HSBC autocallables interesting but risky, advisor says; Invesco to market ETNs for Deutsche

By Kenneth Lim

Boston, May 14 - HSBC USA Inc.'s autocallable notes linked to the common stocks of JPMorgan Chase & Co. and Goldman Sachs Group, Inc. are an interesting play on the financial sector, an investment advisor said.

"It's a highly volatile sector right now, but they're kind of taking the two names that are seen to be better than the rest," the advisor said.

Meanwhile, Invesco PowerShares Capital Management LLC said it will begin to market Deutsche Bank's 11 exchange traded notes, which are linked to the agriculture, commodity and gold sectors.

HSBC links to banks

HSBC plans to price zero-coupon autocallable notes due May 24, 2010 linked to worst performing common stock of JPMorgan and Goldman Sachs.

The notes will be called automatically if the worst-performing stock closes at or above its initial price on an auto redemption date. Investors will receive 124.75% of par if the notes are called on

May 18, 2009, 137.125% of par if called on Nov. 17, 2009 and 149.5% of par if called on May 17, 2010.

If the notes are not called, the payout at maturity will be par if the final price of each stock is greater than or equal to its barrier price of 75% of the initial price. If the final price of the worst-performing stock is less than its barrier price, the payout will be a number of shares of the worst-performing stock equal to par divided by that stock's initial price.

The notes are expected to price on May 16.

Underlying assets volatile

The notes are linked to a highly volatile sector, the advisor said.

"Are they risky? Yes," the advisor said. "Pretty much anything linked to the financials these days will be relatively risky because the volatility in the sector is so high right now. Every week something's going on, whether it's some credit story or bond insurers or the U.S. economy, so in general it's what you would consider a risky space to be in."

But linking the autocallables to two stocks is not necessarily more risky, the advisor said.

"Most of the time, linking to an individual stock would probably be more risky," the advisor said. "An index is a combination of a large number of stocks, so unless all the components of the index are very closely correlated, the index tends to be less volatile...But in this case you're linked to JPMorgan and Goldman Sachs, and they're the two banks that so far appear to be weathering the current market turmoil better than the other banks. So you could argue that you could even be better off than linking say to the XLF [Financial Select Sector SPDR exchange traded fund], which not only has JPMorgan and Goldman Sachs, but also Citigroup and AIG."

Binary outcome likely

The HSBC notes are likely to be either really profitable or really painful for investors, the advisor said.

"I think this is a binary kind of investment," the advisor said. "Either you do really well or you do really badly. If the notes are called, you could make 24.75% in a year, which is a really good return. But the thing is they're linked to the worst of the two stocks, so you need both of them to get you that return. And if the notes are never called, you're linked to the worst of the two, which is actually not that great. There is a 75% barrier, which honestly is quite reasonable, but if you break that barrier you'll lose from your principal."

But the advisor said current sentiment on the financial sector has improved.

"There's still a lot of uncertainty," the advisor said. "But I think there's definitely a growing number of investors who think that the U.S. economy and the financial sector could start to improve within the next one to two years."

"If you're confident about the banking sector and those two stocks, then this product could be for you," the advisor said.

Deutsche, Invesco partner on ETNs

Invesco said Wednesday that it is expanding its marketing partnership with Deutsche Bank to include Deutsche's 11 long and short exchange traded notes linked to the agriculture, commodity and gold sectors.

The names of those notes will now include the PowerShares label.

The ETNs are Agriculture Double Short, Agriculture Double Long, Agriculture Short, Agriculture Long, Gold Double Short, Gold Double Long, Gold Short, Commodity Double Short, Commodity Double Long, Commodity Short and Commodity Long.

"We are excited to be expanding our successful partnership with Deutsche Bank, and believe that it is important to continue to offer investors innovative ways to access and to hedge their portfolios in these sought-after commodity markets," Invesco PowerShares president and chief executive Bruce Bond said in a statement.

Deutsche Bank global markets investment products managing director Kevin Rich added: "We are confident that PowerShares will successfully market our innovative investment products to a broad range of investors."

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