Income Security Recommendations

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.

Strategy/Banc of America Securities LLC

The investment bank recently raised its estimate for the S&P 500’s “earnings from continuing operations” by $1 in 2007, to $92, and by $2 in 2008, to $100. It also lifted its 12-month target price to 1550 from 1465. “Earnings should continue to benefit from commodity prices that are higher than anticipated, as well as some signs that some companies near the end of the production pipeline are beginning to achieve some price increases of their own,” it asserted in a recent note to clients. A big reason for this change: the dollar’s recent weakness, which should boost earnings, it explains.

Strategy/Citigroup

The banking giant asserts that its model slightly favors small-caps over large-caps through June. It explained that three of its five model factors favor small-caps this quarter and only two favor large-caps. This is the third straight quarter that the bank expects the Russell 2000 to outperform the S&P 500.

How accurate are these models? The average quarterly return of the portfolio during the 57-quarter period was 3.76%, while those of the S&P 500 and Russell 2000 indices were 2.86% and 3.08%, respectively, Citi points out. It also stressed that the model has forecasted correctly in 37 of the last 57 quarters, or nearly 65 percent of the time.

Meanwhile, a separate Citigroup report, published on May 4, reiterated the bank’s forecast for 1600 on the S&P 500 by year-end.

Fixed Income Strategy/UBS

UBS slightly increased its forecast for the 10-year Treasury note after the rise of yields at the long end of the curve from March to mid-April. “As our Fed call remains unchanged, our money market rate forecasts are unchanged,” a recent report notes. “At the long end of the curve, we have adapted our forecasts to market movements. We continue to expect the yield curve to steepen.”

In its report, UBS points out that in April, the combination of weaker economic data and less inflation pressures helped yields on 10-year Treasury notes to decline from 4.78% to 4.6%. Yields of 2-year Treasury notes declined by roughly 20 basis points due to better-than-expected inflation numbers, it explains. “This eased pressure on the Fed to hike interest rates once more and confirmed our view that the Fed will start to ease in 2007,” the investment bank adds.

As a result, it points out that the interest rate curve returned to its positive shape in the 2- to 10-year segment at the end of April, with about a 3-basis-point difference between 2- and 10-year yields.

And it expects this recent trend to continue, resulting in a gradual steepening of the yield curve throughout 2007. “Because short-term bond yields are more highly correlated to changes in the fed funds rate, we expect short-term bond yields to experience a more pronounced drop than intermediate- and long-term yields (10- to 30-years),” UBS adds in a recent report.

In general, it recommends a defensive stance on corporate credit risk in fixed income portfolios, noting that valuations appear excessively high.

Here is a rundown of its current recommendations in the various fixed-income categories:

Treasuries: It recommends what it calls a moderate overweight to offset its cautious stance in credit-sensitive segments.

TIPS/Treasury Inflation-Protected Securities: It asserts that as its inflation concerns likely abate over the coming months while US private consumption loses steam, TIPS should perform less than nominal Treasuries. “We have reduced TIPS to neutral,” UBS adds.

Agencies: UBS recommends a moderate overweight, noting that in the current low-spread environment, there is no reason for a difference in the performance of agencies and Treasuries.

Investment-Grade Corporate Bonds: UBS says it remains cautious on IG corporate bonds, given the high M&A and buyout activity and its expectation of credit quality deterioration. As a result, it recommends a moderate underweight.

High-Yield Corporate Bonds: UBS also has a moderate underweight recommendation on corporate junk bonds. “Valuations are back at levels that we consider unattractive, as spreads do not appear to compensate investors in the medium term for the risks of holding HY bonds,” the investment bank asserts.

Preferred Securities: Significant new issue volumes and buyout news appear to have placed the secondary market under some pressure, UBS points out. “With recent price movements already reflecting the progressive erosion of credit quality that we expect looking forward, we maintain a neutral stance,” it adds.

Mortgages: UBS is sort of upbeat, insisting that investors in mortgage-backed securities should be able to reap a yield advantage over Treasuries, as long as bond yields remain range-bound and volatility remains contained. “However, our expectation of a continued correction in the housing market, lower short-term rates, and higher uncertainty in fixed income markets argue against overweighting mortgages,” it adds. So, it has a neutral recommendation on the asset class.

REITs/UBS

The investment bank asserts that commercial property conditions remain strong despite the slowing economy. In general, it is looking for a 15% total return in 2007, heavily driven by continued net operating income (NOI) growth, as reflected by quarterly earnings. The bank is currently overweight the Mall, Industrial, and Healthcare sectors.

UBS singles out four key factors that should drive REIT stocks higher: solid same store NOI growth across most sectors; incremental growth from development pipelines and expanding funds businesses; attractive valuations for high-quality names due to the sector’s recent sell-off; and a two- to four-year global capital queue that should maintain current direct market pricing. See Yield and Income Newsletter for the list of recommendations.

The investment bank recently singled out two healthcare-oriented REITs it deems to be poised to outperform. In both cases, UBS asserts that fundamentals remain strong and management remains committed to making accretive acquisitions. See Yield and Income Newsletter for the list of recommendations.

REITs/Banc of America

BofA recently reiterated its buy recommendations on commercial and apartment REITs. “We are usually not fans of owning stocks where growth profiles are moderating, but most apartment REITs are trading at 5-15% discounts to NAV,” the investment bank asserts. As rent growth visibility improves for the second half of 2007 and 2008, the discounts should narrow, the bank adds.

Utilities/Banc of America

BofA recently boosted the stock price targets of a number of what it calls “Ratebase Growth” utilities. One of these companies is currently rated buy, and four are currently rated neutral, but wth higher targets. “These names have substantial long-term ratebase growth that supports a higher multiple, especially in light of continued sub-5% risk-free rate,” the investment bank asserts.

Utilities/Citigroup

The bank recently upgraded two utilities to Buy. “Integrated utilities have led the group’s performance year to date,” Citi points out in a recent report. “In the defensive universe, there remain rate base growth stories with constructive regulatory backdrops that offer good risk-adjusted returns.”

MLPs/Lehman

Lehman recently lifted its target price on two MLPs – midstream natural gas providers. See Yield and Income Newsletter for the list of recommendations.

Closed-End Funds/Stifel Nicolaus

The regional brokerage firm recently initiated coverage of a wide range of closed-end mutual funds, including Leveraged Municipal Bond Funds. It is initiating coverage of five funds in this group with buy ratings.

Stifel Nicolaus says that on a tax equivalent basis, investors can attain yields of 7%-8% through leveraged municipal closed-end funds. “We believe that investors should consider these municipal investments in place of more aggressive asset classes,” it stresses.

The broker asserts that there are three catalysts that would benefit investors of these funds over the near term. One example: a reduction in borrowing costs. Stifel Nicolaus believes that if the FOMC reduces the Fed Funds rate during 2007, it would likely increase the benefits of utilizing leverage in the closed-end structure and improve the earning condition of leveraged municipal funds.

Also, if increased market volatility continues, the brokerage asserts that retail investors will find comfort in less volatile investments like municipal bonds and municipal bond closed-end funds.

Thirdly, if investors grow concerned about a recession, the brokerage expects them to reduce risk by investing in more stable asset classes, such as municipal bond closed-end funds. For specific municipal funds, please subscribe to Yield and Income Newsletter, or PreferredsOnline/All Sectors (which includes a subscription to the newsletter).