JPMorgan's notes on buffered leveraged indexes offer mildly bullish bet on developed countries

By Emma Trincal

New York, April 14 - A note linked to a weighted basket consisting of three buffered and leveraged international indexes offered terms that should appeal to investors mildly bullish on the eurozone, U.K. and Japanese equity markets, sources said.

JPMorgan Chase & Co. priced $20 million of 0% notes due April 25, 2012 linked to three buffered return enhanced components, each converted into dollars, according to a 424B2 filing with the Securities and Exchange Commission.

The components are the Euro Stoxx 50 index with a 51% weight, the FTSE 100 index with a 25% weight and the Topix index with a 24% weight.

The payout at maturity will be par plus the basket return, which will equal the sum of the weighted component returns for the basket indexes.

Multicap

If an index finishes above its initial level, its component return will be double the underlying return.

Each component index has a specific cap. It is 19.54% for the Euro Stoxx 50, 13% for the FTSE 100 and 6.64% for the Topix. The maximum return at maturity is 14.81%.

A 10% buffer also applies at the component level, according to the filing. Sources said that applying a cap and a buffer at the component index level rather than to the overall basket made the structure slightly different.

"I guess the benefit would be based on the allocation decisions. If you agree with the allocation, you would benefit from it," said Matt Medeiros, president and chief executive officer of the Institute for Wealth Management.

Good for mild bulls

Medeiros said that he liked the basket and also the one-year term.

"It's an interesting play. We like the underliers," he added.

"These are notes for mildly bullish investors. The cap is prohibiting you from any runaway bullishness.

"The fact that it's short term, I like very much. Things can be choppy in the next few months. But I'm comfortable with one year."

Medeiros said that he was bullish on the three equity markets tracked by the component benchmarks, that of the eurozone, the United Kingdom and Japan.

"We anticipate this basket to have perhaps a sluggish start, but we see a strong finish," he said.

Medeiros said he is bullish on the Euro Stoxx 50 index, the blue-chip index for the eurozone, because despite some "sovereign concerns, I see fundamental growth opportunities in France and Germany."

He is also bullish on the U.K. and therefore on the FTSE 100 index, which tracks the 100 most highly capitalized U.K. companies.

For Japan, Medeiros said he anticipates rising stock prices for the second half of the year once the reconstruction efforts begin to pay off. "I'm not bullish on Japan for the next three months, but I'm bullish for the period," he said.

The notes also give investors a way to express a bearish view on the dollar. Each index is calculated in the foreign currency and converted into dollars at maturity, which can give investors additional returns if those currencies appreciate against the dollar, according to the prospectus.

However, Medeiros said that he would not buy the notes as a way to make currency bets.

"I'm relatively neutral on the potential gains from exchange rates," he said.

"There are going to be pressures on currencies for a while. The euro will have some pressure, the dollar will have some pressure and obviously the yen as well. It's going to be a lot of back and forth short term."

For investors moderately bullish on developed countries, the product is a good fit, Medeiros noted.

Risk/reward profile

Others however said that the downside risk was too great in today's market conditions.

If an index falls by up to 10%, its component return will be zero, according to the prospectus.

If an index falls by more than 10%, its component return will be 0% minus 1.11111% for every 1% decline beyond 10%.

Howard Simons, president of Rosewood Trading, said that the 10% buffer was too small.

"If we do go down, the 10% might be the starting point of the conversation," he said.

"If the central banks start tightening, we'll be hurt a lot more than 10%.

"And when you hit the 10%, you're leveraged on the downside. I don't like that."

He added that the basket was overly concentrated, another factor of risk.

"This basket looks like the EAFE without the diversification. I don't like the concentration of this portfolio," he said.

The MSCI EAFE index is an equity benchmark for international stocks from Europe, Australasia and the Far East.

"I don't think we have a good risk/reward profile here," he said.

"If we're going to have a continuation of the bull market, then you have a pretty tight cap. Meanwhile you're overly exposed to the downside.

"A 1% fee is not unreasonable. But if you like international stocks, why would you want those terms? This product is very complex. You're better off buying the EAFE index with a protective put."

The fees for the notes are 1%.

J.P. Morgan Securities LLC is the agent.

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