Volume rises 61% for week, 6.38% for year; bullish mood picks up as year's end draws near

By Emma Trincal

New York, Dec. 21 - The market approached the end of the year on a positive note. Volume grew 61% to $461 million in 112 deals in the week ended Friday from $286 million sold in 96 deals the week before. Sales were also up 3.85% for the month to date and rose by 6.38% year to date.

Better mood

"There has been some positive news in the U.S., and people are trying to put some money to work before the end of the year," a distributor of structured products said.

Agents had priced 260 deals totaling $910 million this month as of Friday. The volume for the year to date was $40.33 billion, compared with $37.91 billion during the same period last year, according to data compiled by Prospect News. The figures do not include exchange-traded notes.

"I don't know if we'll keep the momentum in the New Year. ... Not sure if it's an overall trend, because volume varies a lot issuer by issuer. Some firms are tipping the scale," the distributor said.

The top agents last week were not the usual suspects.

BMO Capital markets led with the largest deal of the week, Bank of Montreal's $90 million of medium-term notes linked to a Raymond James stock basket, capturing 20.5% of the market.

The 13 stocks composing the basket were selected in December by the equity research department at Raymond James & Associates, Inc. as the "Raymond James Analysts' Best Picks for 2012."

Deutsche Bank was No. 2 with $75 million sold in nine deals for 16.25% of the total.

JPMorgan was next with $67 million in 11 deals, or 14.55% of the week's volume.

Tactical approach

Investors last week were drawn to offerings linked to stocks and exchange-traded funds rather than equity indexes, according to the data.

By the second half of the week, stock prices edged higher, reviving bullish momentum and inciting investors who so far had stayed on the sidelines to step in, sources said.

"People are feeling better about the market. We haven't heard anything drastic from Europe. There was a huge rally on Friday," a sellsider said.

"Compared to the downward feeling of November, December has been better.

"Right now, the mood is shifting. People are tired of hearing negative news. It looks like we're going into the New Year on a better footing.

"But it will depend on the news coming out. No one knows right now if it's a sure trend or another blip."

The renewed optimism led investors to be more opportunistic, this sellsider said, leading him to interpret the popularity of stocks and ETFs as desire from investors to jump onto the bullish bandwagon.

"Clients are utilizing these asset classes in order to capture immediate performance," he said.

"As you see the Dow and the S&P rally, people are trying to jump in as soon as possible.

"It really makes sense to take positions using stocks or ETFs, especially as prices are close to bottom. It's a tactical play."

Bid on emerging markets

One clear example of this trend was the strong use of the iShares MSCI Emerging Markets index fund as the underlying for five deals totaling $80 million, which amounted to 17% of the week's total.

Two deals were particularly larger than most, one from JPMorgan and the other from Deutsche Bank.

JPMorgan Chase & Co. priced $50.3 million of 0% capped index fund knock-out notes due Dec. 26, 2012 linked to the iShares MSCI Emerging Markets index fund. It was the second largest offering of the week. Separately, Deutsche Bank AG, London Branch sold $23 million of 0% capped knock-out securities due Dec. 26, 2012 linked to the same ETF.

"Because EEM hasn't had a good month in December, a lot of people want to lock in at this level. So JPMorgan offers that type of product, and it makes sense. It's at $37 a share; it's pretty close to bottom. This note tied to an ETF offers a good entry point," the sellsider said.

Almost all of the ETF-linked notes that priced last week were tied to the "EEM" - the NYSE Arca ticker symbol for the iShares MSCI Emerging Markets index fund. The one exception was a small reverse convertible deal from Royal Bank of Canada that gave investors exposure to the iShares Russell 2000 index fund.

"People are a lot more specific," the sellsider said.

"Emerging markets, the Russell, these are tactical allocations."

Baskets of stocks saw a big bump as well, with one deal accounting for the entire asset class bucket. It came from the $90 million Bank of Montreal offering, which was popular because it offered access to the best picks of Raymond James' well-respected equity research team.

Some sources expressed surprise at the $90 million size for a transaction that costs investors 3% before breaking even.

But the sellsider disagreed.

"It's really based on Raymond James' analytical research. It's almost a proprietary trade. It may have more fees, but it's really because a lot of work is put into it on the Raymond James side and also on the hedge counterparty side," the sellsider said.

Single-stock deals grew in volume by 7% last week to $69 million, making for 15% of the total.

Equity indexes on the other hand dropped by more than 40%, accounting for 13.7% of the total, or less than stocks' share, which is not typical, according to data compiled by Prospect News.

"The market is trending up a little. There is less volatility," the sellsider said.

"People pursue the same tactical strategy with individual stocks. They're hunting for good value in picking stocks that have been unjustly sold off due to negative news. They're trying to find resistance levels."

The biggest stock deal was HSBC USA Inc.'s $19.02 million of 10% STEP Income Securities due Dec. 31, 2012 linked to Amazon.com, Inc. shares. It was sold by Bank of America Merrill Lynch. The step level is 110% of the initial share price, and the step payment is 7.65%. The downside barrier is 95%.

"I don't know if we'll keep the momentum in the New Year." - A distributor

"The market is trending up a little. There is less volatility." - A sellsider

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