But today I want to ask the question – Is the F Fund forming a bubble?
I will not deny the strong uptrend in the F Fund.
But last Tuesday, the Fed’s policy setting committee said it would stop shrinking its balance sheet, which was happening automatically as mortgage debt holdings matured. The Fed now will take those principal repayments — about $200 billion a year — and plow them into Treasuries with durations of two years to 10 years. The first purchases began yesterday. Investors full of fear are also plowing in. I get a lot of emails asking me why I am so reluctant to dive into Treasuries when there is a clear and strong uptrend. While I do rely on technicals a lot, I also like to look at the core fundamentals of an investment and weigh both before making a trade. By law, the F Fund must be invested in fixed-income securities like mortgage-backed, U.S. Government, corporate, and foreign government securities. To make a long story short, I think Treasuries are in a bubble. While I do go in and out at times, I just prefer not to play that much, or for that long.
TSP King – I would like to post a poll on this to see what other TSP Center participants think?
This article here describes the bubble building in Treasuries, which usually ends badly…………short, sweet, and to the point. Worth the read.
Next Dot.Com Bubble: Treasurys?
Published: Monday, 16 Aug 2010 | 2:51 PM ET
By: John Melloy, Executive Producer, Fast Money
One bubble was driven by a technological innovation that would change the way businesses and consumers do business and interact. The Internet was and still is a positive force in our lives. It just played perfectly into Wall Street’s tendency to inflate the asset prices of anything associated with the next big thing. But technology, home ownership or tulips are not driving a bubble unfolding right now.
Fear is.
“If one compares the trading alignment of equity returns from 1990 to 2005 and that of 10-year Treasury bonds since 2000, the relationship is startling,” wrote Tobias Levkovich, head of North America equity strategy at Citigroup Global Markets. “It would suggest that the tremendous money flows into bond funds could end with similar losses to that which transpired for equity investors who poured cash excessively into stock funds back in 2000.”
Levkovich found that the first 10 years of the run in the S&P 500 total return index starting in 1990 and the first 10 years of the 10-year Treasury rally starting in 2000 have a correlation of almost 90 percent. “The similarities should cause anxiety especially when one considers the high correlation and what it suggests about plausible future trends for bonds,” wrote the strategist. We all know all too well what happened tech stocks the next five years. The strong correlation hints that 2010 could be 2000 for Treasurys.
Investors pulled $12.4 billion from U.S. equity funds last month, even as stocks rebounded, according to Morningstar. They added $22.3 billion into taxable bond funds, the firm said. The iShares Barclays 20-Plus Treas. Bond Fund (TLT), which tracks the performance of longer-dated government bonds, hit a new 52-week high today.
The Federal Reserve will begin buying more Treasury securities to stimulate the economy on Tuesday, keeping a bid under the securities. However, outside of the Federal Reserve and the risk adverse retail investor, Treasurys may be slowly losing backers on concerns about mounting deficits.
Pimco, the world’s largest bond manager, cut its holdings of government-related debt to 54 percent of assets in July from 63 percent a month earlier. Furthermore, the latest government data shows that China’s holdings of U.S. Treasury securities fell by another $24 billion in June. This follows a $32.5 billion drop in July and brings China’s total holdings to $843.7 billion.
Holy Cow! Another………
Don't Touch 10, 30 Year US Bonds: Marc Faber
Investors should stay clear of 10 and 30-year U.S. government bonds, warns Marc Faber, editor & publisher of The Gloom, Boom & Doom Report, following the Treasury Department's report that China's ownership of American debt has fallen to its lowest level in a year.
"I think eventually inflation will accelerate," he said. "Whenever food prices go up, and grains have been very strong recently, with the sum delay, you get inflationary pressures."
10-year treasury yeilds fell to 2.570%, the weakest level since March 2009. While, the 30-year bond's yield reached 2.719%, the lowest level in 16 months.
Faber cited a weakening U.S. dollar as a second reason to decrease holdings in the country's debt.
"(The) U.S. dollar will weaken, that's the policy of the U.S. government to weaken the dollar in order to cushion the downturn in the American economy."
Looking Beyond the Asian Titans
"I'm not so keen on Chinese companies...I'm not a great investor in China," Faber said. However, he recommends investing in companies that do business with China, or currencies that benefit from China's growth.
Faber is bullish on India though, believing investors building a portfolio "must" park some of their money in the south Asian economy.
"If I look at the long-term potential....there is an emerging middle class and capitalism has now been truly endorsed by everybody," he said, adding that India also has some "very well run" companies.
In addition to the Asian titans, Faber says Myanmar, Cambodia and Mongolia offer "a lot of potential".
"Mongolia has the potential to be the Saudi Arabia of Asia because they only have 2.5 million people. It is a huge land mass and very resource rich." "They have in the Gobi dessert, copper, gold, coal and much more would be found in future."
The new democracy is attracting investments from international mining firms as a result of its untapped resource reserves and close proximity to China.
© 2010 CNBC, Inc. All Rights Reserved
So what is my solution?
In an attempt to answer several emails and post something relevant today I decided to cover this. Most participants on TSP Center have their own methods and mechanism that helps them decide when to get in and out of the market. BUT there are many readers who are new and want to know how they can make a ‘buy’ or ‘sell’ decision own their own. While not always accurate, I think a good place for a newbie to begin would be by utilizing two moving averages for signaling this process, and would probably be an excellent indicator to use on the F Fund for when the trend is breaking (AGG).
If you look at the chart I posted above of the F Fund you will see I am utilizing the 20, 50, and 200 day moving averages. If you got to www.stockcharts.com – click on “Free Charts” section, you can create your own ‘buy’ or ‘sell’ indicator by changing your variations on these. For the current trend in the F Fund I think you could replace the default moving averages with, oh for example sake, a 10 day and 20 day simple moving average (or whatever works for you). Once you do this you can monitor daily. Once you see the 10 day cross below the 20 day it would alert you to weakness and sell.
Thoughts?
Now this would probably work on the current trend for the F Fund, but the C, S and I funds are a little more complicated. We are trending in a channel sideways, and you would get whip sawed out repeatedly, racking up quite few losses.
