the election.

From the beginning, the Obama campaign tried—usually—to create a positive image for itself rather than merely making opponents look bad. The campaign’s emphasis on design was no small part of the excitement that the campaign generated. Many found great significance just in his choice of font ("You Had Me at Gotham," Ryan Masterlaz). The Gotham font, wrote Alice Rawsthorn in The New York Times, “conveys a potent, if unspoken, combination of contemporary sophistication … with nostalgia for America's past and a sense of duty.” The “O” logo elicited similar praise, despite being vaguely reminiscent of Pepsi’s. The logo’s creator, Sol Sender, has said he didn’t originally envision all the creative ways in which people would adapt the “O.”

In Design for Obama, you can find designers playing with the logo and font to make the candidate seem more traditional and rural (“States United”, Renee Graef):

In fact, while some of the posters confirm the criticism that Obama imagery tends to be hagiographic—several of the posters in Design for Obama use the “O” as a halo —

many more of the visuals undermine any piety by portraying the candidate as a regular guy or as someone supported— joyously — by people on the street:
or by playfully emphasizing things like his environmental policy ("Polar Bears for Obama," Christopher McInerney).

The aesthetic merit of such posters is minimal, but they document the light-hearted mirth of Obama supporters who were, and are, too often characterized as zealous acolytes. The poster that caught Spike Lee’s attention and led to the publication of the book was itself a persiflage of the poster for Lee’s 1989 film, Do the Right Thing.
Designer Don Button pasted Obama’s face on the body of the pizza deliverer and Biden’s face on the body of the Italian restaurant owner—not exactly a gesture of reverence. And yet the poster can be viewed as showing how much the country had changed since Lee had made his film about a race riot that ended in the destruction of the Italian’s pizza shop. If Obama has grown weaker in the past year, it’s not because the racial coalition has weakened. Instead, the political coalition is what's looking vulnerable — in part because of the intractability of the problems Obama inherited, in part because Obama made unnecessary and unwise compromises to his agenda, and in part because many of his followers have failed to maintain their interest in politics past election day. On the last score, Design for Obama is testament to the speed with which a cult of personality can vanish in a democracy.

Highlights of Today’s Reading:

2008-02-26T14:32:00.005+01:00

1.
The NYT on the Philharmonic’s first performance in North Korea: “It was the first hint of a broader thaw in a half-century long cultural stand-off between North Korea and the United States. Introducing Gershwin’s "American in Paris," Lorin Maazel, the Philharmonic’s music director, said, "Someday a composer may write a work entitled “Americans in Pyongyang.””

To which I thought: Hopefully not a march.

2.
Julian Baggini has a short but clever review of Slavoj Žižek’s Violence in which he faults Žižek for repetitiveness, overreliance on Lacan, and a compulsion to identify everything by its paradoxical nature. He also criticizes him for making unsupported assertions, as when Žižek writes that George Soros has “ruined the lives of thousands.” Although one still comes away from the review with the impression that Baggini’s respect for Žižek is not insignificant, the criticisms are damning and point out fundamental shortcomings that Žižek is unlikely to fix in the future.

I hope Robert Shiller has a role to play in the next administration. His proven foresight would inspire confidence.

For Barack Obama and Against Hillary Clinton

2008-02-14T15:08:00.002+01:00

Just finished reading a good article in which the author describes the reluctant evolution of his support for Obama.

I support Obama as well, although I prefer Hillary’s health care plan and find her foreign policy team of Albright and Holbrooke more reassuring than Obama’s recruitment of Brzezinski as advisor to the campaign—although I find it unlikely that Brzezinski would take a government role when he’s in his early 80s. Albright and Holbrooke errors that were as serious as Brzezinski’s, but the two seem to have a breadth, depth, and flexibility of intelligence that Brzezinski lacks.

To some extent, my vote is anti-Clinton. Paul Krugman’s dismissal of the Clintons’ scandals as minor (his description of Whitewater) is a bit disingenuous. The scandals do not compare to the damage that Bush has done to the republic, but they go far, far beyond vague reports of Obama’s dealings with Rezko (see this link as well). If we were just talking about Hillary’s mysterious success as a novice commodities trader in the 1970s, it’d be one thing; but the pardon of Marc Rich and the subsequent acceptance of contributions from his wife shows that the lack of judgment is ongoing. The Rezko contributions have all been returned; the Denise Rich contributions have not. Hillary's refusal to make her tax return public and Bill's refusal to reveal donor's to his presidential library should give us all pause. Even if they right their course on those two matters, the foot-dragging in doing so reveals that their sensitivity to the appearance of impropriety remains remarkably dull.

