Morgan Stanley outperformance notes link unusual pair, observer says; Citigroup sells Deere-linked ELKS

By Kenneth Lim

Boston, March 26 - Morgan Stanley's planned outperformance notes linked to S&P GSCI Energy Index- Excess Return relative to the S&P 500 index offer an interesting juxtaposition of asset classes, a structured product distributor said.

Morgan Stanley said it plans to price 0% outperformance Performance Leveraged Upside Securities (PLUS) due May 20, 2009 linked to the energy index relative to the S&P index.

The notes will pay par plus triple the amount by which the S&P GSCI Energy index return exceeds the S&P 500 return. Investors will lose 1% for each 1% that the S&P 500 return exceeds the S&P GSCI Energy index.

The payout will be capped between $12.40 and $12.80 for each $10 principal amount of notes, with the exact cap to be determined at pricing.

The S&P GSCI Energy index represents only the energy components in the S&P GSCI - Excess Return, which is in turn an index that tracks the return on a portfolio of commodity futures designed to reflect the relative significance of each of the underlying commodities in the world economy. The Energy index tracks the WTI crude oil, Brent crude, gasoline, heating oil, gasoil and natural gas.

"It's quite an interesting pair of indexes to take such a strategy," the distributor said. "It's commodities versus stocks, but at the same time because energy futures are also affected by global demand, you're also looking at the global economy versus the U.S. economy."

The distributor said the product could appeal to investors who think the global economy will outperform the U.S. economy.

"As with most outperformance products, you're not really concerned about whether one is going to go up or down," the distributor said. "What you looking for is whether one will do better than the other. So you might be worried that a poor U.S. economy might drag down the rest of the world, but you think the rest of the world will hold up better maybe because of major economies like China and Europe, and if that's the case this will still give you a positive return at maturity."

But the nature of the two underlying components adds another twist, the distributor added.

"On the other hand, you got energy prices at a high right now, and the S&P 500 is near a low," the distributor said. "I can see how someone might think that one might peak or the other may bottom out this year. If that's the case this product may not be for you."

The distributor said careful research should accompany any investment in the product.

"The moving parts are somewhat more interesting in this product," the distributor said.

Also, "the cap on the return means that you stand to leave some money on the table if the outperformance exceeds 8% to 9.3%," which is a typical risk for outperformance products, the distributor said.

Citi sells $71 million of ELKS

Citigroup Inc. said it sold a sizable $71.28 million worth of 11.75% equity-linked securities (ELKS) due April 6, 2009 linked to the common stock of Deere & Co.

The notes, which have par of $10 apiece, will pay par at maturity unless Deere common stock falls by 35% or more during the life of the notes and closes below the initial price of $81.34.

The ELKS will list on the American Stock Exchange under the symbol ECB.

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