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Best=20 Way to Short Oil By=20 Lawrence=20 Carrel TheStreet.com=20 Senior Writer 11/13/2007=20 11:09 AM EST With=20 so many people so bullish about oil, it might be a good time to think = about=20 shorting it. After=20 all, at close to $100 a barrel, the price of crude has nearly doubled = this year=20 without a significant pullback. There are=20 plenty of people, like Fadel Gheit, managing director of oil and gas = research at=20 New York financial services firm Oppenheimer & Co., who will tell = you oil=20 prices have nothing to do with fundamentals. "Current fundamentals don't = support=20 $60, let alone $90," he says. "Demand hasn't increased significantly. = What's=20 changed in the world this year?" Even some=20 people who think current prices are justified are looking for a = technical=20 correction. Phil Flynn, senior energy market analyst at Chicago's Alaron = Trading, thinks oil's rally has been driven by fundamental reasons, like = a weak=20 dollar, an unseasonal decline in inventories and an increase demand for = oil=20 in=20 India and China. Still,=20 he thinks the market is due for a 10% to 15% pullback. The=20 traditional way to trade oil is through a futures account. But going = short via=20 the futures market is expensive -- and risky. Chances are, your stock = broker=20 doesn't trade them and you'll have to pony up a sizeable amount of money = to open=20 up a new account with a new firm. Exchange-traded=20 products that track oil are an alternative worth considering. There are = now five=20 of them, and, in theory, they should all be as easy to sell short as = stocks,=20 borrowing the shares and selling them in the hopes of buying them back = at a=20 cheaper price when it's time to repay the loan. But as I=20 wrote here in August, it's not as easy to short exchange-traded products = as you=20 might think. While all of these products are relatively new, four are = relatively=20 thinly traded, meaning they may be hard to borrow. For this=20 reason, the most logical choice to bet on a decline in the price of oil = would=20 seem to be the MacroShares=20 Oil Down Tradeable Trust (DCR -=20 Cramer's Take - Stockpickr), which tracks the inverse performance of the = long-term trend for oil. This isn't quite the same thing as tracking the = inverse=20 performance of spot oil prices, but it's still a directional play. DCR, = and its=20 twin the MacroShares=20 Oil Up Tradeable Trust (UCR -=20 Cramer's Take - Stockpickr), are trusts that hold short-term Treasuries = and cash=20 equivalents. They work like swaps in that when the Up Trust increases in = value,=20 it takes the money from the Down Trust.

Unfortunately,=20 the Up Trust and the Down Trust aren't the hedges they might be because = their=20 share prices tend to trade out of line with their net asset value. As of = Monday's close, the Down Trust was trading at a 73% premium to its NAV, = while Up=20 Trust was trading at a 20% discount to NAV. Robert Tull, managing = director of=20 MacroMarkets, says the products take a long-term view of the market and = so=20 aren't the best choices for investors trying to capitalize on near-term = trends.=20 But he=20 says investors with a bearish short-term view are better off shorting = the Up=20 Trust than buying the Down Trust. Tull=20 actually recommends a competing product, the U.S.=20 Oil Fund (USO -=20 Cramer's Take - Stockpickr - Rating), a commodity pool that holds the=20 front-month oil futures contract, as the best short candidate because it = has the=20 most liquidity. U.S. Oil=20 does have more assets under management, $395 million, than the other = four=20 products. That suggests it would be relatively easy to borrow. = Another=20 thing USO has going for it is that it does the best job of the five = products of=20 tracking the spot price of light sweet crude -- although the spot price = and=20 front-month futures contract don't always move hand in hand. = But this=20 product also generates bigger tax bills than the typical exchange-traded = product. Because it only holds the contract for the near month and = futures=20 expire, every month the fund needs to roll the contract to stay = invested. It=20 sells the near month and buys the next month's contract. Each time it = does this=20 it generates a taxable capital gain or loss. These gains are taxed like = regular=20 futures contracts. That means 60% of the profits generated in a year are = taxed=20 as if they were long-term gains, a rate of 15%, and 40% of the profits = are taxed=20 as short-term gains, or ordinary income, which can run as high as 35%.=20 However,=20 only about 8% of a futures contract needs to be put on margin, and the = U.S. Oil=20 Fund invests the remainder in 90-day U.S. Treasury bills, which earn = interest=20 that is also taxed as ordinary income. The product has an expense ratio = of 0.5%.=20 The=20 PowerShares=20 DB Oil Fund (DBO -=20 Cramer's Take - Stockpickr) is also a commodity pool holding futures = contracts,=20 although it doesn't necessarily hold the front-month contract. It tracks = the oil=20 component of the PowerShares DB Commodity Index, which holds whichever = futures=20 contracts have the biggest implied yield during the next 13 months.=20 This=20 strategy is intended to offset some of the negative effects that can be=20 experience by rolling the futures contract every month, such as = contango. DB Oil=20 has the same tax structure as the U.S. Oil Fund.

