Over the past several years, exchange-traded funds have enjoyed a tremendous surge in popularity, passing many major milestones as they were embraced by retail and institutional investors alike.

Once comprised solely of “plain vanilla” products tracking well-known equity indexes, the ETF industry has evolved at an incredible pace in recent years, and now offers investors exposure to nearly every corner of the investable market. Along the way, we’ve seen brilliant innovations (such as leveraged ETFs, “intelligent” ETFs, and actively-managed ETFs, just to name a few) and a plethora of new fund launches (at last count, there were 850 ETFs in the ETFdb Database).

Strangely, economic commentators have missed the most obvious impact of the tragic Gaza War on the global economy: Oil prices are going to rise, and will go sharply higher if the war widens into a regional conflict. So too will precious metal prices. Perhaps this perception will change now that a serious ground offensive has started.

Higher oil prices will be the death knell for the recent modest rally in global stock markets and the impact of higher energy costs on a weakened world economy would be nasty. This is back to 1973 and the oil embargo years, and the horrendous stock market slump of 1974.

“As a responsible employer of more than 290,000 employees and contractors worldwide, there is a time to justify such an ad spend and a time to step back.”

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.

They say the smart money is shorting oil. There is a lot of truth to that, but there is reasoning behind it. Much of the smart money people are talking about is long term investors, not many of the traders that are moving the commodity with "hot" money. What the smart money generally will do is make a small position at say $99 a barrel. When this is done, it is accomplished by adding to the position at each interval of resistance. This would generally be at $109, $119 and etc. This hedges their position and if the investor truly thought that oil would go below $100 a barrel long term, the short term move upward would be of little consequence.

If there is any one position that I would think you could add to in this situation, it would be to DCR. The reason is that this stock is moving exponentially with the price of oil. This ETF seems to have additional upside and downside risk as it was down over 12% today. The DCR is the inverse of UCR which tracks the price of crude as it is being priced in West Texas intermediate and light sweet crude. The UCR in comparison today was only down .36%.

Everyone talks mercilessly about Peak Oil, but is it time to introduce the concept of Peak Demand? At least in the United States? The Federal Highway Administration [FHWA], a part of the United States Department of Transportation [DOT], released its monthly "Traffic Volume Trends" report last Friday.

The report showed that estimated vehicle miles traveled [VMT] on all U.S. public roads for March 2008 fell 4.3 percent as compared with March 2007 travel. The report also said it was the first time March travel on public roads fell since 1979.

By Jim Wiandt

I want to take a minute and discuss the oil futures situation. It seems that they continue to rise with no end in sight and that gas prices at the pump are destined to continue higher. Do you want the good news or the bad news first?

Well, I'll start with the bad to get it out of the way. The crude oil futures contract looks like it is in the beginning phases of making a parabolic move of some sort. Even with all the chatter about a top in oil, structurally, it is still bullish and continues to move higher without any significant pullbacks. Technical indicators would tell you that this thing is extremely overbought and it is, but overbought markets can stay that way for quite some time (i.e. stock market bubble from 1998 to 2000). At this point, crude futures are driven primarily by speculation and this being said, I am looking for a blow off top to put an end to all this insanity. This means that we will probably be looking at a move to 150 and potentially higher in the near term. 150 will be a psychological magnet for the crowd.

It's weird how normal $100 plus oil suddenly seems. Oil has gone parabolic, and this chart from Bespoke Investments seems to suggest that things could be getting toppy.

Speculators are not very popular right now. Futures trading in many commodities across the world has been banned. Numerous experts have spoken out that most of crude's price today is due to "speculation" and a "strong inflow of funds". Indeed, I came across this interesting article where an analyst was commenting on the rampant speculation in the oil space:

With the whirlwind of new structured retail investment products being introduced everyday (e.g. Ultra ProFunds, UltraShort PowerShares), it seems only inevitable that something is eventually going to blow up. For example, when MacroShares created its "Oil Up" and "Oil Down" (UCR) and (DCR) tradable shares back in 2006, I'm sure they thought it very unlikely that crude oil would be trading over $126 per barrel. And unfortunately for some unsuspecting investors, that unlikelihood may prove to be quite painful.

In early April, we pointed out the DCR/UCR trade to Bespoke readers, noting that if oil closed above $111 for three consecutive days, the two notes would hit termination at the end of the quarter at wherever their NAVs were trading. UCR is the "oil up" note and its NAV is calculated by dividing the price of oil by three. DCR is the "oil down" note and it is calculated by subtracting UCR's NAV from 40.

Once oil closed above $111 for three days in a row (seems so long ago), the termination triggered, so at the end of this quarter, the notes will be distributed to holders at their NAVs. But now that oil is trading above $120, DCR has no NAV [40-(120/3)=0]. Surprisingly, DCR's price is still trading at a premium to its NAV, and if oil is above $120 at the end of the quarter, owners will lose all of their money, effectively making it an option play on oil's decline at this point. UCR, on the other hand, will distribute $40 per share if oil is above $120, even though its price is trading at $37.26.

By Jim Wiandt

One thing Matt Hougan fails to note is that in the frenzied final days of DCR and UCR, assets have soared to nearly $1/2 billion!

By Matthew Hougan

The Macro's, of course, are the unusual oil ETFs that are issued in pairs and whose values are tied to one another. There is an "Up" oil fund (UCR) and a "Down" oil fund (DCR), and they work like a teeter-totter tied to the price of oil. When the price of oil rises (or falls), assets move from UCR to DCR (or vice-versa).

As oil prices head south, one ETF shot way up.

MACROshares Oil Down (DCR) closed up 10.6% in trading Thursday after oil speculators pulled out of the market. Crude settled at $112.52, stripped of its appeal to investors as the dollar gained strength, says John Wilen for the Associated Press. Oil is sitting at its lowest level since April 14, but analysts caution that it could be temporary.

This is part three of a three part series (see part I here and part II here).

The mysterious case of the commodity conundrum is sure to elicit passionate debate on either side of the equation—is the commodity boom due to speculation or fundamentals? By the time you read this, a battle in this dispute will have taken place on April 22, 2008 with the CFTC roundtable on agricultural markets.

By Matthew Hougan

The MacroShares are dead. Long live the MacroShares!

That's right, Jim Wiandt: The termination trigger is triggered, and the first generation of MacroShares ETFs is going away. The Up Oil Trust (UCR) and Down Oil Trust (DCR) will cease trading on June 25, and liquidate in the following week.

NNNooooooooooohhhhhhhh!

We recently filed a prospectus with the SEC to offer a
new MacroShares oil product.

By Matthew Hougan

About the only redeeming feature of the controversial MacroShares Oil Up (UCR) and Oil Down (DCR) ETFs is that they automatically blow up—sorry, are subject to a termination trigger—if the NYMEX Light Sweet Crude oil contract settles over $111 on three consecutive days. The May 2008 contract settled at $111.76 on Monday, and $113.79 Tuesday.

It would only take a 3.5 percent move down—easily imaginable if, for example, the storage report shows an increase in supplies—to let the ETFs live another day. Facing big percentage losses are the holders of DCR; it closed Tuesday at $4.12, a mere 83 percent premium to the NAV at which it will be paid out in the event of the termination event. While that premium is down from over 100 percent on the $5.55 close Monday...

By Brad Zigler