sales surge

The March 28 Bloomberg Brief for structured notes opened with this line:  “U.S. investors are betting soaring stocks can deliver higher yields through structured notes that potentially expose them to large losses and lock up capital for as long as 20 years.”

It later says, “The equity-tied securities depend on the performance of large stock indexes and eventually pay coupons as high as 15 percent a year, as long as they’re not redeemed early and markets don’t plunge.”

Here’s a graph of the “sales surge” that the article’s headline describes for these things:

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For reference, see an earlier posting on sure things and structured products (Apple edition) and one from Accelerant that begins: “While structured products are often marketed with one-page fact sheets, they are usually highly complex.”

According to Bloomberg, the notes in the tall bar on the chart include variable coupons, call dates, and “barriers” beyond which the protection implied in the structure disappears.

Sales surge, but understanding is in a bear market.

research puzzles of 2012

Here are some of the highlights from my writing during 2012:

the research puzzle ~ On the original site, the most popular posting from this year concerned distortions in the investment process from Apple.  Other favorites include an essay on investment beliefs and a reminder for investment firms:  everything is connected.  While written two years ago, my letters to a young analyst continue to be very popular, with many new readers during this year.

research puzzle pix ~ This site features a chart and commentary on wide-ranging investment topics.  Highlights this year included pieces on farmland (soon to be updated with 2012 levels), gold, less active management in some “active” mutual funds, a stunning look at interest rates, and “the big question" (namely, what unexpected things will happen when the bond bull market ends?).

research puzzle pieces ~ Brand new, the site you’re currently reading features quick takes and great links.  The most read item so far has been a posting on “sure things and structured products.”  (Apple plays a role in that one too.)

inside investing ~ I have written three articles for this new site from the CFA Institute.  The one on cash — as trash, as king, and as a weapon — may be the most important piece for investors (both amateur and professional) that I wrote this year.  It is certainly the most widely read.

Thanks to all my readers and to those who have promoted my work to others.  I appreciate your support.

Many happy total returns to you in 2013.

sure things and structured products

Once a type of investment is viewed as a sure thing, new ways are created to get in on the action.  Take Madoff.  In addition to direct investments, there were the notorious feeder funds, banks that lent against client balances, and structured products based upon Madoff’s returns.

That was a fraud, of course, but legitimate investments that come to look like sure things have that happen too.

A recent Bloomberg article regarding Apple structured notes is a case in point.  If you put yourself in a retail broker’s shoes, what could be easier to sell than yield plus Apple?

Here’s a line from the story:  “Banks create structured notes by packaging debt with derivatives to offer customized bets to retail investors while earning fees and raising money.”

The banks get paid up front, the advisors get paid up front, and the buyers may or may not get what they think they’ll get.  Most retail buyers don’t understand structured products.  Many advisors don’t really either, but they do understand an easy sell with a nice payday.

Buyer beware.  Even without the allure of an Apple as the reference security, a structured product can look like a sure thing.  It’s not.