Free Writing Prospectus
Filed Pursuant to Rule 433
Registration Statement No. 333-155535
Dated December 1, 2010
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November 19, 2010
J P. Morgan Structured Investments
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The JPMorgan ETF Efficiente 5 Index
Strategy Guide
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Important Information
The information contained in this document is for discussion purposes only. Any
information relating to performance contained in these materials is illustrative
and no assurance is given that any indicative returns, performance or results,
whether historical or hypothetical, will be achieved. These terms are subject to
change, and JPMorgan undertakes no duty to update this information. This
document shall be amended, superseded and replaced in its entirety by a
subsequent term sheet, disclosure supplement and/or private placement
memorandum, and the documents referred to therein. In the event any
inconsistency between the information presented herein and any such term sheet,
disclosure supplement and/or private placement memorandum, such term sheet,
disclosure supplement and/or private placement memorandum shall govern.
Investing in CDs linked to the JPMorgan ETF Efficiente 5 Index (the "Index") is
not equivalent to a direct investment in the Index or any exchange-traded fund
or index that forms a part of the Index.
Investments in CDs linked to the Index require investors to assess several
characteristics and risk factors that may not be present in other types of
transactions. In reaching a determination as to the appropriateness of any
proposed transaction, clients should undertake a thorough independent review of
the legal, regulatory, credit, tax, accounting and economic consequences of such
transaction in relation to their particular circumstances. This strategy guide
contains market data from various sources other than us and our affiliates, and,
accordingly, we make no representation or warranty as to the market data's
accuracy or completeness. All information is subject to change without notice.
We or our affiliated companies may make a market or deal as principal in the CDs
mentioned in this document or in options, futures or other derivatives based
thereon.
Use of Simulated Returns
Back-testing and other statistical analysis material that is provided in
connection with the explanations of the potential returns of the CDs linked to
the Index use simulated analysis and hypothetical circumstances to estimate how
it may have performed prior to its actual existence. For time periods prior to
the launch of an exchange-traded fund included in the Index and such
exchange-traded fund's initial satisfaction of a minimum liquidity standard,
back-testing uses alternative performance information derived from a related
index, after deducting hypothetical fund fees, rather than performance
information for such exchange-traded fund.
The results obtained from "back-testing" information should not be considered
indicative of the actual results that might be obtained from an investment or
participation in a financial instrument or transaction referencing the Index.
J.P. Morgan provides no assurance or guarantee that the CDs linked to the Index
will operate or would have operated in the past in a manner consistent with
these materials. The hypothetical historical levels presented herein have not
been verified by an independent third party, and such hypothetical historical
levels have inherent limitations. Alternative simulations, techniques, modeling
or assumptions might produce significantly different results and prove to be
more appropriate. Actual results will vary, perhaps materially, from the
simulated returns presented in this strategy guide.
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IRS Circular 230 Disclosure
We and our affiliates do not provide tax advice. Accordingly, any discussion of
U.S. tax matters contained herein is not intended or written to be used, and
cannot be used, in connection with the promotion, marketing or recommendation by
anyone unaffiliated with J.P. Morgan of any of the matters addressed herein or
for the purpose of avoiding U.S. tax-related penalties.
Investment suitability must be determined individually for each investor, and
the financial instruments described herein may not be suitable for all
investors. This information is not intended to provide and should not be relied
upon as providing accounting, legal, regulatory or tax advice. Investors should
consult with their own advisors as to these matters.
This material is not a product of J.P. Morgan Research Departments. Structured
Investments may involve a high degree of risk, and may be appropriate
investments only for sophisticated investors who are capable of understanding
and assuming the risks involved. J.P. Morgan and its affiliates may have
positions (long or short), effect transactions or make markets in CDs or
financial instruments mentioned herein (or options with respect thereto), or
provide advice or loans to, or participate in the underwriting or restructuring
of the obligations of, issuers mentioned herein. J.P. Morgan is the marketing
name for the Issuer and its subsidiaries and affiliates worldwide. JPMSI is a
member of FINRA, NYSE, and SIPC. Clients should contact their salespersons at,
and execute transactions through, a J.P. Morgan entity qualified in their home
jurisdiction unless governing law permits otherwise.
