Structured Notes

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CIBforeveryone's picture
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Isn't that what is in INV,STR?
 

Bureaucrat's picture
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what is INV,STR?

AllREIT's picture
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Bureaucrat wrote:Anyone selling these?  What has the investor response been?

You can sell them, but just remember the people on the other side of
the table are the prop desk at Goldman Sachs. They wouldn't be offering
these notes if they didn't expect to win.

If you lose client's money, you will lose clients.

troll's picture
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Joined: 2004-11-29

AllREIT wrote:
Bureaucrat wrote:Anyone selling these?  What has the investor response been?

You can sell them, but just remember the people on the other side of
the table are the prop desk at Goldman Sachs. They wouldn't be offering
these notes if they didn't expect to win.

If you lose client's money, you will lose clients.
Exactly...I did the first few issues at UBS in '01, until I realized that in the aftermarket the only guys on the other side of the trade were the traders on OUR desk, and they specialized in that trade and they had better computers.Once I realized that was the only bid in the market, I took a pass on the rest of the issues.  My conviction was only strengthened when I read parts of one the the VERY LARGE prospecti and realized how much was stated the bankers were making, plus god knows what else they made on the options trades that went behind the issue.  Ugh.If it takes more than 5 minutes to explain the basic pricing to the client, it's probably too complicated.

AllREIT's picture
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joedabrkr wrote:My conviction was only strengthened when I read parts
of one the the VERY LARGE prospecti and realized how much was stated
the bankers were making, plus god knows what else they made on the
options trades that went behind the issue.  Ugh.

Firms love to issue these, the embeded options inside the note are surely misspriced, and not in your favor.

The typical contingent option's in these products result in an unusual
risk profile where you get small gains often, large losses sometimes.
In Texas, they call it eating like a bird and crapping like an elephant.

I'm also going to guess that if one of these structured transactions
turns sour, you will have a hard time defending the suitability of the
investment for the client during the inevitable arbitration.

Back in the late 1990s the UK had a big problem with "precipice bonds",
(Structured Principal at Risk notes) being sold all over the
place.Major scandal's will all the classic players,

 (High pressure cold calling stockbrokers, little old laddies, "He
said it was safe", "That promise was purely incidental to the sale of
the notes" etc etc.)

troll's picture
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AllREIT wrote:joedabrkr wrote:My conviction was only strengthened when I read parts
of one the the VERY LARGE prospecti and realized how much was stated
the bankers were making, plus god knows what else they made on the
options trades that went behind the issue.  Ugh.

Firms love to issue these, the embeded options inside the note are surely misspriced, and not in your favor.

The typical contingent option's in these products result in an unusual
risk profile where you get small gains often, large losses sometimes.
In Texas, they call it eating like a bird and crapping like an elephant.

I'm also going to guess that if one of these structured transactions
turns sour, you will have a hard time defending the suitability of the
investment for the client during the inevitable arbitration.

Back in the late 1990s the UK had a big problem with "precipice bonds",
(Structured Principal at Risk notes) being sold all over the
place.Major scandal's will all the classic players,

 (High pressure cold calling stockbrokers, little old laddies, "He
said it was safe", "That promise was purely incidental to the sale of
the notes" etc etc.)

Yep.  We learned a little bit about that with some WCOM based bonds, one of the first US retail issues.  It was remarkable how clients were told something along the lines of "You have no exposure for the first 20% to the downside" but a year or so later they were saying "You told me it was guaranteed....."  How the story changed.Fortunately we didn't overcommitt for anyone, they were all folks with whom we generally had good longstanding relationships, and nobody decided to take anything further.  It was a stressful time and I swore I'd never get involved with something like that again.We did the right thing in terms of whom we put in the product, telling them the whole story, and providing them with prospectusses.  It almost became a serious problem anyway.

rightway's picture
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Joined: 2004-12-02

I have been using them for about 3 years and everyone one of them have
worked well.  I like the notes that track an index with a multiple
increase on the upside with a cap and 1:1 downside. 

They have gotten much better and shorter in my opinion.  Most I use are 12-14 month notes. 

troll's picture
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rightway wrote:I have been using them for about 3 years and everyone one of them have
worked well.

