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In the past, I've warned (here and here) about situations where iPath DJ-UBS Natural Gas TR ETN (NYSEARCA:GAZ) and VelocityShares Daily 2x VIX ST ETN (NASDAQ:TVIX) detached from reality, started trading at huge premiums to intrinsic value and ought to not be bought or should even be shorted.

It's happening again. Now the victim is PowerShares DB Agriculture Double Short ETN (NYSEARCA:AGA). As always, the culprit for the situation is the issuer (in this case, Deutsche Bank) suspending unit creation. The unit creation by the issuer is the first line of defense by arbitrageurs to bring an ETN's market price in line with its intrinsic value. If an ETN starts trading at a premium to its intrinsic value, then an arbitrageur can sell it short and cover using units subscribed from the issuer at the intrinsic value.

Once this process is suspended by the issuer, there's still some arbitrage possible by shorting the ETN when it starts pricing at a premium to its IV. However, once there are no more shares to short, the ETN basically breaks free and goes as high relative to the intrinsic value as the uninformed public wants it to. It might even generate a short squeeze of those first arbitrageurs that tried selling it short at smaller premiums.

So that's where AGA stands today. It trades at $14.71, while its intrinsic value is just $10.75 (you can check the intrinsic value here).

When can this stop?

For AGA to again trade at its intrinsic value, Deutsche Bank would need to start issuing units again. If Deutsche Bank starts issuing units again, AGA will eliminate its premium in a matter of hours, so the ETN would drop around 27% in a day or two, just like TVIX did.

What does it mean?

AGA is a fund that tries to replicate the 2X inverse return of the Deutsche Bank Liquid Commodity index - Optimum Yield Agriculture. This index is composed of roughly equal percentages of corn, wheat, soybean, and sugar futures contracts. AGA trading at a premium shows a willingness by the uninformed public to bet against the present drought-derived rally in these commodities.


AGA has no options trading at this moment, and there are no shares available to borrow and short it. Even if there were shares available, it would be likely that they'd be called in and whoever shorted would find himself forced to buy back the stock before it plunged towards its intrinsic value. So there's not a lot that one can do to take advantage of the situation, except selling the ETN if one holds it. That's the only thing that can be recommended here. If you have AGA, sell it. It's trading at an irrational price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.