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Overview
The JPMorgan ETF Efficiente 5 Index (the "Index" or the "Strategy" or "ETF
Efficiente") is a member of J.P. Morgan's family of Efficiente indices which
generally seek to provide exposure to a range of asset classes and geographic
regions based on the modern portfolio theory approach to asset allocation. ETF
Efficiente leverages the convenience of exchange-traded funds ("ETF"s) as well
as the rapidly growing investment options available with ETFs to provide
exposure to a wide range of asset classes and regions. The Index selects from a
basket of 12 ETFs (the "ETF Constituents") and the JPMorgan Cash Index USD 3
Month (the "Cash Index"). The ETF Constituents, together with the Cash Index,
are referred to as the Basket Constituents.
Key features of the Index include:
[] the use of ETFs to provide access to a broad range of asset classes and
geographic regions;
[] exposure to developed market equities, bonds (including Treasuries and
corporate bonds), emerging markets, alternative investments (broad
commodities exposure, gold and real estate) and inflation;
[] the weights allocated to the Basket Constituents are dynamic and are
determined monthly based on a rules-based methodology that targets an
annualized volatility of 5% or less;
[] an algorithmic portfolio construction which utilizes momentum and
correlation across asset classes;
[] the Index is an excess return index and reflects the weighted performance
of the Basket Constituents (including reinvested dividends for the ETF
Constituents) in excess of the Cash Index; and
[] the Index levels incorporate a fee of 0.50% per annum and are published on
Bloomberg under the ticker EEJPUS5E.
The table and graph below illustrate the performance of the Index based on the
hypothetical back-tested closing levels from Jul 1, 1999 through Oct 29, 2010.
Based on the hypothetical back-tested performance, the Index realized annualized
returns of 5.14% per annum over the period, and outperformed both the SandP 500
Index and the Barclays Capital U.S. Aggregate Bond Index (the "Barclays
Aggregate Bond Index"), on an excess return basis, as well as the SandP 500 on a
price return basis. There is no guarantee that ETF Efficiente will outperform
the SandP 500 Index or the Barclays Capital Aggregate Index during the term of
your investment in CDs linked to the Index.
Hypothetical Comparison of the JPMorgan ETF Efficiente Index (Jul 1, 1999 -- Oct
29, 2010)
SandP 500 SandP 500 Barclays
ETF Efficiente Index Index Aggregate Index
(Price Return) (Excess Return) (Excess Return)
- ----------------------------------------------------------------------------------
12 Month Return 9.26% 14.19% 16.00% 7.53%
3 Year Return 4.30% -8.61% -8.66% 4.86%
(Annualized)
Full Period Return 5.14% -1.35% -2.99% 2.80%
(Annualized)
Annualized volatility 5.47% 21.4% 21.44% 3.92%
- ----------------------------------------------------------------------------------
Source: Bloomberg and J.P. Morgan. Please see notes immediately following the
graph below.
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Hypothetical performance of the JPMorgan ETF Efficiente Index (Jul 1 1999 --
Oct 29, 2010)
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Source: Bloomberg and J.P. Morgan
Note: Because the Index did not exist prior to October 29, 2010, all
retrospective levels provided in the graph and table above are simulated and
must be considered illustrative only. The simulated data was constructed using
certain procedures that may vary from the procedures used to calculate the Index
going forward, and on the basis of certain assumptions that may not hold during
future periods. The variations in procedures used in producing simulated
historical data from those used to calculate the Index going forward could
produce differences in returns of indeterminate direction and amount. Past
hypothetical performance results are neither indicative of nor a guarantee of
future returns. Actual results will vary, potentially materially, from the
hypothetical historical performance described herein. Please see "Important
Information" at the front of this publication for a discussion of certain
additional limitations of back-testing and simulated returns.
