Mad Money

Sell Block: Do Not Buy United States Oil Fund


Here’s another exchange-traded fund to add to Cramer’s do-not-buy list: the United States Oil Fund .

This ETF and its peers are similar to the UltraShort Financial ProShares fund that Cramer has railed against. Like the SKF, the USO fails to deliver the performance you’d expect given movements in the price of oil, which the fund tracks. That’s why the whole crude oil fund group belongs in the Sell Block.

Cramer's Sell Block

Between the USO’s start date of April 10, 2006, and oil’s peak on July 11, 2008, the ETF underperformed spot prices by 73% to 111%, Cramer said. And while crude is down 30% since the fund’s creation, the USO has dropped 58%. This year has been no different: Oil has climbed 8.5% in 2009, compared a 14% decline for the USO. When oil prices are rising, it appears, investors earn less. When those prices are falling, investors lose more.

How does an ETF built to track oil prices so miss the mark? Because the USO tracks those prices by buying listed crude oil futures contracts and similar derivatives, and those contracts have a limited shelf life. Once a month, the USO sells its expiring contracts and buys replacements for the following month. When the futures contracts go for more than the present spot price of oil, something known as contango, then the USO is selling its holdings for a loss. That cuts into the fund’s performance.

Now, Cramer would endorse the USO as soon as oil futures switched out of contango and into backwardization, which is when spot prices are higher than those of futures. At that point, he said, this fund would outperform the price of crude per barrel. In the meantime, though, investors should steer clear of the United States Oil Fund.

On the flip side, Cramer did released a few Sell Block prisoners this week. Las Vegas Sands , Wynn and MGM Mirage are down 95%, 76% and 96%, respectively, since Jan. 17, 2008, which is when he locked them up and threw away the key. A month later on Feb. 14, 2008, he did the same thing to International Gaming Technology , which has plummeted 78% since then.

The stocks are up recently, thanks to news that MGM Mirage may get funding for its CityCenter project in Las Vegas and LVS is ready to restart construction in Macau after a lack of money caused a work stoppage. With the credit markets thawing out, Cramer is less worried about the debt these casinos carry. He’s not saying any of these stocks should be bought, of course, but we should note that he nailed this call.

Questions for Cramer?

Questions, comments, suggestions for the Mad Money website?