I never particularly cared for Bill Clinton. The gays in the military initiative was a fiasco; healthcare reform failed; his hesitation to get involved in the Balkans and refusal to act in Rwanda cost countless lives. His record on presidential appointments showed a lack of savvy and an unwillingness to defend worthy appointees once they started to encounter resistance (Zoe Baird, Kimba Wood, and especially Lani Guinier come to mind). Hillary’s desire to count her time in the White House as “experience” while evading any responsibility for the conduct of the Administration does not inspire respect or confidence.

I assume the next president will enjoy Democratic majorities in the House and Senate. If so, those majorities will be ideologically broad and probably unruly. I believe Obama’s conciliatory rhetoric and willingness to see the other side of an argument will aid him in passing difficult legislation—something that the Clintons were never good at, even before the rise of Gingrich.

I doubt Obama will be as scandal prone as the Clinton family. His decision to oppose the Iraq War when few others were doing so leads me to expect that he will use the bully pulpit to defend his decisions more courageously—and more persuasively—than the Clintons did, could, or can. I’m encouraged by his comment that he would consider health care insurance mandates later if it appeared they were necessary. For these reasons, as well as others mentioned more often in various media, I have supported Obama with campaign contributions and my vote.

Nichts ist "Sicher": A Look Back at Some Lousy Financial Journalism

2008-01-21T17:18:00.000+01:00

So, the quote I’m getting right now shows the DAX at 6815, down 6.81% today, and I am wondering if anyone will mention this to Messieurs Gerhard Grebe, Gerrit Weber, and Carsten Klude, all of whom appeared on the cover of the June 6 issue of the German magazine, Focus Money, with the headline: “Wir Sind Sicher! Die Börser Steigt Weiter” (We Are Certain! The Market Will Climb Further”). This was the same week that the sister publication, Focus, carried the headline, “Become a Market Winner,” as I noted in my blog that week.

I was so sure that these magazine issues were going to be an embarrassment to the people involved that I actually saved my copies. Today, people who took their advice (a group to which I thankfully do not belong) are now down about thirteen or fourteen percent, not including trading commissions and any fund loads investors might have been foolish enough to pay. What better day to review the mixture of stupidity and irresponsibility displayed by Focus Money editor Frank Pöpsel and the “strategists” rounded up by the reporters who penned the story, Mika Hoffmann and Hans Sedlmaier, and the reporters themselves?

I have no problem with making a bad market call. I was wrong, for example, in thinking that Master Limited Partnerships would provide shelter in the coming storm, as they did in the bear market at the start of the decade. (I sold 4 of my ten MLP positions as they broke their trendlines; I hedged other positions by purchasing ProShares Ultra Short funds, which appreciate as indices decline.) My problem is with the arrogance of the strategists, which no doubt emboldened Herr Pöpsel to pen a headline proclaiming “certainty” about market movements—never a good idea. Oh, sure, title pages with nuance don’t sell as many copies as those that shout. But don’t Germans usually say that theirs is a culture that values intellectual integrity over marketplace concerns? Hmmm…

The articles might also have led some to believe that there weren't people with strong reasons for contradicting Grebe, Weber, and Klude. But there were. Talking to a mere handful of people who all basically have the same opinion is one of the cardinal sins of journalism, financial or otherwise.

The Focus Money article mentioned, and in the same breath belittled, problems arising from a weakening U.S. economy, speculating that a resulting drop in interest rates “could bring about new dynamics” (“könnte zudem für neue Dynamik sorgen”). The unwinding of the carry trade was mentioned as another concern. A correction of five to ten percent would be “no surprise and certainly not a turn from a bull into a bear market,” according to M.M Warburg “expert” Carsten Klude. Journalists Hoffmann and Sedlmaier said a correction would be “almost desirable” (“nahezu erwünscht”).

