The six new long VIX futures ETNs listed below share a common summary page, fact sheet (pdf), and prospectus (pdf):

• UBS ETRACS 1-Month S&P 500 VIX Futures ETN (VXAA)
• UBS ETRACS 2-Month S&P 500 VIX Futures ETN (VXBB)
• UBS ETRACS 3-Month S&P 500 VIX Futures ETN (VXCC)
• UBS ETRACS 4-Month S&P 500 VIX Futures ETN (VXDD)
• UBS ETRACS 5-Month S&P 500 VIX Futures ETN (VXEE)
• UBS ETRACS 6-Month S&P 500 VIX Futures ETN (VXFF)

The six new short (inverse) VIX futures ETNs listed below share a common summary page, fact sheet (pdf), and prospectus (pdf):

• UBS ETRACS Daily Short 1-Month S&P 500 VIX Futures ETN (AAVX)
• UBS ETRACS Daily Short 2-Month S&P 500 VIX Futures ETN (BBVX)
• UBS ETRACS Daily Short 3-Month S&P 500 VIX Futures ETN (CCVX)
• UBS ETRACS Daily Short 4-Month S&P 500 VIX Futures ETN (DDVX)
• UBS ETRACS Daily Short 5-Month S&P 500 VIX Futures ETN (EEVX)
• UBS ETRACS Daily Short 6-Month S&P 500 VIX Futures ETN (FFVX)

The 2-month, 3-month, 4-month, and 6-month indexes are newly created (August 2011) and have no prior history.  All contracts are rolled on a daily basis to maintain the specified constant maturities.

The inverse versions will bear an Event Risk Weekly Hedge Cost of 7.7 basis points (0.077%) per week, accrued daily.  This works out to about 4% annually and “represents the general cost to UBS to hedge overnight extreme market movements.”

“Event Risk” is not defined in the prospectus, nor is the benefit of the hedge described anywhere (and there is not a Statement of Additional Information mentioned).  The 4% annual drag (5.35% total fee) over 30 years implies that UBS hopes to collect fees in excess of the original principal amount.  However, the high fee structure practically guarantees that an early termination event will occur prior to the 2041 maturity date.

In my opinion, any company (or security) that charges a 4% annual fee should be required to describe what it is doing to earn that fee and how the fee benefits investors.  This really makes me wonder if anyone at the SEC actually looked at these products.

To the credit of UBS, they do include the following warnings in multiple places throughout the literature using an all-cap typeface:

EACH OF THE ETNs IS DESIGNED FOR TRADERS.  IF YOU DO NOT UNDERSTAND THE EFFECTS OF DAILY RESETS, THE NEGATIVE CARRY ASSOCIATED WITH VIX FUTURES AND THE NEGATIVE EFFECTS OF THE EVENT RISK WEEKLY HEDGE COST, THEN YOU SHOULD NOT INVEST IN THE ETNs

DUE TO CERTAIN CHARACTERISTICS OF THE ETNs, INCLUDING THE NEGATIVE EFFECTS OF THE EVENT RISK WEEKLY HEDGE COST, WHICH WILL BE SIGNIFICANT OVER LONGER PERIODS OF TIME, THE ETNS ARE NOT INTENDED TO BE A “BUY AND HOLD” INVESTMENT.

Disclosure covering writer, editor, and publisher:  No positions in any of the securities mentioned.  No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

Claymore U.S. Capital Markets Bond ETF (USB), was launched more than three years ago, only attracted $5.3 million in assets, traded rarely, and became a regular member of ETF Deathwatch.  Rather than admit failure by closing USB, Guggenheim has given it a new name, new ticker symbol, and new objective.  The CUSIP and the 3-year track record did not change.  This ETF has been repackaged as Guggenheim Enhanced Core Bond ETF (GIY).

Claymore U.S. Capital Markets Micro-Term Fixed Income ETF (ULQ) had a similar story, except that it attracted nearly $20 million in assets.  On 6/1/11, ULQ morphed into Guggenheim Ultra-Short Bond ETF (GSY).

I’ll say it again so we are all perfectly clear: GIY and GSY are not new ETFs.  They are Extreme Makeovers of previously-launched products.  ETF sponsor Claymore pioneered this process in July 2009 when Claymore/Great Companies Large-Cap Growth Index ETF (XGC) mysteriously became the Claymore/BNY Mellon International Small Cap LDRs ETF (XGC).   I highly suggest clicking the link for some background.

