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Reasons Why The United States Oil ETF Is A Sell

Summary 1-month return is -10.85%. Year-to-date return is -35.41%. USO is a Sell. Poor ROE for USO unsettles WTI crude oil investors. Upcoming OPEC meeting to provide no long-term relief. (click to enlarge) USO NYSE ARCA 3-Month Performance of Oil The United States Oil ETF (NYSEARCA: USO ) has been listed on the NYSE ARCA since 10 April 2006. The 30-day yield is 0% and the 12-month yield is 0%. The total net assets of the company are $2.80 billion. But the performance of USO has been anything but exemplary. With a year-to-date return of -35.58%, it is ranked among the poorer performing oil funds on the market. There is no price/earnings ratio to speak of either. The fund price is $13.11 (as at 30 November 2015) and the 52-week trading range spans $12.37 on the low end and $26.39 on the high end. The 1-year chart paints an even more disturbing picture in the sense that the stock has plunged 41.87% between November 30, 2014 and November 30, 2015, from $25.58 to the current trading price of $13.11. Here are some interesting metrics about United States Oil, to further illustrate why is a strong sell contender – despite the news of falling inventories, rising oil price projections, Fed rate hikes and declining WTI oil inventories for 2016 and beyond. Looking at the total market returns for the past 3 years we see the following: The year-to-date return is -35.58 % The 1-year return is -53.30 % The 3-year return is -25.87 % USO Fund Performance Overview More importantly, the performance of USO trails the performance of the index by almost 10%, with -26.14% for the year-to-date and an index year-to-date return of -15.43%. When compared to the S&P 500 index, the performance history of USO is equally bearish. The 10-year annualized return of the S&P 500 index is 6.84%, the five-year annualized return of the S&P 500 index is 13.69% and three-year annualized return of the S&P 500 index is 16.12%. USO has a significantly poorer performance record over 1 year, 3 years and 5 years. The worst year of course has been the period between November 2014 and November 2015 when the price of WTI crude oil dropped from over $120 per barrel to its current trading range in the region of $40 – $45 per barrel. Things to Look Out For in Coming Weeks As at 1 December 2015, the likelihood of a Fed rate hike following the December 15/16 Fed FOMC meeting is 76%. The dollar index is now over 100, and close to its 52-week high. The Euro for its part is faltering and is trading under the critical 1.06 support level. This is likely to decrease further when two things happen: the ECB decides to implement quantitative easing with additional stimulus measures to boost the money supply, and the Fed moves in the opposite direction with monetary tightening to increase interest rates. This will open up plenty of daylight between the euro and the dollar, sending the European currency closer to parity with the greenback. However, despite general market weakness in China and its impact on EM countries, we are seeing some positive movements in commodity prices around the world. Both gold and copper staged minor rallies, but the concern remains crude oil. In this vein, the USO fund will likely be driven lower on the back of several upcoming meetings and announcements by OPEC and non-OPEC producers. On Friday, 4 of December OPEC members will meet to discuss the issue of supply, demand and equilibrium prices for crude oil. For its part, WTI crude oil has been clinging to single digit gains over the past couple of days. The price of WTI crude oil dropped by 3.19% ($-1.33) over the past month. The price of Brent crude oil dropped 2.92% ($-1.31) since October 30, 2015. The 1-year forecast for WTI crude oil is $47 per barrel. For its part, United States Oil Fund of Delaware has the objective of having changes in its unit’s net asset values reflect the equivalent changes in the price of WTI crude oil from Cushing, Oklahoma. It operates as an oil futures price on the WTI crude oil futures on the NYMEX. The current fund managers are Ray Allen. How Crude Oil is Going to Be Impacted in the Weeks Ahead A big part of the problem with the oil markets is the oversupply. This is true of WTI crude oil, Brent crude oil and other crude oil suppliers. Oil companies are jockeying for position with one another, refusing to budge on market share considerations in favor of price considerations. A global supply glut is the order of the day and there are real concerns about a stronger USD, weakness in China and the possibility of a Fed rate hike. On the Nymex, crude oil for January delivery closed the week at $41.71 per barrel. This is now the fourth consecutive week of declines for oil futures traded in New York. For November alone, Nymex futures have declined by 10%. The EIA released a report detailing increases of 961K barrels of crude oil for its ninth consecutive