Current TSP Allocation and Business Cycle Phase Update – December 2014

12/15/2014

Capitol Christmas TSPAG

THIS IS AN ARCHIVE POST. CLICK HERE FOR THE CURRENT TSP ALLOCATION GUIDE UPDATE.

Welcome back for the final TSP Allocation Guide update of 2014. This month in the update we will discuss falling oil prices and the impact those are having on the markets, hopefully clarify the TSP contribution limits confusion, the usual rundown of the economic indicators which I follow, some non-TSP investing discussion of Bitcoin and what I think are some exciting opportunities in energy sector stocks, and some links so you can obtain the brand spanking new versions of Dan Jamison’s FERS Guide.

Bottom line up front: my current Thrift Savings Plan allocation remains 100% in the TSP S Fund (this reflects both my contribution allocation as well as where my existing balances are invested).

TSP Allocation Guide’s performance year-to-date through market close on 11/24/2014: 3.60%.

I am neither excited about nor particularly unhappy with that number. I will talk more about my mental annual average target next month in the 2014 wrap-up, but I think I have been in the right fund all year based on historical averages for where we are in the business cycle — some non-business cycle factors just pushed the S Fund out of the sweet spot. That will happen (see 2011 most recently), but I believe I will be in the right position more often than in the wrong using the business cycle strategy.

Year to date TSP fund performance (for those of you who care about such things):
•    TSP C Fund:  10.56%
•    TSP S Fund:   3.60%
•    TSP I Fund:    -5.72%
•    TSP G Fund:   2.20%
•    TSP F Fund:    6.75%

My view of the markets

Oil prices and market volatility TSP Allocation GuideThe stock market’s recent volatility is tied directly to plunging oil prices, with a barrel falling below $60 for the first time since 2008. While I was enjoying that $10 savings on a tank of gas last week, my TSP balance probably fell $30,000, but I honestly won’t lose any sleep over it. Lower oil prices are crushing the stocks of energy companies (oil producers like Exxon and Chevron, natural gas producers like Magnum Hunter Resources, and companies which service those producers like Schlumberger and Halliburton), with many of them down from 20 to 50%.

How does that effect the TSP? The energy sector makes up about 13% of the S&P 500 (the C Fund) and about 4% of the Russell 2000 (the S Fund, roughly). What we saw last week was a combination of those individual stocks going down, which hurt the indexes as a whole, and then a minor stampede as short term traders sold their positions in the indexes. When there are outflows from TSP, mutual funds and ETFs which tracks those indexes, shares of all of the stocks in the investment vehicles have to be sold, further depressing the index.

From my perspective, there is no larger problem impacting the markets, the fall in oil prices is not some historic event (oil traded at this level just six years ago in 2008), and I expect prices to stabilize in the near term and then start to trend back up in the longer term.

Oil prices (and energy stock prices) are extremely cyclical. Over supply leads to lower prices which lead to fewer resources for extraction and exploration which leads to reduced supply which leads to higher prices. Prices will go back up (notwithstanding the headline grabbing pronouncements of media nitwits predicting it could fall to as low as $25 a barrel), and the energy sector will recover. Once this energy sector correction is absorbed by the markets, the upward trend will continue and the rebound of energy stocks in a few months will help to fuel the market’s ascent.

I will talk more in the individual stock section near the end of this update about opportunities which I think the bloodbath in the energy sector presents for me.

2015 TSP Contribution Limits Redux:

To clarify last month’s section on maximizing your TSP contributions, the number of pay dates in 2015 does vary depending on which payroll service your agency uses. (Thanks very much to Dan Jamison of FERS Guide fame who confirmed this is the case. I will talk more about Dan later in the update.)

For typical Feds (those paid through the National Finance Center) the first pay period for 2015 contributions is Pay Period 25. There are 26 pay dates in 2015, so $18,000 / 26 = $692.31; round up to $693 per pay period.

For Feds whose payroll is handled by different payroll services, there may be 27 pay dates in 2015. I was able to confirm that both DFAS and USPS have 27 pay dates. If your agency uses another, you will need to check with your HR department. Doing the math for those in the 27 pay date situation: $18,000 / 27 = $666.67; round up to $667 per pay period. Those services also use a different pay period schedule, so make sure you make your changes effective the first pay period with a pay date in 2015.

