On Monday, June 29, interim service began on REX East, the eastern section of Kinder Morgan Energy Partners' (KMP) 1,679-mile multi-state Rockies Express Pipeline (REX). With a capacity of 1.6 billion cubic feet per day (Bcf/d), natural gas started flowing on the 444-mile segment of the $6.6 billion pipeline that runs from Audrain County, Missouri, to the Lebanon interconnection point in Warren County, Ohio. Earlier, during May last year, the western section of the pipeline (REX West) came online. The 713-mile pipeline runs from the Cheyenne hub in Weld County, Colorado, to a major delivery point in Brown County, Kansas and has a capacity of 1.5 Bcf/d.

The remaining portion of the 639-mile 42-inch diameter Rex East pipeline, which will end in Clarington, Ohio, is expected to be operational by November 1, 2009. When fully completed, the entire 1,679-mile pipeline will be capable of transporting roughly 1.8 Bcf/d of natural gas and is backed by firm commitments from creditworthy shippers for nearly all of the capacity on the pipeline. Kinder Morgan is the operator of the REX project and has a 50% interest, with the other partners being ConocoPhillips (COP) and Sempra Energy (SRE).

REX is a key pipeline asset that will fully integrate the fast growing Rockies natural gas producing region with consuming markets in the Midwestern and Eastern U.S. The lack of adequate take-away capacity in the Rockies has been the bane for natural gas producers in the region due to its negative impact on local natural gas pricing. It is expected that with the completion of this pipeline, the Rockies basis spread (the discount at which Rockies natural gas gets priced relative to other regions in the country) will narrow significantly.

Kinder Morgan is the largest independent owner and operator of petroleum product pipelines in the U.S., transporting nearly 2 million barrels per day of gasoline, jet fuel, diesel fuel, and natural gas liquids. The partnership also has capacity to transport 7 billion cubic feet/day (Bcf/d) of natural gas. It owns or operates more than 26,000 miles of pipeline and approximately 170 terminals.

We currently have a Buy recommendation on the partnership given its focus on stable, fee-based, well-diversified assets, and its strong balance sheet, which allows flexibility when raising capital for acquisitions/expansions. With a number of organic projects expected to come online over the next few years, we see favorable long-term growth profile for Kinder Morgan.

Kinder Morgan Energy Partners LP's (KMP) MACD indicator has moved into bearish territory with a reading of -0.0660. The Zacks #5 Rank ("Strong Sell") stock has declined more than 1% to $46.19 in morning trade. Analysts have been reducing their full-year earnings estimates, with the consensus down 18 cents over the past 30 days to $1.48 per share.

Kinder Morgan Energy Partners L.P. (KMP) dropped close to its 50-day moving average of $46.33 at noon. The average forecast on the company's full-year profit has gone down by 27 cents per share to $1.48 in the last month. KMP is a Zacks#4 Rank ("Sell") stock.

The graph below shows the year-over-year growth rates expected for each year out to 2014. I think they are all too high, but for 2010, the administration's forecast is the highest and, therefore, the most off base. Yes, the stimulus will help, but the underlying situation is much more dire than the forecasters admit. We are caught up in a vicious cycle, where declining wealth has lead to lower consumption, which has lead to decreases in production, which has lead to more unemployment, causing more stress on the financial system, causing more declines in wealth. There are a few more steps in the cycle, but you get the idea.

There is absolutely nothing in the current set of economic statistics that suggests the decline in the first quarter will be any less severe than the 6.2% decline in the fourth quarter. Obviously the further one goes out, the murkier the crystal ball becomes, but anything other than an anemic 2010 seems unlikely to me.

What usually gets us out of a recession? Housing is usually the first thing to turn upward. While there is no way that declining Residential Investment can subtract more from GDP growth in 2009 and 2010 than it did in 2008 (it can't go negative), that does not mean it is likely to post a strong rebound. We currently have over 13 months of new houses available for sale at the current selling rate. It is sheer insanity to add more to the supply until the inventory overhang is cleared up. Housing prices still have a ways to go on the downside, relative to historical relationships between housing prices and both incomes and rents.

How much? Close to 20% on a nationwide average basis, although clearly there will be large local differences. There is a name for someone who buys something using a lot of leverage that is likely to fall in price: STUPID. Well, even with a 20% down payment you are talking 4:1 leverage. You are also talking about the very large probability that you will lose your entire down payment, which for most first-time buyers represents their entire life savings. Besides, why buy a new house, when buying a used house out of foreclosure is so much cheaper?

