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Monday, February 12, 2007

Conservative Portable Alpha

As of Friday’s close, the S&P Mid Cap and S&P Small Cap markets continue to be the most attractive areas to focus on at this time. This is confirmed in both our Major Market and Style Box analysis. We’re still not seeing many “buy” recommended investments, which is evident in the “AAS Status” columns listed in the Beta Portfolio below.

For conservative investors utilizing portable alpha, we reiterate our words of caution and support our stance with the Long Term Market Model, bearish since 12/8/06. The model is currently recommending a 25% cash allocation. An underweighted allocation in equities is appropriate at this time and converting from MDY to the leveraged UMPIX releases capital for a portable alpha allocation. Alpha exposure can be addressed by combining holdings of mature utility companies with intermediate- to short-term U.S. Government and Municipal Bonds.

We recognize that there are investors out there classifying themselves as moderate in nature while not being extremely bullish. Too add more alpha to the portfolio, we’re reducing the fixed income allocation by 5% and adding that to the portable alpha allocation. From there, investors seeking ideas to add alpha might consider selections from the Retail (RTH), Telecom (VOX), Real Estate (ICF) and Utilities (IDU) sectors. Retail and Telecom had a rough week, and it’s difficult to gauge the impact of the EOP deal on the REIT market, so don’t get too aggressive yet.

Alpha within specific funds might be accomplished by adding holdings of ProFunds Telecom (TCPIX), Real Estate (REPIX) or Internet (INPIX) funds. Similarly Rydex selections include Basic Material (RYBIX), Telecommunications (RYMIX), or Real Estate (RYHRX). Fidelity offers opportunities in Real Estate (FRESX), Telecommunication (FSTCX), or Utilities (FSUTX).

On the more aggressive note, potential alpha generation within specific equities from the Mid Cap Value group include BWA, LYO, PCH, MEG, CBRL, JBHT, NXL. Alpha generating securities from the All Cap Value group include NAV, CMI, BDC, JWN, JAS and that of the Small Cap Value group include CGX, SPF, RYL, AGL, SMP.

Short-Term Technical Indicators

Investor Sentiment

Long-Term Market Model – Bearish since December 8th.

Asset Allocation – AAS Model Portfolios are between 56.25% and 75% long currently.

Beta Exposure and Portable Alpha Generation
Date = Date of AAS “Buy” or “Short/Sell” Recommendation

Top Rated Major Market Derivative – No buy recommended major market investments

Top Rated Style-Box Derivative – No buy recommended style-box investments

Top Rated Sector Derivative – Retail HOLDRs (RTH 1/29/07)

Today’s Top “Buy” Recommended Stocks

NBTY, Inc. (NTY 12/5/06)

Martin Marietta Materials, Inc. (MLM 11/6/06)

CPI Corp. (CPY 1/23/07)

Navistar International Corp. (NAV 9/12/06)

Simon Property Group Inc. (SPG 2/1/07)

Investors Financial Services Corp. (IFIN 1/12/07)

Public Storage Inc. (PSA 12/13/06)

MEMC Electronic Materials, Inc (WFR 1/8/07)

Energizer Holdings Inc. (ENR 1/26/07)

USANA Health Sciences Inc. (USNA 12/20/06)

Today’s Top “Sell” Recommended Stocks

New Century Financial Corp. (NEW 6/13/06)

Google Inc. (GOOG 12/18/06)

Advanced Micro Devices Inc. (AMD 9/27/06)

Plexus Corp. (PLXS 12/29/06)

The Corporate Executive Board Co. (EXBD 12/1/06)

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