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Published on 12/8/2008 in the Prospect News Structured Products Daily.

JPMorgan links bear notes to S&P 500; RBC ties bull notes to oil; notes reflect uncertainty, adviser says

By Kenneth Lim

Boston, Dec. 8 - JPMorgan Chase & Co.'s planned bearish autocallable notes linked to the S&P 500 index could offer an almost opposite outlook to Royal Bank of Canada's buffered bullish notes linked to the S&P GSCI Crude Oil index, an investment adviser said.

"It's interesting that you're seeing both at the same time," the adviser said. "I think it's reflective of the massive uncertainty that's currently plaguing the markets."

JPMorgan plans to price zero-coupon bearish autocallable optimization securities due Dec. 23, 2009 linked to the S&P 500.

The notes may be called on March 13, 2009; June 15, 2009; Sept. 15, 2009; or Dec. 17, 2009 if the underlying index closes at or below the initial level on the relevant observation date.

The return will be 5% if the notes are called in March, 10% if called in June, 15% if called in September and 20% if called in December.

Investors will receive par at maturity if the index does not end above 115% of its starting level. Investors will lose 1% for every 1% that the index ends above 115% of its starting level, subject to a minimum payout of $1.50 for every $10 note.

RBC links to crude

RBC plans to price zero-coupon buffered bullish enhanced return notes due Dec. 23, 2010 linked to the S&P GSCI Crude Oil Index - Excess Return.

At maturity, investors will receive 150% of any gain in the underlying index, subject to a maximum total payout of 130% to 160% of the principal. If the index finishes between 0% and negative 15% of its initial level, investors will receive par. Investors will lose 1% for every 1% that the index declines beyond 15%.

Notes could diverge

The value of the two series of notes could be inversely correlated to each other, the adviser said.

"If the stock market goes up, that could be a signal of an improving economy, and that could actually help to push oil prices higher because there would be more demand for oil," the adviser said. "That's one way to look at it."

But the adviser also noted that it was possible for investors to make a profit from both notes at the same time.

"You have to be careful about comparing the two of them," the adviser said. "One point is the historical correlation isn't perfect. The reasons that are pushing oil prices lower are not going to be exactly the same as the ones that are keeping stock prices low. The products also have different maturities, and different structures, so the 12-month one, because it's an autocallable, you're probably hoping for it to be taken out sooner, which means there's still lots of time to make money on the other one."

Uncertain markets

The existence of both offerings at the same time could suggest that the market outlook remains cloudy.

"I don't want to say that what the banks are offering is any kind of an indicator of what's going on in the markets, but I think it's reasonable to say it gives you a sense of what they think investors want," the adviser said. "It shouldn't be a surprise that there are vastly different views in the market right now because of the continued lack of certainty."


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