gain in inventories. Now, US crude oil stockpiles stand at over 488 million barrels – the highest level in over 80 years. But it’s not only WTI crude oil that is feeling the pressure – it’s Brent crude oil too. On the ICE Futures Exchange in London, Brent crude oil retreated by 1.32% to close at $44.86. While there were some concerns about a potential conflagration between Russia and Turkey, that only led to a slight uptick in the oil price, but nothing strong enough to sustain higher prices. Concerns remain over the potential fallout of a larger regional war from Syria into Iraq, Iran, Jordan and other countries. But the most important upcoming announcement will be what is decided at the OPEC meeting on 4 December. This will be one of the most crucial meetings to take place in the final four weeks of 2015. Should OPEC member nations, led by Saudi Arabia, decide to cut output, the price of crude oil will rise moving into 2016. This will invariably have a positive effect on oil futures, oil funds like USO, and inflation rate targets for the US, the UK, the European Union, Japan and other countries. In fact, it is precisely the actions of the energy rich bodies like OPEC that can turn the global economy around. It is not that OPEC lacks the ability to effect change, it lacks the determination to do so. The majority of analysts – Banc De Binary among them – do not expect OPEC to come to any agreement about cutting oil production. That would be a blatant surrender to WTI and global pressures. There are low expectations ahead of this meeting, and even Russia – a key energy producer – has decided not to send an envoy. It is well-known that OPEC nations have deeper pockets to sustain plunging revenues and profits compared to WTI producers. It may well be a war of attrition taking place between both power blocs, but until such time as global demand is able to soak up global supply, prices will remain at historically low levels. US Oil Rig Count Expected by Baker Hughes on Friday Everyone is determined to defend market share at the expense of all else – even if it means putting themselves out of business. That is precisely what is happening with many oil producing countries around the world. High cost oil producers are feeling the pinch in a big way, and they are having to endure falling credit ratings, falling profitability and revenue streams, layoffs and the like. The bigger companies with lower costs of operations are now able to swallow up the smaller companies. Then of course there are the policy decisions of the European Central Bank and the Fed. The ECB is moving towards quantitative easing and the Fed is moving towards quantitative tightening. This will likely strengthen the greenback and make oil prices less affordable in an already flat-demand scenario. One of the things to look for this coming week will be the Baker Hughes report on US oil rig counts on Friday, 4 December. As greater numbers of oil rigs shutter operations, so US supply declines and inventories decline too. Falling numbers of US oil rigs in production is a double-edged sword for investors as it shows the US is incapable of maintaining operations at current prices. Falling numbers of US oil rigs will invariably be perceived negatively by investors in USO. Performance of Oil ETFs Exchange Traded Funds (ETFs) such as USO allow investors to access commodity markets for crude oil without actually taking futures contracts. Since USO has been one of the lower-ranked oil ETFs, it is worth considering other exchange traded funds. Among the strongest performers are the following crude oil ETFs on the US exchanges: The DB Crude Oil Dble Short ETN (NYSEARCA: DTO ) with a year-to-date return of 66.41% and a 5-year return of 140.02% The UltraShort DJ-UBS Crude Oil (NYSEARCA: SCO ) with a year-to-date return of 40.73% and a 5-year return of 102.05% The DB Crude Oil Short ETN (NYSEARCA: SZO ) with a year-to-date return of 35.66% and a 5-year return of 86.73% The United States Short Oil Fund (NYSEARCA: DNO ) with a year-to-date return of 31.98% and a 5-year return of 76.70% The VelocityShares 3x Inverse Crude Oil ETN (NYSEARCA: DWTI ) with a year-to-date return of 26.72% and a 3-year return of 183.02% The United States 12-Month Oil (US) with a year-to-date return of -30.24% and a 5-year return of -54.63% The Pure Beta Crude Oil ETN (NYSEARCA: OLEM ) with a year-to-date return of -33.39% and a 3-year return of -56.26% The DB Oil Fund (NYSEARCA: DBO ) with a year-to-date return of -35.29% and a 5-year return of -62.41% The DD Crude Oil Long ETN (NYSEARCA: OLO ) with a year-to-date return of -36.63% and a 5-year return of -60.39% The United States Oil Fund with a year-to-date return of -38.80% and a 5-year return of -67.48% The S&P GSCI Crude Oil Tot Red IDX ETN (NYSEARCA: OIL ) with a year-to-date return of -42.42% and a 5-year return of -71.32% The Ultra DJ-UBS Crude Oil (UCL) with a year-to-date return of -68.45% and a 5-year return of -93.18%