Well, congratulations. You have your correction. And all thanks to factors that Jeremy Grantham at GMO, James Grant of Forbes, economists such as Robert Shiller, and fund managers such as John Hussman, Bill Fleckenstein, and Doug Kass were talking about before, at the time of, and subsequent to the publication of your predictions. To all involved in those unabashedly bullish Focus articles: If you still have capital to invest, I hope you’re stepping up to buy. The market needs your support, and you owe it to your readers.

For the record, the market is “oversold” here and it could probably bounce a bit, this week or the next. I suppose it depends on whether or not one of the monoline bond insurers declares bankruptcy, and perhaps on the potential of the Fed to cut rates more than expected. But lately I haven’t been hearing so many Germans looking forward to the next round of Fed cuts. If cuts result in a still weaker dollar, does Klude, Weber, and Grebe think that Oracle won’t benefit at the expense of SAP, or GE at the expense of Siemens, just to name a couple of examples? And are global markets sending a message that the world economy has really “decoupled” from the USA?

Maybe things will all work out wonderfully in the CDO and CDS markets and liquidity will reappear and global markets will rocket for the rest of the year. I just wouldn’t be too… “sicher.”

From Bloomberg: “It's the worst I've ever seen,'' said Johan Stein, who helps manage the equivalent of about $14 billion at Nordea Asset Management in Stockholm. ``The financial system is in terrible shape, and no one knows where this will end.”

And Jim Cramer: “We know that what's left on the banks' sheets after the selling is paper that looks like AAA but is actually lower because a lot of it was BBB but was enhanced by insurance that really isn't going to hold up so will instantly be downgraded to BBB where it will have to be sold by a great many institutions that insist on their holdings being all AAA. When that happens the glut will be catastrophic and the sell-off awful.”

MLP update

2007-09-10T21:17:00.000+01:00

Well, the Master Limited Partnerships have not held up as well as I would've hoped in the last few weeks, although I haven't sold any positions. Here's an overview of some of the research I've read.

In early August, Lehman's MLP analyst, Richard Gross, issued a report titled, "Selloff Not Fundamentally Driven," calling the decline a buying opportunity and recommending the G&P, E&P, and GP subsectors, which is where he thinks distribution growth will be strongest. He also likes small caps, e.g., GLP, HLND, ETE, MWE, CEP, EROC, KSP, and MGG for an aggressive portfolio. For a conservative portfolio, he likes BWP, DPM, MMP, SEP, WPZ, EPE, PAA, and NRGY.

Citigroup and Credit Suisse have issued more recent overviews of the MLP sector. Citi thinks institutional investors have gone into less liquid small cap MLPs and that they may be shorting the larger cap MLPs as a hedge. It explained the sell-off by the fact that MLPs pay out most of their cash flow in the form of shareholder distributions, and so widening credit spreads would hinder their efforts at raising capital to fund growth. That would also smack down outlook for distribution growth. Citi thought this would be more of an issue for MLPs with credit ratings below investment grade; the fact that MLPs with high ratings sold off hard presented a buying opportunity. Citi recommended BLP, ETP, EPD, OKS, MMP, NS, and TPP.

Credit Suisse also recommended buying the pullback. They recommended a few names they think offer a particularly nice combination of yield and growth: BWP, EEP, EPD, KMP, NS, and EVEP.

Another analyst, Kurt Wulff, has for some time favored natural gas and royalty trusts over MLPs. The stocks he covers, which you can see for yourself on his website, are, he says, blessed with little or no debt, and yet they sold off just as hard as the MLPs which tend to carry a heavier debt load. The royalty trusts he likes also offer higher dividends. So, he, too, sees the sell-off as a buying opportunity.

At any rate, you can see why the MLPs were hit harder in this late summer sell-off than they were during the 2000-2003 bear market: The 2000-2003 bear market was not a time when access to the credit markets was becoming more problematic for the MLPs. Interest rates were plummetting and liquidity was being injected into the system. If a bear market scenario unfolds now, those conditions will be different, so the response of MLPs cannot be counted on to be as steady as it was before. Alas. I think I will maintain my allocation to the sector, as selling brings with it tax implications and, as I said in my earlier post, it is basically one of the only investments a U.S. expat in Germany can make that still has tax advantages. As my allocation is already about 7%--which I think is quite high--I do not intend on buying the pullback.