Spending on Durable Goods, such as Autos, is the other normal key driver at the start of a recovery. Yes the sales rate so far this year of under 10 million light vehicles is probably unsustainable over the long term. Eventually we will have some pent up demand. But remember that cars these days are far better than they were during the last recession of comparable magnitude in the early 1980's. At that time, a car with 100,000 miles was headed to the junk yard, or at best a station car or one for your teenager to drive to school. Now, it seems practically new.

Other parts of Personal Consumption Expenditures are not likely to rise anytime soon either. The almost unfathomable declines in wealth over the last 18 months imply that people are going to want to save as much as they can. Most people in the middle class still do hope to retire and send their kids to college. Absent a mind-blowing new bull market, the only way those objectives can be achieved is to consume less than you earn. That's tough to do when you are not earning anywhere near what you used to earn.

The rest of the world is arguably in worse shape than we are, with the possible exception of China, which might be seeing a few tentative signs of getting better. The flight to quality has resulted in the dollar becoming much stronger. This will make our exports less competitive, not to mention hurt reported corporate earnings through currency translation. Net exports might be a wash due to falling imports, but it sure isn't going to be a real locomotive of growth in 2010.

The decline in Commercial Real Estate is only getting started, and a recovery in investment typically lags the start of a recovery by a good margin in any case. Investment in Equipment and Software might recover sooner than commercial investment in structures, but before companies start to invest they are going to want to wait for some pick up in final demand, which gets you back to the point about increased savings rates keeping demand down.

State and Local Governments are, by and large, required to keep balanced budgets. They will face falling tax revenues, most notably property and sales tax revenues, and to a lesser extent income taxes. The aid to the states in the stimulus package is only a partial offset to this. They will be forced to either cut back spending or raise taxes. It's often said that California leads the nation, well just look at what was going on in Sacramento recently. Expect that movie to play in state capitals across the nation both this year and next.

Incidentally this was also a major problem in the Great Depression, and if you want to read more, I strongly suggest reading the presentation by Christina Romer, the head of the Council of Economic Advisors, to the Brooking Institution yesterday, available here. I watched it last night, and C-Span will probably be replaying it as some point. While I think she is overly optimistic, it is a very interesting presentation.

In this context, the stimulus package is useful, but clearly not sufficient to cause a robust recovery in 2010. More will most likely be needed.

In this environment, it is best to keep your investments very conservative. One area that I think is very attractive is the Natural Gas Pipelines. They are tied more to the volume of gas used than to the price of the gas, and are hence much more stable. They will provide you with very attractive dividend yields, although some of them are structured as Master Limited Partnerships, so there are some tax implications for them. For most individual investors that should not stop you.

Some names in this area to consider would be Enterprise Product Partners (EPD), Energy Transfer Partners (ETP), Kinder Morgan (KMP) and TC Pipelines (TCLP). There is also Sempra Energy (SRE), a diversified Utility with a nice gas pipeline operation that is structured as a common stock - if the MLP structure turns you off.

OPEC Cutting Production

At today's meeting, OPEC ministers agreed to a production cut of 2.2 billion barrels per day, which equates to a 4.2 million per day reduction from September levels. In addition, Russia, Syria and other non-member countries are also likely to lower production levels.

The moves are in response to the $100+ drop in oil that has occurred since Jul 11. The global economic slump, and forecasts for reduced consumption next year, has oil producers concerned about a loss of revenues.

Though OPEC members have a long history of violating quotas, production levels should drop after the meeting. The commodities markets, however, are unimpressed as crude was trading at just $43 per barrel this morning.

The Impact on Oil Stocks

For investors, today's meeting won't have any meaningful short-term impact. The "magic" number for many companies is believed to be about $65 per barrel. Oil prices below this level discourage capital investment and production. Prices above this level encourage more activity.

Not a line in the sand, per se, but a good benchmark for gauging what the industry is going to do.

The other issue is the credit markets. Even for companies with strong cash positions, access to debt financing remains difficult and expensive. This also discourages investment.

It is this combination of low oil prices and a lack of financing that has led brokerage analysts to continue lowering 2009 profit forecasts on a large number of oil-related stocks. The downward revisions span most of the energy sector including exploration and production company Anadarko Petroleum Corporation (APC), services provider BJ Services Company (BJS), equipment maker Dril-Quip, Inc. (DRQ) and driller Precision Drilling Trust (PDS).

