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 TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass's daily trading diary, please click here.

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