MITTS Investments

MITTS Investments

MITTS: The Only "Can't Lose" Stock Market Investment on Earth

* Republished with permission from the Oxford Club Research Department

Despite the economic uncertainty, there exists an investment opportunity that's 100% immune to it all.

These securities feature unlimited upside potential, zero risk to principal and, best of all, guaranteed profit. In other words, they are the Holy Grail of investing…and they form the perfect centerpiece for our Oxford Fortress Portfolio.

These securities are neither obscure nor newfangled. In fact, they were created by one of the largest financial institutions in the world. They're highly liquid and traded on both the NYSE and AMEX.

They're called market index target term securities (MITTS). If you don't already own them, it's probably because you didn't know they exist. But now you do, and here's why MITTS investments should be a part of your portfolio…

What Are MITTS Investments?

Market Index Target-term Securities (MITTS), also known as equity-linked notes, are essentially bonds linked to an index or a series of stocks. MITTS investments are designed to do two things: 1) limit an investor's downside risk while 2) producing a return that's tied to the performance of a group of stocks. Initially created by Merrill Lynch, MITTS are traded on the New York Stock Exchange and the American Stock Exchange.

The enticing aspect of MITTS is that no matter what the outcome of the stock, investors are guaranteed to get their money back come maturity time. Should the stocks rise higher, investors get some of that upside return.

MITTS Investments: A Rock-Solid Financial Foundation

Unlike single-stock investments, MITTS offer you the chance to invest in sectors, indexes or even regions of the world.

Publicly traded, they were created by Merrill Lynch for investors who want capital appreciation coupled with complete protection of principal.

For instance,  take the now-expired Russell 2000 MITTS (AMEX: RUM). Merrill Lynch brought these securities public at $10 a share when the Russell 2000, the U.S. small-cap index, was at 449.4. RUM shareholders were then guaranteed to receive 100% of the percentage increase in this index over the benchmark index value (494.3) at the time it matured on Sept. 30, 2004.

In other words, if the index doubled (to 988.6), the MITTS would be worth $20 at maturity. If the index tripled, they matured at $30. And so on.

However, even if the index declines over its lifetime, Merrill guaranteed - as it still does with all MITTS - that the shareholder would not receive less than $10 per share at maturity. That's the absolute minimum. In other words, you have the unlimited upside of the index, but with no risk to principal provided, of course, you pay $10 or less when you buy them.

How Are MITTS Purchased?

You are not required to buy these securities through Merrill Lynch, however, nor are you required to hold them until maturity. MITTS trade on the American Stock Exchange and New York Stock Exchange, giving shareholders daily liquidity. If the index begins to rise, so will the MITTS. If the index falls, so will the share price, temporarily.

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However, no matter how badly the index gets hit, Merrill Lynch guarantees that you will NOT receive less than $10 at maturity. So there's no reason to sell if the price is down temporarily. And, of course, if the price is up, you can take profits whenever you like.

Unlike stock and mutual fund shareholders who are always left wondering when, or if, their share prices will recover, holders of MITTS have the supreme peace of mind that comes from knowing that under no circumstances will they suffer a loss of principal.

That's because MITTS are neither stocks nor mutual funds, but essentially debt obligations of Merrill Lynch with the return tied to the value of a particular market index.

For obvious reasons, these "Protected Growth Investments" have been popular with investors anxious about market volatility. As a result, Merrill has offered MITTS investments linked to a variety of indexes and various sectors including energy, consumer staples, healthcare/biotech, etc. You could actually construct a complete index portfolio of large caps, small caps and foreign stocks, all with zero risk to principal over the life of the investments.

One interesting thing about MITTS investments is that the market is sometimes quite inefficient in pricing them. Just as closed-end funds often sell at substantial discounts to their net asset values, MITTS can trade at a substantial discount to their intrinsic value. This creates superb opportunities for us. Especially since, unlike a closed-end fund - which may never see its discount to net asset value go away - we know that over the next few years either the discount will vanish and we will get the full value of the index, or the market will tank and we'll get back our $10 per share.

The Profit Magician's Tricks Revealed

So exactly how does Merrill Lynch pull off this sleight-of-hand? Simple. When it brings these securities public, part of the proceeds go into a zero-coupon bond that guarantees the principal at maturity. The balance goes into a long-term index option that locks in the increase in the index over the life of the security.

Voila! And just like variable annuities there is unlimited upside with zero downside risk. It's every investor's dream.

And once you own these three MITTS, you have really done something quite extraordinary. To begin with, you have positioned your portfolio to benefit from market appreciation in U.S. large-caps, Euro-Pacific stocks and Japanese stocks.

That's a wonderfully diversified global portfolio. And, despite the cautious optimism that currently reigns in many markets, as the world confirms that its economy is gradually getting back on its feet, the capital appreciation in these markets could be extraordinary.

Secondly, even if the direst predictions about future market performance come true, it won't deflate your portfolio in the slightest.

In short, you have built a fortress around your investment portfolio. One that no recession, no war, and no market crash can undo. Your worst-case scenario is a small profit. Your best-case scenario, depending on how much the markets appreciate from here, is you make a heck of a lot of money.

Good investing,

The Investment U Research Team