Harris links multiple observation CDs to S&P; products can ride out uncertainty, adviser says

By Kenneth Lim

Boston, June 17 - Harris NA is in the market with a couple of periodic-observation structured certificates of deposit - and they could benefit investors if the underlying asset is hitting a bottom, an investment adviser said.

Harris plans to price zero-coupon principal-protected certificates of deposit due June 30, 2014 linked to the S&P 500 index.

The payout at maturity will be par plus 3% plus the sum of the index returns in each of the 20 quarters making up the life of the CDs. The return in each quarter will be capped at 5%.

The minimum payout at maturity will be par plus 3%.

Harris is also offering zero-coupon principal-protected certificates of deposit due June 30, 2014 linked to the S&P 500 index, but with an annual observation date.

The payout at maturity will be par plus the sum of the index returns in each of the five years making up the life of the CDs. The return in each annual period will be capped at 18% to 22%, with the exact cap to be set at pricing.

The minimum payout at maturity will be par.

The CDs will price June 25 and settle June 30.

Incapital LLC is the distributor for both products.

Conservative bulls

The products could perform better if the S&P 500 drops slightly before recovering during the life of the CDs, the adviser said.

"Because your starting point is reset every quarter or every year, when the index is lower you also lower your starting point for the next observation period," the adviser said. "If the index is at 1,000 and it goes down to 800, you don't need it to go back to 1,000 to break even. You only need to get back to 960 by the next observation date."

Investors may not want a consistent increase in the index, the adviser said, because the products will probably underperform the index if the starting point is raised each time.

Recovery theme

Because the products will perform well in markets that occasionally drop and recover, they could work well in a recovery situation where markets pull out slowly from their bottom, the adviser said.

"Markets tend to drop fast and rise slowly," the adviser said. "In any bull turnaround there's going to be starts and stops, a lot of hesitation along the way. I can see how something like this can take advantage of a lot of ups and downs, repeated false rallies."

But the five-year tenor of the products could work against investors if a full-fledged recovery arrives sooner rather than later.

"I have an issue with the length of the CDs," the adviser said. "If the market starts to pick up after the first year, as an example, you could actually underperform because the longer the market's in a rally, the worse off you are relative to the market. And if you think a recovery could be on the way, you want to have the flexibility to put your money in a leveraged product instead."

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