Here the plot thickens.  Around the same time XGC changed its stripes, Claymore was acquired by Guggenheim but continued operating under the Claymore name.  I do not know for a fact that the sponsor’s ownership change had anything to do with the Extreme Makeover of XGC, but the timing was certainly convenient.

In any case, in August 2010 Claymore/Guggenheim did it again, transforming Claymore/Sabrient Stealth ETF (STH) into Claymore Wilshire Micro-Cap ETF (WMCR).  I contacted Claymore at the time to ask for an explanation.  I was told that they chose the cosmetic surgery option because of the  “critical mass” behind STH and the “cost benefits” of not having to close one fund and open another.

In September 2010, Guggenheim had assimilated its new acquisition enough to drop the Claymore name from most products.  UBD and ULQ were left out of the rebranding, making me speculate something unusual was in the works.  Indeed it was.

Guggenheim Enhanced Core Bond ETF (GIY)is now an actively-managed ETF that attempts to outperform the Barclays Capital U.S. Aggregate Bond index.  The fund’s advisor (Guggenheim Funds Investment Advisors, LLC) uses a quantitative strategy which attempts to identify and capitalize on relative mispricing of securities.  GIY has a stated expense cap of 0.27%, but there are many expenses that fall outside this cap, producing actual net operating expenses of 3.66% (a cap that’s not a cap).  Additional information is on the GIY overview page.

Guggenheim Enhanced Ultra-Short Bond ETF (GSY) is now an actively-managed ETF.  Its low-duration strategy seeks to outperform the 1-3 Month Treasury Bill Index.  GIY has a stated expense cap of 0.27%, but there are many expenses that fall outside this cap, producing actual net operating expenses of 3.37% (another cap that’s not a cap).  Additional information is on the GSY overview page.

To do what they are doing with actively-managed ETFs, Guggenheim must have received exemptive relief from the SEC.  They apparently elected to keep the news quiet until now.  The February 2008 launch date makes GIY and GSY the longest-living actively-managed ETFs in existence.  Both have 3-year track records but were not actively managed for most of that time.  Be sure to read the footnotes if it sounds like they are claiming otherwise.

Bottom line, it appears to me that Guggenheim has not taken any steps to change the tricks employed at Claymore in the past.  In fact, they may even be taking the game to a new level with their expense cap disclosures.

Disclosure covering writer, editor, and publisher:  No positions in any of the securities mentioned.  No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

After two months of operation, the Alerian MLP ETF (AMLP) has already incurred expenses of more than 4%.  This translates to an annualized rate of 24%, almost double the 12.5% of MacroShares Major Metro Housing, the former record holder of the most outrageous expense ratio.

The Alerian MLP ETF (AMLP) has a stated objective:

“The Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of its underlying index, the Alerian MLP Infrastructure Index.”

The following five data points are taken directly from the performance page of the AMLP website:

• Total Operating Expenses 0.85%
• Alerian MLP ETF gain for September = +3.42%
• Alerian MLP Infrastructure Index gain for September = +5.70%
• Alerian MLP ETF gain for October = +3.17%
• Alerian MLP Infrastructure Index gain for October = +4.99%

Now, let’s do the math.  Since AMLP says it will track the underlying index minus fees and expenses, the performance difference must then be equal to those fees and expenses.  Therefore, the total operating expenses were 2.28% (5.70% – 3.42%) for the month of September 2010 and 1.82% (4.99% – 3.17%) for October.  For its first two full calendar months of operation, total expenses have been 4.1%.  In other words, the fund has already surpassed its total annual expense ratio by more than four times.  If this pace continues for a full year, shareholders in AMLP could be looking at an expense ratio of 24.6%.

Why is this happening?  It’s because AMLP, based on my research, is structurally different than every other ETF and ETN (all 1,067 of them) listed for trading on US exchanges.  It’s because AMLP is not a “pass through” entity.  Instead, AMLP is a corporation and is obligated to pay federal income at the corporate rate of 35% and will likely also have to pay some state taxes.  It’s because AMLP is making its shareholders pay that tax obligation.

How are they doing that?  They refer to it as their “secret”, but it’s really quite simple.  AMLP is clipping about 37.5% of each day’s gain/loss in the underlying index to pay those taxes.  This was verified by both Alerian and ALPS (the fund’s distributor).  However, I couldn’t find this fact in the prospectus or any of the small print disclosures, and certainly not in any of the marketing materials.  The closest I could find is “As a result, the Fund’s after tax performance could differ significantly from the Index even if the pretax performance of the Fund and the performance of the Index are closely correlated.”  Sure seems a little obtuse to me. 

