Fed Scrambles as Oil ETN Premium Soars to New Highs

Featured in Zero Hedge

Daniel Drew,  1/17/2016


Over the weekend, Zero Hedge reported exclusively how the Dallas Fed is pulling strings behind the scenes to conceal the fallout from the oil market crash. By suspending mark-to-market on energy loans and distorting the accounting, they are postponing the inevitable as long as possible. The current situation is eerily reminiscent to the heyday of the mortgage market in 2007, when mortgage defaults started to pick up, and yet the credit default swaps that tracked them continued to decline, bringing losses to those brave enough to trade against the crowd.

Amidst the market chaos on Friday, a trader brought something strange to my attention. He asked me exactly what the hell was going on with this ETN he was watching. I took a closer look and was baffled. It took me awhile to put the pieces together. Then when I saw the story about mark-to-market being suspended, it all made sense.

Here is the daily premium for the last 6 months on the Barclays iPath ETN that tracks oil:

iPath Oil ETN Premium

Initially, I thought this was merely a sign of retail desperation. As they faced devastating losses on their oil stocks, small investors turned to products like oil ETNs as they tried to grasp the elusive oil profits their financial adviser promised them a year ago. Oblivious to the cruel mechanics of ETNs, they piled in head first, in spite of the soaring premium to fair value. After all, Larry Fink is making the rounds to convince the small investor that ETFs are indeed safer than mutual funds. Because nothing says "safe" like buying an ETN that is 36% above its fair value.

Sure, there are differences between ETFs and ETNs, particularly regarding their solvency in the event of an issuer default, but the premium/discount problem plagues ETFs and ETNs alike. Nonetheless, widely trusted retail sources of investment information perpetuate the myth that ETNs do not have tracking errors.

I thought I had connected the dots on the Oil ETN story. It was just retail ignorance. Then I saw this comment from a Zero Hedge reader:

3:30 ramp

He had a point. On Friday, stocks were slammed, and the team known as 3:30 Ramp Capital was noticeably absent.

Or were they?

Behold, the missing 3:30 ramp has been found:

The Hidden 3:30 Ramp

With the oil fallout quickly spreading, the Fed is resorting to behind-the-scenes manipulation of energy debt, and now, that apparently includes oil ETNs as well.