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Kass: The Model Portfolio


This blog post originally appeared on RealMoney Silver on April 20 at 10:08 a.m. EDT.

Beginning today, I plan to publish (probably on a regular monthly basis) the general construction of a model portfolio (long-only) with a six-month investment horizon.

Should there be a major change in market conditions or in market outlook, I will provide a timely update to the portfolio.

My hypothetical portfolio will embrace where I believe a long-term investment portfolio should be positioned relative to S&P 500 industry benchmarks and weightings.

Given the scope and duration of the recent market advance, I believe that the U.S. equity market is vulnerable to a short-term decline of 5% to 6%.

Advance/Decline Line 30-Day Moving Average
Capital Observer

Percentage of S&P Stocks Above 50-Day Moving Average
David Rolfe, Wedgewood Partners

Above-average cash positions should now be held in light of a possible market correction and in order to have excess reserves to capitalize on opportunities available in a volatile trading environment.

Given that credit has underperformed equity and that credit currently provides outsized yields vs. Treasuries, most portfolios should substantially overweight credit holdings, which are senior claims relative to equity.

S&P Weighting Recommended Weighting Rationale for Weighting
Technology 17% 10% Business spending will remain subdued
Energy 16% 14% Cheap relative to commodity price
Financials 14% 8% Elevated share prices, deleveraging and dilution risks
Health Care 12% 7% Government intervention threatens pricing
Industrials 11% 6% Shallow economic recovery a headwind
Consumer Staples 11% 5% Exposed to generic trade-down
Consumer Discretionary 8% 6% Cheap relative to expectations
Materials 4% 3% Shallow economic recovery a headwind
Utilities 4% 2% Limited value against rising interest rates
Telecom 3% 4% Secular prospects remain solid
Total equities 100% 65%
Credit 0% 20% Opportunistic
Total exposure 100% 85%
Cash 0% 15%

Finally, I have included a shopping list of over 50 individual stock candidates (by sector) that could be considered in the aforementioned model portfolio.

  • Technology: Apple (AAPL); Microsoft (MSFT); Dell (DELL); Cisco (CSCO); Qualcomm (QCOM); Research In Motion (RIMM); Oracle (ORCL)
  • Energy: Transocean (RIG); Schlumberger (SLB); BP (BP); ConocoPhillips (COP); Chevron (CVX); select MLPs
  • Financials: Bank of America (BAC); Berkshire Hathaway (BRK.A); Cohen & Steers (CNS); AllianceBernstein (AB); REITs, including Vornado (VNO), Boston Properties (BXP), Weingarten (WRI) and SL Green (SLG); Chubb (CB); Loews (L); National Financial Partners (NFP); Hatteras (HTS); Annaly (NLY); SLM (SLM); Visa (V)
  • Health Care: Abbott Labs (ABT); Gilead (GILD); Celgene (CELG)
  • Industrials: Emerson Electric (EMR); Ingersoll-Rand (IR); 3M (MMM); PPG (PPG); Union Pacific (UNP)
  • Consumer Staples: Procter & Gamble (PG); General Mills (GIS); Unilever (UN)
  • Consumer Discretionary: Home Depot (HD); Lowe's (LOW); Disney (DIS); Nike (NKE); Yum! Brands (YUM); Wal-Mart (WMT); eBay (EBAY); Starbucks (SBUX)
  • Materials: Freeport-McMoRan Copper & Gold (FCX); BHP Billiton (BHP)
  • Utilities: Duke Energy (DUK); Dominion Resources (D); PG&E (PCG)
  • Telecom: Verizon (VZ); AT&T (T)
  • Credit: putable converts (REITs); bank loans; high-yield debt

Doug Kass writes daily for RealMoney Silver , a premium bundle service from For a free trial to RealMoney Silver and exclusive access to Mr. Kass's daily trading diary, please click here.

At the time of publication, Kass and/or his funds were long MSFT, DELL, RIG, BAC, BRK.A, CNS, VNO converts, WRI converts, SLG converts, CB, L, NFP converts, HD, LOW, DIS, SBUX and FCX, although holdings can change at any time.

Doug Kass is founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Long/Short LP.

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