This blog post originally appeared on
on June 15 at 7:10 a.m. EDT.
In late April, I established the Kass Model Portfolio, intended to reflect the general construction of a model long-only portfolio with a six- to twelve-month investment horizon. My hypothetical portfolio depicts positioning relative to S&P 500 industry benchmarks and weightings.
As promised, today's opening missive updates a major change in the portfolio -- a near-doubling in the cash component of the portfolio from 15% to 29%. I am also reducing credit -- which has had a very strong rally in price -- from a 20% weighting down to a still-high 15%.
I view the investment mosaic as a scalene triangle (though in its complexity it is more like a quadrilateral pyramid!), with the angles of that triangle representing fundamentals (substantially the highest weighting), valuation (second-most-important weighting) and sentiment (the least important weighting).
Four factors suggest that the U.S. equity market is now vulnerable to a decline of 5% to 10%.
- The scope and duration of the recent market advance seem to have discounted a
second-half production boom.
- An uneven and shallow economic recovery that could double-dip in early 2010, coincident with higher interest rates and a hike in individual tax rates, is becoming more likely.
- We're seeing some early signs of emerging technical deterioration.
- Bullish sentiment is rising.