Income Security Recommendations

BondsOnline Advisor – September 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 – andBondsOnline 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

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.

Equity Strategies

The U.S. economic slowdown, credit crisis, rising inflation, record-high oil prices, declining housing markets. Investors have plenty of reasons to worry about when they consider whether to plunk money down on U.S. stocks. However, Fidelity recently tried to reassure its clients that it's important not to underestimate the seriousness of these events, they should also remember that the U.S. stock markets is no stranger to turmoil.

It reminded investors that the markets have endured many unsettling events during the past 45 years, including several wars, assassinations, the oil embargo, Black Monday, Watergate and President Nixon’s subsequent resignation, to name just a few of the seemingly earth-shattering events.

Citi recently pointed out that small cap valuations remain stubbornly near long-term averages on most metrics and elevated versus large caps. “Indeed, the only source of deep valuation seems to be the largest “mega cap” stocks in the U.S. equity market, which have been compelling on a valuation basis for some time,” the bank recently told clients.

The Royce Funds, a money management firm that specializes in smaller company portfolios, is currently finding more value outside the United States. It asserts that the degree of inefficiency it is seeing these days in many international smaller companies is reminiscent of the small-cap market in the United States 15 to 20 years ago. “It is possible that we may be in the early phases of a long-term outperformance cycle for smaller companies on a global scale, as international smaller companies follow their U.S. peers and potentially evolve into a professional asset class,” it recently told clients in its semi-annual letter.

UBS  recently pointed out that investors should not fear higher taxes on dividends if Barack Obama is elected president given recent comments made by the Illinois senator. It noted that the Obama camp is signaling that it acknowledges that low investment taxes are pro growth and pro Federal revenue and that dividends and capital gains are economically the same. “We’re impressed,” UBS recently noted. “This is a good sign.”

JPMorgan Chase pointed out that three gloom measures troughed around mid-July, which is encouraging: 1) consumer confidence bottomed in June when The Conference Board Consumer Confidence Index touched 51; 2) the AAII (American Association of Individual Investors) 12-week Percent Bulls less Percent Bears--troughed at -8% on July 24. Past troughs saw a 25% gain in the S&P 500 over the ensuing 12 months; 3) short interest in the S&P 500 peaked on July 15 at 10.951 billion shares, and is down 200 million shares since. “If a short covering cycle is underway, it has a long way to go,” the investment bank told clients.

Master Limited Partnerships

Lehman lowered its price target on five master limited partnerships but retained its “overweight” recommendation on four of them and retained its “equal weight” rating on another. Lehman also reiterated its “overweight” rating as well as price target on another MLP.  For a list of securities, target prices, and more, get the current issue of Yield and Income Newsletter through PreferredsOnline.

Citi, JPMorgan Chase, UBS, and Credit Suisse also made adjustments to stocks in this group.

REITs

UBS has initiated coverage of the self storage industry with a market-weight recommendation. “We like the fact that some demand for self storage occurs on a needs basis, which gives the sector some defensive characteristics,” the bank told investors in a new report.

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

Utilities

JPMorgan Chase identifies one utility with significant upside.

Closed-End Funds

Stifel Nicolaus recommends five of the six equity funds it covers in large part because they are currently trading at huge discounts to net asset value (NAV). The investment bank noted that during the second quarter, five of the six equity funds it covers registered negative returns. “Financial stocks’ impact was widespread as many dividend oriented portfolios have investments in the sector,” it explained.

But, be careful. Stifel warned that all of the equity funds it covers, with the exception of the BlackRock Dividend Achievers Trust, use leverage in their portfolios. This makes them more volatile on average than the indices they are benchmarked to, it explained.

Preferred Securities

UBS recently moved to a neutral stance on preferreds, noting that it expects a deteriorating credit trend for financial companies to continue into 2009. “Preferred credit risk premiums continue to be closely correlated with equity movement in the Financial sector,” it stressed. “We look for preferred share prices overall to continue to experience wide swings.”

Fixed Income

Citi recently noted that individual investors are warming up to tax-exempt single family mortgage revenue bonds. In the past, retail investors have ignored the product because interest was previously subject to the alternative minimum tax (AMT). However, Citi noted that the recently enacted federal housing legislation eliminates AMT treatment for all new issues beginning on the date of enactment.

“Given the high yields provided in this sector, we would consider this sector for the longest-maturity component of a laddered or balanced portfolio”  Yields on longer maturities of this type can exceed 6%.

Wachovia recently told clients to overweight agency mortgage-backed securities. “We believe that since the Fed is on hold, interest rates should remain low and thus will give the housing market more time to recover,” it explained.

It said that Government National Mortgage Association (Ginnie Mae) MBS look attractive for investors who are a little more conservative and want to avoid headline risk. “Ginnie Mae is not experiencing the capital concerns experienced by Fannie Mae and Freddie Mac because Ginnie Mae does not retain mortgages on its own balance sheet,” Wachovia explained.

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

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