Friday, April 16, 2010

TIP's Seasonal Variations



This chart shows the median distribution in each month along with the median price in each month (as determined on the 15th or the next day the market was open in the event of a weekend or holiday). I have chosen median values over average values because the fund has only existed since 2003. This helps to remove the noisy outlying data points from the analysis.

TIP's distributions are tied to the non-seasonally adjusted CPI. The CPI is affected by seasonal factors though. Therefore TIP's distributions are affected by seasonal factors. Since TIP's distributions are affected by seasonal factors, so is its price.

Note that TIP's price tends to be higher in the parts of the year when the distributions are generally lower. This is pretty much what efficient market pricing should do. If it didn't happen this way then investors would simply own TIP from April to September, scrape off the hefty distributions, and find somewhere else to park the money in months that generally don't offer decent distributions. That would basically allow them to get a free lunch. No free lunches here.

Here's another look at that same data.




This does not imply that TIP's price is generally lower when distributions are higher though. That is certainly not the case as seen in the following chart.



This chart shows all of the distributions plotted against all of the prices. It is no longer sorted by month and therefore all seasonal information is lost. In general, the market seems to like higher distributions. It seems to know the difference between seasonally higher distributions (as seen in the first and second charts) and sustainably higher distributions though (as seen in this third chart).

Disclosure: I am long TIP in my retirement account. I did sell TIP outside of my retirement account in November at
$105.401 though. I thought it was overpriced then and still do at today's $104.65. I've missed $1.10 in distributions so far but that's offset by a $0.75 drop in price. I'm therefore $0.35 underwater on the trade. That's roughly offset by interest earned in my online savings account though. It's pretty much a wash.

Actually, I am doing a bit better than that. 14% of the money has been spent directly in a 10-Year TIPS auction in January. I'm flat on that trade. 21% was spent on the 30-Year TIPS auction in February. As of today, I'm up 5% on that trade. No joke. It's like everyone got fearful long-term all of a sudden.

I continue to wait with my remaining cash for what I hope will be a better re-entry point in TIP. If not, so be it.


Source Data:
iShares: TIP Distributions
Yahoo: TIP Historical Prices

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