Even conglomerates like Exxon Mobil Corporation (XOM) are seeing their consensus earnings estimates lowered.

BJS and PDS are Zacks #5 Rank ("strong sell") stocks. APC. DRQ and XOM are Zacks #4 Rank ("sell") stocks.

Crude Will Rebound

Crude prices will not stay at current levels, though the timing of the rebound is uncertain. It will be soon enough, however, to make recent buyers of new SUV question their purchases. Bluntly put, enjoy the cheap gasoline prices while you can.

Long-term investors should not be in a rush to buy oil stocks, though long-term valuations are cheap. Therefore, it makes sense to continue eyeing the sector, even if the short-term outlook is not positive.

An alternative method is to look at pipeline partnerships. Our senior oil analyst, Sheraz Mian, discussed these in a recent blog post. Among the stocks he likes are Enterprise Products Partners L.P. (EPD), NuStar Energy L.P. (NS), Energy Transfer Partners, L.P. (ETP) and Kinder Morgan Energy Partners LP (KMP).

Though opportunities for short-term capital appreciation might be small, all of these partnerships yield attractive dividends.

Industry Groups

Because the weakness in crude prices affects the entire sector, I covered multiple industry groups this week. The specific groups are:

• Oil & Gas-Drilling - Precision Drilling Trust
• Oil Field Machinery & Equipment - Dril-Quip
• Oil-Field Services - BJ Services
• Oil-International Integrated - Exxon Mobil
• Oil-Production/Pipeline - Enterprise Products Partners, Energy Transfer, Kinder Morgan and NuStar.
• Oil-U.S. Exploration and Production - Anadarko Petroleum

Related ETFs

There are several ETFs that target the oil sector, though most specialize in certain segments such as drilling or oil field services. The fund providing the most broad coverage might be Energy Select Sector SPDR (XLE).

Zacks Premium and Zacks Elite subscribers can view the Zacks Industry Rank List at http://www.zacks.com/zrank/zrank_inds.php. This interactive list allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. Shown below is the Zacks Sector Rank List, which shows the trend in estimate revisions on a broader scale.

Sector Rank as of Dec 17
Sector	This Week's Zacks Rank	Last Week's Zacks Rank	FY09 Revisions Ratio	FY09 Estimates Revised Up	FY09 Estimates Revised Down	FY08 Revisions Ratio
Medical	2.55	2.55	0.45	134	300	0.45
Aerospace	2.76	2.83	0.36	16	44	0.42
Computer and Technology	2.89	2.92	0.12	111	913	0.21
Business Services	2.94	2.94	0.14	11	76	0.31
Consumer Discretionary	2.98	3.01	0.24	54	221	0.31
Transportation	3.03	2.97	0.19	52	274	0.29
Utilities	3.05	3.04	0.22	29	132	0.55
Consumer Staples	3.08	3.10	0.14	27	198	0.27
Retail-Wholesale	3.11	3.17	0.09	52	568	0.22
Construction	3.16	3.12	0.15	9	61	0.15
Finance	3.18	3.19	0.09	82	867	0.17
Industrial Products	3.23	3.18	0.09	19	202	0.14
Oils-Energy	3.26	3.28	0.11	78	733	0.25
Basic Materials	3.34	3.27	0.06	18	302	0.10
Auto-Tires-Trucks	3.53	3.55	0.03	2	72	0.11
Conglomerates	3.63	3.67	0.00	0	73	0.03

Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.

"EPD" Free Stock Analysis: Buy? Sell? Hold?
"ETP" Free Stock Analysis: Buy? Sell? Hold?
"BJS" Free Stock Analysis: Buy? Sell? Hold?
"APC" Free Stock Analysis: Buy? Sell? Hold?
"KMP" Free Stock Analysis: Buy? Sell? Hold?
"XOM" Free Stock Analysis: Buy? Sell? Hold?
"NS" Free Stock Analysis: Buy? Sell? Hold?
"XLE" Free Stock Analysis: Buy? Sell? Hold?
"DRQ" Free Stock Analysis: Buy? Sell? Hold?
"PDS" Free Stock Analysis: Buy? Sell? Hold?
Zacks Investment Research

With yields on treasury instruments are at all-time lows (the 10-year yield is hovering around the 50-year low of ~2.5%), to say that these are extraordinary times would be an understatement. The severe compression in treasury yields (the 3-month paper is yielding close to zero, even briefly slipping into the negative territory) reflects extreme risk aversion. This 'flight to safety' has starved many otherwise stable sectors of capital, pushing risk premiums into irrational territories.

