It's not over yet: March should be strong month despite poor showing last week, sources say

By Emma Trincal

New York, March 28 - The diversity of structures and asset classes used last week revealed an overall lack of conviction, and investors positioned themselves in range-bound trades to capture what may be left of the rally, sources said.

Risky assets such as commodities made a comeback but remained limited as a percentage of the total.

Structures that reward investors betting on a sideways market were the most popular, according to sources.

The week coming up

The week ended Friday was weak, but several sellsiders said the action will take place this week, especially Thursday, with the end-of-the-month momentum.

Agents had sold $1.77 billion this month as of Friday in 459 deals versus $2.57 billion during the same time in February in 592 deals, a 31% decline.

In the March 1 to 24 period last year, agents priced $3.17 billion, $1.4 billion more than the same period of this year.

Those figures do not include exchange-traded notes.

For many, March last year was exceptionally strong due to strong ETN activity.

When including ETNs, this month is already breaking the level of last year with $15.11 billion versus $11.6 billion last year, a 30% increase. These figures represent all sales between March 1 and March 24 for this year and last year.

Last week's activity alone or for the month to date is not conclusive, a sellsider noted.

"I think March will be a good month," he said. "A lot of houses are not done ticketing. We're still open."

A distributor agreed. "All the deals are closing out this week. I'm very optimistic. We had a big month so far."

The sellsider said a lot of deals will price this week as dictated by the calendar. But other factors may come into play.

"Some houses may overload the calendar because they want to push the deals before the earning blackouts because some firms limit marketing during those periods," he said.

In addition, the push this week may be greater in anticipation of the tax season.

"Firms know that their wealthy clients won't give them a lot of attention in April," he said.

Finally, March is a full month, he noted.

"With no holiday to contest with ... firms have a full month to market their trade ideas," the sellsider said.

The strength of the issuance a year ago may also help as the month reaches its close.

"Most of last year's deals were one-year trades. These are trades that have done very well. Most asset classes are higher. I suspect that you'll have a lot of rolls this week coming through," the sellsider predicted.

So far, investors remain optimistic about the market.

"Last year's view based on core indexes is doing well. People want to stay long on the market," he said.

Top deals

Given the recent bull ride, investors who are bullish are cautiously bullish. This is reflected by some of the top deals, which reward mild market moves.

"There is not much conviction, and it's true for most asset classes," the sellsider said.

The largest deal of the week ended Friday was a signature Bank of America Corp. deal: $37.59 million of 0% Accelerated Return Notes due May 31, 2013 linked to the S&P 500 index. The leveraged capped product has no downside protection but a three times leverage factor on the upside and a 17.58% cap.

"This is the usual bread and butter deal that draws a lot of volume," the sellsider said.

The leverage of the structure reflects a moderately bullish view on the market.

In the second largest deal of last week, investors tried to gain access to multiple equity markets through a non-equally weighted basket of exchange-traded funds.

Wells Fargo & Co. priced $17.62 million of 3.25% access securities due Sept. 22, 2015 linked to the iShares MSCI EAFE index fund, the SPDR S&P MidCap 400 ETF Trust, the iShares MSCI Emerging Markets index fund and the iShares Russell 2000 index fund. The deal has a 26% cap and a 10% buffer.

With a similar focus on global equity, JPMorgan sold on the behalf of Credit Suisse AG, Nassau Branch $16.74 million of 0% notes due April 10, 2013 linked to a weighted basket of three buffered return enhanced components. The basket includes the Euro Stoxx 50 index, the Topix index and the FTSE 100 index. It was the week's third largest offering.

Commodities

Investors showed a renewed interest in commodities last week. Issuers priced $74 million of such deals, and they made up 19.5% of the total. The volume was $22 million the week before, or 3.37% of the total.

Despite this uptick, the sellsider said he does not anticipate another big commodity trend as seen last year.

"It's not much. The big push was last year, especially in the last quarter. Commodities have had their big run-up. But there is no conviction where it's going," he said.

Pricing is also an issue in this asset class, he noted.

"A lot of those commodities are expensive to stay long in because of the way the curve shape is," he said.

He was referring to the steep futures curve that makes the cost of rolling the contracts higher, which in turns erodes returns.

The top commodities deal, sold by JPMorgan, was Deutsche Bank AG, London Branch's $16.71 million of 0% capped absolute return knock-out notes due April 5, 2013 linked to the Brent crude oil futures contract. It was the No. 4 deal of the week.

"You're not seeing those big deals on the Rogers anymore. This deal may just be JPMorgan making an allocation call," the sellsider said.

As investors wonder if the rally is drawing to a close, some are exiting equities.

"If you're not convinced the S&P 500 will go up, you want to go for other asset classes," the sellsider said.

Equities-linked note issuance is down 31% year to date. The decline is mostly due to fewer single-stock underliers (down 53%) versus equity indexes (down by 16%).

Meanwhile, notes linked to exchange-traded funds are up 20% but represent only 6% of the total versus 3% last year.

Range bound

Structures that aim to generate a profit when the market trades sideways or when the upside growth is mild tend to be the most successful, sources said.

Investors have shown a greater appetite for twin-win products, which offer positive returns to investors even if the underlying asset declines as long as the decline stays within a limit.

"Those range-bound trades are very popular," the distributor said.

"People want to continue to be long the market but with some protection," the sellsider said. "The best deals are trades where you get paid for sitting in the range.

"Most wirehouses are saying that equity indexes are going to stay more or less at the levels they're at now."

The top twin-win product was Deutsche Bank's absolute return knock-out notes linked to Brent crude oil.

Investors at maturity will pocket a gain equal to the absolute value of the underlying price decline, if any, as long as the decline does not exceed 25%. On the upside, the payout is the lesser of the price appreciation and 16%.

Complacency

A few investors are switching to cash or hedges, but retail investors seem to be willing to stay in the market, hoping that the rally is not over yet.

Paul Weisbruch, vice president of options sales and trading at Street One Financial, said it is a general tendency in all corners of the market.

"It's one of those complacent rallies," he said.

"You would think demand for protection would be high, but the VIX indicates otherwise. There's relatively no fear going on. You had the VIX spiking last year in October after the market had already moved."

While some investors are buying downside puts, selling calls or simply investing in some inverse ETFs, in general, only a few are ready to exit the market, he noted.

"There's a great supply of protection, but not much demand," he said.

"The market has been up steadily and consistently, so people don't really feel like realizing their gains. A few more days like today and things could change."

Weisbruch was talking on Wednesday during the mid-afternoon session. The S&P 500 was down 1% and the VIX had moved up, crossing the 17 threshold.

But so far sources said that fear seems to have evaporated.

"You don't see bearish trades in this market even though bearish trades are not expensive to put on. Again, it's this lack of conviction," the sellsider said.

"The S&P 500 is up 12% year to date. If it was up close to 20%, I would expect a lot more bearish trades with people wanting to take some profit.

"The smart money may be switching to cash. But the retail guy wants to be long with buffers.",

The top agent last week was JPMorgan with 27.12% of the total in 13 deals. It was followed by Bank of America Merrill Lynch and Credit Suisse with 16.10% and 10.91% of the volume, respectively.

JPMorgan was also the top agent in the prior week, followed by Bank of America Merrill Lynch and Goldman Sachs.

"I'm very optimistic. We had a big month so far." - A distributor

"The smart money may be switching to cash. But the retail guy wants to be long with buffers." - A sellsider

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