Interfund Transfer 1/28 for 1/31/05

[tsptalk]

I'm going to lighten up on stocks as this morning's weakness has me concerned. I don't have time to write much here so I'll just tell you I am going to 60% G, 40% C this morning, which will be effective Monday.

Notice that the weakness is being compounded by strength in the dollar. As a result, the I fund is taking the largest pounding as of now.

[tsptalk]

Looks as if the S&P is trying to test Monday's1163 low. A break of that may give the panic selling we need to get a real turn around.

It burned me to get cautious in front of the U.S. election so we'll see what happens here after the Iraqi election.

[mrktmkr]

thanks for the forum you provide here. i went 100% G yesterday after being 100% C fund. i follow some of the same indicators you do and it is interesting to hear your point of view. i'd like to add the following observation to your thinking. the leading indicator in this market has been the SOX Index (tracks the semis .. which is often an excellent bellweather for the high tech group which has also been the primary leader in therecent past bull periods). if you bring up the SOX ($SOX), you'll notice that there was a significant crossover of the 200 and 400 day MA in which an uptrending failure took place. this month's activity has been nothing but a followthrough of that occurrence. at best, this market will give you oversold rallies as the SOX seeks a low to collect itself. while i am happy that the TSP has moved to once a day allocation changes if desired, it still makes playing these 3 to 5% bounces difficult.

once the SOX finds that point to collect itself, i'll be looking for the larger cap stocks to be the next place money will move into. the OEX and DOW are displaying this tendency with healthier looking long term MAs.

again, i appreciate your forum and would like to hear more about the F Fund. i've seldom traded it, but would like to entertain the idea of using it as the place to go when the equity markets require greater nimbleness than the TSP system currently allows.

[tsptalk]

Welcome mrktmkr!
We look forward to hearing more of your ideas. You may have seen the F fund forum by now. Basically we talk about using it more when the economy is in decline and interest rates are likely to go down. Interest rates have been rising lately so I have used the G fund as the safe haven.

Thanks for joining us!
Tom

[Rolo]

Welcome, mrkt!

Interesting way to look for leading indicators...I like it.

[Wheels]

Many analysts (including Tom and Saraho and others on this board) will tell you to stay away from the F fund completely because we are in an extended period of RISING intersest rates and bond funds perform much better during periods of FALLING interest rates. This was my line of thinking as well. However something I've observed over the last year is that when these fed rate hikes began there was an initial surge in the 10 year bond rate but since then it has traded in a fairly consistent range. Every time the 10 year bond yield gets to about 4.25 or so it falls back down to about 4.12 or so and then back it goes again to 4.25. I'm guessing this is due in part to the fact that the fed rate increases have been slow and steady and most importantly there have been no surprises. This is only causing swings in the F fund price of about 3-6 cents but if I was jumping out of stocks for a few days I would consider the F fund over the G fund IF the 10 year note was yielding the high end of that recent range.

I am a rank amateur compared to many on this board so my question is, Does this make sense to any of you?

Dave

[coolhand]

hey wheels,

I'm no pro either, but here is my thought. First of all the bond market has been an enigma for awhile. Typically, as you said, when interest rates rise bonds start to sell. We've had 5 rate hikes since last year at a quarter point each. Now maybe the long term bonds have not responded because the fed funds rate has been so ultra low to start with.That may be part of it. Also, inflationwill drive folks out of bonds as well. Inflation was over 3% last year.Why would anyone want to earn 4.12% interest on bonds (10Y Note) in an inflation environment of greater than 3%?Inflation adjusted earnings are less than 1%!!

Of course the real question is what is the actual inflation rate? Oil can't be helping. CPI dropped last month, but oil was lower overall for the month of December. Not so this month. If oil keeps bouncing around in the high 40s I wonder what the CPI will be next month.

There is also a large forex component to bonds. Those forex inflows have been financing ourgovernment debt. I do not know what the historical norm (percentage) is for forex purchases of government treasuries, but I wonder where the rates would be if we had less of those forex inflows?

The bond market is not stupid. What's going on here?

[tsptalk]

Wheels wrote:
Does this make sense to any of you?
It is a good observation Dave. I think I have been looking at the bond market too broadly and we probably can take more advantage of the swings.