Goldman's leveraged notes with 45%-52.5% cap linked to MSCI EAFE designed for confident bulls

By Emma Trincal

New York, June 12 - Goldman Sachs Group, Inc.'s 0% leveraged index-linked notes linked to the MSCI EAFE index offer high upside potential with no downside protection, which makes the notes only attractive to the "optimist" investor with a positive outlook on the euro zone crisis and the economic outlook of developed countries, sources said.

For others though, the three-times upside leverage factor and the elevated cap are not enough to offset the risk or lack of efficiency of the product in today's market environment.

The notes will mature between 24 and 27 months after issue, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus triple any index gain, up to a maximum settlement amount of $1,450 to $1,525 for each $1,000 principal amount of notes. The exact cap will be set at pricing.

Investors will be exposed to any losses.

Optimism required

"You have to be optimistic on what transpires in Europe. If not, definitely stay clear of this note," said Tom Balcom, founder of 1650 Wealth Management.

"It's for someone bullish over the next 27 months on the EAFA. But EAFA is two-thirds exposed to Europe."

The majority of the index is indeed exposed to greater Western Europe with a 23.54% allocation to the United Kingdom, 9.12% to France, 7.96% to Germany and 2.53% to Spain.

Italy makes for only 2.13%, and Greece, with a 0.05% allocation, is almost non-existent. Japan represents 21.59% and Australia 8.82%.

"If you're bullish though, then it's great. You can get an 18% annualized return on a little bit over two years with a 45% cap," he said.

However, Balcom said that many investors may feel uncomfortable with the downside risk.

"I'm long-term bullish. I like the play personally. But most clients are inclined to sacrifice some of the upside for some downside protection," he said.

"For instance, they may prefer to get two-times [leverage] up and 5% to 10% [protection] down.

"If you're an aggressive investor, you will love this note. But it's not for everyone.

"I would probably hedge it. I would have to reconstruct the structured note somewhat with options."

No, thanks

Thomas Livingston, director of structured products at Halliday Financial Group, said he also does not like the full exposure to losses.

"I wouldn't invest in this," Livingston said.

"We're very cautious. Any given day, the market is off substantially.

"If there was some protection, we would be interested, but I am not thrilled about it with no buffer or barrier, even if it has a great upside. We're more interested in the protection than in the three-times leverage on the upside."

Arbitrage versus directional

A market strategist said that the leverage feature is not all that attractive in a choppy market.

"The interesting piece here is that they give you three-times leverage with no downside protection," he said.

"But I don't know how helpful it really is. It will take 10 years for the market to sustain an upward trend. Until then, it will be up 10% to 20%, down 10% to 20%. If you stay in that tunnel, the average is zero.

"If the market was up 2% per year for the next three years, you would make money with the leverage, then fine. But you assume a sustained upward trend. I don't see it that way.

"Our market is similar to this flattish period between the early '60s and the '70s when it did nothing. And you had headlines then too, including the war."

This equity strategist said that one thing has changed today compared to several decades ago when downturns were more pronounced.

"It used to be a long-only market. Not anymore. You have no clear direction today because you have a strong hedge fund market. The key word is arbitraging. So you could be in the deepest decline, if prices drop badly enough, you buy. You close your eyes and without even blinking, you buy. You can't really have a bear market anymore," he said.

"Today, my favorite strategies are market neutral, statistical arbitrage and high frequency. So forget Goldman Sachs' leveraged notes tied to the EAFE index. Those bullish bets are not adjusted to what the market is doing."

Goldman Sachs & Co. is the underwriter.

The exact deal terms will be set at pricing.

The Cusip number is 38147B364.

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