JPMorgan’s capped buffered leveraged notes on basket priced for a market rebound, source says

By Emma Trincal

New York, Dec. 19 – JPMorgan Chase Financial Co. LLC’s 0% capped buffered return enhanced notes due Jan. 24, 2020 linked to a basket of equity benchmarks offer a risk-adjusted return profile that largely depends on one’s view about the current stock market tumult and by extension the longevity of a bull market nearly 10 years old.

According to an industry source, it was a timely play on the market pulling out of the current correction.

The basket consisted of the S&P 500 index with a 40% weight, the Russell 2000 index with a 30% weight and the Euro Stoxx 50 index with a 30% weight, according to a 424B2 filing with the Securities and Exchange Commission.

If the basket finishes at or above its initial level, the payout at maturity will be par plus 1.5 times any gain of the basket, capped at par plus 16.4%.

If the basket falls but by no more than 10%, the payout will be par.

Otherwise, investors will lose 1.1111% for each 1% decline of the basket beyond the 10% buffer.

Basket

“It makes sense to use a basket of equities. A worst-of wouldn’t have been good in that case,” this source said.

Worst-of deals provide better terms when the underlying assets have low or negative correlation, which is no longer the case in today’s market, he explained.

“When stocks go down, they tend to go down together. You’ll always see a spike in correlation in down markets,” he added.

Terms

The deal offered a good risk-adjusted return, he noted.

“You get 16.4% in one year so that you lever the first 11%. It’s not a terrible return for a one year. If the market rallies you can certainly take advantage of it.”

The 10% geared buffer was seen as satisfactory in the context of the current market correction.

“It’s an interesting play in this market. This is for someone who may say: the market has already dropped. It’s difficult to catch the bottom. I’m taking the view it won’t drop more than 10% from where it is now, which in this environment is a reasonable assumption.

“On the upside, I’ll participate up to 16% in the rebound. I think there will be one but it’s unlikely to be more.

“Looks like an OK deal to me,” the source said.

Market sell-off

Andrew Valentine Pool, main trader at Regatta Research & Money Management, did not share that view.

His most negative observation was about the buffer, which he said did not offer adequate protection. The gearing made it worse as investors may lose their entire principal.

“What did we just have in the past couple of months? I think there’s a lot of risk in this market. They give you a 10% buffer that’s leveraging down. I would expect better. It’s like – you don’t get any milk with your cookies.”

No crystal ball

Over the next 12 months, the market could rebound, remain choppy or turn bearish.

“It’s anyone’s guess,” he said.

“If you buy now are you getting a good discount or are you catching a falling knife?”

He said he leaned toward the latter.

“We’ve had a very good run for nearly a decade. Historically it’s a record-long bull market. The pullback we had in the last three months is minimum.”

Despite the stock market tumble, both the S&P 500 and the Russell 2000 were still overpriced by historical standards.

“Saying the sell-off provides value is a stretch,” he said.

While the cap on the return was attractive, he found the level of downside protection inadequate.

“We have plenty of headwinds, starting with rising interest rates, a global economy slowing down and this treacherous market,” he said.

“Too many things going on...a 10% buffer for the next 12 months is just not enough for us.”

The notes will be guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes will price on Dec. 20 and settle on Dec. 26.

The Cusip number is 48130WLV1.

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