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Since our last longer-term, inactive account commentary in July, the
market has really taken off. That is good because our long-term account
has been 100% in the stock funds since mid-June.
Back then we [in our longer-term outlook commentary] were saying…
“Now that we have a bullish signal from our long term indicators, we
expect to be fully invested for several months - possibly through the
end of the year.”
And…
“If you are not active in your TSP account we believe now is the time
to be fully invested. If you are not fully invested you may want to use
any summer / fall weakness in stocks to move to a more aggressive
allocation.”
That thinking gave our TSP Talk longer term account a return of +19.06%
in 2006, compared to the other TSP funds:
G Fund = +4.93%
F Fund = -4.40%
C Fund = +15.79%
S Fund = +15.30%
I Fund = +26.32%
Diversified (20% in each fund) = +13.35%
As you may know, our short-term trading account did not fair as well
because it is looking at short-term indicators which are much more
sensitive to the market’s wiggles. As a result we spent a lot of time
in conservative mode, which turned out to be overly defensive causing us
to lose out on some gains. As we mentioned above, we said to use any
summer/fall weakness in stocks to get more aggressive, but there was
little weakness to be found. Investing paid off in 2006. Trading did
not.
In our long-term account we look at the overall market picture but this
approach also comes with its risks. If the market does take a big hit,
our accounts would be at risk as well, assuming the overall picture is
still positive. We remain at the mercy of the market rather than just
stepping aside as we would in our short-term account. That is the give
and take; big gains come from taking on bigger risk, which in turn makes
your account more vulnerable. It happened to pay off for us in 2006.
2007 starts off with our three legs of the market, psychology,
valuation, and monetary conditions, in fair shape. Not great, but
fair. Valuation has been the real backbone of the market the past
couple of years. With interest rates so low, it made stocks a much
better value over bonds and cash. According to
Standard & Poor’s, the S&P 500 earnings estimates for 2007 is
$96.18. With the S&P 500 starting 2007 at 1418, that gives us an
earnings yield of about 6.8%. With the 10-year Treasury Note currently
yielding 4.71%, that makes stocks 30.7% undervalued and makes for
a very positive investment environment.
Monetary conditions had been lagging the other two legs but with
interest rates coming down and liquidity levels up, money is available
to be loaned out cheaply. The Fed basically controls this and while
this indicator has lagged, it is gaining in strength.
The psychology leg is a bit more fickle. It tends to move around a
little more than the other two. Currently it is in a slightly negative
area but that can be expected after what the market did the last half of
2006. People tend to get more and more bullish when the market climbs.
It is just amazing to me that this indicator is even near neutral given
that strength. I believe this is also why the market has failed to
pullback. There is still a lot of skepticism out there. You know that
I have been waiting for a pullback so it is likely a lot of others are
in the same boat. That is the type of sentiment that keeps markets from
dropping.
Historically, the 3rd year of a presidential term is very
strong. Whether that is because economic conditions are better in those
years than others, or because of some manipulation by the party in
charge, it is something to consider and another reason to believe 2007
could do very well.
So, we have a very positive long-term market environment shaping up for
2007 although the market has already made a very strong run up. I still
believe we could see a little selling early this year so raising a small
amount of cash here could be a good idea. I have not done that yet but
I may raise 20% to 25% cash (G fund) within the first couple of days or
weeks in January, to wait for a better opportunity to put that money
back into the market. I will let you know when I do that.
Conclusion: We made a lot of money in the long-term account over the
past six months and that means we have some gains to protect. We also
strongly believe 2007 could be as fruitful as 2006, if not better.
Being that this is an inactive account with minimal changes in
allocation we don’t want to get too worried about timing the smaller
movements in the market, but we feel we may be at an optimal time to
take a little something off the table to wait for a better opportunity
to buy back in at a lower price - but no more than 20% or 25%. If you
consider yourself an aggressive investor, we’d recommend keeping at
least 75% of your TSP assets in the stock funds in 2007, until something
tells us otherwise.
Good luck!
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