Income Security Recommendations

BondsOnline Advisor - November 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.

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

Equity Strategies

JPMorgan Chase recently told its clients it believes a synchronized global economy is under way, resulting in asset reflation. “Thus, we remain constructive on equities through year-end,” it added.

It expects the S&P 500 to close “comfortably” above 1100 despite the recent volatility in the markets.

The bank also said it stills favors cyclicals over defensives, small caps over large, higher-debt equities. “We also favor Energy,” it told clients.

If the bank is right, how should investors play this shift? It identified the 15 groups that have shown the most outperformance in the six months following a turn in payrolls.

Wells Fargo Securities recently increased its exposure in its Focus List to the Industrials sector, which is currently over-weighted, as well as to the even-weighted Consumer Discretionary sector. “As U.S. and global economies improve over the next 12-24 months, exposure to more cyclically sensitive sectors should benefit overall portfolio performance,” the bank recently told clients in a note.

The Focus Portfolio is a recommended list made up of 25 positions with an intermediate (nine to 12 month) time frame under the umbrella of its Equity Strategy guidance. Wells says the list is most appropriate for aggressive, active investors willing to commit to a long-term diversified portfolio strategy.

“We recommend that those clients following the Focus Portfolio strategy complete these transactions as soon as possible,” Wells urged.

Grantham Mayo van Otterloo: When the stock market plunged on the last trading day of October, one firm that probably wasn’t shocked was Grantham Mayo van Otterloo. Afterall, a week or two earlier the money manager warned that the overall equity markets were in for a huge correction.

Grantham Mayo figures fair value on the S&P is now about 860. This would put the market 25% overvalued. “On a seven-year horizon [it] would move our normal forecast of 5.7% real down by more than 3% a year,” it added.

This investment firm is worth listening to. It is widely credited with picking the market bottom in March and predicting a huge rally. “After a very large decline and a period of somewhat blind panic, it is simply the nature of the beast,” it explains, looking back.

Credit Suisse Securities recently raised integrated oil companies to 10% underweight from 20% as part of an overall effort to beef up its recommended exposure to commodities. “The sector has been our biggest underweight since March,” the bank said of the IOC’s.

It explained it has become more positive given that the sector's relative performance since March “has materially decoupled” from the oil price and the stocks are now discounting a $67 per barrel oil price.

Energy Master Limited Partnerships

Credit Suisse recently initiated coverage of energy master limited partnerships (MLPs) with an Overweight position, and an Outperform rating for five companies. Its initial coverage universe focuses on investment-grade pipeline MLPs. “These MLPs own and operate essential North American infrastructure that generate stable and predictable cash flows which support the current distribution,” the bank added in a recent report to clients.

UBS recently raised its target price on three MLPs, including Boardwalk Pipeline Partners.

Citigroup Global Markets recently raised its target multiples and prices on a number of master limited partnerships that specialize in exploration and production. It cited a reduced aversion to risk allowing capital to flow back into the markets, sustained strength in crude oil and natural gas prices, a renewed ability to make acquisitions and tap the capital markets for financing, and ample credit availability to pursue deals and increase distributions over time. Citi singled out four of the MLPs with its highest rating.

REITs

Deutsche Bank recently hiked its price targets on two REITs.

Collins Stewart: The independent investment banker recently pointed out in a weekly report that urban hotels recently posted their best RevPAR (revenue per available room) performance for the week, down only 10.5%. New Orleans (+7.9%), Philadelphia (+2.9%), Boston (0.0%), and San Francisco (-1.3%) were especially strong.

Collins Stewart also noted that upper upscale (-12.4%) performed the best, followed by midscale while luxury (-19.1%) was the worst performing chain. “Our take-away is that it appears business travel is picking up, but the more affluent travelers are clearly bypassing the luxury hotels and trading down one notch to the 4-star providers,” the bank recently told clients. Limited-service hotels are also faring reasonably well, it noted.

Utilities

Barclays recently reiterated its Overweight rating on at least two utilities.

Closed End Funds

Citigroup Global Research recently maintained its Outperform rating on two bond closed-end mutual funds.

Stifel Nicolaus: This has been a great year for closed-end funds. The average fund, across all sectors and asset classes, has risen 38% year-to-date, according to Stifel Nicolaus. Average discounts have contracted from 11.35% at the beginning of 2009 to 4.66% at the end of October. The 10-year average discount of all closed-end funds is 4.52%.

The investment bank, however warns investors not to become complacent. “While the broad and powerful recovery of the closed-end fund market has been a welcome relief, we do not anticipate such uniformly strong performance going forward,” it stressed in its most recent quarterly report.

Preferred Stocks

UBS Wealth Management points out that non-US preferreds represent 19% of the $250 billion preferred market. However, it warns that many of the non-US financials come with more than the usual risks. (On November 3, after this newsletter had gone to press, RBS announced new government intervention, and a suspension of dividends. See the full report in PreferredsOnline – Research).

Like the U.S. companies, European financials have suffered through the sharpest economic downturn in decades and European banks and insurance companies have been severely bruised by the global recession, UBS notes. As a result, security writedowns that began in the second half of 2007 have mounted and credit losses continue to occur.