JPMorgan ties notes to S&P 500; UBS links to real estate; products work in turnarounds, advisor says

By Kenneth Lim

Boston, July 15 - JPMorgan Chase & Co.'s new lookback return enhanced note linked to the S&P 500 index and UBS AG's partially protected notes linked to a real estate index are turnaround products aimed at investors who think the economy will improve, an investment advisor said.

JPMorgan links to S&P 500

JPMorgan plans to price lookback return enhanced notes due Aug. 25, 2009 linked to the S&P 500 index.

The payout of the product will be based off of a "lookback index level," which will be the lowest closing level of the underlying index during the 30 calendar day period from and including the pricing date.

At maturity, if the index ends above the lookback level, each note will pay par of $1,000 plus triple the index's gain above the lookback level, subject to a maximum total return of at least 13.35% on each note. The return cap will be set at pricing. Investors will lose 1% for every 1% decline in the index below the lookback level.

Lookback provides buffer

The lookback feature is essentially a variable buffer structure, the investment advisor said.

"If the index goes down in the next 30 days, that's better for me because the base level is lower," the advisor said. "So if the index goes down by 10% in the next 30 days and at maturity it's down 20% from where it is today, I only lose 11.1% instead of 20%. So it works just like a buffered note, the only difference is that I won't know until after the first 30 days what the buffer is going to be."

The structure will work better for investors if the S&P 500 hits bottom within the first 30 days and starts moving up after that, the advisor said.

"Usually for a buffered note you're basically just bullish on the underlying index," the advisor said. "But because of the way they structured this, you basically have to time a market turnaround. If the market keeps going up, obviously that's not so good for you. If it keeps going down, you might get a bit of buffer, but you'll still lose money. The only scenario where you'll make money is if the market goes down then goes up again, and that's asking you as an investor to basically predict when the market will change direction."

The implicit strategy in the structure may be a tough sell, the advisor said.

"Personally, I think it's just really, really hard to know when a turnaround is going to occur, especially if you're talking about a period of 30 days," the advisor said. "That's like a billion dollar question. Do you know when the market is going to change its direction?"

UBS links to real estate index

UBS plans to offer partially protected zero-coupon return optimization securities due July 30, 2010 linked to the Dow Jones U.S. Real Estate Total Return index.

At maturity, each UBS note will pay par of $1,000 plus 2.5 times the underlying index return if the index finishes higher, subject to a maximum total return of 30% to 32%. The return cap will be set at pricing.

If the index finishes between 90% and 100% of its initial level, investors will receive par. For every 1% that the index declines below 90%, investors will lose 1% of their principal. Investors will receive at least 10% of their principal.

The Dow Jones U.S. Real Estate Total Return Index measures the performance, taking into account dividend payments and reinvestment, of the real estate sector of the U.S. equity market.

Notes suit turnaround view

The UBS notes also reward investors who think that a turnaround is imminent in the U.S. real estate sector.

"That's kind of interesting, this one is also a turnaround kind of product," the advisor said.

The notes can offer a relatively generous participation rate and return cap because the sector has been very volatile, the advisor said.

"The sector obviously hasn't been doing very well," the advisor said. "The residential market is still suffering, and if the economy continues to suffer you wouldn't put too much faith in the other sectors as well, commercial, retail. But obviously for taking that kind of risk you can get up to something like 31% if you make the right bet."

The advisor said the product could also be used to hedge a short position on real estate.

"I think some people use this as a hedge," the advisor said. "If I'm short on the sector, well, if I have $100,000 short on the sector and $100,000 on this product. If the sector goes up by 15%, I lose 15% on my short but I make 37.5% on this, so I'm better off. If the sector goes down by 15%, I lose 5% on this product, but I make 15% on my short, so I'm also better off. The problem is if the sector goes too high, I won't make enough on this to cover the other position."

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