Income Security RecommendationsBondsOnline Advisor – October 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

Stock	Ticker	Type*	Current Price	Current Yield	Firm
Simon Property	SPG	REIT	$95.34	3.20%	Merrill
Taubman Centers	TCO	REIT	45.98	2.70	Merrill
Equity One	EQY	REIT	24.45	4.90	Merrill
Developers Diversified Realty	DDR	REIT	$57.84	4.00	BondsOnline
Kimco Realty	KIM	REIT	$45.24	3.00	BondsOnline
Tyco	TYC	E	$29.13	1.40%	Morningstar
Wal-Mart Stores	WMT	E	48.46	1.40	Morningstar
Time Warner	TWX	E	19.06	1.20	Morningstar
Anheuser-Busch	BUD	E	48.01	2.50	Morningstar
Johnson & Johnson	JNJ	E	64.58	2.30	Morningstar
Sprint Nextel	S	E	17.79	0.60	Morningstar
Pulte Homes	PHM	E	32.84	0.50	Morningstar
McDonald’s	MCD	E	$42.11	2.40%	Citigroup
Harrah’s	HET	E	75.37	2.10	Citigroup
Avon Products	AVP	E	29.36	2.40	Citigroup
Conagra	CAG	E	25.12	2.90	Citigroup
Fifth Third Bancorp	FITB	E	39.06	4.10	Citigroup
Occidental Petroleum	OXY	E	46.67	1.90	Citigroup
Wyeth	WYE	E	51.66	2.00	Citigroup
Johnson & Johnson	JNJ	E	64.58	2.30	Citigroup
Honeywell International	HON	E	42.61	2.10	Citigroup
Exelon	EXC	E	60.64	2.60	Citigroup

Merrill Lynch/Stocks vs. Bonds

Who knows better, the stock or bond market? This is the big question on Merrill Lynch’s mind these days since the two markets are seemingly serving up mixed signals.

On one hand, the inversion of the yield curve is widely known to be a forecast of slower growth, the investment bank points out. However, the stock market's recent rally seems to be suggesting accelerating growth. Which market has the correct forecast?

“We think the apparent contradiction is merely a matter of time horizon,” Merrill states.

It explains that the equity market is reacting to what it calls “the liquidity-potent combination” of falling energy prices and the potential for the Fed to ease. “Certainly, the collapse in gasoline prices will help boost the consumer,” it adds. Noting the expectation that the holiday shopping season to be “better than investors currently think,” Merrill asserts that equity portfolio managers cannot afford to miss this rally.

Merrill says that shorter-term interest rates more likely reflect expectations of the next 10 weeks, which could explain the inversion of the yield curve. “The long end of the curve seems more concerned about nominal growth in 2007–2008,” it adds.

“We don't give too much credit to the idea that the current inverted yield curve's forecasting prowess has been diminished because of technical issues because EVERY cycle's inversion is fueled by technical issues,” Merrill elaborates. So, it believes both markets are correct.

“The consumer might well be stronger than people think for the next 10 weeks,” Merrill explains. “However, one should probably consider the rally in consumer stocks to be finite. The bond market seems to be telling us 2007 seems murkier.”

Leverage World/Credits

The newsletter asserts that bonds of companies rated Single-B at the senior level (including subordinated issues rated CCC+ or CCC) offer better value than bonds of companies rated Double-B at the senior level (including subordinated issues rated B+ or B).

However, it warns that it does not recommend actively swapping out of the higher and into the lower tier, since the valuation gap between these two main segments of the high yield universe is 10.55 percentage points, and thus lies below the 15-percentage-point threshold it believes may render such action profitable.

On the other hand, the newsletter asserts that bonds of companies rated Triple-B at the senior level currently offer the least value of all, with a percentage-wider-than-estimated ratio of 23.68%.

Its current favorite trade: James River Coal’s 9-3/8s of 2012. The newsletter says they are “potentially attractive” after declining by 1.66% despite a 24.04% rise in the related stock.

Merrill Lynch/AAA Bonds

Investors have not been shy about scooping up low-rated debt during the current economic cycle. Merrill Lynch points out that AAA corporates now comprise an historically low proportion of global debt outstanding.

This could spell trouble if the economy slows down since higher quality assets tend to outperform when the cycle slows, the bank notes. “If our US and global profits indicators are correct, and global profits cycles are poised to slow, then investors are likely to shift back toward higher quality stocks and bonds,” Merrill adds.

Bear Stearns/ Fixed-Income

Analyst Meridith E. Alin recently initiated coverage of Ziff Davis Media with an outperform recommendation on the floating-rate notes and a marketperform recommendation on the senior subordinated compounding notes. “We currently characterize Ziff as an asset play, not an operational story,” she explains.

She points out that the company has publishing assets, which are relatively easy to value due to the wealth of valuation benchmarks available; and non-publishing assets, which are subject to inconsistent or limited relevant valuation benchmarks.

“Our recommendation on the floating-rate paper is based in large part on our asset recovery analysis, as we calculate that the bonds are nearly if not fully covered under several scenarios,” points out Alin.

She recommends the floating-rate paper up to the mid-90s in price.

Merrill Lynch/REITs

The investment bank recently lowered its rating on four stocks and upgraded its rating on only 2 stocks over the past month due to the strong performance in the sector in the third quarter.

“We recommend that investors use pullbacks in the sector to increase positions and lighten their positions as the stocks continue to rise,” Merrill adds.

Merrill likes upscale mall owners such as Simon Property Group (SPG), with a price objective of $97, and Taubman Centers (TCO), with a price objective of $47. Both are buy-rated, and “offer investors reasonable valuations with stable growth prospects.”

Of Simon, Merrill states: “We believe the company’s strong portfolio of regional malls and premium outlet centers and its stable balance sheet warrant a premium relative to historical pricing levels.”

Of Taubman, it states: “We believe the company’s strong portfolio of regional malls and premium outlet centers and its stable balance sheet warrant a premium relative to historical pricing levels.”

It also noted that while neutral on all of the community center REITs that it covers, it believes there is still value to be gained from trades based on relative valuation. This said, it said it currently sees a better value in the community center sector when it compares Cedar Shopping Centers (CDR) and Equity One (EQY).

It notes that in the past month, Cedar significantly outperformed with a 5.1% gain. Merrill points out that the stock is nearly its 52-week high of $16.31 and is trading at its highest level with respect to NAV at 114%.

On the other hand, Equity One has experienced weakness in the past month and the stock’s negative return of 4.7% made it the lowest performer in the community center sector.

Here are the most recent yields for the various REIT groups in Merrill’s universe:

Apartment, 3.5%

Strip Center, 3.8%

Regional Mall, 3.5%

Office, 3.7%

Industrial, 3.0%

Self-Storage, 2.8%

Diversified, 3.3%

Morningstar/Value Stocks

The mutual fund and stock research firm has put together what it calls The Ultimate Value Investor's Portfolio (see table above).

It is a model portfolio of the top names recommended by Morningstar's analysts, and also owned by a number of what it deems to be the best value-oriented mutual funds. The stocks selected by analyst Justin Fuller were based on the number of the funds holding them, a 5-star Morningstar Rating for stocks, and the price/fair value estimates, using Morningstar's recent estimates of intrinsic value.

Citigroup/High Yield Stocks

Citigroup’s most recent recommended list highlights 25 individual stocks. Of those, 10 are highlighted for having current yields of 1.9 percent or higher. (See table above).

The investment bank, for example, calls Avon a “dividend, restructuring story,” and asserts that Exelon has an “attractive dividend and valuation.”