“The lemmings run to the bulls. The bears hide their money under the mattresses,” said LaSalle BDSD structured products manager John Tessar, as he discussed the gulf between what US product sponsors think investors ought to be considering during current equity market volatility and what they are actually buying.“During times of high volatility and potential peaks, there’s a desire (for sponsors) to put out bear products,” Tessar told SRP. “But as far as traction, I don’t see them gaining traction in the retail market. Inherently, investors are bullish with short periods of bearish sentiment.” Most will not, therefore, buy into bear products with lengthy maturities.
“Bearish-based products are a hard sell,” agreed InCapital structured products VP Glenn Lotenberg: retail investors are not buying into long-term bear market thinking, and if they expect a short-lived market decline, they are more likely to short an individual stock or even an exchange-traded fund than to hibernate for months on end with a bear market structured product, he said.
Since 1 June this year Merrill Lynch has either launched or intends to launch ten tranches of accelerated return bear market notes, six of them in the past two weeks. Although several are linked to the performance of broad equity indices such as the Russell 2000 and Dow Jones Industrial Average, two are linked to the Utilities Select Sector Index and a trio to the performance of the Phlx Housing Sector Index, a twenty-company housing index on the Philadelphia Stock Exchange.
Morgan Stanley has launched four bear market products of its own; a duo of bear market plus notes linked to equity indices and one auto-callable security tied to the performance of the S&P 500 Index.
While we have no indication of how sales of these products are progressing, we understand from distributors such as Lotenburg that instead of pure bear plays, retail investors are looking to principal protected notes and products with appetizing coupons and hefty downside protection.
One such product is the recent JP Morgan Reverse Exchangeable Note linked to the worst-performing stock of a basket of five broker-dealer/investment banks: Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley. The six-month note pays 7.5% in six monthly payments, so long as none of the stocks declines by more than 50% and has a 50% protection barrier, beyond which capital declines on a one-for-one basis in line with the worst-performing stock. Physical delivery is possible.
JP Morgan Reverse Exchangeable Note is available now in Recent Additions (US).
