ETF Expert

It used to be that Wall Street cheered milestones like Dow 10,000. More recently, it was Dow 14,000.

Today, however, the most intriguing number to the "talkers" is the price per barrel on oil. The magic number, which nearly every investor seems to be demanding is $100.

On the other side of the headlines, though, is the reality of a speculative bubble. No longer can genuine analysts say with a straight face that supply and demand drives the $100 target. Any reasonable assessment puts the price at $60.

So why has crude run this high this quickly? Some say it’s the storms brewing out over the oceans. Others talk about the premium on Middle East tensions. Still others talk about strikes, shutdowns, and bomb threats. And then there are those who still insist that China/India demand, coupled with a faltering U.S. dollar, is leading people to purchase the commodity.

None of these explanations accurately reflect the difference between $60 per barrel 6 months ago and $100 per barrel today. In truth, it’s primarily about the easy access to commodity investing.

Let me explain.

A few years back, the only way that you could invest in oil was through a specialized account with a futures broker. This is due to the fact that commodities and futures trade on regulated futures exchanges like the New York Mercantile and the Chicago Board of Trade (CBOT).

And a few years ago, as crude oil began rising from $30 to $40 and $40 to $50, and $50 to $60, a great deal of the rise could be attributed to the tens of thousands of new commodity trading accounts. Simply stated, people wanted to make money on the "oil up" gamble. (Keep in mind, most investors are psychologically seeking an investment that rises in value; they are not typically looking for price declines via "buying puts" or "shorting.")

Today, however, there are quite a few crude oil ETF investments. So now, one does not even need to open a separate account to make money on the "oil up" scenario. Speculators can simply purchase:

1. United States Oil Fund (USO). This investment pursue the performance of the spot price of West Texas Intermediate light, sweet crude oil.

2. iPath ETN Crude Oil (OIL). This investment tracks the Goldman Sachs Crude Oil Return Index… an index that is derived from West Texas Intermediate (WTI) crude oil futures contracts.

3. Claymore MACROshares Oil Up Fund (UCR). This investment also seeks to track the positive price movement, before fees and expenses, of West Texas Intermediate crude oil.

With the entire investing public going one way, though, won’t there be a point at which oil will likely come down? Is it too far-fetched to recall Q4 2006, when over-hyped fears of a cold winter turned out to be a false alarm and oil fell from approx $80 per barrel to $50 per barrel? That was a 37.5% decline!

I think it may make sense to consider the benefits of contrarian thinking here. Everyone wants to zig. Perhaps you may wish to zag.

If Federal Reserve Governor Frederic Mishkin is a worthy resource, he said today that the oil futures market are signaling a near-term retreat. "The best bet is that oil prices will come down," Mishkin told the House Small Business Committee. (He also said that oil price swings are outside the Fed’s control… yikes!)

In any event, one way to move against the herd mentality in oil may be with the Claymore MACROshares Oil Down Fund (DCR). With everyone and their soccer moms banking on $100 per barrel oil, you might just want to consider the possibility that a "triggering event" sends oil on a 2-month hiatus.

Unfortunately for Claymore MACROshares Oil Down Fund (DCR) investors, it simply hasn’t worked as advertised; that is, the vehicle hasn’t accurately tracked the inverse of West Texas Intermediate crude oil. (Or even close, many analysts have argued.)

Then again, speculators will be speculators. One may wish to consider pursuing "the opposite."

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.