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 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.
Long Model Candidates
- Technology: Previous selections (Apple (AAPL), Cisco (CSCO), Research In Motion (RIMM) and Oracle (ORCL)) are now fully priced and have been dropped from my buy list. Remaining are Microsoft (MSFT), Dell (DELL) and Qualcomm (QCOM).
- Financials: I'm dropping mortgage REITs and Visa (V). Remaining are Bank of America (BAC), SunTrust (STI), Regions Financial (RF) (convertibles), Legg Mason (LM), Prudential (PRU), MetLife (MET), Hartford (HIG), PNC (PNC), State Street (STT), Berkshire Hathaway (BRK.A), Cohen & Steers (CNS), Weingarten (WRI) (convertibles), SL Green (SLG) (convertibles), Chubb (CB), Loews (L), National Financial Partners (NFP) (convertibles) and Sallie Mae (SLM).
- Energy: Dropping extended integrated oils and several oil service companies. Remaining are Transocean (RIG), select master limited partnerships (MLPs).
- Health Care: Select depressed HMOs -- a true contrarian play!
- Consumer Staples: Procter & Gamble (PG), General Mills (GIS), Unilever (UN).
- Industrials: 3M (MMM); PPG (PPG), Union Pacific (UNP).
- Consumer Discretionary: Home Depot (HD), Lowe's (LOW), Disney (DIS), Nike (NKE), 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: Select bank loans/debt, high-yield debt.