One such sector hit unnecessarily hard by the current downturn is the publicly traded master limited partnerships group (MLPs), particularly those owning and operating energy infrastructure assets. The assets that these partnerships own -- oil and natural gas pipelines and storage facilities -- typically bring in stable fee-based revenues and have limited, if any, direct commodity-price exposure. This enables these MLPs to pay out fairly growing distributions (dividends).

Granted, weak demand for oil and natural gas impacts pipeline volumes and reduced access to credit/equity markets affects growth plans, but the extent of the sell-off in the group is much greater than can be justified by fundamentals alone.

This atmosphere of fear and over-reaction has created attractive opportunities to own quality energy infrastructure MLPs with low risk profiles and juicy yields.

• While MLPs no doubt have significant ongoing need for outside capital (debt as well as equity), they do not need funding for ongoing operations or to maintain their distributions. MLPs are mandated by law to pay out substantially all of their cash flows to unitholders after meeting their operating, maintenance capex and debt obligations. As such, they are constrained to access outside markets to fund ONLY their growth initiatives.
• So while access to the credit and equity markets is the only way for MLPs to fund growth projects or acquisitions, lack of the same would basically have an impact on growth. They will continue to operate and pay out distributions. Most of them will even be able to grow distributions, albeit at a slower rate.
• They extent of the recent MLP sell-off appears to suggest that distributions are in danger; nothing could be farther from the truth. Most of the MLPs in our coverage universe can not only easily maintain distributions at current levels, but actually grow them.

The level of yield spread to the 10-year Treasury bond, our preferred MLP valuation metric, is at an all-time high right now. The average yield for our MLP universe is 11.4%, which represents an 876 basis-point spread over the 10-year Treasury. Just to put the current spread level in a historical context, it was at 388 basis points in late July 2008 and 184 basis points in January 2007. Historically, the spread has remained under 200 basis points.

Our Buy-rated names -- Enterprise (EPD), NuStar (NS), Energy Transfer (ETP), TC PipeLines (TCLP), and now Kinder Morgan (KMP) are investment-grade credits with comfortable distribution coverage levels. We believe that these entities offer some of the best risk-adjusted yields in the current market.

Read the full analyst report on EPD

Read the full analyst report on NS

Read the full analyst report on ETP

Read the full analyst report on TCLP

Read the full analyst report on KMP

This from Investment U:

Most investors have never heard of, or purchased, shares of a master limited partnership (MLP). But, with many yielding more than 10% and prices at historically low levels, these bargains are getting hard to ignore.

Few investors know that master limited partnerships are publicly traded asset pools. They have the tax benefits of a partnership plus the liquidity…

We believe that the recent broad MLP-group sell-off in general and KMP weakness in particular is overdone and provides for excellent buying opportunities. Distributions are safe as evident from KMP's just-announced distribution increase.

For the third quarter of 2008, the partnership announced a 16% increase in distribution to the annualized run rate of $4.08 per unit. We believe that MLP valuations are at extremely attractive levels.

Given its diversified business mix and comfortable distribution coverage ratio, we believe the partnership can easily maintain a distribution growth rate of around 8% annually over the next few years. With over $3 billion of organic projects beginning to come online over the next few years, we see favorable long-term growth profile for KMP.

Read the full analyst report on KMP

Importantly, it also announced a 16.5% yearly increase in quarterly distribution to the annualized run rate of $3.96 per unit. Looking forward, with over $3 billion of organic projects beginning to come online over the next few years, we see favorable long-term growth profile for KMP.

However, our Hold recommendation remains unchanged as we continue to believe that current valuation premium adequately reflects the partnershipÂ’s risk profile and growth prospects.

On a distribution yield basis, KMP common units are currently trading at a premium (lower yield = higher value) to the peer pipeline MLP group average. This represents a 400 basis points (bps) spread over the 10-year Treasury bond, compared to the peer group s average spread of 543 bps.

Our new $51 price objective (reduced from $53 before) reflects an annualized distribution run rate of $4.32 per unit (9% above current levels) and a target yield of 8.45%. Our yield assumption is based on a 395 bps spread over our 10-year Treasury bond yield expectation of 4.50%.

Read the full analyst report on KMP