"Return" is the percentage return of the relevant index over the period
indicated, and where "Annualized" is indicated, is the annual compounded return
of the relevant index over the period "Annualized volatility" is the annualized
standard deviation of the daily returns of the relevant index for the full
period from July 1, 1999 through October 29, 2010
"SandP 500 Index Excess Return" represents a hypothetical index constructed from
the total returns of the SandP 500 Index with the returns of the Cash Index
deducted
"Barclays Aggregate Index Excess Return" represents a hypothetical index
constructed from the returns of the Barclays Aggregate Index with the returns of
the Cash Index deducted
Growth Trend of Assets Under Management in ETFs
- -----------------------------------------------
The ETF industry has grown rapidly since 2002, with total assets under
management increasing from approximately $100 billion at the end of 2002 to
approximately $800 billion as of August 2010, as illustrated in the chart. There
are now over 900 ETFs listed in the United States covering a range of asset
classes and investment styles.
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Source: State Street Global Advisors. August 2010.
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Strategy description
The Index employs an allocation strategy based on modern portfolio theory. The
modern portfolio theory approach to asset allocation suggests how a rational
investor should allocate capital across the available universe of assets to
maximize return for a given risk appetite. The Index uses the concept of an
"efficient frontier" to define the asset allocation of the Index. An efficient
frontier for a portfolio of assets defines the optimal return of the portfolio
for a given amount of risk, using the volatility of returns of hypothetical
portfolios as the measure of risk.
Illustration of the Efficient Frontier
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On a monthly basis, J.P. Morgan Securities Ltd., acting as the ETF Efficiente
calculation agent, will rebalance the Index to determine the allocations to the
Basket Constituents based on the mathematical rules that govern the Index. The
weights for each Basket Constituent will be determined subject to certain
weighting constraints, including constraints on the weight of each Basket
Constituent as well as constraints on the sum of the weights of Basket
Constituents within a sector. For more information on the weighting constraints
related to the Basket Constituents comprising the Index, see "What are the
Basket Constituents?".
The Index seeks to identify the weights for each Basket Constituent that would
have resulted in the hypothetical portfolio with the highest return over the
previous six months while realizing an annualized volatility over the same
period of 5% or less. Thus, the portfolio exhibiting the highest return with an
annualized volatility of 5% or less is selected, and the weighting for such
portfolio is applied to the Basket Constituents. This forms the practical
application of the modern portfolio theory and the efficient frontier. No
assurance can be given that the ETF Efficiente Index will achieve its target
volatility of 5%. The actual realized volatility of the Index may be greater or
less than 5%.
On each selection date for the monthly rebalancing of the Index, the weighting
algorithm implements the following steps:
[] ETF Efficiente identifies all Eligible Portfolios as described under "What
are the Basket Constituents?" and calculates the performance for each
portfolio for an observation period over the previous six months.
[] For each Eligible Portfolio, ETF Efficiente calculates the annualized
realized volatility over that same observation period.
[] The performance and the volatilities of the Eligible Portfolios are used to
construct the "efficient frontier. "
[] ETF Efficiente selects the Eligible Portfolio with the strongest
performance that has an annualized realized volatility equal to or less
than 5%. If no such portfolio exists, the target volatility is increased in
increments of 1%, and the selection procedure is repeated until a portfolio
is identified.
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The ETF Efficiente calculation agent will publish the index values for the Index
on Bloomberg, subject to the occurrence of a market disruption event. You can
find the current Index value on Bloomberg under the ticker EEJPUS5E.
There is no guarantee that the concept of an efficient frontier combined with
modern portfolio theory will generate positive returns for the Index or that
other theories applied to the portfolio of the Basket Constituents would not
produce a better result than an investment linked to the Index.
What are the Basket Constituents?
The following table sets forth the Basket Constituents that comprise the Index
and the maximum weighting constraints assigned to each asset as well as specific
groups of assets ("sectors").
