Credit Suisse’s $5 million notes tied to five tech stocks show stunning 48.5% call premium

By Emma Trincal

New York, Nov. 14 – Credit Suisse AG, London Branch’s $5 million of 0% review notes due Nov. 8, 2019 linked to the least performing of the common stocks of Amazon.com, Inc., Facebook, Inc., Alibaba Group Holding Ltd., Microsoft Corp. and Alphabet Inc. was not a big deal, at least, in size. But the annual autocallable offered a 48.48% annual call premium on two review dates when all stocks closed at or above their respective initial level, according to a 424B2 filing with the Securities and Exchange Commission

If the notes are not called, the payout at maturity will be par unless any stock finishes below its 70% knock-out level, in which case investors will be fully exposed to the loss of the worst performing stock.

First glance

“My first reaction is: that’s compelling. What a phenomenal yield!” said Michael Kalscheur, financial adviser at Castle Wealth Advisors.

“If I invested in the five stocks, what are the chances that the average return could be 50% in one year or 100% in two? So this gets my attention.

“On the downside I have this barrier. That’s good.

“But this is not your ordinary autocall.”

He was referring to the risk associated with the worst of.

“It only takes one stock to breach the barrier at the end. So it’s pretty risky. If it was two indices, that’s one thing. But it’s five, highly volatile tech stocks,” he noted.

No firepower

Kalscheur invests in broad-based indexes when he uses structured products. Part of his selection process consists in running statistical analysis based on back tested performance of the major indexes. His data, sometimes going back 30 years, allows him to calculate his chances of breaching a barrier or hitting a cap based on the specific terms of a note offering.

“I can run my backtesting on the S&P 500 or the Euro Stoxx. But I have no data, no firepower for this.”

Mad money only

Kalscheur said that such high return demands that investors look into risk-adjusted return.

“It’s five stocks with huge returns. What are the odds that a year from now, there won’t be at least one of them down from today’s level?”

The only way Kalscheur would consider the note would be for a very speculative investor determined to take the risk to lose money and on a small “mad money” amount.

“This is pure gambling. You’re rolling the dice. You could hit a home run. If you do, great. If you don’t make any money, fine. If you’re down, it’s not the end of the world. That’s the mindset.

“I would never push a client to look into this.”

Besides not being able to run any back testing analysis, Kalscheur had another concern.

“It’s a two year. Those stocks are among the best performers in the market today. But if the market is down in two years, these stocks are going to be hit. They’re so volatile, they may be hit harder.”

Alibaba is up 107% this year. Facebook and Amazon have gained 55% and 52% respectively while Microsoft saw its shares climb 35% and Alphabet rose by 33%.

Bear in sight

Steven Jon Kaplan, founder and portfolio manager of TrueContratian Investments, objected to the deal as a bear.

He said he already has short positions on some of the underlying stocks, including Amazon.

Overall, he expects a bear market to hit global markets within the timeframe of the notes.

“Two years from now I think is especially dangerous,” he said.

“We’re noticing some red-flags. I am thinking of the divergence between the Russell 2000, a leading indicator and the rest of the market.

“While the S&P, the Nasdaq have hit new highs, the Russell peaked in Oct. 5 and has declined from that level since.

“This is a classic sign that we’re probably entering into bear market territory.

“It happened in the past. Whenever these divergences occur, it’s an important signal of a turn.”

He cited the 2007 bear market, which officially began in October when the S&P 500 index reached its last high. But in July of the same year, the Russell had already peaked and began to fall at that point, two months ahead of the broader market.

“We’ve seen this pattern in the past during the beginning of other bear markets,” he said.

“The next two years are going to be extremely dangerous. You don’t want to lock up your money during this time.

J.P. Morgan Securities LLC is the placement agent.

The notes (Cusip: 22550BPD9) priced on Nov. 3.

The fee is 1.5%.

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