Ed Hynes

Invest in the New Housing ETFs

John:

Most of your information is correct. However small one mistake is (as you have correctly mentioned elsewhere) the products are leveraged 3 times. So if the index is up 20%, the NAV at expiration will be up 60%.

I put together some information when these products were expected to be offered a month or so ago that can be found at: seekingalpha.com/artic...

Cheers,

Ed

No End in Sight to the Housing Bust

Mad Hedge Fund Trader:

As I am sure you know it's important not to get year-over-year and month to month results mixed up. The 19.1% drop for the national index is year over year, while the city numbers you quote are month over month in S&P terms. Actually they compare the three months ending in March with the three months ending in Feb.

Prices are not back to 2000 levels. Depending on the index, prices are back to late 2002 - mid 2003, which is still terrible.

The problem is spreading for the west and south. However, the good news is San Diego and LA are all starting to show some real improvements. After showing year over year declines of around 28-29% six months ago, year over year declines are now around 22%.

Cheers

No End in Sight to the Housing Bust

ubuy2w: I agree with some of what you say, but I think it is reasaonable to look at charts before I buy stocks, not to forecast the future, but so I better understand the past and present. Why not with home prices?

In addition to what you mention, a third reason to watch the housing market is because our financial system will have trouble stabilizing until housing stabilizes.

Cheers, Ed

No End in Sight to the Housing Bust

My comment just above was in response to HardwoodFlooring.

No End in Sight to the Housing Bust

I personally think the S&P Case-Shiller index is pretty good. It may not measure what you think is important, but what it measures, it appears to do it well.

You're right, it is not a measure of how many houses are being kept off the market. It also does not measure "price changes" for new construction, as by definition there was no previous price and therefore no price change.

However, you are wrong about distressed sales. As long as the sale occurred on an arms length basis, it is included.

The good thing about this index is it does drill down on every sale, creating sales-pairs and then calculates an average. In your example of a house purchased for $1.5 million it not clear if you mean the sale has happened. If it is "now selling" and still on the market, it's not counted as only closings are counted. However, if you mean the sale has closed at $750,000, it certainly is included. If the purchase for $1.5 was one year ago, it would go into the calculation as a decline of 50%.

You should go back and study this index in more detail.

MacroShares Housing ETFs Suffer Another Body Blow

Ron:

Cool. (I'm usually the angry one!)

BTW - the SA editors did the same thing to my article and added ETF. And you blasted me! I requested SA change it back to ETP and they did.

I just like innovation, as long as it is not a rip-off of unsuspecting investors, like most annuities.

I also think investors might misprice (be too optimistic) on this index which might create some opportunities.

Cheers,

Ed

MacroShares Housing ETFs Suffer Another Body Blow

Ron:

Why do you seem so angry at MacroShares and gleeful about their problems?

I suspect you understand the structure, but try hard to hide it. We all agree these are not ETFs, but for some reason you will not recognize the positive ETF-like features of their products, in particular the creation/redemption feature, which you know insulates holders from harmful trading and tax costs caused by frequent traders.

I also don't get why the innovative application of tying a pair of shares/trusts to a combined NAV would disturb you so much. I think it is kind of intriguing as this allows the shares to move up and down due to market forces while still preserving the creation/redemption mechanism. Do you have a better solution?

Did you hate ETFs when they first came out because they were not open-ended mutual funds, but had some of the same characteristics? Did you rail against State Street because the SPY was really a UIT?

The last line in your comment makes no sense. The second oil product certainly did not catch on and was a failure. To imply the "market" failed the first oil product, either shows a lack of understanding about the limits of these products or a desire to spread innuendo and falsehoods. Your choice!

The Grail Fund: The Market's First True Actively-Managed ETF

Michael:

With all due respect, your table purporting to show "the ETF's top five holdings have already changed dramatically since inception, indicating the fund managers' hands are not completely tied by the disclosure requirements" is completely misleading.

A stock's "percentage" of a fund changes due to a change in shares and/or a change in price. To make your point, which may be right, you need to calculate the number of shares at both points and see if it changes.

The New MacroShares Housing Funds Revealed

With all due respect, here are a few points on you article.

There is no real "teeter-totter." Assets (Treasury's) are not shifted back and forth between the UP and DOWN Trusts on a monthly or quarterly basis depending on where the index is. The transfer only takes place at expiration or early termination. Assuming expenses do not eat into the NAVs; both trusts will hold $25 per share until expiration. There is "swap" agreement between the trusts and a "mark to market" on the swap results in an "underlying value" of the trusts that will change monthly based on the index. This is good for holders - no transfer means no tax event.

In terms of your point #2, there is also an agreement of the trusts to pay interest to each other and onward to the holders based on the "underlying value" not the NAV.

You say: "Will UMM and DMM trade at premiums and discounts to the current value of the S&P/Case-Shiller index in the intervening five years? Yes. But those premiums and discounts won't mean anything. Investors should basically ignore them. They should focus on where the indexes will be in August 2014."

This is technically correct, but I believe investors should focus on what will be many profitable trading opportunities based on the premiums and discounts. In other words investors should try and capture other investor's misplaced emotion, be it optimistic or pessimistic, just like any other stock.

This is a tiny point, but I'm not sure why you call the IPO an effort to raise “seed” capital. I think they hope the offering is for a $1 billion, as they earn IPO fees based on the size of the offering.

Cheers.

Are the New MacroShares Housing ETFs Just Too Complicated?

Just one minor comment. The MacroShares' presentation is confusing. The trusts don't actually transfer assets back and forth with the release of the index each month as the presentation suggests. They only transfer assets at expiration which is in the really tiny print.

