JPMorgan ties accelerated notes to S&P 500; slim protection reflects better mood, adviser says

By Kenneth Lim

Boston, April 29 - The thin downside protection on JPMorgan Chase & Co.'s two new accelerated notes linked to the S&P 500 index could be a sign that investor risk appetites are increasing, an investment adviser said.

JPMorgan plans to price zero-coupon buffered return enhanced notes due Nov. 5, 2009 linked to the S&P 500.

At maturity, investors will receive par of $1,000 per note plus double any gain in the index, subject to a maximum total payout of 111.8% of the principal. Investors will receive par if the index ends flat or declines by no more than 10%. Investors will lose 1.1111% for every 1% that the index declines beyond 10%.

JPMorgan is also offering another series of zero-coupon buffered return enhanced notes due Nov. 5, 2009 linked to the S&P 500.

The second series will return par of $1,000 per note plus triple any gain in the index, subject to a maximum total payout of 119.05% of the principal. Investors will lose 1% for every 1% that the index declines.

Alternative options

The JPMorgan products are alternatives to direct investments in the S&P 500, such as via an index fund, the adviser said. By buying the structured product, investors receive leverage for some of the upside and give up participating beyond the return cap. In the case of the two-times participation notes, investors also receive a 10% buffer on the downside.

"On the most part, the downside risk is almost similar to a direct investment because it's almost a one-to-one exposure on the downside," the adviser said.

The accelerated payout if the index goes up suggests that the products should be attractive to investors who believe that the underlying index will end up moderately higher after six months, the adviser said.

Risk exposure

But the lack of significant downside protection means that the products will not be suitable for investors who are uncertain about the direction of the equity markets, the adviser added.

"There's no point in buying a structured product where most of the benefits are on the upside if you think the underlying could end up lower," the adviser said. "If you think it can be lower, you should buy some downside protection."

Products with such little protection were rare a few months ago, the adviser noted.

"I guess after Lehman, everything just collapsed, nobody wanted this kind of risk," the adviser said. "If you could get past concerns about the banks' credit, which most people, including us, couldn't, you still wanted principal protection because there was no certainty about the markets. But principal protection was so costly, none of the products looked good.

"Obviously the only time products like this can sell is when investors are optimistic about the underlying asset."

The re-emergence of such products could be a sign of improving sentiment in the markets, the adviser said.

"I do think there's a bit more comfort with risk right now," the adviser said. "I don't think people are necessarily thinking that the S&P 500 is going to go up, but people are sticking their heads out of their caves to look around."

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