Finance and Markets: American Housing

2007-07-19T11:27:00.000+01:00

The daily papers have been telling readers about the human consequences of home foreclosures while financial sources debate the effects on the stock market—with people like James Grant forecasting widespread consequences and James Cramer expecting the damage to be contained to the companies that made most of the bad loans.

If you want a good, basic primer on the history and potential future of the housing downturn/crisis, check out Lawrence B. Lindsey’s "Fear and Greed" article in the current issue of The International Economy (the link opens a pdf file). Lindsey was a Fed Governor and a Chairman of the Neighborhood Reinvestment Corporation during the 1990s. (He also taught Economics at Harvard when I was there as an undergrad—I think he even lectured for my intro economics course, but those were not my best semesters, so let’s move on.)

The Lindsey article is worthwhile because as an academic economist, he really has no interest in taking an “angle” on the market and, as he admits, he actually played a role in drafting the regulations that eased mortgage lending standards in the 1990s. He doesn’t make a market forecast per se or act as if disaster is inevitable, but he certainly paints a gloomy picture that makes Cramer’s contained damage scenario sound precarious, contingent on political forces in America restraining their impulse to take steps that exacerbate the tightening of credit.

You should check the article out yourself—his prose is clear as a bell and it’s a great explanation of the problem if you’ve so far managed to remain oblivious to it.

Here are some of the excerpts I found particularly interesting:

“By 2006 the median down payment for first time homebuyers was only 2 percent, down from a 20 percent standard down payment fifteen years before. Forty percent of all first time homebuyers in 2005 put zero down, or actually took out mortgages that were more than the cost of their homes.”
“None of these loan product innovations are malicious in their intent. Their purpose was to help the borrower qualify for the mortgage.” This is an important point for Lindsey to make given his concern, expressed later in the piece, that Congress will implement legislative reactions that punish lenders.
“The first thing that happens when the real estate market softens is that volume drops sharply. In 2006, for example, 9 percent fewer homes were sold than in 2005. By contrast, prices have only softened a little, with the price of the median home that was sold in January 2007 just 3 percent lower than a year earlier.”
“The important points are twofold. First, the ultimate lenders or people who have money at risk in the home mortgage market have virtually no direct knowledge of the actual collateral that lies behind their financial product. Second, the leverage on that collateral that is always inherent in a mortgage has, in turn, been leveraged several times over in the process of creating financial products with very large returns that the market would buy… A breakdown in this process of creating mortgage-backed securities could have profound ripple effects on the availability of mortgages generally.”
“The credit markets have evolved ways of minimizing [foreclosure]. There are now ‘work-out’ procedures that change the terms of the original mortgage in ways that often allow the homeowner to remain in the property. Credit markets may be heartless, but they are not dumb. Foreclosure is a long and expensive process in which the condition of the home—the collateral to the loan—usually declines sharply in value. Despite populist sentiment to the contrary, the bank is not repossessing the home because it expects to make money on it.”
“As long as credit remains available and credit markets work smoothly… financial institutions that bought the paper will face a haircut, but the aggregate size of the losses at this point are probably able to be absorbed by the financial services industry.”
After estimating that about 150,000 families are going to end up getting evicted nationwide, Lindsey continues: “Now if one were going to be positive about all of this, one would note that despite all the anguish, 1.85 million families who previously were not able to get a mortgage to own their own homes now could and will be able to keep those homes. But that is not the kind of story you are likely to see on the nightly news…. Those 150,000 foreclosures amount to about 350 per Congressional district.”
“Even if Congress rises to the challenge and avoids making things worse, the nation’s mortgage market may still come under assault from state attorneys general and the trial bar…. When the financial risks are already so high in the mortgage market that lenders are pulling back to a more cautious stance, the worst thing that could happen would be for the risks to go even higher…. It is vital that the Fed and other political actors recognize that this is a credit market cycle and not yet an economic or monetary policy cycle. Should the mortgage market actually break down due to the enhanced legal risks now looming, there probably is no reasonable change in monetary policy that could offset the downward spiral.”

It’s a balanced piece and one of the few I’ve seen that identifies the political aspects of the unfolding housing crisis as playing a potentially significant role in compounding economic losses which might otherwise manage to remain contained.