Basket Constituents
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Sector/ Asset Class Assets Ticker Asset
Sector Cap Cap
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Developed U.S. Equities SPDR SandP 500 ETF Trust SPY 20%
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U.S. Small Cap Equities iShares Russell 2000 Index Fund IWM 10%
Equity
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Developed Market
50% iShares MSCI EAFE Index Fund EFA 20%
Equities (excluding U.S.)
- --------------------------------------------------------------------------------------------------------
Treasuries iShares Barclays 20+ Year Treasury Bond TLT 20%
Fund
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Bonds Investment Grade Bonds iShares iBOXX Investment Grade Corporate LQD 20%
50% Bond Fund
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High Yield Bonds iShares iBOXX High Yield Corporate Bond HYG 20%
Fund
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Emerging Emerging Market iShares MSCI Emerging Markets Index Fund EEM 20%
Equities
Markets
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iShares JPMorgan USD Emerging Markets
25% Emerging Market Bonds EMB 20%
Bond Fund
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Alternative Real Estate iShares Dow Jones Real Estate Index Fund IYR 20%
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Investments Broad Commodities iShares SandP GSCI Commodity-Indexed Trust GSG 10%
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25% Gold SPDR Gold Trust GLD 10%
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Inflation Protected Bonds iShares Barclays TIPS Bond Fund TIP 50%
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50% Cash JPMorgan Cash Index USD 3 Month JPCAUS3M 50%
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Note: See the relevant disclosure statement for more information on the Index
and the Basket Constituents.
An Eligible Portfolio is any hypothetical portfolio composed of the above Basket
Constituents whose weights satisfy the following weighting constraints:
[] The minimum possible weight assigned to any Basket Constituent is 0%.
[] The weight assigned to each Basket Constituent is an integral multiple of
5%.
[] The maximum possible weight assigned to any Basket Constituent is 20%, with
the exception of (i) the JPMorgan Cash Index USD 3 Month or the iShares
Barclays TIPS Bond Fund, each of which have a maximum possible weight of
50%; and (ii) the iShares Russell 2000 Index Fund, the iShares SandP GSCI
Commodity-Indexed Trust or the SPDR Gold Trust, each of which have a
maximum possible weight of 10%.
[] The maximum possible weight assigned to (i) either the Developed Equity or
the Bonds sector is 50%; and (ii) either the Emerging Markets or the
Alternative Investments sector is 25%. In addition, the sum of the weights
assigned to the JPMorgan Cash Index USD 3 Month and the iShares Barclays
TIPS Bond Fund cannot exceed 50%.
[] The sum of the weights assigned to all Basket Constituents will be equal to
100%.
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Historical analysis
The Index aims to provide exposure across a diverse spectrum of asset classes
and geographic regions.
Diversified exposure
As illustrated in the table below, equities (as represented by the SandP 500
Index) and bonds (as represented by the Barclays Capital Aggregate Index) have
historically displayed negative correlation. Correlation can be described as a
measure of the degree to which two components change relative to each other. A
diversified approach to investing would stipulate maintaining exposure to a
variety of asset classes to attempt to generate positive returns in a wide range
of market environments.
Based on the rebalancing methodology and the constraints described in "What are
the Basket Constituents?", ETF Efficiente can dynamically allocate to the Basket
Constituents in response to the current market environment, with the potential
to exploit any low historical correlations exhibited by the Basket Constituents.
The hypothetical correlations below illustrate that returns of the Index have
historically not been overly dependent on either bonds or equities.
Summary of hypothetical correlations for Efficiente (Jul 1, 1999 through Oct
29, 2010)
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JPMorgan ETF Barclays Aggregate
Strategy Efficiente 5 Index SandP 500 Index Index
- ----------------------------------------------------------------------------
JPMorgan ETF 1.00 0.24 0.30
Efficiente 5 Index
SandP 500 Index 1.00 -0.22
Barclays Aggregate
Index 1.00
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Source: Bloomberg and J.P. Morgan
Note: Based on the daily hypothetical back-tested returns. The correlations
shown above are for informational purposes only. Hypothetical, historical
performance of the Index. Future correlations may be higher or lower than the
hypothetical, historical correlations in the summary above.
