UBS Preferred Stock Strategist - Third Quarter 2006
The following is a summary of a report prepared by UBS Financial Services Inc.
* Maintain market weight:
* We maintain a market weight allocation within the preferred market.
With Treasuries near the upper end of WMR’s forecast range, we
continue to be more comfortable easing into higher duration
preferreds. However, with continued monetary policy uncertainty, the
risk remains that preferred prices have yet to reach their bottom for
this cycle.
* Move up in quality:
* We prefer higher quality preferreds in the banking and securities
sectors over lower-rated BBB issues. Shifting to higher quality
preferreds can be done rather inexpensively, and higher rated
securities should fare better if overall credit risk premiums continue
to gradually rise.
* Floating-rate preferreds:
* While floating-rate preferreds have lower duration risk than
fixed-rate issues, their risk/reward profile has become less
symmetric, in our view. Floaters would likely underperform
fixed-coupon securities should both short and long-term rates trend
lower as the tightening cycle ends.
* Rating changes:
* We upgrade 13 preferreds to Neutral from Reduce. We upgrade
tax-advantaged HBC A to Buy from Neutral. We downgrade floating-rate
LEH G and MER G to Reduce from Neutral. We initiate coverage on BAC B
and HRP C with Neutral ratings. We reclassify BK E and VZC to
Uncertain Refi from Refinanceable.
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