BondsOnline Advisor – June 2006
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.

Income Security Recommendations

Fund/Stock	Ticker	Type	Current Price	Current Yield	Firm
Vanguard Long-Term Investment-Grade	VWESX	Bond Fund	$8.77	5.87%	Morningstar
Legg Mason Partners Total Return	TRBAX	Bond Fund	11.01	5.17	Morningstar
Edison Intl.	EIX	E	40.56	2.70	Merrill
U-Store-It Trust	YSI	REIT	17.75	6.60	BancAmerica
Host	HST	REIT	21.27	3.20	Smith Barney
Equity Inns	ENN	REIT	15.55	4.90	Smith Barney
Highland Hospitality	HIH	REIT	12.96	4.90	Smith Barney
Sunstone	SHO	REIT	28.46	4.20	Smith Barney
FelCor	FCH	REIT	20.08	3.00	Smith Barney
Kimco Realty	KIM	REIT	36.05	3.70	BondsOnline
Energy Transfer Partners	ETP	MLP	43.91	5.30	BondsOnline
Weyerhaeuser	WY	E	59.05	3.40	Lehman

* E – equity; REIT – real estate investment trust; CB – corporate bond; Pr – preferred.

PreferredsOnline Yield & Income Securities Coverage – and Research!

Every properly constructed portfolio contains securities to generate income, and the new features of PreferredsOnline will provide the Income Investor Tools to understand and track interest rate sensitive securities.Click here to learn more.

SMITH BARNEY/Bond Strategy

Smith Barney analysts George Friedlander and Michael Brandes think long-term rates could be peaking. They note despite daily warnings of rising inflation, yields on high-quality fixed income investments, such as Treasuries, have actually receded from recent highs. “The bond market seems to be saying that inflation threats will be contained, but perhaps at the expense of a softer economy and weaker profit growth,” they write in a recent report.

They point out that many so-called inflation trades have already weakened considerably, including gold, commodities, and TIPS. “A corollary explanation is that there is a higher volatility premium being priced into riskier assets, as well as a flight from risk supporting the highest quality bonds,” the analysts add.

Addressing the issue of why interest rates aren’t higher, they point out four reason they have relied on for awhile: A widespread belief that the Fed has the commitment, mandate, and capacity to do whatever is necessary to control inflation; massive demand for dollar-denominated fixed income assets, stemming from surplus global savings and our own current account deficit; a global “hunger for yield”; and a negligible net new supply of corporate bonds.

They now add four more reasons: A belief that the U.S. economy is entering a soft patch, due partly to weaker consumer spending; added pressure on short-term rates and liquidity as central banks struggle to control inflation is dampening economic strength through several avenues; a general flight from risk, and the increased possibility that the Fed might be forced to “overshoot” relative to neutral monetary policy in its quest to prevent long-term inflation expectations from moving above its comfort zone.

With all this in mind, Smith Barney asserts the peak in long-term interest rates occurred when the yield on the 10-year Treasury reached 5.20% or so. “Going forward, both the inflation component and the real component of long-term interest rates may come under modest to moderate downward pressure as the economy slows, the risks of more Fed tightening recede, and day-to-day volatility eases,” the analysts note.

Their recommendation: Bond investors should continue to ease into the market, focusing on intermediate maturities, and keeping credit quality high. In the taxable arena, they assert callable agencies may also provide “some attractive yields,” along with better-quality preferreds that would benefit from a peaking of long-term rates. In the Municipal market, they continue to prefer intermediate maturities in the five- to 14-year range.

MORNINGSTAR/ Bond Funds

As the pros start to call the top in long-term interest rates, the mutual fund rater has trotted out its favorite long-term bond fund. “The long-term bond category has suffered through the first half of 2006, but relief could be on the way,” asserts analyst Scott Berry.

It recommends Vanguard Long-Term Investment-Grade (VWESX), which it says is heavily aided by its tiny expense ratio of just 0.25 percent. “That gives it a head start over just about everyone else,” Berry adds. He also asserts the low expenses allow the fund to compete with its rivals while maintaining a relatively high-quality profile.

Overall, Morningstar says the fund's three- and five-year returns rank among the best in the long-term bond category. The fund is sub-advised by Wellington Management and manager Earl McEvoy. “The fund's high rate sensitivity is a critical component here and can weigh on returns when inflation concerns push long-term interest rates higher,” Berry adds.

The fund is down 5.7 percent so far this year, compared with 3.4 percent for the average fund in its category. However, its current yield is about 5.87 percent.

On the other hand, Morningstar points out that so far this year, Legg Mason Partners Total Return (TRBAX) is down less than 1 percent versus a gain of 1.5 percent for its category. And its current yield is 5.17 percent. However, be aware that it has a 4.5 percent front-end load and a 1.06 percent expense ratio, according to Morningstar.

MERRILL LYNCH/ Utility Stocks

Analyst Steve Fleishman recently raised his rating on Edison International (EIX) to “buy” with a $46 price target, from Neutral. He notes that the holding company for Southern California Edison is down 12 percent this year, compared with a 1 percent gain for the S&P Electrics. Its current yield is 2.7 percent.

Fleishman says Edison combines two core businesses – a fully regulated utility with a solid rate base growth story and an independent power generator. He notes that traded comparables for both of Edison’s units have mostly seen stronger performance in 2006, further highlighting the relative underperformance of Edison stock. He adds: “Risks to our price objective are significant natural gas price and commodity downside in the merchant business; failure to execute on the utility’s rate base growth strategy and valuation downside in the broader utility group.”

The Bonds Online Career Center

The Bonds Online Career Center, in association with eFinancialCareers, lists employment trends, research and job postings for the Securities, Investment Banking and Asset Management industries. Click here for more... Click here to learn more.

BANC OF AMERICA SECURITIES/ REITs

Analysts Christy McElroy and Ross Nussbaum recently upgraded their rating on U-Store-It Trust (YSI) to “Buy” from “Neutral.” They call the REIT, which specializes in self-storage facilities, a turnaround story. “Our meetings with new management indicate the company’s new focus on operational performance,” the analysts write, saying it has significant room for improvement as its occupancy and margins have been well below industry norm after too-rapid growth. Its current yield is an impressive 6.6 percent.

SMITH BARNEY/ REITs

Smith Barney’s REIT analysts see strong dividend growth in 2007 for lodging REITs, driven mainly by earnings recovery. More specifically, it estimates dividends can increase 25%, on average, for a 100-basis-point increase in yields, to 5.3%.

“Balance sheets are reasonably leveraged, providing solid financial flexibility,” the brokerage explains. “Dividend increases are likely to be balanced against capital projects, although we think most companies have the capacity to do both, and many are already renovating their portfolios this year.”

It explains that lodging REITs offer what it calls “a unique combination of strong EBITDA growth—which is a function of leverage to the lodging cycle--and attractive dividends.

LEHMAN/ Forest Products

Lehman recently reiterated its top rating on Weyerhaeuser (WY) with a 12-month target price of $95. It is currently trading at $59 and has a dividend yield of 3.4%.

One of the major reasons Lehman likes the stock is the company’s recent announcement that it will hike its dividend by 20%, to $2.40 per share, providing a yield of 4.0%. “WY's dividend policy is to return 20-40% of sustainable operating cash flow to shareholders,” it adds in a recent report.

Lehman also asserts that Weyerhaeuser anticipates a formal announcement on the planned sale/spin of their "white paper" business this summer, after which the brokerage.

© 2006 BondsOnline Group, Inc.