UBS Preferred Stock Strategist
First Quarter Outlook
The Following is a summary of a UBS report, Preferred Stock Strategist, dated Jnauary 9, 2006
* Mediocre results:
A flattening yield curve, wider credit spreads, heavy new issuance,
and an implosion in the auto sector produced mediocre results for the
overall preferred market during 2005.
* Retain modest underweight position:
Despite an expected benign interest rate outlook through year end,
Treasury yields can hardly be viewed as cheap at current levels and
may well rise from here over the next few months. Moreover, prospects
for credit deterioration, expected heavy net issuance, and a
persistently flat yield curve may continue to pressure preferred
prices lower.
* Less positive outlook for floaters and tax advantaged issues:
We take a more cautious outlook in both the floating rate and
tax-advantaged markets, as the Fed engineers the end of the current
tightening cycle and political uncertainty surrounds the extension of
the 15% dividend tax rate.
* Ratings Changes:
We downgraded floating rate issues LEH G and MER G to Neutral from Buy
as income distributions may be nearing a peak as the current
tightening cycle draws to a close. We downgraded LEH F to Neutral from
Buy due to uncertainty surrounding the extension of the 15% dividend
tax rates. We initiated coverage on BAC Z, PSA F, and USB F with
Reduce ratings and HBC A with a Neutral rating.
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