Despite tech rally, deals referencing Nasdaq are not many, sources say

By Emma Trincal

New York, April 21 - While equity buyers are lifting the prices of technology stocks, investors in structured products are not buying a lot of products linked to the Nasdaq 100, the benchmark for the largest technology stocks in the United States, some sources noted.

Technology stocks have been rallying at a strong pace this year fueled by strong sales and earnings from some top constituent companies such as Apple Inc., whose shares have been hitting new highs. The stock was up nearly 6% on Wednesday.

Nasdaq rally

As a result, the Nasdaq 100 has outperformed the S&P 500 in the year to date.

The PowerShares QQQ trust, the exchange-traded fund that tracks the Nasdaq 100 index, is up 9.36% this year, versus 8.27% for the SPDR S&P 500, the ETF that replicates the S&P 500 returns.

Last year, technology stocks also outperformed the S&P 500 with the PowerShares up 47.5% versus about 20% for the SPDRs.

No deals done

And yet very few structured notes referencing the Nasdaq 100 or the PowerShares QQQ priced last year, and none have been brought to market so far this year, according to data compiled by Prospect News.

"Issuers haven't done a lot of deals on Nasdaq," said a distributor of U.S. structured products.

"Most deals in the U.S. are done on the Dow or the S&P 500. It could be that investors still haven't forgotten what happened in 2000 with the internet crash," he said.

So far this year, only two Nasdaq 100-related deals have been announced, but they have not priced yet.

Last month, JPMorgan Chase & Co. said it would price 0% buffered equity notes due April 9, 2012 based on the PowerShares QQQ trust, series 1, according to an FWP filing with the Securities and Exchange Commission. Pricing was expected to happen on April 6. As of Wednesday, the deal has not been brought to market.

The payout at maturity was to be par plus any gain on the fund, up to a maximum return of 20.5% to 25.5%. The exact cap was going to be set at pricing. There was a 15% buffer.

Barclays Bank plc has an announced deal that is set to price Tuesday.

The bank announced the offering of 0% Super Track notes due Oct. 31, 2011 linked to the PowerShares QQQ trust in an FWP filing with the SEC.

The payout at maturity will be par plus double any fund gain, subject to a maximum return of 12.5% to 15% that will be set at pricing. Investors will be exposed to any fund decline.

Lack of demand

"There's not much, and I don't think it has to do with pricing," the distributor said.

"When a deal doesn't get done, it's usually due to one of the two following causes. Either it doesn't work, meaning it's not hedgeable. Or there is no demand for it. I think it's more the lack of demand here because you could very well hedge a deal based on the Qs. It's highly liquid, and options are easy to price," he said.

The "Qs" is the term investors often used to designate the PowerShares QQQ ETF.

Poor supply in 2009

Last year's issuance of Nasdaq 100-linked notes or notes linked to the PowerShares QQQ ETF was also scarce, according to data compiled by Prospect News.

Issuers priced a total of $34.36 million of notes linked to the Nasdaq 100 index or the PowerShares QQQ in eight deals last year.

Total U.S. structured products issuance was $37.77 billion in comparison.

Morgan Stanley was the most involved in this market, pricing four of the eight deals alone.

In comparison, deals linked to the S&P 500 index alone that priced last year amounted to $1.43 billion in 105 transactions.

Bad memories of 2000

"It's true that there are not that many deals on the Nasdaq," said a sellsider in New York.

"When you talk structured products in the U.S., you almost always refer to the S&P 500. I'm not sure why we don't see more tech deals with this Nasdaq rally. But it's a fact that there's not much demand for it. Maybe people have a bad taste in their mouth after the internet bubble," he said.

Greg Werlinich, president of Werlinich Asset Management, agreed.

"The Nasdaq 100 is led by the biggest of the big technology stocks, names like Microsoft, Intel, Cisco that haven't done well for some time. But now they're starting to do relatively better. So you're seeing a little bit more enthusiasm for those mega-cap names," he said.

"However, Nasdaq hasn't recovered from the technology crash. It's still lower than what it used to be 10 years ago during the peak of the internet bubble."

The Nasdaq 100 reached its peak in March 2000 at 4,705. It remains today almost 57% lower at 2,034.

Europe and invisible deals

Sources said that U.S. investors in technology stocks are likely to seek growth and to look for it directly via stocks rather than indirectly through notes.

John Jacobs, executive vice president, Nasdaq OMX, told Prospect News that one possible explanation was the prevalence of the equity culture in the United States.

"There are a lot of Nasdaq-linked notes and certificates, but primarily in Europe. Structured products have always been stronger in Europe than in the U.S. In Europe capital protection and tolerance for expensive product structures have led in the direction of structured notes and certificates while in the U.S. we have a comparatively stronger equity culture."

Jacobs also stressed that there is more that gets priced than what gets to be filed with the SEC.

"There may be some structured notes that are out there in the U.S. but that are not publicly offered and are therefore not visible. These may be offered under blanket licenses that are not reported to GIG."

Nasdaq OMX Global Index Group (GIG) is a service that accomplishes the design, development, calculation, dissemination, licensing and marketing of Nasdaq OMX indexes.

Finally, Jacobs noted that Merrill Lynch & Co., Inc. and JPMorgan used to offer Nasdaq 100-linked notes in the past "but not since about 2007."

"There may be some impact related to creditor risk that has added to product cost and may have made this product structure unpalatable," he said.

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