Citigroup's Index Lasers due 2015 tied to Euro Stoxx 50 ex Financials aimed at cautious bulls

By Emma Trincal

New York, Sept. 11 - Citigroup Funding Inc.'s 0% Index Lasers due October 2015 linked to the Euro Stoxx 50 ex Financials index may appeal to bulls and range-bound traders alike, financial advisers said.

The structure, according to those buysiders, offers sufficient upside potential and protection to accommodate bullish investors as well as those betting on the index trading in a range wide enough to offer a chance for noteholders to outperform the index.

However, investors wary of the European debt crisis should not be involved in the trade, one of the buysiders said.

If the index finishes above the trigger level - 75% of the initial level - the payout at maturity will be par plus the greater of the index return and the contingent minimum return of 13% to 16% that will be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission. The payout is subject to a maximum return of 50%.

Otherwise, the payout will be par plus the index return with exposure to losses.

The Euro Stoxx 50 ex Financials index is a subset of the Euro Stoxx 50 index. It represents the major non-financial blue-chip companies in the euro zone.

Bears beware

"They're taking out the financial sector. That's a good thing given the headline risk," said Thomas Balcom, founder at 1650 Wealth Management.

"However, it's a three-year note. You have to be optimistic about Europe and you have to believe that at some point they will resolve their issues. This is not for the gloom-and-doom investor. You can't be bearish on Europe and buy this product," he said.

The bulls have made a comeback in the euro zone equity space, including the non-financial part of this market, seeing a bargain opportunity in a sector characterized by uncertainty, political risks and lower stock prices. Since the beginning of June for instance, the Euro Stoxx 50 ex Financials index has soared by nearly 20%.

Balcom said that the bet investors in the notes are making is either "optimistic" or "cautiously optimistic," seeing himself as the former.

"I am optimistic on Europe because the euro zone equity market has already declined a lot. I believe that at some point they will find a solution. The 25% threshold in my view is sufficient for a market that has already taken such a hit," he said.

"But you have to be optimistic, and this note would not be for all of my clients. It would be for certain clients who don't believe that we could have another big sell-off, a sell-off taking us down 26% over the next three years. They would have to be either bullish or have the stomach for risk."

Once an investor has an interest in getting exposure to this asset class and the required tolerance for risk, the terms of the product, he said, are relatively attractive.

"If the index is down 20%, you can be up somewhere around 5% per year. That's pretty appealing right there," he said.

"The 50% cap, which is about 16.5% per year, is quite good too. Historically, returns have been in the high single digits, so you're capturing some decent upside."

Historical range

Kirk Chisholm, principal at NUA Advisors, took a technical analysis approach and concluded that the notes offer a comfortable trading range for investors seeking to outperform the underlying index.

"This index is made of global blue chips. Europe certainly had its problems, and I don't think those problems are over," Chisholm said.

"However, this index sold off a lot in the last few years. If you look at it, we've come back from the lows of 2009 but we're still significantly lower than the highs of 2008."

The index is at 1,315. It peaked in February 2008 at 1,713 before bottoming 12 months later, losing nearly half of its value.

"A 25% decline from now would take us close to the worst. This protection allows the index to fall near its 2009 lows. I would not expect to go back to the lows of 2009. In my view, the protection they give you is quite reasonable," he said.

Chisholm said that he also likes the upside potential provided by the 50% cap, which is the equivalent of about 16.5% a year.

"Fifty percent for three years is a decent amount of cap," he said. "The 50% maximum upside on three years takes you at a higher level than the highs of 2008.

"It's a good strategy just looking at the historicals. I personally think that this euro zone index is going to trade range bound."

In addition, he said that he likes the contingent minimum return of 13% to 16% for three years.

"If you're going to make 13% for three years instead of losing money, that's not bad. If you close anywhere above the 75% trigger and below the 13% minimum, you are going to outperform the index. That's not bad. In fact, I'd rather do this than invest in that index," he said.

"It would make sense to invest directly in the index if you were going to break the high of 2008 on the upside or the low of 2009 on the downside. I don't see that happening.

"You're getting paid for being range bound."

Duration, upside

Some of the concerns Chisholm said he may have relate to the duration.

"Three years is a long time in this market, especially in Europe with the uncertainty and the political posturing," he said.

"I would have some issues with the credit risk on a three-year. But in any of these notes you have credit risk, and I don't think Citi is more of a problem than any other U.S. bank. In fact I would be less concerned with them because they are one of the too-big-to-fail banks," he said.

Another potential risk may be to give up too much of the upside.

"There's certainly less risk involved if you use a euro zone benchmark without the financials, but there is also less reward," he said.

"At some point in time, the financials are going to outperform because it's been such a beaten up sector. So while you're probably giving up some upside, you're still coming out ahead with this note.

"I think you're in pretty good shape to outperform the underlying index. The risk/reward is very favorable."

The securities (Cusip: 1730T0YV5) are expected to price Sept. 28 and settle Oct. 3.

The fees are 1.5%.

Citigroup Global Markets Inc. is the underwriter.

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