It’s time that shareholders are told the truth.  They need to know that the expense ratio is nowhere close to being 0.85%, even if that additional 37.5% goes to Uncle Sam.  They need to be told why.  They need to know that AMLP is not a tax efficient investment because shareholders are paying those 35% corporate taxes.  They need to have the outrageous “1 and 37″ fee and expense structure explained to them.

Disclosure covering writer, editor, and publisher:  No positions in any securities mentioned.  No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

New security measures resulting from the thwarted Detroit bombing promise to make flying even more of a hassle than it already is. This comes at the same time as the economic slowdown is changing a lot of vacation plans. Competition for passengers is brutal. If ever there were a time not to be in the airline business, now would seem to be it.

Why, then, are airline stocks performing so well lately? Even after a small retreat since the Christmas Day incident, Claymore/NYSE Arca Airline ETF (FAA) has still more than doubled from its March 2009 low. How can this be?

I do not believe this is simply a result of economic recovery hopes. The more likely answer is that airlines are, like banks, a government-protected industry. They employ a lot of people, directly and indirectly, so the politically expedient move for Washington is to do whatever it takes to keep them in business.

Imposing ever-greater security measures might seem inconsistent with this goal. I have a theory there, too: the security measures are not really security measures. The real goal of all the screening and searching is to create the appearance of security, thereby reassuring passengers and keeping the airlines in business.

The fact is that any terrorist who wants to create havoc doesn’t need to get on a plane to do it. The same amount of explosive can kill just as many people and send just as big a message in any number of places. Extremist groups are well aware of this. So are airlines and their regulators. Even if it were possible to make the airliners 100% secure (and I’m not sure it is, short of stripping the passengers naked and giving everyone a body cavity search), terrorists would simply find new targets.

This being the case, major airlines are probably just as safe as major banks, and for similar reasons. At some point the bailouts and protection will stop working, but that point seems far in the future for now.

Disclosure covering writer, editor, publisher, and affiliates: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

Last week I wrote an article on the early termination of MacroShares Major Metro Housing Up (UMM) and Down (DMM).  In it, I mentioned that I did not know the fair prices for the pair, but there was a potential trade since the combined prices added up to only $46.11 instead of the expected $50.00.  MacroShares are based on a teeter-totter arrangement, whereby the underlying values undergo equal but inverse movements.  Their combined value is therefore supposed to remain constant except for expenses.

I went looking for a trade, but what I found instead was the most outrageous expense ratio ever.  At the June 30 launch, the NAVs were $20.02 for UMM and $29.98 for DMM.  As expected, the two NAVs added up to $50.00 as part of the teeter-totter arrangement.  As of December 21, the NAVs were $22.68 for UMM and $25.87 for DMM.  Those “pre-termination” NAVs add up to only $48.55.  Each of the pair lost 2.9% in less than six months due to daily expenses.

According to the press release, the underlying values of both UMM and DMM will also bear the early termination fees, expected to range from $0.85 to $0.90 per share.  The early termination expenses will accrue ratably starting December 22 and going through December 28, the last day of trading.  Since the termination values are to be based on the November 24, 2009 release of the S&P/Case-Shiller Composite-10 Home Price Index, all fluctuations in the NAVs during this period are expense related.

Subtracting 85-cent termination fees yields the anticipated liquidation NAVs of $21.83 for UMM and $25.02 for DMM.  Their expected combined value of just $46.85 represents expenses of $3.15, or 6.3%, in less than six months.  On an annualized basis, the expense ratio is in excess of 12.5% for UMM and DMM.

This is beyond outrageous.  It is obscene.  The teeter-totter is broken.  Where are the directors that are supposedly looking out for the interest of the shareholders?

The prospectus contains 15 hypothetical examples.  The worst case expenses used in any of these examples is $0.095 (less than a dime) per share per quarter for a 1.52% annualized expense ratio.  Additionally, all 15 hypothetical examples show a combined value of $50 for the pairs for all quarters and all years.  Maybe I am missing something, but it sure looks like more misleading marketing material to me.

Last Thursday (12/24/09), I purchased an equal number of shares of both UMM and DMM.  I intend to go through the liquidation and early termination process and will report back with the results.

