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Income Security Recommendations
BondsOnline Advisor – November 2008
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.
For a full list of this month’s
recommendations subscribe to our Yield and Income Newsletter www.yieldandincome.com. The newsletter is also available to
monthly and annual subscribers to PreferredsOnline – All Sectors, www.epreferreds.com
Equity
Strategies
Is it time
to jump back into the stock market? Better yet, is it safe to do so? These are
the critical questions investors ask themselves every single day.
And each
investment bank has its own take on this issue as they try to figure out their
next move.
Citi, for
example, recently pointed out that the price-to-book value of the S&P 500
has dropped to levels last experienced in the 1990–91 recession. Same is true
with price-to-sales. “Thus, investors are clearly looking at valuations against
more stable factors than earnings, which were last evident almost 20 years ago
with far lower inflation and interest rates,” it added.
Indeed, it
pointed out that TIPS yields imply much lower inflation expectations in the
market. “With plenty of cash on the sidelines, one could argue that stocks
prices are quite inexpensive,” Citi added.
It
calculated that Retail Money Market Fund Assets as a percentage of the Wilshire
5000 exceeds 10 %, about where it stood at the beginning of 2001, but way off
the peak of January 2003. In addition, there is about $5 trillion more of cash
in household bank accounts, more than $1 trillion on corporate balance sheets
in the U.S., in excess of $2 trillion in sovereign wealth funds and as much as
$2 trillion in private equity funds, not to mention an estimated $500–$700
million of cash in many de-leveraged hedge funds. “This cash could come back
into equities when confidence returns, although we would not expect that to
occur in sweeping imminent fashion,” Citi said.
Wachovia
recently asserted that investors should already be averaging into stocks. It
reminded clients that while many of the leading indicators still point toward a
softer economy ahead, historically the equity markets tend to lead the economy
by as much as a quarter of a cycle. “In other words, when the economy is
hitting its lowest point in a cycle, the stock market has often already begun
its move upward for the next cycle,” it added.
Master
Limited Partnerships
Citi,
Deutsche Bank, UBS and Barclays have each identified energy master limited
partnerships that look attractive based upon current valuations and dividend
stability. For a list of these four securities, target prices, and more, get
the current issue of Yield and Income
Newsletter through PreferredsOnline.
REITs
Citi is
slowing beginning to tip-toe back into Real Estate Investment Trusts (REITs).
It upgraded five stocks to Buy from Hold.
It did
reduce target prices across its coverage universe following the significant
slide in REIT equity valuations and higher risks and cost of capital associated
with real estate. Citi also lowered its NAV estimates across its universe,
citing a higher cost of capital, weaker outlook for fundamentals and dramatic
re-pricing of real estate equities.
JPMorgan
recently reiterated its Overweight rating on at least three REITs and upgraded
another one to Overweight. Many of these heavily beaten down shares are
throwing off dividend yields in the mid-teens, believe it or not.
Utilities
Wachovia
is bearish on utilities. It believes that as bond yields rise and investors
look beyond the current economic slowdown, this more defensive yield-oriented
sector would underperform the general market.
Closed-end
Funds
Stifel
Nicolaus recently pointed out that equity closed-end funds are currently
trading at massive discounts to their net asset value (NAV). However it likes
five funds in the dividend and income class.
Fixed
Income
Merrill
suggests that Treasuries should continue to outperform commodities. There are
wider ramifications if Merrill is right. If bonds continue to outperform
commodities, then defensive equity sectors such as Consumer Staples, Health Care,
“old-fashioned” Utilities, and high quality secure dividend payers should
remain the market leadership, Merrill added.
Citi notes
that the muni market came under severe pressure in the first half of October
for a number of reasons, including a poorly functioning short-term market,
severe pressure on hedged/leveraged positions and resultant unwinding of many
remaining positions, net outflows from bond funds, and heightened day-to-day
volatility and illiquidity.
For a list
of securities, target prices, and detailed comments, get the current issue of Yield and Income Newsletter through
PreferredsOnline.
© 2008,
BondsOnline and BondsOnline Group, Inc.
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