November Economic Numbers:

As always, I will run through the key indicator data I use in determining where I think we are in the economic cycle and what that data means to me (these indicators are explained in some detail in How to Determine the Current Phase of the Business Cycle). I am starting to run long this month, so I think I will dispense with the charts and just provide the numbers this month:

Employment numbers: the November 2014 jobs numbers were very strong and continued the longest private sector job growth streak in US history. I obtain this data from the Bureau of Labor Statistics:

Total nonfarm payroll employment increased by 321,000 in November, and the unemployment rate was unchanged at 5.8 percent. Job gains were widespread, led by growth in professional and business services, retail trade, health care, and manufacturing.

Purchasing Managers’ Index (PMI): as usual, I pulled up the most recent report from the Institute for Supply Management. Any number above 50 indicates economic growth, and this month’s reading of 58.7 is very high:

Economic activity in the manufacturing sector expanded in November for the 18th consecutive month, and the overall economy grew for the 66th consecutive month. The November PMI® registered 58.7 percent, a decrease of 0.3 percentage point from October’s reading of 59 percent, indicating continued expansion in manufacturing… Comments from the panel are upbeat about strong demand and new orders, with some expressing concerns about West Coast port slowdowns and the threat of a potential dock strike.

Yield spreads: I obtain my data for this section from the Cleveland Federal Reserve. This month the Cleveland Fed noted:

Using the yield curve to predict whether or not the economy will be in a recession in the future, we estimate that the expected chance of the economy being in a recession next November is 3.02 percent, down from October’s reading of 3.42 percent, but still above September’s 1.99 percent. So although our approach is somewhat pessimistic with regard to the level of growth over the next year, it is quite optimistic about the recovery continuing.

Money supply growth rate: Money Supply M2 (which includes savings deposits, money market mutual funds and other time deposits which can be quickly converted into cash or checking deposits) continues to expand. I obtain this data from the Federal Reserve:

Money Supply M2 in the United States increased to 11561.90 USD Billion in November of 2014 from 11511.40 USD Billion in October of 2014.

Conclusion: So again, all of the indicators are pointing in the same direction, and I believe that we remain in the Recovery Phase of the Economic Cycle for all of the reasons which I described in my earlier post on The Business Cycle Theory of Investing. For that reason, I remain 100% invested in the TSP S Fund.

The Other TSP Funds:

My views on the other TSP funds are unchanged from last month.

Investing outside the TSP:

Disclaimer: This non-TSP talk is for fun, not at all a recommendation to buy. The vast, vast majority of my investments outside the Thrift Savings Plan are in great big index funds, not individual stocks. While I have had some great winners over the years, overall I am sure I would have been much better off if I had put all of the money I have invested in individual stocks into those index funds. So this is Vegas money, just for fun. Really.

oil workers thrift savings plan allocation guideCrashing oil prices and the resulting carnage in the energy sector will continue to provide opportunities in (1) energy sector stocks and (2) emerging markets.

(1) Quality companies in the energy sector will rebound as prices stabilize and their earning bounce back. The larger, more efficient energy companies which can still make a profit at oil prices in the $50s will be fine, while weaker firms which have to spend more to extract a barrel of oil than it is worth will quickly stop producing. Over the long term, the quality companies are now in a position to buy up valuable assets at fire sale prices from weaker companies which overextended themselves.

(2) Low oil prices will also favor many emerging market nations, although obviously not the ones which rely heavily on oil production such as Russia and Venezuela. This because emerging economies spend a disproportionate amount of their GDP on energy. I expect the drop in oil prices will lift the GDP of oil importing emerging nations such as India, Indonesia, and China by one or more percentage points in 2015, and their markets will reflect that improvement.

I wrote last month about my plays in both emerging markets (Vanguard’s Emerging Market’s ETF VWO) and in energy sector stocks (Chevron (CVX) and Magellan Midstream Partners (MMP)), so please refer back to that update for details on why I like those investments. I don’t believe we are at a bottom or that any of those are going to rocket up in the next few months, so I’m not in a rush and will build positions slowly as I see particularly bad days. And I believe the energy sector is such a good buying opportunity right now that I am exploring some other companies which I will discuss next month.