Disclosure covering writer, editor, publisher, and affiliates: Long UMM & DMM. No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

Arresting a billionaire or two must have seemed like a good way to get started.  Earlier this year the SEC went after Allen Stanford, who like Madoff operated unmolested for years.  Now they have Raj Rajaratnam in handcuffs for alleged insider trading.

Rajaratnam, if you haven’t heard of him, is the founder and head of a large hedge fund firm called Galleon Group.  (In hindsight, the pirate-looking ship photos on their web site might have been a clue something was up.)  He was recently listed in Forbes magazine as the 559th richest person in the world with a net worth of $1.3 billion.  He is charged along with several others, including executives at Intel, IBM and McKinsey & Company.

I realize the wheels of justice turn slowly.  However the fact that the SEC has been wiretapping Rajaratnam’s cell phone since March 2008 and has only just now arrested him makes me wonder what they’ve been doing all this time.  I also wonder why someone who is already a billionaire would get involved in a criminal scheme worth only $20 million.

Meanwhile, on a surely unrelated note, the SEC has hired a 29-year-old former Goldman Sachs employee to be the Chief Operating Officer of its Enforcement division.  According to a Bloomberg story, Adam Storch will be charged with making the unit more efficient.

Some will decry the ever-revolving door between Washington and Goldman Sachs, but I will give Mr. Storch the benefit of the doubt along with this suggestion:  When one of your staff attorneys investigates Bernie Madoff and finds nothing wrong, don’t give her the highest possible performance rating and don’t promote her to New York branch chief.  Neither act made the SEC’s enforcement efforts any more efficient.

Today the Labor Department reported that the Consumer Price Index rose 0.2% in September and fell -1.3% in the last twelve months.  This was no great surprise, since it was the seventh consecutive month of negative year-over-year CPI.  September is a special month, however, because it is the end of the federal government’s fiscal year and is used to determine inflation adjustments for the next year.

By law, Social Security payments cannot go down – but they don’t have to go up, and this year they won’t.  This may come as a surprise to retirees who have grown accustomed to getting a “raise” each year.  The last year without a COLA was 1975.

Even more aggravating, health care was one of the few CPI categories to actually go up in the last year while much of the decline was related to energy costs.  Retired people, of course, are often above-average consumers of health care and below-average consumers of energy.  Their cost of living hasn’t dropped, negative CPI notwithstanding.

President Obama and members of Congress are keenly aware that senior citizens won’t like this development at all.  They are therefore seeking to defuse the political explosive environment with a one-time $250 payment to all Social Security recipients.  This would be in addition to the $250 “economic stimulus” payments sent to the same group earlier this year.

These payments will largely offset the lack of a Social Security COLA this year, and some seniors may actually come out ahead.  Nonetheless, at least one lobbying group is already whining that it’s not enough.  The younger workers who pay the bills are, apparently, not their concern.

According to data published in USA Today, the government gave a total of $365 billion to 700 different banks under the TARP program.  The Treasury received preferrred stock from these banks which is supposed to pay a quarterly dividend.   Now we learn that 33 of these banks simply decided not to pay dividends this quarter.  American International Group (AIG), which also received TARP money but is not technically a bank, also failed to pay its dividend.

A Treasury spokesperson claims that the banks are contractually permitted to skip these payments – and of course the federal government respects their rights.  This is laughable.  The federal government is probably the least contract-respecting institution in the world today.   The rights that need to be respected are those of the taxpayers whose capital is being used to prop up institutions that would otherwise have collapsed. 

Why are these institutions stiffing us?  From their point of view, why not?  They were handed free cash at a time when their very existence was being threatened.  Of course they took it.  Maybe now their existence is threatened again due to loan losses and they need to conserve cash.  Or maybe they would just rather use the TARP money for other things.  We don’t know.  What we do know is that the odds the government will  make a “profit” from TARP are not high.

AIG alone owes the Treasury $69.8 billion, according to Reuters.  The automotive industry owes $80 billion.  The 600 banks that haven’t yet repaid their TARP money owe a total of $134 billion.  I, for one, feel sure that the AIG and automotive “investments” will be near-total losses.  One of the dividend-skippers is CIT Group (CIT), which owes $2.3 billion and is probably going to file bankruptcy soon.   This will wipe out preferred shareholders like TARP. 

None of these numbers include the various other bail-out programs and Federal Reserve lending facilities.   The bottom line is that billions (and probably trillions of dollars) have been transferred from the public to politically favored industries like banks.  Most of it is probably never coming back.  A shocking number of people appear to be okay with this.  They say it is distasteful but necessary to save our capitalist system.

