JPMorgan links accelerated notes to housing index; investors taking positions for recovery, adviser says

By Kenneth Lim

Boston, April 2 - JPMorgan Chase & Co.'s planned Return Optimization Securities linked to a housing index are an example of some investors beginning to think about an economic recovery, an investment adviser said.

JPMorgan, through placement agent UBS Financial Services Inc., plans to price zero-coupon Return Optimization Securities due April 17, 2012 linked to the PHLX Housing Sector index.

At maturity, the notes will pay par plus triple any gain in the index, subject to a maximum total payout of 200% to 205% of the principal. The return cap will be set at pricing.

Investors will lose 1% for every 1% decline in the index.

The PHLX Housing Sector index is designed to measure the performance of companies that are primarily involved in the U.S. housing construction market.

Recovery-themed product

Stock prices in the housing sector have fallen sharply over the past couple of years, the adviser said.

"Housing has been one of the hardest hit sectors in this current crisis," the adviser said. "In fact, it all began with housing."

But investors are now beginning to think about preparing for a recovery, the adviser added.

"I think initially, in the second half of last year and the start of this year, a lot of people were still very fearful and the common reaction was just to take everything out and wait for the dust to settle," the adviser said.

"I think some people are starting to think that the dust is beginning to settle, and they want to get themselves in position to take advantage of any kind of recovery. Especially over the last few days and last week, we've seen some optimism in the equity markets, which is good, although I would be more patient before declaring that the worst is over."

The JPMorgan product offers investors an opportunity to take a bullish position on a depressed sector, the adviser said.

"It's got quite a generous upside leverage, 300%, and a high cap, so it makes sense if you think the sector could be just starting to climb out from the bottom," the adviser said. "You don't need a big improvement in housing to be able to get a good return on this."

The three-year maturity is also useful for investors, the adviser said.

"It basically means the index has a little more time to hit the bottom and climb back out," the adviser said.

Unprotected bet

But the lack of downside protection could render the notes uninteresting for some investors, the adviser said.

"There's no downside protection at all," the adviser said. "Not even a buffer or a barrier. Are investors that willing to take on risk again? Is the risk appetite of two years ago back?"

Some downside protection would be valuable for investors who are still stung by the broad market downturns in the past year, the adviser said.

"I think even if you just give a 20% buffer, that makes a lot of difference," the adviser said.

"People are already worried about the ability of the issuers to stay solvent. If they can't even get past that, they're not going to accept zero downside protection. Especially if you think that these investors are trying to bet on a turnaround, which is an inherently risky position to take."

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