Income Security Recommendations

BondsOnline Advisor – April 2007
By Stephen Taub
The BondsOnline Advisor strives to present you with income investment insights from analysts throughout the United States. Bonds, preferred stocks, real estate investment trusts, or master limited partnerships can be a part of a successful income portfolio – and BondsOnline and PreferredsOnline provide the “Income Investor Tools” to keep you informed.

GLOBAL STRATEGY

Citigroup

The investment bank recently upgraded the Energy sector to overweight from market weight and downgraded Health Care Equipment & Services to underweight from market weight.

In addition, it raised Insurance to market weight from underweight, and lowered three groups: Telecom Services to market weight from overweight, and Food & Staples and Retailing and Consumer Services to underweight from market weight.

“We see a defensive stance as inappropriate now and thus recommend underweights on all three Consumer Staples industry groups, as they tend to underperform during trading rallies,” the bank asserted in a recent report.

Behind these moves is a conviction that the recent market pullback provided a buying opportunity. “We reiterate our bullish outlook for 2007, with low double-digit gains likely,” it added. Citi noted that its year-end 2007 S&P 500 price target remains at 1,600.

Credit Suisse Securities

The investment bank recently raised it allocation to equities to 5% overweight from 3%. “We find valuations cheap-especially when comparing FCF (free cash flow) yield to the corporate bond yield,” it explained. The firm asserted that two-thirds of the rise in US profitability is due to structural factors, such as lower taxation and interest, outsourcing of low-margin businesses and less dilution. As a result, US corporate earnings are only 15% above cyclically sustainable levels, it added.

The bank also stressed that most of its tactical indicators are positive.

Breaking down the regions, the firm raised its rating on global emerging markets (GEM) to 30% overweight from 15% overweight. It especially prefers non-Japan Asia (NJA), such as India, Brazil, Mexico, Poland, Egypt and Russia. “The equity risk premium is 40% higher than in the US without 40% more risk,” it explained.

In the US, it recommended staying 10% underweight. “The US is the epicenter of global economic concerns,” the bank asserted. “The US typically underperforms when lead indicators accelerate to be more than 2% year-over-year. Earnings momentum is worse than anywhere else as is the risk to revenue growth. No valuation measures show the US to be cheap relative to global markets.”

In continental Europe, it lowered its weightings to 5% overweight from 20%. In the UK, it raised its weightings to 5% underweight from 10% underweight.

MLPs/Credit Suisse Securities

The investment bank reported that MLPs recent received a big boost when the IRS ruled that ethanol blending can be considered MLP qualified income. It explained that the IRS ruled on a specific request from one unidentified MLP. “Although this particular ruling cannot be used or cited as precedent, it does highlight the thoughts of the IRS that ethanol is a natural resource activity as defined by the code,” Credit Suisse stressed.

“We believe that this ruling will give other MLPs which are contemplating investing in ethanol infrastructure the comfort they need to go forward with projects, and that ethanol blending provides a solid growth opportunity for those with existing refined products infrastructure,” the bank added. “This was an overhang issue of MLPs who were looking at ethanol blending projects because the tax treatment would affect the project economics and thus the ability to proceed.” For the list of the MLPs with the most exposure in this space, subscribe to this month’s Yield and Income Newsletter.

Utilities/Banc of America Securities

The investment bank continues to maintain an overweight on the Electric Utility sector and specifically upgraded its ratings to Buy on three stocks, downgraded one to a Sell, and added one as a “new top pick.

It elaborates that greater value for unregulated generation assets, driven by higher secular natural gas assumptions and little new supply should lead to an increased marginal heat rate. “Evolving capacity market can add further value,” the bank adds. The picks are available to subscribers to Yield and Income Newsletter.

Utilities/Credit Suisse

CS recently upgraded two utilities to outperform from neutral and hiked its target price on the two stocks. Credit Suisse said that after underperforming the regulated group by 230 basis points and the UTY (The PHLX Utility index) by 630 basis points year-to-date, this is a good time to get into the stock of PG&E Corp. (PCG) with limited downside. It points out that it is raising its earnings per share estimates for the three years ending 2010, putting it “meaningfully above consensus.”