Effectively there is a swap contract between the trusts and the "mark to market" on the swap allows investors to "see" the “underlying value” of each trust. Unless the NAV’s get eaten into by expenses, each trust will hold $25 per share until expiration. (There is also a mechanism for the “interest” payments to be split between the Trusts based on their “underlying value” rather than the actual value ($25) of each trust.)

Not transferring assets each month has a couple of benefits. Most important, there is no tax event. Second, the leverage built into the product doesn't get "messed up" if the index is very volatile like we have seen with some of the leveraged ETFs. The swap’s leverage is always calculated as 3 times the percentage change in the index from its starting level (162.17) multiplied by the NAV per share, which hopefully stays at $25 or close to it.

What to Do with This Rally?

I generally agree with this article. Develop an appropriate strategy, implement in a low cost fashion and stick to it.

I also think investors that have the time and talent should look for opportunities in beaten down sectors. But you have to be careful and willing to average down on high quality companies (or sector ETFs), because no one knows in advance where the bottom is.

In terms of buy and hold, one of the comments was this is not appropriate for older investors. That's just plain wrong. You have to go back one step in the investment process and make sure the "correct" amount of money is in stocks. My suggestion is all the money you might need from your savings in the next 7-10 years, should not be in the stock market - period. That's the starting point for your asset allocation decisions.

Grail Active ETF Launched, But Is the Market Ready?

Try the Grailadvisors.com website. It's filled with information about the offering including the current portfolio.

I don't know if these will work, but it's a pretty interesting structure. Effectively all three active funds have an "ETF Class" look alike. One problem though is the managers will trade in the mutual fund before the ETF fund in order to avoid others front running their fund. This obviously means the ETF will always get a worse price and that worries me, especially since most funds already underperform their benchmarks.

In terms of history, at least investors can see how the three funds operate and their returns, which is better than with most of the quant "active" ETFs.

MacroShares Major Metro Housing ETPs: Changing the Housing Game

In response to Ron's second comment on 4-29 at 6:35 pm:

Ron, with all due respect, have you read the prospectuses? Nothing says ETF. This is not an ETF. It is not a tracking product and as I say in my article, its success depends on the UP and DOWN shares not tracking the index. And, I hope you agree being a "structured product," but not necessarily an ETF is not automatically a bad thing.

If you think the product will fail and investors should stay away, which is a perfectly legitimate point of view; you will need to invent a new Deathwatch category as this is not an ETF!

In fact, in the “retail” road show presentation on the web that’s available to everyone, MacroMarkets articulates how the MacroShares are similar and dissimilar to ETFs.

The website also offers a tool (which I think could work better) at helping investors understand the index over time and how they might value the UP and DOWN shares on their expectation of the reported index level on November 25, 2014 for the three months ending September 2014.

I join most investors (and maybe you) in not "understanding" the MacroShares Oil product. I thought it was a tracking product and had no idea it was based on expectations out into the 2020s. How ridiculous!

But looking through the “Housing” material I had no problem seeing it was based on the index in 2014 and was not a tracking product. I actually thought it was a brand new variation after the “failure” of the oil product.

I don't know if this product will work and I am pretty critical - but it seems to be innovative at taking variations of some of the more attractive features of ETFs (creation/redemption tied to the “pairs’” NAV to keep it in line; and protecting investors on the tax side from investors moving in and out), adding a features of an ETN (it settles into the index with no slippage) and a swap between the two Trusts that allows leverage; only settles at expiration to avoid flows which might generate tax bills; and maybe helping (although I am not completely sure) with OID (Original Issue Discount) rules.

BTW, did you want to agree to the deal about the “staleness” of the index?

Cheers – I look forward to more discussion. EH

MacroShares Major Metro Housing ETPs: Changing the Housing Game

I'm not sure how to respond to your first comment. It's just a fact that I hope it was well explained in my piece.

I agree with you that MacroShares are not ETFs and early this morning, I asked SA to change the title they incorrectly put on the article I titled MacroShares. Check out my instablog with the correct title.

You're also right you cannot arb the individual shares to the index, but who cares, as the goal of the product is to let investors buy and sell based on their expectation of where the index will be in Nov. 2014. Just like stocks are not tied to a company's book value, these are not tied to the index.

The question on the staleness of the index data is really not central to the product as I have just said the shares are supposed to trade on expectations. But, it will be interesting to see if the shares react when the index is published over the next few months. If the shares don’t move or have more volume than on a normal day, I will agree with you that the data is stale and in the market. However, if we do see movement and/or volume, I assume you will alter your opinion. Or, at least let us know beforehand how the stale data will move the shares so we can all make some money on the "stale" data. Deal?

As you know, in order to keep the UP and DOWN shares in syc and allow the shares outstanding to respond to greater or weaker demand, a creation/redemption mechanism for a pair of shares (one UP and one DOWN) at the “paired” NAV is in place and allows the necessary arb. This also allows the structure to be tax efficient for longer-term holders, just like in an ETF, no matter the coming and going of other shareholders.

The duel Trusts (UP & DOWN) with a Swap agreement between them is also tax efficient as “monies” are not settled up between the Trusts with each mont's index publication, only at the expiration.

Thanks for your comments.



On Apr 29 10:15 AM Ron Rowland wrote:

> ...and if the index changes by 33.3% or more between now and maturity,
> one of the pair will go to zero.
>
> These are not ETFs, not ETNs, nor CEFs. They are MacroShares. It
> is not possible to arb the price to the NAV, they will trade at premiums
> and discounts. The NAVs will be based on stale data (the February
> Case/Shiller data was just announced and it is almost May).
>
> All other MacroShares have either put themselves out of business
> by going to zero or they are on ETF DeathWatch.
> investwithanedge.com/e...
>
> DOY had zero volume three out of five trading days last week. Buyer
> beware.