Yes and did you happen to notice that the market has been going UP for "about three years"?

doberman's picture
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joedabrkr wrote: rightway wrote:I have been using them for about 3 years and everyone one of them have worked well.Yes and did you happen to notice that the market has been going UP for "about three years"?

AllREIT's picture
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joedabrkr wrote:Yep.  We learned a little bit about that
with some WCOM based bonds, one of the first US retail issues.  It
was remarkable how clients were told something along the lines of "You
have no exposure for the first 20% to the downside" but a year or so
later they were saying "You told me it was guaranteed....."  How
the story changed.

At least you didn't sell ENE (Enron) linked notes.

AllREIT's picture
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rightway wrote:I have been using them for about 3 years and everyone one of them have
worked well.  I like the notes that track an index with a multiple
increase on the upside with a cap and 1:1 downside. 

They have gotten much better and shorter in my opinion.  Most I use are 12-14 month notes. 

Those are crap, since the return on stock market comes from the positive skew of returns. All these notes are based on capped upside, and zero-bounded downside.

If you are going to put 100% of your principal at risk you should demand unlimited returns. I.e own the index/stock directly.

troll's picture
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AllREIT wrote:
joedabrkr wrote:Yep.  We learned a little bit about that
with some WCOM based bonds, one of the first US retail issues.  It
was remarkable how clients were told something along the lines of "You
have no exposure for the first 20% to the downside" but a year or so
later they were saying "You told me it was guaranteed....."  How
the story changed.

At least you didn't sell ENE (Enron) linked notes.
Nope.  Learned my lesson before that.Actually had almost no solicited exposure to ENE.I learned a bit about technical analysis from that experience!I agree with your other post, btw, those notes do suck because they cap your upside but leave you with most of the risk.  You just said it so much better. ;-)

AllREIT's picture
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joedabrkr wrote:
I learned a bit about technical analysis from that experience!

Just tell the client that the WSJ printed the stock chart upside down.

troll's picture
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AllREIT wrote:
joedabrkr wrote:
I learned a bit about technical analysis from that experience!

Just tell the client that the WSJ printed the stock chart upside down.
lol...I recall one particular conversation....client was one of THREE who had ENE...he had been pushing me to come up with something "more aggressive"...I told him..."Hey our research guys like this I don't understand why...I can't understand why a gussied-up utility should get a 40 P/E...but it's on our "list".   He bought 1000 shares at 40.  I think I marked it SOL, but whether it was or not is for the compliance pukes to figure out...."Anyway, not so much later the stock is in the low 20's.  I call him and say "Hey look I can't really tell you why, but looking at the charts the smart money is selling this thing like hell...it stinks to high heaven....I wasn't excited when you bought it(as I said) and now I'm really not comfortable with what is going on....""Well, Joe, how low could it go?  I'm almost down by half!""Well, theoretically it could go to ZERO and I don't see much help between here and there......""Sell it."If I had only known how right I was at the time.... but I didn't.

rightway's picture
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AllREIT wrote:
rightway wrote:I have been using them for about 3 years and everyone one of them have
worked well.  I like the notes that track an index with a multiple
increase on the upside with a cap and 1:1 downside. 

They have gotten much better and shorter in my opinion.  Most I use are 12-14 month notes. 

Those are crap, since the return on stock market comes from the positive skew of returns. All these notes are based on capped upside, and zero-bounded downside.

If you are going to put 100% of your principal at risk you should demand unlimited returns. I.e own the index/stock directly.

Good point, although you don't have to say something is "crap" just because you do not participate. 

How I have used them is laying them next to an index the client is long
in anyway as part of their allocation.  If I have a cap of 20% and
the index goes up 3.5% I get 10.5% on the note.  If the index goes
up 30% I have missed out on some of the gain with the note, but they
were long as well.  It is just a hedge for area's of the capital
markets that may go flat.  Its just a strategy for a portion of a
portfolio, and I really don't think it deserves such negative
feedback.  Frankly, showing clients where this increase in
performance occurred has been quite positive.

As for Joe's comment on the last 3 years, for some strange reason I
have noticed what the market has done.  In light of that all but
one of the notes I have done have beaten the index as per the above
thoughts.  The only one where my cap was less than the market was
one I did with Japan, and there we capped at 26% in 13 months...not
entirely a bad day.  They have worked for me and our clients quite
well so far, and we will continue to position them strategically.

