EFTA01386943.pdf

1. This trade idea initiated on September 13 and is moving significantly today, +1.8a 2. DB's Asset Allocation Strategists published an updated report on this trade which included some new baskets: • Top SO / Bottom 50 from the SPX-ex-RElTs-and-UTES, chosen by effective tax rate offer manually adjusting for deferred tax assets —"modified" tax reform on our Monitor • Top beneficiaries of repatriation based on offshore cash and "buyback alpha score" i.e. stock's statistical tendency to outperform when doing a buyback We've updated our Trump Policy Monitor, replacing some dead things with our various iterations of tax reform sensitivity. Available for your Launchpad if you want to monitor these trends intraday. Reminder that we also think Size is a surprisingly good proxy for tax rate so IWM upside works well. IWM outperformance vs SPY today looks small, but becomes much more significant after controlling for sector skews (+1.3o), consistent with our model. Lots more room to go if this starts to look like a real possibility. <image0ll.jpg> ORIGINAL TRADE IDEA PUBLISHED SEPTEMBER 13: Buy DBUSTXHI / sell DBUSTXLO on swap for beta-neutral, sector-neutral, rates-neutral exposure to a corporate tax cut <image002.pne We're getting increasing chatter around the potential for success in tax reform before year end for the Trump administration. (Hey, it could happen!) Our customers are asking us how to trade. We still think IWM vs SPY is the cleanest but we've also seen demand for baskets. We've seen a variety of constructions of this trade,* aiming to create exposure to tax reform, many of which result in taking a material sector bias and often an implicit interest rates view (for instance, Banks vs Utilities has a huge DV01, as we've highlighted before). And rates have been a widow maker all year. DB's suggested construction: • Compute effective tax rate for every company in the S&P 500 on a 5 year trailing basis • Remove REITs and Utilities sectors due to unique tax treatment • Remove Telcos due to tiny universe of stocks (n=4) • Identify the top 10 and bottom 10 stocks from each remaining sector by tax rate and construct as a equal-weight long-short pair. • Result is DBUSTXHI and DBUSTXLO, tradable on swap in >5100mm/side/day, 1ML flat / 1ML 30 as a pair Resulting construction looks like the below, in each remaining sector. Full composition available on Bloomberg. Avg effective tax rate on "low' names: ir% Avg effective tax rate on "high" names: 45% CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0088892 CONFIDENTIAL SDNY_GM_00235076 EFTA01386943