No, no, no.  This is not capitalism.  If it were capitalism, incompetent and unprofitable businesses would cease to exist.  Their directors, managers and employees would lose their jobs.  Investors would lose their investments.   This is what happens in industries that lack the ability to extract capital from the public with the government as intermediary/collection agency.  Call it whatever you like, but it’s not capitalism.

The final insult: if you happen to owe money to one of these deadbeat banks, do you get the right to skip payments?  Does your lender simply shrug and tell you to pay when you feel like it?  I didn’t think so.

There is no doubt the Federal Deposit Insurance Corporation is running out of cash to pay the depositors of failed banks.  Its insurance fund had only $10.4 billion as of June 30.  While ostensibly a private entity, FDIC has a $100 billion line of credit from the U.S. Treasury.  But since we’re all against bailouts, isn’t it better to let the industry pay to save itself?  Yes, but that’s not what is being proposed here.

Where to begin?  First of all, there are no healthy banks.  They differ only in the degree of their sickness.  Fractional reserve banking is at best a kind of managed instability.  The reason FDIC is running out of money is that banks as a group made stupid business decisions motivated by greed.

Now if we had an actual free market economy, mismanaged businesses would be liquidated.  Banks, however, are not subject to this discipline.  Quite the opposite: they routinely reap huge rewards while sticking taxpayers with the bill if losses get too big.

The plan described by the Times is not a way for the banks to save themselves.  It is a cleverly-disguised way of transferring money from the general public to the managers, creditors and shareholders of certain politically-favored banks.  Here’s how it works.

First, the banks borrow money from the Federal Reserve at near-zero interest rates.  We don’t know how much they borrow or their exact terms because the Fed won’t tell us.  Second, the banks will give this money to the FDIC.  Third, the FDIC will give the banks government bonds in return, at an unknown interest rate that will almost certainly be more than zero.

What happens then?  The FDIC will have cash to bail out failed banks, the remaining assets of which will be sold to larger banks at deeply discounted prices.  The banks pay each other interest on the government bonds they got from FDIC.  They also get to count those bonds as risk-free capital.  Bankers will get bonuses.  Bank bondholders will get paid.  Common bank shareholders will get what’s left.  Taxpayers will cover any losses.

Exactly how does this differ from having the Treasury simply give money to FDIC so it can do its job?  Depositors get paid off either way.  The Treasury is still deeper in debt either way.  The difference is that the new debt will be processed through banks in such a way as to let them make more money.

The audacity of this idea is breathtaking.  Will they get away with it?  Maybe, maybe not.  For the most part, the people who actually comprehend what is happening are the same ones who will benefit the most from it.  Organized opposition will be scarce.  Once again, banks win and you lose.

When the banking system began to melt down last year, the Fed made billions in loans to supposedly save the economy.  To whom and on what terms is the subject of the current litigation.  The beneficiaries of these loans wish to remain anonymous.  The Fed appears to be stalling for time while it plans an appeal.

Bloomberg’s argument is simple, according to attorney Thomas Golden: “… the public interest in disclosure outweighs the bank’s interest in secrecy.”  The Fed argues that the recipients, if publicly identified, will face “irreparable harm” and the Fed’s ability to respond to future crises will be impaired.

I am not sure I understand how releasing this information will hurt anyone.  Surely we can all make a very good guess which dozen or so large banks and brokerage firms are on the list.  The talk about loss of confidence and bank runs is just silly: we’ve already had bank runs.  The Fed dealt with them effectively, at least for now.  Ben Bernanke and his associates have made it crystal-clear that systemically-important banks will be protected, whatever it takes.  If anyone is in danger, it is the banks that are NOT on the list because we will know that the Fed does not regard them as “too big to fail.”

This idea that identifying who received loans somehow threatens the banking system is also inconsistent with everything else the Fed tells us.  Ben Bernanke himself took credit earlier this month for saving the world from economic disaster.  He can’t have it both ways.  Either the worst is behind us and the system is stable, or the banks are still in such a perilous state that revealing who needed help in the midst of crisis is unacceptably risky.

The Federal Reserve’s defense is so transparently ridiculous that they must know they will eventually lose.  So why the fuss?  Because they are accustomed to operating in secrecy, as are the banks who receive the Fed’s favors.  This doesn’t work in the digital world.  Any bank that cannot survive without secret loans from the state should not exist in the first place, so I’ll be glad to see some of them fall.  They brought it on themselves.