CIBC’s $47.82 million Leveraged Index Return Notes linked to S&P 500 index aimed at mild bears

By Emma Trincal

New York, Sept. 29 – Canadian Imperial Bank of Commerce’s $47.82 million of 0% capped Leveraged Index Return Notes due Sept. 29, 2017 linked to the S&P 500 index appealed to investors who envision neither strong bullish momentum nor a bear market over the next two years, sources said.

If the index return is positive, the payout at maturity will be par of $10 plus 200% of the index return, subject to a maximum return of 16.92%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index declines by 10% or less and will lose 1% for every 1% that it declines beyond 10%.

Beware the bear

Steven Kaplan, founder and portfolio manager of True Contrarian Investments LLC, said he would not invest in the notes because the risks of a pending bear market are too great.

“If you’re really bullish, you’re not going to get that much upside,” he said.

“This product is geared toward people who are a tiny bit bullish.

“I don’t see the market trading that way over the next two years. The S&P reached an all-time high in May, and we haven’t hit new highs since then.

“Usually when the market hits an all-time high it zooms up to a new peak or it declines. You see those new highs in the middle of a bull cycle. But we already had a bull market for more than six years.”

Kaplan said that the chances of a bear market occurring within the next two years are very high. In addition, the fact that the notes mature in the month of September is not attractive as the September/October period is a time of the year when the market has a tendency to bottom, he said.

“Since the peak in May, the market has shown some weakness, no dramatic losses but the type of weakness that’s typical of the early stages of a bear market,” he said.

Aging bull

“The S&P has gained a lot during this bull cycle. It’s better to stay away from the assets that have outperformed and to focus more on the weakest ones, especially when you see such strong disparities between the two,” he added.

“A lot of emerging markets, commodities producers, metal producers or miners are very cheap, sometimes cheaper than at the worst part of the last recession. It’s more promising to me to focus on those contrarian plays than on the S&P, which has hit all-time highs already.

“In order for the S&P to close up in September 2017, you would have to consider the possibility of an eight-and-a-half-year bull market. It’s not a realistic expectation. It’s really hoping for too much.”

People who bought the notes, he said, probably assumed the benchmark will generate “small” returns.

“They like the idea of getting double a small return.

“But it’s rare to have that slow-growth environment after years of a strong bull market. A bull market usually doesn’t end that way.”

Range bound

Kirk Chisholm, principal and wealth manager at Innovative Advisory Group, said the notes are a good play for someone with a mildly bullish view on the market.

“In general, I would look at these kinds of products as not all that attractive,” he said.

“The view is that the market will close in a narrow range. It only takes 4% a year for the index to get you to the cap, and this is about 8% a year in maximum return. ... Not that appealing.

“However, given the market conditions, there is a strong possibility the S&P would be range bound for a while.

“I do not expect a large upside growth from here, so this would work with the cap.

“Having a 10% buffer on the downside is nice considering the current market volatility.

“If you expect the market to trade in a range, it’s actually an attractive offering.

“Of course you could have different scenarios. You could have a bear market or a continued bull market. At the end of the day, you can’t predict the future.

“But if I’m comparing this product versus the S&P, I find it more attractive. I like the leverage, and I like the buffer.

“If I compared it with cash, I would prefer cash.”

The notes (Cusip: 136069374) priced on Sept. 24.

BofA Merrill Lynch was the underwriter.

The fee was 2%

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