Morgan Stanley’s dual directional trigger PLUS on Dow could use a buffer, advisers say

By Emma Trincal

New York, Aug. 22 – There is a lot to like with the Morgan Stanley Finance LLC’s 0% dual directional trigger Performance Leveraged Upside Securities due Aug. 28, 2024 linked to the Dow Jones industrial average, advisers said. But given the market cycle, they would much rather see a buffer instead of a barrier on the downside.

If the index finishes at or above its initial level, the payout at maturity will be par plus at least 132% of the gain, according to an FWP filing with the Securities and Exchange Commission.

If the index falls but finishes at or above the 70% trigger level, the payout will be par plus the absolute value of the return.

Otherwise, investors will lose 1% for each 1% decline of the index from its initial level.

Five-year term

“It’s a nice vanilla note,” said Steve Doucette, financial adviser at Proctor Financial.

“Going five years out isn’t a bad thing. The market continues to run then it pulls back. You go back up.”

At first glance, he said that the 30% barrier protection seemed “reasonable.”

But the uncertainty of the next five years made him reconsider.

“There is just one problem. We don’t know where the market is going to be. Whoever wins the elections there could be big changes.”

If the market was to rally for the next five years – which Doucette as most investors doubt – the 1.32 leverage factor with no cap would be ideal for growth.

But the difficulty was to time the occurrence of a late-to-come bear market within the five-year timeframe.

Timing the bear

“Three years ago, if you asked me, I thought the market would turn. And it hasn’t happened yet,” he said.

“We are in the longest economic expansion ever.

“Who knows how long it’s going to run before we get into a bear cycle.”

Signs of an upcoming recession are becoming visible, he said. The most recent one was last week’s brief inversion of the spread between the 10-year Treasury yield and the two-year yield, which is seen as a reliable indicator of an upcoming recession. The inversion on this portion of the yield curve was the first since 2007 and caused the Dow to plunge 800 points on Aug. 14.

“We’re starting to see cracks in the economy. After such a long run who knows how quickly the market will react. We could take a really bad hit,” he said.

The expectation of investors buying five-year notes, he said, is to buy time after the bear market so that even if stocks plunge, there will be enough time for a recovery.

“Hopefully, five years out, we hit the bear, which has to happen, and we go back up.

“We could run for two more years and then go down. But it’s just too hard to predict,” he said.

Absolute return

Doucette for this reason found the absolute return attractive.

“It always confuses clients. You tell them they can make money if the market is down, they’re not quite sure they understand,” he said.

“But I like it. Since I don’t know if the market will be down in five years, I’m not even sure I would need it. But it’s good to have.

“It doesn’t cost you too much and you have the potential for a huge outperformance.”

Buffer wanted

If Doucette may tolerate the uncertainty attached to the five-year tenor, if he liked the uncapped leverage on the upside and the absolute return on the downside, the real drawback in his view was the barrier.

“I’d much rather have a buffer. Some people plug in the stats and say: ‘there is a very small probability to drop more than 30% based on historical data.’ They go ahead with the barrier. Well I don’t really believe in that.

“Once it’s down 1% more than the barrier, you’re toast.

“You buy life insurance to cover the risks you don’t foresee. Well, you buy buffers for the same reason. That’s what they’re for. So why wouldn’t you use one?”

One piece missing

Jeff Pietsch, head of capital markets at the Institute for Wealth Management, was also unwilling to take a chance with a barrier.

“You get paid if the market goes up and you can also get paid if it goes down. It’s not a terrible bet for retail investors,” he said.

“I like that there is no cap.

“The 1.32 accelerator is good. It certainly makes up for the lack of dividends.

“Too bad it’s a barrier and not a buffer.

“I might give up a little bit of the accelerator to get a buffer. But I wouldn’t use this note with the barrier.”

The notes will be guaranteed by Morgan Stanley.

Morgan Stanley & Co. LLC is the agent.

The notes (Cusip: 61769HRC1) will price on Friday.

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