Managing Editor

D-Day for the MacroShares Crude Oil ETFs

Yes, indeed, the embedded option explains the price disparity as pointed ut in the Hard Assets Investors article "Accounting for MacroShares Premia/Discounts," hardassetsinvestor.com....

Deathwatch Redux: Oil Over $111

Thanks, all, for your comments. I stake no claim to a crystal ball, Phil. There are lots of pundits making oil forecasts (several are interviewed on HardAssetsInvestor.com).

One particularly prescient forecast was made back in 2005 cheaper, when a Wall Street investment house called for a $105 per barrel top. Noting that "oil markets may have entered the early stages of what we have referred to as a super-spike period," the firm's analysts predicted oil entering a "multiyear trading band of oil prices high enough to meaningfully reduce energy consumption and recreate a spare capacity cushion only after which will lower energy prices return."

The prediction was met with a fair amount of skepticism. A move to $105 would have represented a jump of more than 75% from mid-2005 price levels.

Here's the fun part: Analysts cast the possibility that their prognostication could actually lowball oil's ultimate price. Back in the late '70s and early '80s, gasoline spending was a much higher percentage of consumer spending than it is today, which for some observers explains the lack of impact that seemingly high crude oil and gasoline prices had on the economy. "Our new super-spike range," the doomsday forecasters said, "assumes a level of gasoline spending relative to the economy and consumer spending that is still below the heights reached in 1979–1981, suggesting our new range could prove conservative."

Now ... you tell me where you think black gold peaks.

The Good, the Not-So-Bad and the Ugly Commodites ETFs

No worries. UCR and DCR are novelties as far as oil ETFs/ETNs go. They're issued in tandem as complementary sides of a trust made up of credit instruments.

When you deal with the MacroShares products, you're taking on a huge tracking error risk. Tracking spot WTI can be hard enough for "old-fashioned" oil ETFs/ETN when the market's in contango.

The Good, the Not-So-Bad and the Ugly Commodites ETFs

Thanks for your insights.

Look back on the article, though. It says: "SOMEDAY (emphasis added) the commodities tower will topple leaving imprudent investors who've OVERSPENT (again, added emphasis) on commodities vulnerable ..."

Note I haven't said WHEN the reversal of fortunes will occur. To think that commodities will remain in the ascendency indefinitely denies history. Commodities prices and inflation are cyclical, to wit:

Commodity vs. Stock Bull Markets

US Stock Market Producer Price Index
Composite (All Commodities)

1898-1920 61% 228%
1920-1929 196% -38%
1929-1951* -12% -58%
1951-1965 256% 6%
1965-1981 49% 204%
1981-2001 828% 37%

*Includes anomalous effect of the Great Depression (1929 – 1940)
(Source: Legg Mason)

Without market timing, overexposure to the asset class can be deleterious to a portfolio with a date-certain horizon. And how good are any of us in the timing department?


I'm not saying one SHOULDN'T have commodity exposure, only that the allocation be prudent.