Targeting volatility
As described in "Strategy description," the Index targets an annualized realized
volatility of 5%. The graph below illustrates the hypothetical six-month
realized volatility of the Index as well as that of the SandP 500 Index and the
Barclays Capital Aggregate Index between December 1999 and October 2010.
Volatility is a measurement of the variability of returns. The historical, or
"realized," volatility of a portfolio can be measured in a number of ways. For
the purposes of the graph below, volatility is calculated from the historical
daily returns of the indices over a six-month observation period. For any given
day, the "six-month annualized volatility" is the annualized standard deviation
of the daily returns of the relevant index using the closing levels of the index
during the 126 index-day period preceding that day. For example, for the day,
September 30, 2010, the data point on the graph for that day represents the
annualized standard deviation of the daily returns using closing levels of the
relevant index during the 126 index-days up to and including September 30, 2010.
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Hypothetical six-month annualized volatility (Jul 1, 1999 -- Oct 29, 2010)
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Note: The hypothetical, historical six-month annualized volatility levels of ETF
Efficiente, the SandP 500 Index, and the Barclays Aggregate Index, are presented
for informational purposes only. The back-tested, hypothetical, historical
six-month annualized volatility has inherent limitations. These volatility
levels reflect historical performance (and in the case of the Index hypothetical
historical performance). No representation is made that in the future ETF
Efficiente, the SandP 500 Index or the Barclays Aggregate Index will have the
volatilities as shown above. There is no guarantee that ETF Efficiente will
outperform any alternative investment strategy, including the Barclays Aggregate
Index or the SandP 500 Index. Alternative modeling techniques or assumptions might
produce significantly different results and may prove to be more appropriate.
Actual six-month annualized volatilities will vary, perhaps materially, from
this analysis. Please see "Important Information" at the front of this
publication for a discussion of certain additional limitations of back-testing
and simulated returns.
Hypothetical historical sector weightings
The following graph illustrates the hypothetical historical allocation to the
various sectors, the Cash Index (labeled as "Cash") or the iShares TIPS Bond
Fund (labeled as "Inflation") based on the rebalancing mechanics set forth under
the "Strategy description." For a detailed description of which Basket
Constituents make up each sector displayed in this graph, please see "What are
the Basket Constituents?". Although ETF Efficiente rebalances on a monthly
basis, for ease of display, allocations are shown on a semi-annual basis in the
chart below.
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Hypothetical allocations Jul 1999 to Oct 2010
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Source: J.P. Morgan
Note: The hypothetical allocations are obtained from hypothetical back-testing
of the ETF Efficiente algorithm and should not be considered indicative of the
actual weights that would be assigned to the sectors or the applicable Basket
Constituents during your investment in CDs linked to the Index. J.P. Morgan
provides no assurance or guarantee that the actual performance of the Index
would result in allocations among the sectors or the applicable Basket
Constituents consistent with the hypothetical allocations displayed in the
preceding graphs. Actual results will vary, perhaps materially, from those in
the hypothetical historical allocations contained in this hypothetical backtest.
Please see "Important Information" at the front of this publication for a
discussion of certain additional limitations of back-testing and simulated
returns.
The charts below illustrate the average allocation over specific time periods to
the various sectors or to Cash or Inflation and are intended to demonstrate how
the average allocation of the Index changes during different market
environments. These hypothetical allocations were calculated by averaging the
monthly allocations during the periods indicated.
Average allocations in declining equity markets
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July 2000 to March 2003 November 2007 to March 2009
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Average allocations in rising equity markets
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April 2003 to October 2007 April 2009 to October 2010
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Source: J.P. Morgan. Numbers have been rounded for convenience.
