This posts link from Big Dogs thread leads to an ETF article of importance. Me thinks the author is a forensic specialist and his concerns as documented should be noted. ETF's were created at a time when the broader market was busy killing as many public companies as possible, we know that through the data of the market. ETF's are Proxy by products, and are ripe....as the winter thaws, keep your nose to the breeze.
I've copied a contributors coment below the article that illustrates this MO....everyone should be made aware of those details to understand the gaming going on. The etf was founded on 17 million units of the product, and now stands above 200 registered with another 100 + million more units pending issuance...its a insiders game....pay attention to the players in the flow chart.
From: Kayaker 2/24/2009 10:53:57 PM
Read Replies (1) of 118188
The United States Oil Fund mystery
Posted by Izabella Kaminska on Feb 24 13:18.
Olivier Jakob at Petromatrix continues his crusade against the United States Oil Fund in his Tuesday note, an issue increasingly being picked up across the commodities and investment spectrum.
Jakob’s specific case is with the distortions being caused in the WTI market on account of the ETF’s size and predictability. He notes people are already rolling positions from the front-month April contract and into May just to avoid the distortions. This is making the front-month contract somewhat of a farce, with a number of oil traders telling FT Alphaville the contract’s viability as a hedging instrument is truly in question. The volatility, meanwhile, is also immense relative to any other contracts further down the curve....
ftalphaville.ft.com
From a Blog contributor
Hi izabella
If the USO were to issue more shares, it would do it in a public offering, not sell them to an Authorized Partner . I just pulled USO's 10-Q filing from November, and found this very interesting quote:
"Since its initial offering of 17,000,000 units, USOF has made five subsequent offerings of its units: 30,000,000 units that were registered with the SEC on October 18, 2006, 50,000,000 units that were registered with the SEC on January 30, 2007, 30,000,000 units that were registered with the SEC on December 4, 2007, 100,000,000 units that were registered with the SEC on February 7, 2008 and an additional 100,000,000 units that were registered with the SEC on September 29, 2008. Units offered by USOF in subsequent offerings were sold by it for cash at the units’ NAV as described in the applicable prospectus. As of September 30, 2008, USOF had issued 205,700,000 units, 20,000,000 of which were outstanding. As of September 30, 2008 there were 121,300,000 units registered but not yet issued."
so they DID do public offerings!
This is EXTREMELY unusual for an ETF - normally the creation/redemption process and active arbitrageurs allow the etf to grow and shrink over time, in such a way that the NAV trades at a reasonable level. In other words, if you wanted to buy $5B of SPY, State Street, who manages the trust, would never have anything to do with it - you'd buy the shares from a broker, who would in turn be buying a basket of S&P 500 stocks and selling the SPY to you. They then turn around, as an authorized participant, and "create" SPY from the trust, managed by State street, and use the newly created SPY shares to cover their short. note that the trust itself did not go out in the market and buy any stocks.
USO works similarly, but they also did these secondary offerings! I can't explain why they did that - they shouldn't need to: if everyone wants to own USO, investors should buy USO, and someone should be shorting the USO shares into the excessive demand, buying WTI futures, and "creating" new USO shares as a result. There isn't really a reason for the fund itself to have to issue more shares - yet they clearly have! It's possible that traders in the market place kept redeeming USO shares, so the trust needed to replenish them with new shares - this could have happened as oil prices ripped, and people looked for a way to short oil: arbitrageurs in turn would be buying USO at a slight discount because of all the supply, shorting WTI futures, and "Redeeming" their USO for futures to cover their WTI short. As a result, the USO trust would shrink in size. I think this is unlikely. Perhaps there was something odd in the oil futures (like the recent cantango) that made it possible for arbs to take advantage of the trust via massive redemptions of units - i'm just guessing though.
Also, if you look at the data in their 10-Q, you will see that the NAV tracked the benchmark very closely for the 30 days ending Sep 30th 2008 - so that wouldn't explain the additional offering |