Kids in Berlin: Citizenship Issues.

2007-07-10T11:00:00.001+01:00

In another forum (Yahoo! Answers), I also recently answered another question that I've received from a number of people regarding the citizenship status of children born to couples in which one parent is German and one, American. Here's how I answered the question on Yahoo!:

"The following text comes from the web site of the American consulate in Germany:

"A child born to an American parent and a German parent acquires both American and German citizenship at birth, regardless of place of birth, if the parents satisfy the jus soli or jus sanguinis requirements of their respective countries. See the sections above entitled, "Basic Primer on American Citizenship Law," and "Basic Primer on German Citizenship Law." Neither country requires a person born under these circumstances to choose between American and German citizenship, i.e., he/she may keep both citizenships his/her entire life."

In other words, children born to one American citizen and one German citizen are entitled to lifelong dual citizenship."

See here:
http://germany.usembassy.gov/germany/services/dual_nationality.html
The text from the consulate page was last updated in November of 2006.

Other interesting tidbits from that web page:
"A child born in Germany to two American parents may also become a dual national at birth under the circumstances described in paragraph 4 in the section above entitled, "Basic Primer on German Citizenship Law." Under German law, he/she would have to choose between American and German citizenship before turning 23."
and
"Under German law, a person may not have more than one citizenship unless he/she was born with both, as described in paragraphs 2 and 3 above. Thus, German law requires an American who becomes a German citizen through the Einbürgerung process (see paragraph 5 in the section entitled, "Basic Primer on German Citizenship Law") to formally renounce his/her American citizenship, and a German who becomes an American citizen (see paragraph 5 in the section entitled, "Basic Primer on American Citizenship Law") to give up his/her German citizenship."
and
"An American-German male dual national must register with the U.S. Selective Service System within three months of his eighteenth birthday; that he is also a German citizen does not exempt him from that requirement. Registering with the Selective Service System, however, has no effect on his German citizenship.

d. An American-German dual national is not exempt from German military service simply because he is also has U.S. citizenship. However, service in the German military, at least under these limited circumstances, has no effect on his U.S. citizenship."

Health: Finding good doctors in Berlin.

2007-07-10T10:45:00.000+01:00

Someone on the "Berlin Scholars" listserv recently asked about finding a good doctor in Berlin. I fretted about this for a while after moving here, and I think a lot of people worry about it.

Here's the response I wrote for the group:

"I think finding a good doctor is a particularly difficult challenge for expats (short-term or long-term). I'm not in Eli's neck of the woods so I can't make a specific recommendation, but I think it's not a bad idea to look for someone who's a Chefarzt/Chefaerztin at a clinic or hospital. You can find a Chefarzt at institutions in your area via this web site:

http://www.arzt-auskunft.de/index.html

Look for titles like Prof. Dr. med. or Priv. Doz. Dr. med., click on the name, and the description should confirm if the doctor is a Chefarzt/in or not and provide other details (contact info, insurance info where relevant, etc.) Some listings even mention if a doctor speaks English or not--though in my experience the people in top positions at clinics and hospitals tend to speak English, regardless of whether or not that's mentioned in an online bio.

Other useful online doctor search engines are:

http://www.aerzte-berlin.de/_php/therapie30/fach.php3
and
http://www.calladoc.com/.

It's a blunt instrument, but the Chefarzt title is the only easily accessible indicator for finding doctors who have distinguished themselves in a positive way."

In the U.S., publications like New York magazine will run special issues on "New York's Best Doctors," and whatnot. They don't do that here in Berlin. Anecdotal information from German acquaintances is not particularly reliable, particularly given the surprising number of people here who put their faith in things like homeopathy. If you're not networked into the medical community here, looking at the Chefarzt title is the best way to go--at least, it's the best that I've been able to think of. If anyone has any other ideas, please share.

Many accept all types of insurance, but some Chefaerzte limit patients to people who are privately insured or "Selbstbezahler." Most expats, I suspect, are privately insured or Selbstbezahler.