The=20 iPath S&P GSCI Crude Oil Total Return Index (OIL -=20 Cramer's Take - Stockpickr) is an exchange-traded note that doesn't hold = futures=20 or commodities. It is an unsecured debt security issued by Barclay's = Bank, a=20 unit of Barclays=20 Plc (BCS -=20 Cramer's Take - Stockpickr). Investors don't own anything except = Barclays'=20 promise to provide the exact return as the index, minus its 0.75% = management=20 fee. That=20 means you're taking on the risk that Barclays has a solid balance sheet. = The big=20 benefit to owning OIL is that it has the best tax structure of the = bunch. Not=20 only are there no capital gains or income distributions requiring annual = taxes,=20 but if held longer than a year, all gains and distributions are taxed as = long-term capital gains. However, the Internal Revenue Service hasn't = made a=20 final ruling on this tax structure, so it could possibly change. = Comparing=20 the ETFs, this year since its Jan. 8 launch, DB Oil has gained 40.9% = compared=20 with a surge of 53.3% in OIL and 53.2% in USO. The MacroShares Up Trust = trailed=20 the pack with an increase of just 25.7%. Of=20 course, betting on short-term trends in commodities prices is a risky = business,=20 no matter how you do it. This asset class should only comprise a small = part of=20 your portfolio. Matt King, a portfolio manager at Bell Investment = Advisors, a=20 manager of $540 million in Oakland, Calif., recommends between 5% and = 15% in=20 commodities, with 10% being a reasonable amount. However, he recommends=20 investors buy a commodity index instead of just one or two single = commodity=20 funds. He likes=20 the PowerShares DB Commodity Index Tracking Fund (DBC - Cramer's Take=20 - Stockpickr=20 - Rating) and the iPath Dow Jones-AIG Commodity Index Total Return ETN = (DJP -=20 Cramer's Take - Stockpickr), because they are both well diversified. But = investors who want more exposure to oil might want to consider the iPath = S&P=20 GSCI Total Return Index (GSP - Cramer's Take - Stockpickr). It tracks = five=20 industries, but 70% of the index is in energy.
MACRO=20 Securities Depositor, LLC, a Delaware limited liability company which is = acting=20 as the depositor for the MACROshares Oil Up and Oil Down Holding and = Tradeable=20 Trusts, has filed registration statements (including prospectuses) with = the SEC=20 for the offering of the MACROshares Oil Up Holding Shares, the = MACROshares Oil=20 Down Holding Shares, the MACROshares Oil Up Tradeable Shares and = the=20 MACROshares Oil Down Tradeable Shares which are referenced by this = paper.=20 Before any prospective investor makes any investment decision, such = investor=20 should read the relevant prospectus in the applicable registration=20 statement and other documents the issuer has filed with the SEC for more = complete information about the issuer and the offering of such = MACROshares. You=20 may get these documents for free by visiting EDGAR on the SEC web site = at=20 www.sec.gov. Alternatively, MACRO Securities Depositor, LLC, any = underwriter or=20 any dealer participating in the offering will arrange to send you the = prospectus=20 if you request it by calling 001 (800) 345-7999. You may also request a = copy of=20 the prospectuses by accessing the MACROshares web site at=20 www.macromarkets.com.