As of last Tuesday there is a way to trade houses just like you would stocks – sort of. A company called MacroMarkets has created two instruments that allow people to take positions that bet on the price of houses going up or down in 10 markets that comprise the Case Shiller 10 City Composite Index. The motivation for creating these instruments (aside from MacroMarkets collecting fees) was to permit homeowners to hedge their exposure to housing prices.

These instruments are similar to ETFs in that they trade on the exchanges and their value is (loosely) tied to an index value, that being the 10 City Composite Index. The way MacroMarkets created these instruments is that they deposited money into two trusts – one of which represents an interest in the underlying index going up and the other representing an interest in the underlying index going down.

There are at least three main ETFs that allow the retail investor to buy oil, as in the commodity:

• The United States Oil Fund (USO)
• The iPath S&P GSCI Crude Oil Total Return Index ETN (OIL)
• The MacroShares $100 Oil Up Fund (UOY)

The first two of these essentially buy oil futures contracts, while the latter one essentially represents an economic interest in 1/4 of a barrel of oil. Like its predecessor fund, UOY shares are created as one half of a pair of shares. The other half is the DOY shares, where the D stands for Down. There is a trust structure that basically obligates the UOY shareholders to transfer assets to the DOY shareholders to the extent that the price of oil moves down and vice versa. In other words the UOY and DOY shareholders are always on opposite sides of changes in the price of oil. Whereas the other ETFs derive their value from holdings of futures contracts the UOY/DOY pair derive their value from each other.

I seem to have a real knack for investing in funds that don't quite work as one would expect. For instance, there was that little incident back in February with the UltraShort FTSE/Xinhua China 25 Fund. Since then I have moved on to investing in natural gas, as I have indicated in the past that I thought natural gas was underpriced relative to oil. The vehicle that I chose for doing this was the United States Natural Gas Fund (UNG).

Now, aside from the fact that natural gas prices have fallen since I made my investment and the fact that they have fallen faster than oil prices, I have recently determined that this fund is performing even worse than the underlying commodity - by a huge amount. Check out these numbers:

There are a lot of things in this world that just don’t make sense to me. Add to that very long list the relative prices of Blockbuster’s two classes of stock - the A (BBI) and B (BBI.B) shares. According to the Blockbuster Web site the B shares each have two votes vs. the A shares’ one vote. Otherwise, “there is no difference between the two classes except for voting rights”. Yet, the A shares closed at a 33% premium to the B shares yesterday. Go figure.

So I did some poking around to find out why this is and I came up pretty much dry. Some people talk about the greater liquidity of the A shares but the B volume is adequate at 234,000 per day for the typical retail investor and the spreads are no worse than the A shares. Therefore, you would expect the retail investors to jump all over the B shares and even the institutional guys could make some pocket change. Hmmm. Maybe there’s a stigma attached to something labeled B as opposed to A?

Back in April I identified an opportunity arbitraging the MacroShares Up UCR and Down DCR shares. The Down shares were overpriced relative to a fairly equivalent investment in USO puts. That play paid off well for me as noted in my last blog post.

However, now that the original up and down shares have terminated MacroShares has launched a new series with a higher termination trigger. The up shares (UOY) and down shares (DOY) just started trading yesterday and surprisingly the volume is fairly low compared to their recently expired siblings. I guess all the gamblers who were betting on oil going down have lost all of their money at this point. Also surprising is the fact that the down shares are not trading at much of a premium to NAV. In fact, yesterday the down shares closed at a 1.4% discount to NAV, which just doesn't make sense to me. It doesn't make sense because these shares are basically LEAPS and LEAPS are worth more than intrinsic value, or NAV in this case.

The public, the media, and especially our legislators love to have someone to blame for everything that doesn't suit them. Right now, oil and gasoline prices have everyone up in arms and, of course, someone must be to blame - sort of like Salem, Massachusetts in 1692. In similar form we are currently inundated with articles on how those evil speculators are driving up the price of oil. There's an article today on the Los Angeles Times site and Business Week is blaming it on the pension funds. As you might expect our legislators are ready to fix the problem once and for all by imposing higher margin requirements. Of course those folks, suffering from a false sense of importance, think they can legislate away any problem. I'm amazed that they haven't yet cured cancer, world hunger, and obesity with legislation.

But speculation does not drive up the price of a commodity like oil. Supply and demand do. And you can't legislate supply and demand.

Here is a phenomenal business model. Spend lots of money developing rich content to attract advertisers then make it really difficult for them to give you their money. If you would like to invest in this business, get in line behind Microsoft (MSFT). Or is it Google (GOOG), or maybe AOL (TWX)?

This is exactly the model that Yahoo (YHOO) seems to be following. Of course, I'm sure that if you are a major corporation looking to spend millions, Yahoo! will beat down your door. However, if you are not a major player, but are looking to spend more than $3000, good luck getting their attention. And I didn't just make up the $3000 number. It's the cutoff listed on their site for getting their attention. Try the following experiment. Go to one of the verticals on the Yahoo! site and see if you can figure out how to give them your money to advertise there.

Oil is trading around $98/barrel as of Thursday. So if I told you that you could buy it or sell it at $78.30 on Thursday which would you do? The answer seems pretty obvious doesn't it? So then why is it that some investors are paying full market price for oil while others are selling it below market? It reminds me of the Kathy Griffin video where she is trying to give away money and people won't take it. I've been perplexed for the last 3 months and I am no closer to understanding why this is happening other than that people are just naive.

Take a look at three of the main ways to bet on oil prices going up or down. There are the plain vanilla United States Oil Fund (USO) and the mouthful which is the iPath S&P GSCI Crude Oil Total Return Index Exchange Traded Notes (OIL) that pretty much use futures contracts to track the percentage change in the price of oil. These basically trade at NAV. Invest $1000 in one of these funds and you essentially have bought $1000 worth of oil.

Originally written on Feb. 9, 2008.

A week ago I concluded that the UltraShort FTSE/Xinhua China 25 ProShares fund (FXP) was not working as advertised. I decided to follow up with ProShares to get to the bottom of the mystery and ended up discovering that there is much more to these leveraged funds than meets the eye. In short (no pun intended) this fund is working as advertised but it's not what most people expect. And judging from the exchanges on the message boards I can assure you that there are a lot of people out there that don't understand what they are invested in. Apparently ProShares is used to the confusion because they have the subject aptly covered in all kinds of handout materials.

One of my favorite strategies is to arbitrage international closed end funds when they start selling at too steep of a discount or a premium. I will either buy or short the closed end fund and take the opposite position with a similar ETF. I almost always make money doing this.

Why not just buy low and sell high? That’s easy enough, right? The classical answer is a resounding no and there are reams of analyses to prove that it’s not a good idea to try to do this. Most arguments against timing make the case that the market is extremely volatile and impossible to predict. It’s extremely easy to miss the best performing days and if you do you will have substantially worse performance than if you had stayed in the market the entire time. I’ve seen many variations of the following analysis [1] over the years: