Income Security Recommendations

BondsOnline Advisor – November 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 – and BondsOnline 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

Is it time to jump back into the stock market? Better yet, is it safe to do so? These are the critical questions investors ask themselves every single day.

And each investment bank has its own take on this issue as they try to figure out their next move.

Citi, for example, recently pointed out that the price-to-book value of the S&P 500 has dropped to levels last experienced in the 1990–91 recession. Same is true with price-to-sales. “Thus, investors are clearly looking at valuations against more stable factors than earnings, which were last evident almost 20 years ago with far lower inflation and interest rates,” it added.

Indeed, it pointed out that TIPS yields imply much lower inflation expectations in the market. “With plenty of cash on the sidelines, one could argue that stocks prices are quite inexpensive,” Citi added.

It calculated that Retail Money Market Fund Assets as a percentage of the Wilshire 5000 exceeds 10 %, about where it stood at the beginning of 2001, but way off the peak of January 2003. In addition, there is about $5 trillion more of cash in household bank accounts, more than $1 trillion on corporate balance sheets in the U.S., in excess of $2 trillion in sovereign wealth funds and as much as $2 trillion in private equity funds, not to mention an estimated $500–$700 million of cash in many de-leveraged hedge funds. “This cash could come back into equities when confidence returns, although we would not expect that to occur in sweeping imminent fashion,” Citi said.

Wachovia recently asserted that investors should already be averaging into stocks. It reminded clients that while many of the leading indicators still point toward a softer economy ahead, historically the equity markets tend to lead the economy by as much as a quarter of a cycle. “In other words, when the economy is hitting its lowest point in a cycle, the stock market has often already begun its move upward for the next cycle,” it added.

Master Limited Partnerships

Citi, Deutsche Bank, UBS and Barclays have each identified energy master limited partnerships that look attractive based upon current valuations and dividend stability. For a list of these four securities, target prices, and more, get the current issue of Yield and Income Newsletter through PreferredsOnline.

REITs

Citi is slowing beginning to tip-toe back into Real Estate Investment Trusts (REITs). It upgraded five stocks to Buy from Hold.

It did reduce target prices across its coverage universe following the significant slide in REIT equity valuations and higher risks and cost of capital associated with real estate. Citi also lowered its NAV estimates across its universe, citing a higher cost of capital, weaker outlook for fundamentals and dramatic re-pricing of real estate equities.

JPMorgan recently reiterated its Overweight rating on at least three REITs and upgraded another one to Overweight. Many of these heavily beaten down shares are throwing off dividend yields in the mid-teens, believe it or not.

Utilities

Wachovia is bearish on utilities. It believes that as bond yields rise and investors look beyond the current economic slowdown, this more defensive yield-oriented sector would underperform the general market.

Closed-end Funds

Stifel Nicolaus recently pointed out that equity closed-end funds are currently trading at massive discounts to their net asset value (NAV). However it likes five funds in the dividend and income class.

Fixed Income

Merrill suggests that Treasuries should continue to outperform commodities. There are wider ramifications if Merrill is right. If bonds continue to outperform commodities, then defensive equity sectors such as Consumer Staples, Health Care, “old-fashioned” Utilities, and high quality secure dividend payers should remain the market leadership, Merrill added.

Citi notes that the muni market came under severe pressure in the first half of October for a number of reasons, including a poorly functioning short-term market, severe pressure on hedged/leveraged positions and resultant unwinding of many remaining positions, net outflows from bond funds, and heightened day-to-day volatility and illiquidity.

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