One of them is even in contention for my “Stocks which could double in 2015” list, which, if last year is any indication, largely exists to allow me to demonstrate both how good and bad I can be at picking individual stocks in a very small space. Last year’s choices were Facebook for the mainstream company pick (up 46% year to date), and Insite Vision for the penny stock pick (down -26% year to date). I have some doozies on my short list for next year, so if you enjoy the gambling aspect of the stock market make sure you come back for that. And if you have any stocks which you think I should take a look at for that list, please share in the comments section below.

The one stock I will buy as an energy play this month isn’t an energy stock at all. Blackstone Group (BX) is private equity, investment banking, alternative asset management and financial services corporation. BX is raising a $4.5 billion fund to take advantage of the turmoil in the energy sector. It also has a dividend yield of 5.20%, so it will generate income while I wait to see if their strategy pans out. Conduct your own due diligence, but I will tease it with a quote from CEO Stephen Schwarzman: “There are a lot of people who borrowed a lot of money based on higher (oil) price levels and they’re going to need more capital. There are going to be restructurings to do. There’s going to be a fallout. It’s going to be one of the best opportunities we’ve had in many, many years.”

Bitcoin TSP Allocation GuideSpeaking of gambling, I have had enough questions over the past year about what I think of Bitcoin as an investment that I thought it was worth a few sentences. Short answer: if someone gave me a bunch of Bitcoin tomorrow, I would sell them as quickly as I could figure out how and never look back.

I don’t like Bitcoin as an investment because an asset derives its value from either an ability to generate income (earnings) or through some intrinsic value. Anything else is speculative value. Scarcity is what makes something which has intrinsic value worth something, but scarcity alone does not convey value. The alleged purpose of Bitcoin is to create a currency which can be used to conduct transactions inexpensively and without government oversight – to buy and sell things. But that’s not what is happening. Instead, the overwhelming majority of Bitcoin transactions are speculative trades – people who are buying because they think the price is going to go up from people who are selling because they think the price is going to go down. They aren’t buying a product or paying for a service, they are just exchanging one (real) currency for one which exists only in computer code. Most of the people who own Bitcoin have never used it to buy something and probably never will. The futurist in me sees lots of different platforms for conducting transactions efficiently and privately, but this imaginary currency is not one of them.

Bitcoin has three big problems in my opinion:

  1. It is a purely speculative play with no underlying value, so at any point the market can decide to value it at pennies (for what it is worth, I don’t think that is likely anytime soon, but neither do I see broad adoption).
  2. The “rules” which control Bitcoin can be changed at any time, so the number of Bitcoin could be increased by a factor or two or three or 100 with obvious results to value.
  3. Bitcoin is not secure or insured, and there is a very real possibility of having your Bitcoins just disappear through fraud – 7% of all the Bitcoin in the entire world went poof during the Mt. Gox debacle, and I can’t imagine that will be the last time something happens along those lines.

All that said, if anyone wants to support the TSP Allocation Guide with a Bitcoin donation, I will set up an account faster than Rolling Stone fact-checks a story.

The FERS Guide

Dan Jamison has released the most recent version of his FERS Guide and I strongly encourage any civilian Fed who doesn’t have a copy to get one for themselves post-haste. I really do believe it is the single most valuable resource for Feds out there. Dan has finally retired after a long, illustrious career as an FBI Agent, so he has expanded the guide and introduced a new distribution model to make it self-supporting. It is now available as a PDF directly from Dan’s website. To ease the transition to this paid model, Dan is offering the guide at half price ($5) through the end of December.

You can purchase it directly from Dan’s website at www.fersguide.com.

More details on exactly what the FERS Guide is are on my homage page: Dan Jamison’s FERS Guide

Speaking of Amazon:

At the risk of sounding like I’m pumping the TSP Allocation Guide’s Amazon affiliate program, last year at about this time I started doing my Christmas shopping. I signed up for a 30 day free trial of Amazon Prime so I could get free two-day shipping on everything and ordered every single thing I gave as a gift from the comfort of my keyboard. I fully expected to cancel my membership at the end of the free 30 days, but here I am a year later and I haven’t been able to bring myself to give it up.

The obvious benefit, especially at this time of year, is the free two day shipping on everything. What I didn’t know is that you can share free shipping with up to four additional family members, even if they live at different addresses. So my entire extended family now gets free shipping.

