This blog post originally appeared on RealMoney Silver 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
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.
In conclusion, 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.
Finally, I have included a shopping list of individual stock candidates (by sector) that could be considered in the aforementioned Kass Model Portfolio.
Long Model Candidates
- Technology: Previous selections (Apple (AAPL) - Get Report, Cisco (CSCO) - Get Report, Research In Motion( RIMM) and Oracle (ORCL) - Get Report) are now fully priced and have been dropped from my buy list. Remaining are Microsoft (MSFT) - Get Report, Dell (DELL) - Get Report and Qualcomm (QCOM) - Get Report.
- Financials: I'm dropping mortgage REITs and Visa (V) - Get Report. Remaining are Bank of America (BAC) - Get Report, SunTrust (STI) - Get Report, Regions Financial (RF) - Get Report (convertibles), Legg Mason (LM) - Get Report, Prudential (PRU) - Get Report, MetLife (MET) - Get Report, Hartford (HIG) - Get Report, PNC (PNC) - Get Report, State Street (STT) - Get Report, Berkshire Hathaway (BRK.A) - Get Report, Cohen & Steers (CNS) - Get Report, Weingarten (WRI) - Get Report (convertibles), SL Green (SLG) - Get Report (convertibles), Chubb (CB) - Get Report, Loews (L) - Get Report, National Financial Partners (NFP) (convertibles) and Sallie Mae (SLM) - Get Report.
- Energy: Dropping extended integrated oils and several oil service companies. Remaining are Transocean (RIG) - Get Report, select master limited partnerships (MLPs).
- Health Care: Select depressed HMOs -- a true contrarian play!
- Consumer Staples: Procter & Gamble (PG) - Get Report, General Mills (GIS) - Get Report, Unilever (UN) - Get Report.
- Industrials: 3M (MMM) - Get Report; PPG (PPG) - Get Report, Union Pacific (UNP) - Get Report.
- Consumer Discretionary: Home Depot (HD) - Get Report, Lowe's (LOW) - Get Report, Disney (DIS) - Get Report, Nike (NKE) - Get Report, Wal-Mart (WMT) - Get Report, eBay (EBAY) - Get Report, Starbucks (SBUX) - Get Report.
- Materials: Freeport-McMoRan Copper & Gold (FCX) - Get Report, BHP Billiton (BHP) - Get Report.
- Utilities: Duke Energy (DUK) - Get Report, Dominion Resources (D) - Get Report, PG&E (PCG) - Get Report.
- Telecom: Verizon (VZ) - Get Report, AT&T (T) - Get Report.
- Credit: Select bank loans/debt, high-yield debt.
At the time of publication, Kass and/or his funds were long MSFT, DELL, RIG, BAC, STI, BRK.A, CNS, SLM,LM, WRI converts, SLG converts, Regions Financial (converts), CB, L, NFP converts, MET, PRU, 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.