JPMorgan plans dollar-bullish partially principal protected notes; retail appeal likely limited, adviser says

By Kenneth Lim

Boston, Oct. 16 - JPMorgan Chase & Co. is offering a series of dollar-bullish notes linked to a basket of four G-10 currencies amid recent gains in the U.S. dollar.

"It's an interesting sector right now, so I'm not surprised to see this," an investment adviser said.

JPMorgan plans to offer zero-coupon 97% principal protected bearish notes due April 29, 2010 linked to a basket of four currencies.

The basket comprises equal weights of the euro, the British pound, the Swiss franc and the Japanese yen. The basket level increases if the component currencies appreciate against the U.S. dollar.

At maturity, investors will receive $970 for each $1,000 par note plus an additional amount. If the basket ends at or above its initial strike level, the additional amount will be zero. The initial strike level is the arithmetic average of the four weekly closing levels of the basket beginning Oct. 31, 2008.

If the basket falls by less than 13% from the initial strike level, the additional amount will be 135% of the basket's absolute return. If the basket falls by 13% or more, the additional amount will be 17.55% of the initial level.

Currencies in spotlight

The currency markets have been active in the past few weeks with the greenback moving higher against major currencies, the adviser said.

"I don't do a lot of currencies, but even I've had to take notice," the adviser said. "A lot of money is flowing into the U.S. dollar right now."

The appreciating dollar has largely been a result of investors wanting a safer place to park their money than volatile equities and emerging markets, the adviser said.

"This is one of those patterns that you tend to see in times like these," the adviser said.

But the adviser declined to offer a prediction on where the dollar was headed.

"It's not my field of expertise, No. 1, and No. 2, I think there are too many moving parts right now," the adviser said. "Across the board, whether it's currencies or equities or bonds, the markets currently are moving not entirely based on fundamentals but on the sentiment of the day. A lot of fear and irrational optimism and short-term decisions."

Notes aim high for buyers

The notes are unlikely to attract many small retail investors, the adviser said.

"The first clue is this line right at the top that says 'minimum denominations of $20,000 and integral multiples of $1,000'," the adviser said.

The lack of full principal protection could also limit interest among the retail buyers at this time, the adviser said.

"Normally 97% principal protection could still be acceptable for some retail investors, but I think given the current circumstances, most retail investors are not going to be ready to put even 3% of their money at risk," the adviser said.

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