You also get free Prime Video streaming of thousands of movies and TV shows (which is a perfectly satisfactory replacement for NetFlix for most people), free streaming of over a million songs, and one free ebook a month from the Kindle borrowing library.

You can get a free 30-day trial of Amazon Prime through this link:

Join Amazon Prime – Watch Over 40,000 Movies & TV Shows Anytime – Start Free Trial Now

The Next Update

I will send out a new update as early as I can next month after all the December and year end data comes in unless something shocking happens which requires me to send out a new update. I send out a notification of these updates (or allocation changes during the month) to the email list which you can subscribe to here: Subscribe. If you want to see what I am reading throughout the month, I also have a twitter account to which I usually post items of interest which I have stumbled across for investors, Feds and the military about once a day at: @TSPallocation

What’s in it for me?

I don’t ask anything except that you share the site with your colleagues so we can continue to expand the community of feds and service members helping each other in a free, transparent, no-pressure environment. You can do that by linking to this site from your own webpage or blog; liking it on Facebook; sharing on Twitter and in other investing forums; or actively participating on our Message Board. So if you found this post useful, please share it with your friends and colleagues using the email and social sharing buttons below right now. I added Reddit to the buttons this month after my current favorite reader (you know who you are) mentioned me there and it generated a little flood of visitors, so if you are a Redditer and think the site is worth sharing, please add to the momentum. Thanks, and Happy Holidays!

 

14 thoughts on “Current TSP Allocation and Business Cycle Phase Update – December 2014”

  1. TS Paul-

    Great wrap-up of 2014, and thank you for the additional information regarding multiple agencies pay periods.

    Wishing you and your readers much good health and happy investing in 2015!

  2. I’m confused. The S Fund is outperformed by the C & F fund. Why do you think staying in S fund all year is the right choice?

    Thanks,

    Tan

    1. Because at this stage in the business cycle, typically small caps will outperform large caps by at least several percentage points a year (as they have three kf the last five years).

  3. been following your advise for over 3 years Im retired and haven’t touched my TSP its up 21 % thank you for all you’ve done

  4. What is your feeling towards investing in the I Fund as international markets are experiencing turmoil due to falling oil prices etc? Does investing in a specific fund when share prices are rising (ie S and C) matter a or should one wait until the share price drops before investing in that particular fund? I only ask because I’m trying to decide whether to wait for the “best” or optimal time to invest in the I fund. Thoughts?

    1. The I Fund is mainly based on Europe and Japan, so I look at those economies to decide when I want to be in the I Fund. I would tend to believe the I fund is setting itself up for a run with the recent problems both of those areas have had, but it is hard to know if that run will start in January, or June, or October. So with as well as the US is doing, I’m inclined to stay with the domestic funds for now in my TSP.

  5. Thanks Paul. Perhaps you’ve covered this before, but can we round up our TSP pay period contribution and be okay? I’ve been told that if you go over the contribution limit, you’ll lose out on, say, the last month’s agency matching. So, I’m contributing $666 for 27 pay periods, and perhaps changing to $667 later in the year. Is it true that I could’ve just left it at $667 the whole time (667×27=18,009, $9 over the limit)?

  6. What are your thoughts on (VNR) as a energy play high divided and appears to be down significantly? Also (UWTI) IS SERIOUSLY down?

    1. I am looking at lots of energy stocks, but I would be leery of VNR. Market cap of 1.2 billion with 1.9 billion in debt might put them in a situation where they have to sell assets at fire sale prices just to stay afloat. I think there are better energy stocks to own for share appreciation, and if I was looking for more high dividend payers I would look outside of energy out of concern that a small company like VNR won’t be able to maintain its dividends in the current climate.

      UWTI looks like a casino game to me. I don’t have any guess as to where oil will go short term, so that one looks silly dangerous.

  7. Hello TS Paul. I just received your email regarding your plan to accomodate followers who consider your monthly TSP assessments too lenghty by initiating a new format of multiple posts during the month. I respectfully disagree that your monthly posts are too long. In fact me and a few other followers I know will read your monthly posts multiple times to ensure comprehension of all you have to say. I dont want to suggest reader laziness but………..☺

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