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Thursday, August 10, 2006

Portfolio Strategy- Long Defensive Stocks & Short the Housing and Consumer Discretionary

By Yaser Anwar, CSC of Equity Investment Ideas

A downshift in investor risk appetites has been underway since May. Global tightening has sucked out the liquidity in financial markets and the economic fallout has begun to accumulate, at a halting pace.

Historical innsights have shown that risk indicators such as the VIX index and corporate bond spreads tend to move higher on a sustained basis when interest rates are in a restrictive zone.

The implications for one's portfolio strategy are clear: Expect continued defensive sector outperformance, even if the broad market climbs. The measures of breadth indicate a broad-based advance in defensive groups.

The implication is that equity dedicated portfolios should stay biased toward defensive areas, while staying selective among cyclicals, and avoiding those areas most exposed to the downturn of the current economic cycle, namely housing and consumption.

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