EFTA02668215.pdf

From: Ens, Amanda < Sent: Tuesday, November 22, 2016 7:15 PM To: jeffrey E.; Rich Kahn Subject: Financials: buy XLF call spreads Underweight positioning, buybacks resuming, positive momentum and strong fundamentals all indicate that there is still further upside potential in financials (more details below). Our financials sector specialist thinks XLF could have another 20-25% upside given the many levers to the Trump Trade: less regulation, higher interest rates, higher vol, economic growth, loan growth, etc. The asset sensitive regional banks are more of a pure play on a rates move but we view the larger cap banks as having multi-pronged upside given the aforementioned points. That said, given the velocity and magnitude of the recent move and uncertainty around the impact and timing of Trump's policies, we believe options offer better risk-reward than being outright long financials stocks here. With flat call skew, "appearing" call spreads with upside knock-ins price well. Buy a 1 year XLF call spread for 2.6% premium Buy a 110% call Sell a 117.5% call with an at-expiry knock-in at 125% (call is not active unless XLF is 125% or higher at expiry) o Total premium is 2.6% o Gross max payoff if knock-in is triggered: 2.9x (7.5%/2.6%) o Gross max payoff if knock-in is not triggered: 5.7x (14.9%/2.6%) — you have upside up to 124.9% Post Election Flow Skews - Buyers of Health Care (via ETFs) and Financials (mainly ETFs) US Buyback Flows • Cons Disc, Technology and Financials are the largest 3 sectors for US buybacks (over 70% of execution). We are seeing a seasonal increase in buybacks as we come out of the low seasonal month of the year (October) and should see increased buyback executions until year-end, another source of upside for the Cons Disc, Technology and Financials sectors. EFTA_R1_01920230 EFTA02668215 Global Positioning <https://rsch.baml.com/r?q=wTOeFNkXyl5sMhB9wIslcQ&[email protected]&h=XjOWDg> , Nigel Tupper, 11/14. Large long-only funds are more underweight Financials than any other sector and are UW this sector in all regions. Future of Financials <http://rsch.baml.com/r?q=x37xwH-FUPxMdOaH9Jeplg&e=amanda.ens%40baml.com&h=-2uTOg> conference hosted 90 public and private companies at our Future of Financials conference. We are raising our price objectives across most of our names. Three primary reasons why we think there is upside remaining after the recent rally: 1) an improved outlook on both activity levels and interest rates, driving revenue upside; 2) potentially lower regulatory burden, particularly as new supervisory leadership can come with the new administration; and 3) relatively lighter positioning in US financials vs. other sectors. (Erika Najarian) Trades Gaining Momentum: Finance-Related Assets vs. S&P 500 In the period since the US presidential election, the three top-performing S&P sectors and industry groups have all been finance-related (Banks, Financials, Diversified Financials) Source: Kensho Technologies The Flow Show <http://rsch.baml.com/r?q=lOkdhk4kaufvRbmcQWmwEQ&e=dg.americas_equity_derivatives_sales%40baml.com&h=jy UCXg> , Michael Hartnett, 11/18. Violent rotation: record equity ETF inflow, record financials inflow, biggest bond outflow in 3.5 yrs, record EM debt outflow. Regards, Amanda Amanda Ens Director Global Equities Bank of America Merrill Lynch Merrill Lynch, Pierce, Fenner & Smith Incorporated One Bryant Park I 5th Floor I New York, NY 10036 2 EFTA_R1_01920231 EFTA02668216  <mailto This message, and any attachments, is for the intended recipient(s) only, may contain information that is privileged, confidential and/or proprietary and subject to important terms and conditions available at http://www.bankofamerica.com/emaildisclaimer. If you are not the intended recipient, please delete this message. 3 EFTA_R1_01920232 EFTA02668217