Tag Archives: PowerShares

Why didn’t the oil ETFs surge when oil spiked $25?

Oil prices saw the biggest one-day jump ever on Monday as the front month crude-oil contract rocketed more than $25 a barrel to $130 in midday trading on the New York Mercantile Exchange. By the end of the day, the October contract for light, sweet crude fell off its highs to close at $120.92, a 13.8% jump of $16.37.

So why did the oil ETFs and ETNs post percentage gains much less than half that?

· United States Oil (USO), a commodity pool which holds futures, leapt 6.03% to $87.62.
· iPath S&P GSCI Crude Oil Total Return Index (OIL), an exchange-traded note, jumped 5.6% to $64.57.
· Macroshares $100 Oil (UOY), which bet on the oil market through U.S. Treasurys, climbed 4.1% to $26.68
· PowerShares DB Oil Fund (DBO), a commodity pool which holds futures, rose 2.5% to $40.99
· The Energy Select Sector SPDR (XLE), which holds oil stocks, actually fell 1.8% to $70.

There were a multitude of reasons for the oil spike. Fears over the government’s $700 billion bailout plan and the potential inflation sent the dollar plunging. And lately, oil has been moving inversely to the dollar.

“Basically, there’s a strong negative correlation between the dollar and oil,” says Douglas Hepworth, director of research at Gresham Investment Management, a New York money manager. “It becomes a self fulfilling trading artifact. When the dollar is up, operators sell oil, and when oil is up, people sell the dollar. And the dollar was sold in the sentiment that if this new $700 billion dollar bailout is socialism, do we really want to hold dollars?”

In addition, oil fields in Texas and Louisiana are still shut down because of Hurricane Ike. Platforms are still out of commission in the Gulf of Mexico and companies need to check the pipelines to make sure they’re not leaking. These are coming back on line slowly. So, there was a real short-term squeeze on inventory and companies were tapping into the strategic oil reserve.

In addition, Monday, was the day the October contract expired. So, if you wanted oil for delivery on Oct. 1 you needed to get in the market. And if you wanted to not be holding, you needed to sell or close a position. This was the last chance for refineries and other oil companies to buy and get delivery next week. It created a short squeeze and sent the price of crude soaring.

At the end of Monday’s session, the November contract was scheduled to become the front-month contract, so some investors thought there might be a play to profit on here.

So, why didn’t the oil ETFs see a similar rise?

They didn’t own the October contract.

“USO along with the other commodities ETFs doesn’t own the contract up until the expiration,” says John Hyland, the portfolio manager of USO. So, while the October contract closed up 14.78%, USO owned the November contract which only rose 6.44%. At the end of the day, USO’s NAV was up 6.46%

Hyland says all the commodity ETFs had sold the contract one or two weeks ago. The commodities ETFs don’t hold the front-month contract until the expiration because it’s too risky. He says “unless you’re an oil company and you want to take deliver you would never want to hold them the last week. The last week is mostly trading by oil companies and revenue, someone who will actually get delivery.” If the ETF held the contract on Monday, it was going to have to take delivery of actual oil and none of them want to do that. Where do you store it?

So, it’s normal for the ETF to roll out of the front-month contract and into the second-month in the last two weeks to the movement.

“You won’t see anyone on the last day of trading a contract who is not in the physical market,” says Gresham’s Hepworth. “You basically play a game where you have to make or take delivery. You might occasionally see someone inexperienced who has a position on the last trading day. Well, they will never do that again.”

Hepworth says the October market was an illusion with just a few players playing a high stakes game of poker. The ETFs mirrored the real market, which was the November contract.

Anonymous sources said that high stakes poker game was being played by Chevron, ExxonMobile and BP. Rumor has it that BP was short and needed oil for its October operations and that the other two took them to the cleaners.

PowerShares Takes on Van Eck During Market Mayhem

Amidst the mayhem on Wall Street, Invesco PowerShares Capital Management launched six new ETFs on the Nasdaq Stock Market. If you wonder why, it’s because it can take so long to get an ETF through the regulatory process, that when the SEC approves your application, you pretty much go ahead with the launch, even if the market is crashing all around you .

It appears that PowerShares is taking on Van Eck in the area of commodity stock, killing Van Eck’s monopoly on steel, gold and coal stock funds.

* PowerShares Global Agriculture Portfolio (PAGG) seeks investment results that correspond to the price and yield performance of the NASDAQ OMX Global Agriculture Index.

* PowerShares Global Coal Portfolio (PKOL) will track the price and yield performance of the NASDAQ OMX Global Coal Index.

* PowerShares Global Steel Portfolio (PSTL) follows the NASDAQ OMX Global Steel Index.

* PowerShares Global Gold and Precious Metals Portfolio (PSAU) will track the NASDAQ OMX Global Gold and Precious Metals Index.

* PowerShares Global Progressive Transportation Portfolio (PTRP) seeks results that correspond to the Wilder NASDAQ OMX Global Energy Efficient Transport Index(sm).

* PowerShares Global Biotech Portfolio (PBTQ) follows the NASDAQ OMX Global Biotechnology Index.

With these six new ETFs, PowerShares has listed 12 ETFs on the Nasdaq this year. Currently, 27 PowerShares ETFs list on the Nasdaq.

Emerging Market ETFs Compared

With the economies of the U.S. and Western Europe falling into or nearing recession, the idea of diversifying one’s portfolio into emerging markets takes on greater significance.

Emerging markets are countries that often fall under or have fallen under the Third World umbrella. They are not fully developed, but rather developing, so continued growth is likely in their future. The fact that emerging markets are usually on a growth path creates the potential to post positive returns, even when developed countries fall into recession.

That’s not to say emerging markets aren’t risky. They’re very risky. These markets are typically small or new economies with a variety of political systems, some of which may be volatile. So markets in emerging countries are subject to greater political, economic and currency risks than those of developed nations. But, the big reason for holding securities from emerging markets (in addition to the possibility of outsized returns) is they have historically had little correlation to developed markets. Even if the individual markets are risky—when used for diversification purposes—emerging markets can reduce a portfolio’s overall risk.

For the full story click here.