Tag Archives: contango

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ETF News, Global Macro Strategy

Only Idiots Use USO ETF to Trade Oil-It Can’t Tango!

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For those who are confused as to the near-term, or even longer-term price direction of Oil, even J.R. Ewing would tell you there isn’t an oil man in Texas, including Boone Pickens, who can see far beyond the prices posted at the pump. Especially when one gas station in Oklahoma is now selling one gallon for .99 –a price that has been seen in certain spots, but not since 1993 has oil been so ‘cheap.’ For those who try to express a bet on price direction via a financial instrument, one leading markets muse is going so far as to infer that “..Only idiots use the ETF $USO to make a bet with.” Why? It Can’t Tango!  Well…that’s perhaps a poetic license pun on words, but..

Courtesy of the universally-known ETF Professor Todd Shriber, who pens for financial news site Benzinga, the markets muse in question turns out to be one of the global macro world’s more eloquent and most thoughtful gurus.. Here’s the extract from Shriber’s early a.m. column:

To say the United States Oil Fund LP (ETF) (NYSE: USO), which tracks West Texas Intermediate crude oil futures, is a flawed product is accurate and fair. Over the past three years, USO is down 77.1 percent, but the exchange-traded product remains a favorite, on both sides of the oil trade, of professional traders.

Inflows to USO confirm as much. After adding nearly $3.1 billion in new assets last year, USO has seen year-to-date inflows of almost $900 million. USO’s 2016 inflows put it just outside of the year’s top 10 asset-gathering ETFs.

USO And Contango

Perhaps the greatest source of criticism against USO comes from the fact that the ETF is frequently in contango. As it pertains to USO, contango occurs when the West Texas intermediate futures currently held by the ETF trade at higher prices than the market expects that contract to trade at for the months ahead.

“Oil traders should be aware that USO tracks front-month WTI future contracts and the underlying oil market is currently in a state of contango. Consequently, USO could experience a negative roll yield when rolling a maturing futures contract, or selling a contract that is about to expire in exchange for the next month contract,” according to ETF Trends.

WTI And Negative Yield Rolls

Speaking of negative yield roll, West Texas Intermediate futures are currently facing an epic negative yield roll.

neil azous
Neil Azous, Rareview Macro

“The widening in the ‘contango’ between the first and second futures contracts, or the March-April spread (CLH6-CLJ6), has exploded to ~8 percent in negative roll yield,” said Rareview Macro founder Neil Azous in a note out Wednesday evening.

As Azous noted, West Texas Intermediate’s current level of contango is quadruple that of Brent crude, the global oil benchmark contract, on a percentage basis.

The problem for any trader, professional or retail, who is long USO is that instances of exaggerated West Texas Intermediate have previously given way to savage declines for that contract and USO.

“The extrapolation that the market will likely make into next week’s crude oil futures roll and options expiration is that the next leg lower in the barrel has started and this CLH6-CLJ6 spread can widen out dramatically as evidenced by the extreme widening to 25 percent back in the winter of 2008-2009 when the barrel finally bottomed out for that cycle,” added Azous.

Read more: http://www.benzinga.com/news/16/02/6246307/how-contango-could-affect-a-popular-oil-etf#ixzz3zt6Cpp2D

 

Global Macro Strategy

Macro View : Bears & Bulls & Sheep; The Pain Trade: Risk Reduction

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MarketsMuse Editor Note: At risk of pounding the table too frequently by pointing to global macro strategy think tank “Rareview Macro” and their high-frequency of prescient postulating…the below excerpt from this a.m.’s edition of Rareview’s Sight Beyond Sight illustrates why this analyst is become the analyst ..For those confused by our use of ‘high frequency’, please note that we’ve filed a trademark for a new label “HFP” aka high-frequency prescience; and not to be confused with HFT aka high-frequency trading!. Premium merchandise including t-shirts, ball caps, and other items will be on sale soon!

“…The “True Pain Trade” Now Underway…Only Defence is Outright Risk Reduction”

Neil Azous, Rareview Macro LLC
Neil Azous, Rareview Macro LLC

Yesterday, our main argument was that US equity investors needed to be mindful of chasing higher prices as that was a “bull trap”. We specifically said:

“The key point here is that the S&P 500 finally closed below the 200-day moving average after almost two years and the bounce off the break of that record streak can be large enough to make professionals believe that the weakness is now over.

Make no mistake that is the formula for how we get to 1800 in the S&P 500 next. You suck investors back in only for them to have to liquidate all over again. This time, however, the losses are too great and the even lower prices force them to sell the positions they held onto all the way down in the first place and were not willing to relinquish that time around.

The sentiment is no longer about whether this is a correction or not. It is now about whether it is a 10% or 15% correction.”

At some point our microphone may be louder than it is at the moment, but for now this warning was dismissed by the bulk of investors. At the time of writing the S&P futures (symbols: ESZ4) are down -1.8% from yesterday’s highs. That is the very definition of new longs being trapped at higher prices.

Before dismissing this view we would remind you that the majority of professionals in this business are sheep, and to remain part of the asset gathering business they have to always put themselves in a position to capture ~60% of any market move. And, as sheep would, that is what they tried to do yesterday.

Now most participants who use a Bloomberg terminal just walk into the office and look at the World Equity Index (WEI) screen. This is a lazy exercise as it only provides updates for the major developed markets. The point is that a smart investor should also look at the markets not included on the WEI screen (i.e. Greece) and the Emerging Market Equity Indices (EMEQ) and World Bond Markets (WB) pages.

Why? Continue reading →