Asset Class Performance During The First Week Of December

Below is a look at recent asset class performance using our key ETF matrix. Gains of roughly 2% were seen across the board in U.S. equities today, with the Nasdaq 100 (NASDAQ: QQQ ) leading the way at +2.34%. Today’s move higher left major indices back in the black for the month, but only by a small amount. On a sector basis, everything was higher today except for Energy (NYSEARCA: XLE ), which fell 0.63% and is now down nearly 5% on the month. Year-to-date, Energy is now down 18.27% – by far the most of any sector. On the positive side, Consumer Discretionary is up the most at 12.57% year-to-date. Have a look at the right side of the matrix for international equity performance, commodities and fixed income.

An Aggressive Portfolio For Investors Using Modern Portfolio Theory

Summary The aggressive allocation strategy incorporates a mere 15% of the portfolio to bonds. The portfolio also contains 8% to utilities and 25% to equity REITs which are sensitive to movements in interest rates. This kind of portfolio is designed for an investor that can bear substantial risk and is willing to have the portfolio rebalanced at regular intervals. I’ve selected a combination of the Schwab and Vanguard funds that I find attractive. Several are in my portfolio. Facing expectations for an increase in domestic short-term rates, portfolio strategy has been on my mind. Frequent readers will know that I cover mREITs a great deal and invest a material portion of my portfolio in the mREITs that I consider most attractive. In this piece, I want to talk about a strategy that I think would be very reasonable for the rest of the portfolio. Before we get into the allocations, I want to stress that this is designed as an aggressive portfolio and for many investors, this portfolio would simply be too risky. I have a long-time horizon, and aggressive allocations make sense for me. Each investor should carefully consider their circumstances. The Strategy I feel that a portfolio like this would be most useful under MPT (Modern Portfolio Theory). The portfolio would be designed with the expectation of frequently rebalancing positions. That can be a problem for investors that are holding their positions across several accounts or don’t have free trading on the securities. Several of these ETFs will qualify for free trading through either Schwab or Vanguard but not both. I’d love to see each of those brokerages bring out additional funds to make it possible for an investor to select funds from only one brokerage for this strategy. It might be possible through Vanguard, but I’m more familiar with Schwab’s international options. Tax Exempt For the purpose of this article, I’m assuming the accounts are retirement accounts that are tax exempt. Some investors may figure that this would be a problem because the employer sponsored 401k is unlikely to have all of these options, but I’ve personally had success with rolling former employer 401k accounts into IRA accounts. The heavy weight for domestic equity REITs would be fairly strange for an investor facing higher income taxes on the position. Asset Allocation That domestic total allocation of 65% could be treated as a home country bias and there may be some arguments for moving that combined position down to 60% of the total portfolio so that international positions and bonds can be increased. For now, I’m going to go with 65% in the combination of domestic equity and domestic equity REITs. Many investors may think 40% into traditional equity with 25% into equity REITs is incredibly heavy on equity REITs, but I see the lack of corporate taxation as a huge and durable advantage for providing superior growth. Domestic Equity The first 40% gets broken up between three funds: I’ve used the Schwab U.S. Broad Market ETF (NYSEARCA: SCHB ) over the Vanguard Total Stock Market ETF (NYSEARCA: VTI ) on the basis of a .01% lower expense ratio. This is fairly small, but I’m long both ETFs in different accounts. I’m also using the Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ) and love the defensive allocations. In this case, I opted to use the broad market ETF because I’m combining it with the Vanguard Consumer Staples ETF (NYSEARCA: VDC ) and the Vanguard Utilities ETF (NYSEARCA: VPU ) to make the combined domestic equity position significantly more defensive. Equity REITs This is fairly simple. Investors could use the Vanguard REIT Index ETF (NYSEARCA: VNQ ) or the Schwab U.S. REIT ETF (NYSEARCA: SCHH ). For investors seeking higher dividend payouts, the easy answer is VNQ. Since I have a very long time until the retirement and the portfolios are very similar, I’ve been adding more to my SCHH holdings since it has free trading a lower expense ratio. International As I noted at the start of the article, I’m more familiar with Schwab’s international options than with Vanguard’s. The Schwab International Equity ETF (NYSEARCA: SCHF ) gets only 5% of the portfolio and matches the Schwab Emerging Markets ETF (NYSEARCA: SCHE ). The heaviest weight goes to the Schwab International Small-Cap Equity ETF (NYSEARCA: SCHC ) because I want the international equity allocations to favor smaller companies on the assumption that they will earn more of their revenues from the international market. I don’t have much use for overweighting multinational companies that happen to have their headquarters in a different country. Therefore, I prefer the smaller companies in this space. Bonds I went with a mix of the Schwab U.S. Aggregate Bond ETF to get very high credit quality (including treasuries) and fairly moderate duration and the Vanguard Long-Term Corporate Bond Index ETF (NASDAQ: VCLT ) for a higher yield. The long duration on high credit quality corporate issues allows the fund to still exhibit a negative correlation with the S&P 500 while offering significantly stronger yields than treasury securities of the same long maturity. One Problem Using a portfolio like this would be ideal for an aggressive investor that is ready to put a rebalancing plan in place. Some of the brokerages will offer options to create an automatic portfolio and will allow users to influence the allocations. When I tested out Schwab’s feature for it, I was disappointed to find that some of my favorite Schwab funds were not included in the options. Of course, Schwab also does not have an equivalent option to VDC or VPU in its group of funds with extremely low expense ratios. If it rolls out an option that would allow automatic rebalancing across the account with my favorite ETFs included, I would be very interested in trying it. I wouldn’t want to incorporate my mREIT positions into that part of the portfolio, but I would feel comfortable designing a weighting system for the rest of my portfolio that would be automatically rebalanced. One of the funds I was disappointed to see excluded from the system was SCHH. Since this kind of rebalancing system would be problematic outside of tax-exempt accounts, I would really want to be able to run a heavy equity REIT allocation. Conclusion I’d love to see brokers continue to develop their portfolio management tools so that it is simple for investors to set up a portfolio like this. They would need to be careful about handling things such as rebalancing and allow investors to set a goal like to rebalance individual positions when the bid-ask spread is only one cent.