Art & Architecture: Recommended Reading Online

2007-06-06T14:37:00.000+01:00

The IHT has a nice article on concert hall architecture right here, with a photo of Herzog & de Meuron's beautiful Elbe Philharmonic Hall, which should be completed around 2010 in Hamburg as part of the massive HafenCity project. When my wife visited Hamburg last week and saw the HafenCity site herself, she came back wondering if we'd made a terrible mistake by buying a place in Berlin. That said, my wife reported that the square meter price on the HafenCity residences starts at around 3000 EUR, which is significantly higher than what you'll pay in Prenzlauer Berg.

Finance and Investing: MLPs

2007-06-06T13:44:00.000+01:00

Contrarian investors, take note... In the U.S., investors and traders frequently talk about magazine covers as contrary indicators—for example, Fortune magazine put Cisco’s CEO (John Chambers) on its cover in 2000 with a headline urging readers to buy Cisco. That issue marked the top of Cisco’s share price almost perfectly. There are many other examples of this in the American media. I haven’t seen articles on this phenomenon in the German press, but the cover of Germany’s Focus magazine this week carries the headline, “BECOME A MARKET WINNER!” Unfortunately for its readers, Focus wasn’t pushing people into the market a few years ago. Now that the DAX is close to taking out its all-time high, I guess it’s easier to publish articles about all the money to be made.

Germany’s financial newsletters are not of as high a quality as America’s—here, I’m thinking of American market commentators like James Grant or Fred Hickey, who are at least interesting even when they’re not right. But the financial press is about the same—Euro am Sonntag is more or less a clone of Barron’s, Money has a German edition, BusinessWeek has a WirtschaftsWoche, and a magazine called Capital has a good reputation, too. When I see interesting articles in any of those publications, I’ll try to flag them for readers.

As for what I’m doing with my own accounts, I will confess that the likes of Grant, Hickey, Jeremy Grantham, Michael Steinhardt, John Hussman, and Edward Altman have frightened me into large cash positions—about 50% right now. After the jolt markets received at the end of February, I decided to sell what I thought was going to be the “bounce,” expecting a double top at around the 1450 area on the S&P. Oops. Still, I find the bearish arguments convincing and can’t help believing there’s a lot more downside than upside risk right now. One thing I haven’t sold yet, though, are Master Limited Partnerships (MLPs). These are a question mark for me. I’ve owned MLPs for many years, going back to 1999, when I was drawn to the high yields and the tax-advantaged nature of their payouts. MLPs are of particular interest for expats because of the tax advantages. When an American heads over to Europe, he or she will find that the tax advantages of any municipal bond holdings have evaporated—muni income is fully taxed by EU governments, so all of a sudden, you’re just holding low-yielding instruments. Substantial portions of the yield on MLPs, however, are classified as Return of Capital, and my accountants, at least, have managed to get that favorably recognized by German tax authorities. On top of that, MLPs did very well during the 2000-2002 bear market—and afterwards. So I’ve been very happy to hold these over the years, and they’re hardly ever mentioned in the financial press, which makes me think there’s not too much froth in the stock prices.

Still, the MLP situation is a little more precarious now then it was in 2000. First, their yields relative to Treasuries are much less impressive. Some, like Ferrell Gas (FGP) still yield about 8%, but most (Holly Energy (HEP), Nustar (NS), Energy Transfer (ETP)) are yielding between 5 and 5.5%. As mentioned earlier, whether you’re an American or EU (or at least German) investor, the MLP yield is tax advantaged, but I wonder how high Treasuries can go without starting to strip the MLPs of their income appeal. Unless payouts are raised, the yield factor may also end up capping increases in the share price, or leading to price declines.

I should hasten to add that MLPs are a hassle for accountants and, if you’re looking into them, you should consult with your tax preparer about the extra work involved and how much it will cost you. And obviously, don’t take my advice at face value; the above is neither a recommendation to buy or sell securities, and your decisions are your own responsibility.

For additional info on MLPs, check out Adam Karpf and Richard Gross at Lehman Brothers. Their research is available for free if you have an account at Fidelity Brokerage in the USA. For info on somewhat similar royalty trusts, check out Kurt Wulff’s commentary, available for free online.

If anyone has any opinions about MLPs going forward, though, I’d love to hear them.

(I am long FGP, HEP, NS, KSP, NRP, NRGY, ETP, PAA, MMP, OKS; holdings may change at any time.)