For the past two weeks we’ve been shorting USO on and off and it’s been very entertaining.
We all know thatmostETFs are a total scam as they use a system called “creation units” to deliver shares to market WITHOUT changing the net asset value of the underlying assets of the fund. Because the funds are front-loaded(or front-unloaded) with cash duringthe day,professional arbitrators have a field day buying or shorting the underlying stocks or commodities that theETFs MUST buy to “squareup” their positions at the end of a day. Effectively, ETFs allow professional investors to pool the money of small investors into one, easy-to-manipulate target that follows pre-defined rules they can trade against.
In the case of USO, which has always underperformed oil by a wide margin, the divergence is so bad and the flaws in the fund are so vulnerable to attack by the already manipulative NYMEX crowd, thatoil expertStephen Schorkhas labeled it a pyramid scheme:
So how is this like a pyramid scheme? A pyramid scheme is funded by a constant flow of dollars into the venture by new investors. The second investor knowingly and willingly pays the first investor on the assumption he will get paid by the third investor… and so on. It’s similar to a Ponzi/Madoff scheme, with the key difference, investors don’t know (or don’t want to know as long as those alleged returns keep rolling in) they are being scammed.
The USO is being funded by a proliferation of new retail investors looking to diversify into “alternative investments” (which as far as we have been able to ascertain, alternative investment is a euphemism for Las Vegas style bets on commodities by retail investors tired of watching their 401Ks drop). More importantly, these investors are obviously out of their league, i.e. taking buy-and-hold positions in a contango which raises their cost basis every month they roll into the higher priced deferred contract.
We assume they are buying the USO because they are bullish. But in a peculiar way, their actions could be helping to prevent the market from rallying. These new investors are not funding a pyramid per se, but they are helping to fund storage. That is to say, with global demand in the doldrums, the contango will persist. And, as long as it lasts, traders will continue to front-run the rolls, which in turn will exacerbate the contango, which will then incentivize storage builds further, which will then ultimately weigh…