JPMorgan’s $1 million autocall contingent interest notes on SPDR S&P 500 offer defensive play

By Emma Trincal

New York, June 28 – JPMorgan Chase Financial Co. LLC’s $1 million of autocallable contingent interest notes due June 21, 2024 linked to the SPDR S&P 500 ETF Trust present two attractive features – a deep barrier at maturity and a memory coupon, which gives the product a defensive profile, a financial adviser said. But a more bearish adviser was not confident the downside risk was sufficiently covered.

Investors will receive a coupon of 10.55%, paid quarterly, if the underlying fund closes at or above its 80% coupon barrier on the related quarterly observation date, plus any previously unpaid coupons, according to a 424B2 filing with the Securities and Exchange Commission.

The securities will be called automatically if the price of the underlying fund is greater than or equal to its strike price and on any subsequent quarterly review date.

At maturity the payout will be par unless the ETF closes below its 60% trigger level in which case investors will be fully exposed to the decline of the ETF.

Deep protection

“When I’m looking at any structured note, I want to buy some protection against a black swan event,” said Peter Brunton, chief investment strategist at Strategic Wealth Partners.

“The S&P is already down 20% this year and the note offers an additional protection amount of 40%. It’s as if I was getting a cushion of 60% from the peak. That gives me peace of mind,” he said.

The S&P 500 index reached a 52-week high on Jan. 4 at 4,818.62. On Tuesday, it closed 20.7% off its peak at 3,821.55.

Memory

“I wouldn’t be excited about an 80% coupon barrier if the memory feature wasn’t there. Typically, I’m more inclined to pick a 70% rather than an 80% barrier. The memory is attractive. You can make up for lost coupons. And 10.55% is a nice yield,” he said.

For Brunton, the current entry price offers an interesting opportunity combined with the level of downside protection.

“If the deal had priced two or three months ago, I would have been less excited,” he said.

What’s next

No one can predict if the S&P 500 index has hit bottom or if more downside is to be expected, he said.

“My guess is we still have another 10% decline, but I can’t discount the fact that we could be down more. People say that right now the market is pricing a recession. I think the market is experiencing an end to an asset bubble and yes, a recession is also coming. I don’t know if the drawdown will be an additional 10% or 20%,” he said.

“This is why it’s very nice to have that type of downside protection. If I buy a structured note, I want a 60% barrier.”

Not enough

But one size does not fit all. Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, was not impressed with the barrier level.

“Personally, I have no interest in a 60% barrier. The 40% protection is not sufficient because there is too much risk,” he said.

“I can see the market dropping 40% to 60% from here. For us, two-year is a risky timeframe,” he said.

“People who claim that we just hit bottom are outside the realm of reality.”

The Nasdaq may be closer to a bottom, he noted, because it has already dropped 30.6% from its November high.

“But there is more potential downside with the S&P,” he said.

Chisholm was even more critical of the coupon barrier.

“The 10.55% interest rate is interesting for someone looking for yield. But the 80% barrier is not very helpful. What if the index goes down more than 20% and keeps on going down?” he said.

Been there, done that

Chisholm said that his bearishness is based on experience.

“We have a generation of people who have never seen a bear market. They haven’t lived through the stagflation of the 1970s. They’re asleep at the switch,” he said.

“Inflation is a huge factor of instability. Once you’re in an inflationary environment, you’re no longer in the old paradigm. We have been accustomed to low interest rates for a very long time thanks to the ultra-accommodative Fed’s policy. Now we’re shifting from a tailwind to a headwind, and it will have a significant impact on the economy.”

He gave the example of the 30-year mortgage rate, which doubled from approximately 3% to 6% in the past six months.

“People can no longer afford a house. There will be many other things people won’t be able to afford. Soon comes a recession with people getting laid off.”

Too many investors expect the current bear market to resemble that of February-March 2020, which lasted 1.1 months, he said.

Buffer on steroids

“I don’t think it’s going to take one or several months. In my view, we’re looking at something that’s more reminiscent of the 1970s or early 2000s.”

Chisholm would consider a structured note similar to this one only if it included an enhanced downside protection.

“For a two-year note, it’s not a 60% barrier that I need. It’s more like a 50% to 60% hard buffer. You probably wouldn’t get anything remotely attractive on the upside. So right now, I am just sitting on the sidelines and hedging my portfolio with options,” he said.

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes settled on Thursday.

The Cusip number is 48133GG56.

The fee is 0.25%.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.