JPMorgan prices return enhanced notes linked to struggling funds; offers bear and bull notes on S&P 500

By Kenneth Lim

Boston, April 1 - A series of JPMorgan Chase & Co. buffered return enhanced notes linked to funds that have been performing poorly could be attractive to optimistic investors, a distributor said.

JPMorgan has launched the 0% buffered return enhanced notes due April 8, 2010 linked to a basket of exchange-traded funds, according to an FWP filing with the Securities and Exchange Commission.

The basket consists of the iShares Dow Jones U.S. Real Estate Index Fund with a 60% weight, the S&P Homebuilders with a 20% weight and the Financial Select Sector with a 20% weight.

The payout at maturity will be par times double any increase in the basket, subject to a maximum payout on the notes of no less than 42%. The exact cap will be determined at pricing.

Investors will receive par if the basket declines by 15% or less and will lose 1% for each 1% decline beyond 15%.

The notes are expected to price April 2.

"These indexes have all done poorly over the past year," the distributor said. "It's like a basket of the worst indexes you can find in today's market...I'd say it's unusual just based on that."

The notes offer a potentially nice return if the indexes go up, the distributor said.

"A 200% return on the underlying is a decent leverage factor," the distributor said. "The cap of 42% is also higher than usual, so the basket could go up 21% over the next two years and you'd still outperform the indexes, which means that it still beats buying those funds yourself [at that level]."

The distributor said interest for the product could come from investors who think the real estate and financial sectors could be bottoming.

"I think it's going to be investors who think that the U.S. economy is going to pull out of this funk within the next couple of years," the distributor said. "Right now, real estate prices have been falling, all the banks are having problems, but all of that has been happening since one year ago. There's a lot of restructuring going on, a lot of people trying to fix things, so I'd say it's not far out to think things will start to pick up by 2010."

But the distributor said investors need to be careful.

"The principal isn't protected beyond the 15% buffer, so you do have a bit of protection even though it's not a lot," the distributor said. "I think the basket has already lost more than 15% over the past one year, so it's definitely possible that it ends below the buffer, and investors need to be aware of that."

"In a product like this it's also important to consider the timeframe," the distributor said. "The basket may be low right now, and you have to consider whether two years is enough for the basket to climb back. The other thing is the return is capped at 42%. So if the underlying does really well and gains more than 42%, then you lost out compared to taking a direct investment."

JPMorgan offers bear and bull S&P notes

JPMorgan is also offering products that allow investors to take either view of the U.S. stock markets.

The bank announced a series of 0% buffered return enhanced notes due April 21, 2009 linked to the S&P 500 index.

The notes will pay par of $1,000 plus double the index return at maturity, subject to a maximum payout yield of 16%. If the index is flat or declines by up to 10%, the payout will be par. If the index declines by more than 10%, the principal will be reduced by 1.1111% for every 1% decrease in the index.

The notes are expected to price on April 4.

JPMorgan also announced bearish buffered return enhanced notes due Oct. 31, 2008 linked to the same index.

The bearish notes will pay par of $1,000 plus four times the absolute value of any index decline at maturity, capped at a maximum payout return of 10%. If the underlying index increases by more than 5%, investors will lose 1% of the principal for every 1% increase in the underlying above 5%, subject to a minimum payout of $50 for every $1,000 note.

The bearish notes price on April 25.

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