AllREIT's picture
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rightway wrote:

Good point, although you don't have to say something is "crap" just because you do not participate. 

I don't participate because structured notes are crap.

Quote:
How I have used them is laying them next to an index the client is long
in anyway as part of their allocation.  If I have a cap of 20% and
the index goes up 3.5% I get 10.5% on the note.  If the index goes
up 30% I have missed out on some of the gain with the note, but they
were long as well.

And if the market goes south? They are stuck on the notes and the index
position. You might as well own the index for the entire asset
allocations.

You have 100% of the downside volatility, and only some of the upside volatility.

Quote:It is just a hedge for area's of the capital
markets that may go flat.  Its just a strategy for a portion of a
portfolio, and I really don't think it deserves such negative
feedback.  Frankly, showing clients where this increase in
performance occurred has been quite positive.

The only thing these ION notes hedge is career risk in slightly positive markets. They increase career risk under all other conditions.
Quote: They have worked for me and our clients quite
well so far, and we will continue to position them strategically.

When the market tanks you will rue the day you told clients to buy these.

rightway's picture
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Joined: 2004-12-02

We don't see it the same way, and thats OK.  If the client is long
the position they should be willing to accept the downside, thus the
1:1 downside is a moot point unless you are market timing, which I do
not do. 

If they are unwilling to accept downside they are not in either the index or the note on my watch. 

Believer it or not there are times when area's of the capital markets
go up between 0% and 7% over 12-15 month time periods.  When that
happens in a market I hedge It works quite well. 

The liquidity is a valid concern and one in which I consider. 
However the short term nature of the current notes, the broad indexes I
cover, and the small percentage of the portfolio I hold in these cover
most of that concern. 

I have been in the business for the better part of 20 years and have a
real nice advisory business going.  This in fact is about the only
commission business I do and it represents less that 3% of my annual
production.  I have not and will not "rue" any day I do anything
because I research things until I am comfortable with them and position
them with appropriate portfolios, accepting the consequences should
markets get challenged.  Believe it or not I have experienced a
few rough markets and have only benefited form the fall-out.  

I have a pretty good sense of my career risk, but please continue to
coach me, I can use the information in a variety of ways. 

gad12's picture
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Joined: 2006-12-06

6 months at RJay after 3 yrs at EDJ. 
 
Just came across these structured notes.  Many of you rip on them is this post. 
 
However, many of the ones I find that we've offered are 100% principal protected with 100% (or more participation).  They range from 3-6 yrs.  Some are currency, some commodity, and some equity markets. 
 
They are intriguing to me, but it just seems like there must be a catch. 
 
I know the limited liquidity and phantom income, but am I missing something else?

Indyone's picture
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Joined: 2005-05-31

Gad, IMHO, these DO have a place at the table.  I've been using the 100% principal protected boundary notes and when you put them next to treasuries, CDs and corporates, I think the risk/reward is attractive.  It's obvious from ALLREIT's comments above that he is talking about only one specific kind of structured note that I've never seen or used, while tarring the entire asset class.
 
My B/D recommends limiting exposure to structured notes, but I've talked to product specialists at my firm who think it's a great way to diversify a bond portfolio and/or give a risk-adverse client at least SOME equity exposure.
 
I like my chances when the downside is getting your principal back in 18 months.

Ashland's picture
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Joined: 2007-03-07

Indyone - I'm sure that you sold CMO's sometime in your career & with the same logic.

It's great for diversification, doesn't act like the rest of the fixed income market. Compared to cd's & like rated investments it's got a better yield. It may mature in 4 or 24 years with an average of 12 - 13(which may or may not be meaningless in the next 20 yrs), and don't spend all of the checks I send you... Oh yeah, and the underlying collateral may be worth 50% of what we say it's worth because we don't actually know how these things work and the only folks overseeing their creation are making money by selling them. Finally, I'd like you to meet my new friend. His name is Tranche. Sorry, he doesn't speak English, but makes really good quiche.

That kind of thing?

Indyone's picture
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Joined: 2005-05-31

Well, you guessed wrong.  I've never sold the first CMO...ever.  I'm not saying they're universally bad...they simply don't fit the way I construct portfolios.
 
I'm not going to waste words trying to convince the doubters, but just you because you don't understand the product doesn't mean it isn't good for a client.

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