TLT: The Best House in a Bad Neighborhood

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By David Gillie

NEW YORK ( ETF Digest) -- Long-term Treasuries have entered the center ring of the "Bizarro World Circus."

For generations U.S. Treasuries have been the safest and most conservative investment across the globe. Capital was protected with the closest to a 100% guarantee in the world with a yield that was equal to or better than the rate of inflation. In a post-crash world, this has been brought into question.

On a Sunday evening in November of 2008, the Federal Reserve discovered they had magical powers to prevent pain by making a trillion dollars appear out of thin air.  Probably any crack addict can tell you about their first crack high. Naturally they wanted more. As the buzz of the trillion dollars wore off, the market wanted (needed) more. In the words of Captain Jean-Luc Picard, Ben Bernanke said "Make it so" -- and so it was. Without any effort or analysis on the part of investors, the S&P 500 went up 30%. Of course, Morgan Stanley and J.P. Morgan got their cut of the $600 billion in the deal.

This was just too much fun. With the inspiration of Chubby Checker and the Hokey Pokey, the Fed invented "Operation Twist." A simple dance step to learn. You put your long bonds in, you take your short bonds out, you razzle-dazzle Congress and you shake it all about. Nobody really understood the purpose of this (does anybody know why we do the Hokey Pokey?) but it sounded like fun and the Fed had established a reputation of knowing how to party. So the party (risk) was on.

Now we find ourselves in the "morning after." The AAA credit rating of the U.S. is lost, the dollar is devalued and the market is in desperation for the party to go on. Remember the scene from "Animal House" when Dean Wormer shut down the Delta frat house? Ben Bernanke took his inspiration from "Bluto" (John Belushi), by coming up with a plan too convoluted and obtuse that nobody would understand it but assume it must be good -- "sterilized" bond purchases. Somehow this will continue to dump tons of money into the very hands that cause the crash in the first place.

While other countries scramble to get investor to buy their bonds, the Fed is trying every means to make U.S. Treasuries undesirable hoping to drive investors into riskier stock market positions. Understand that Bernanke holds the nation's wallet and is answerable only to an incumbent president seeking re-election. U.S. Treasuries become the sacrificial lamb.

iShares Barclays 20+ Year Treasury Bond (TLT) is an ETF that holds long term Treasury bonds.

 

 

It is critical to understand that although TLT holds U.S. T-bonds, it is in fact, an equity. Unlike an ETF that holds stocks, TLT's value isn't necessarily determined by its holdings but rather by supply and demand. Whereas Treasuries are bought and held to maturity (20 years), TLT can be traded intraday.

With a state of irrational exuberance in the market, caution is thrown to the wind and the secure U.S. treasuries are dumped for the greed of unheard of capital gains. Most likely into Apple (AAPL), a $580 stock that goes up 3% to 4% per day! Dotcom comes to mind or when I was in SE Coastal NC and saw new home values increase 50% by the time construction was finished.

TLT is at critical support. 

The price of TLT broke under the lower trend line of the ascending wedge pattern, typically a bearish pattern. It is now resting on the long-term support of the 200-day moving average.

Every indicator on the chart is at its most oversold condition in over a year. Despite Bernanke's relentless efforts to destroy the dollar and U.S. Treasuries, it's still the best house in a bad neighborhood. This is proven true from the July-August selloff last year when TLT went up almost 30% in two months. Even gold has lost its stature of the alternative safe investment in hard times and as a hedge against inflation when it fell into the hands of speculators and became extremely volatile.

Mark my words: If the stock market so much as flinches (especially AAPL), investors will flock to Treasuries as the only safe harbor to dock their money in to ride out the storm. Also, with Bernanke having his hands on the throttle of the market and serving at the pleasure of a president on the campaign trail, it would behoove him to let the market sink, if it must, sooner rather than later. This would give time during the normal summer doldrums to clean up the mess for the two months going into elections. 

Watch TLT very carefully at this critical support level for renewed strength should equities show weakness.

Disclosure: At the time of writing, I have no position in TLT, but do have positions in its leveraged alternative, TMF.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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