Oil is trading up more than $3 today to $111.68. DCR is the MACROshares inverse oil note that trades on the AMEX. When oil goes up, DCR goes down. When oil goes down, DCR goes up. Today, however, DCR is down more than 26% even though oil is up just 3.12%. What gives?
When DCR began trading back in November 2006, oil was trading at around $60 per barrel. DCR trades along with UCR, which is the MACROshares oil up note. The net asset value (NAV) of UCR is the front-month oil contract price divided by three. The NAV of DCR is $40 minus the NAV of UCR.
The reason DCR is down so much today is because there is an early termination clause in the structure of the notes. If the front-month price of crude closes above $111 for three consecutive days, the termination clause takes place and the notes will stop trading at their NAVs on the 4th business day prior to the end of the quarter that the termination occurs. Shareholders will receive distribution on the 3rd business day following the end of the quarter.
Going into today, DCR was trading at just over $9 per share, but its NAV was $3.82. Remember, if oil closes above $111 for 3 consecutive days, the termination clause goes into affect and the shares are redeemable at NAV at the end of the quarter. As oil trades above $111, the share price has moved lower and lower. This trend should only accelerate as oil stays above $111. Currently, DCR is down 26.33% to $6.76.
We sent our Premium subscribers a B.I.G. Tips report on this earlier today when oil was trading near $109, but there hasn't been much mention of this in the financial world. It should garner more attention if the potential termination trigger becomes a reality.
The termination clause is mentioned many times in the prospectus for DCR, and MACROshares explicitly points out the risks involved in investing in the notes. This should still remind investors to make sure they know exactly what they're investing in before they put money to work.