Note: The hypothetical allocations are obtained from back-testing and should
not be considered indicative of the actual weights that would be assigned to
the Sectors or the applicable Basket Constituents during your investment in CDs
linked to the Index. J.P. Morgan provides no assurance or guarantee that the
actual performance of the Index would result in allocations among the Sectors
or the applicable Basket Constituents consistent with the hypothetical
allocations displayed in the preceding graphs. Actual results will vary,
perhaps materially, from those arising from the hypothetical historical
allocations contained in this hypothetical backtest. Please see "Important
Information" at the front of this publication for a discussion of certain
additional limitations of back-testing and simulated returns.
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Risks associated with the Strategy
THE STRATEGY COMPRISES NOTIONAL ASSETS AND LIABILITIES--The exposures to the
dynamic basket that tracks the excess returns of the Basket Constituents above
the JPMorgan Cash Index USD 3 Month are purely notional. There is no actual
portfolio of assets to which any person is entitled or in which any person has
any ownership interest.
THERE ARE RISKS ASSOCIATED WITH A MOMENTUM-BASED INVESTMENT STRATEGY--The
Strategy employs a mathematical model intended to implement what is known as a
momentum-based investment strategy, which seeks to capitalize on positive market
price trends based on the supposition that positive market price trends may
continue. This Strategy is different from a strategy that seeks long-term
exposure to a portfolio consisting of constant components with fixed weights.
The Strategy may fail to realize gains that could occur from holding assets that
have experienced price declines, but experience a sudden price spike thereafter.
CORRELATION OF PERFORMANCES AMONG THE BASKET CONSTITUENTS MAY REDUCE PERFORMANCE
OF THE STRATEGY--Performances among the Basket Constituents may become highly
correlated from time to time during the term of your investment. High
correlation during periods of negative returns among Basket Constituents
representing any one sector or asset type that have a substantial weighting in
the Strategy could have a material adverse effect on the performance of the
Strategy.
THE COMMODITY FUTURES CONTRACTS UNDERLYING THE ISHARES SandP GSCI
COMMODITY-INDEXED TRUST ARE SUBJECT TO UNCERTAIN LEGAL AND REGULATORY
REGIMES--The commodity futures contracts that underlie the iShares SandP GSCI
Commodity-Indexed Trust are subject to legal and regulatory regimes that may
change in ways that could adversely affect our ability to hedge our obligations
under the Strategy or your investment linked to the Strategy. Under these
circumstances, we may, in our sole and absolute discretion, determine your
payment at maturity early. Because we will not make this early determination
payment until the maturity date, the amount you receive at maturity will not
reflect any further appreciation of the Strategy after such early determination.
OUR AFFILIATE, J.P. MORGAN SECURITIES LTD., OR JPMSL, IS THE CALCULATION AGENT
AND MAY ADJUST THE STRATEGY IN A WAY THAT AFFECTS ITS LEVEL--The policies and
judgments for which JPMSL is responsible could have an impact, positive or
negative, on the level of the Strategy and the value of your investment. JPMSL
is under no obligation to consider your interest as an investor in CDs linked to
the Strategy.
OTHER KEY RISKS:
[] The Strategy may not be successful, may not outperform any alternative
strategy related to the Basket Constituents, or may not achieve its target
volatility of 5%.
[] The investment strategy involves monthly rebalancing and maximum weighting
caps that are applied to the Basket Constituents by asset type and
geographical region.
[] Changes in the value of the Basket Constituents may offset each other.
[] An investment in CDs linked to the Strategy is subject to risks associated
with non-U. S. markets, including emerging markets.
[] The CDs linked to the Strategy are subject to currency exchange risk.
[] The Index was established on October 29, 2010, and therefore has no
operating history.
[] J. P. Morgan Securities LLC. , one of our affiliates, is the sponsor of the
JPMorgan Cash Index USD 3 Month and of the index that underlies the iShares
JPMorgan USD Emerging Markets Bond Fund.
[] The Index Levels incorporate the deduction of a fee of 0.50% per annum
The risks identified above are not exhaustive. You should also review carefully
the related "Risk Factors" section in the relevant product supplement and the
"Selected Risk Considerations" in the relevant term sheet or pricing supplement.
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