Income Security Recommendations

BondsOnline Advisor – October 2009

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.

Equity Strategies

For complete text and lists of the income securities reviewed this month, including target prices, please see the current issue of Yield and Income Newsletter.  PreferredsOnline subscribers receive this monthly newsletter as part of their subscription.

JPMorgan Chase told its clients it is sticking with its year-end target of 1100 on the S&P 500.

However, it conceded that investors are wary after seven straight up months without a 5-10% correction. Meanwhile, it acknowledges concerns over the economy, which appears to be stalling amid signals from a series of indicators. “The picture overall, in our view, is still of a recovery in manufacturing, improved activity in housing,” the bank says in its strategy report.

Wells Fargo Advisors says stocks appear very attractive relative to most fixed income. The reason: Historically, low inflation and low interest rate environments offer the potential for higher P/E valuations.

It pointed out in a table the high and low P/E valuation of the S&P for each year going back to 1987. The range for the highs is between 30 times and 10 times. The range for the lows is between 24 times and 9 times. Wells noted that currently, the P/E valuation of the S&P Composite Index is roughly 17.7 times this year’s operating earnings and 14.6 times its 2010 operating earnings estimate.

Merrill Lynch recently told clients its target range of 1055-1065 for the S&P 500, which represented the 50% retracement from the May 2008 high to the March 2009 low, has been achieved. “We made the case late last year that the market would undergo a base-building process that would require months to build, and that part of this process would involve an exciting rally,” it explained. Merrill now characterizes this to be a “mature rally.”  It is concerned that technology leadership is not confirming the new recovery high, nor is its VIM model, which measures the strength of buying versus selling. “And the weekly price momentum indicator stochastic is not confirming the move,” it added.

Credit Suisse recently established its mid-2010 target on the S&P 500 at 1150. Interesting, its 2010 year-end target is 1100. “We stay overweight equities,” it emphasized in a recent report to clients.

Standard & Poor’s has singled out 45 stocks that have a relatively high dividend yield and are expected to increase their earnings each year over the next two years. In addition, they all have a dividend coverage ratio of at least 1.25 and a 5-year annual projected earnings growth rate of at least 10%.

Master Limited Partnerships

Deutsche Bank Securities, Morgan Stanley, and Citigroup review 16 MLPs this month in the current issue of Yield and Income Newsletter.

REITs

Credit Suisse recently raised its estimates and targets for Agency real estate investment trusts (REITs).

Utilities

Morgan Stanley recently initiated coverage of seven diversified electric utilities with an In-Line view. It estimates the group offers, on average, 12-month base case upside of 10% and a 12.4% total return.

Closed-End Funds

Stifel Nicolaus warns investors to focus on end-of-year tax-loss selling and its possible effects on closed-end funds.

Preferred Stocks

UBS recently stated that senior debt, as well as some subordinated and preferred securities of six key, systemically important banks, will continue to be supported by the government if necessary.

For a list of securities, target prices, and detailed comments, get the current issue of Yield and Income Newsletter through PreferredsOnline.

© 2009, BondsOnline and BondsOnline Group, Inc.