JPMorgan's buffered PLUS linked to Euro Stoxx 50 index appealing for short tenor despite cap

By Emma Trincal

New York, Jan. 9 - JPMorgan Chase & Co.'s 0% buffered Performance Leveraged Upside Securities due July 15, 2015 linked to the Euro Stoxx 50 index are appealing for their short tenor, sources said, because most leveraged buffered notes have seen their durations extended beyond 18 months in today's low-volatility market.

The payout at maturity will be par of $10 plus 1.5 times any index gain, up to a maximum return of 15%, according to an FWP filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 10% and will lose 1% for each 1% decline beyond 10%.

Potential outperformance

"It's a pretty plain vanilla note. It's got some appeal. I like the short duration of it," said Steve Doucette, financial adviser at Proctor Financial.

The cap on the upside may not penalize investors all that much if the rally loses some of its steam, he said.

"A 15% cap over the 18-month period gives you roughly 10% a year.

"With the market run that we've had, nobody is going to complain with 10% a year. Yes, they might come back if the market continues to move like it has. But you get the downside protection.

"It is a pretty attractive structure for such a short duration. It really is.

"The buffer is nice. What you want is being able to outperform the index.

"The buffer will give you that. The leverage will give you that.

"The only time you're not going to outperform is if you hit the cap.

"Given how the market has run so far, giving up some of the return might be a decent play. The 10% protection you get might be worth giving up the upside above 15%."

Single-digit returns

Matt Medeiros, president and chief executive officer at the Institute for Wealth Management, said that he usually avoids capped structure but that in this case, the short tenor makes the cap acceptable based on a mildly bullish short-term outlook for European stocks.

"I like Europe over the long term. I'm not super excited about the cap on the upside, or I should say, the cap on the upside is not my preferred way to create an equity exposure," he said.

"However, because this is short term, the leverage, which enhances the upside, gives this product an interesting return characteristic if you assume as I do that European stocks short term will see only single-digit returns."

Should European equity markets see a correction this year or in the first half of next year, the structure offers some valuable downside protection, he said.

"I like the 10% buffer. It's not a barrier. It's a plain buffer without any downside leverage. It's a very attractive feature, especially on a short-term note," he said.

Medeiros also likes the simplicity of the structure.

"There is no trick to it, no difficult thing to trend or track, and that's appealing," he said.

Mildly bullish short term

One of the reasons Medeiros said he is only mildly bullish on Europe in the short term is the strength of last year's rally.

"I don't see Europe having the same type of year as it had last year," he said.

"In fact, I don't see the S&P 500 having this year the same type of growth it had last year."

While the S&P 500 index, which gained 32.4% last year, outperformed the Euro Stoxx 50, which was up 18%, both benchmarks have posted unusually high returns.

"In both Europe and the U.S., I see a continued growth but not at the same pace. Europe compared to the U.S. will have a similar trend as far as growth but not the same trajectory," he said.

"Overall, we like the opportunities in the European market for the next few years. But we also believe that the opportunities in Europe will be gradual. European stocks will continue to rise but on a more subdued pace, in single-digit terms.

"This is what makes this product relatively attractive. During that period of incremental returns, the leverage will enhance your upside, giving you an opportunity to outperform the market.

"Because it's short, I like the notes.

"If it was a five-year, I probably wouldn't be that interested."

J.P. Morgan Securities LLC is the agent with Morgan Stanley Smith Barney LLC as the dealer.

The notes were expected to price Friday and settle Wednesday.

The Euro Stoxx 50 is the blue-chip benchmark for the euro zone.

The Cusip number is 48127A310.

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