EFTA02666849.pdf

From: jeffrey E. <[email protected]> Sent: Friday, December 9, 2016 3:56 PM To: Ens, Amanda; Richard Kahn Subject: Re: Financials: buy XLF call spreads lets try, 250k premium On Fri, Dec 9, 2016 at 11:46 AM= Ens, Amanda wrote: We continue to see further upside in financials.<=u> * =C2• Erika Najarian, BAML financials re=earch analyst, just returned from a marketing trip. Bottom line: North American investors are very bullish the banks (lo=g only AND hedge funds AND macro funds), but then conclude "I don=E2 t own enough". Note that high touch flows have slowe= down significantly since Thanksgiving and where the buying has been concentrated in XLF (every client sector we have has been a better buyer o= XLF). * =C2* Client focus: 1) Regulation: Excitement, with the base case that it'= not getting worse. 2) Sentiment on rates: Cautiously bullish=/p> 3) Sentiment on growth: Also bullish 4) Sentiment on corporate tax rate cuts: buyside more bullish =han sellside. In 1986, bank stocks exploded upward (outperforming the S&am=;P) after Reagan's tax reform bill passed the Senate; and 2) in 2003, the last time we saw personal tax cuts, loan growth industry w=de accelerated in 2003 and 2004. * =C2• Biggest Pushback on owning sector =t current levels: Too far too fast: BKX +18.00% post election: Valua=ion coming into question and Q4 has typically been a seasonally weak qtr. Bulls defend valuation on '18ests with potential upside =o 2018 EPS from -25-40% and stocks still cheap vs. discretionary. * =C2• Price action and sentiment keeps u= constructive, we like the long and would expect US financials to be=efit from any beta chase into year end. * =C2* How to play it? We still like "appearing" call spreads=on XLF o Buy a 6 month 105% call with a sho=t 110% call that knock in if XLF trades above 115% during the life o= the trade for 1.75% premium cost EFTA_R1_01918399 EFTA02666849  ••• •••••••• Gross max payoff if knock-in is tr=ggered: 2.8x (5.0%/1.75%) * Gross max payoff if knock-in is not triggered: =b> 5.6x (9.9%/1.75%) — you have upside up to 114.9%<=p> Regards, Amanda </=pan> Amanda Ensau> Director J Global Equities Bank of America Merrill =ynch Merrill Lynch, Pierce, F=nner & Smith Incorporated One Bryan= Park I 5th Floor I New York, NY 10036 From: Ens, Ama=da Sent: Tuesday, November 22, 2016 2:15 PM To: 'jeffrey E.'; Rich Kahn Subject: Financials: buy XLF call spreads Underweight positioning, buybacks resuming, po=itive momentum and strong fundamentals all indicate that there is still fu=ther upside potential in financials (more details below). Our financials sector=specialist thinks XLF could have another 20-25% upside given the many leve=s to the Trump Trade: less regulation, higher interest rates, higher vol, =conomic 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 =forementioned points. That said, given the velocity and magnitude of=the recent move and uncertainty around the impact and timing of Trump =80 s policies, we believe options offer better risk-reward than being outright long finan=ials stocks here. With flat call skew, "appearing" call sp=eads with upside knock-ins price well. Buy a 1 year XLF call spread for 2.6% premiuma> 2 EFTA_R1_01918400 EFTA02666850  * =C2* Buy a 110% call</=> * =C2* 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 tr=ggered: 2.9x (7.5%/2.6%) o Gross max payoff if knock-in is no= triggered: 5.7x (14.9%/2.6%) — you have upside up to 124.9% <=u> </=> Post Election Flow Skews - Buyers of Health=Care (via ETFs) and Financials (mainly ETFs) US Buyback Flows • Cons Disc, Technology and Fin=ncials are the largest 3 sectors for US buybacks (over 70% of execution).=C2 We are seeing a seasonal increase in buybacks as we come out of the low seasonal month of the year (October) and shou=d see increased buyback executions until year-end, another source of upsid= for the Cons Disc, Technology and Financials sectors.</=pan> <1=> Global Positioning <https://rsch.baml.com/r?q=wTOeFNkXy.l5s=hB9wIslcQ&[email protected]&h=XjOWDg> , Nigel Tupper, 11/14. Large long-only funds are mo=e underweight Financials than any other sector and are UW this sector in a=l regions.=/p> Future of Financials <http://rsch.baml.com/r?q=x37xw=-FUPxMdOaH9Jeplg&e=amanda.ens%40baml.com&h=- 2uTOg> conference hosted 90 public and private =ompanies at our Future of Financials conference. We are raising our price =bjectives across most of our names. Three primary reasons why we think there is upside remaining after the recent rally: 1) an impro=ed outlook on both activity levels and interest rates, driving revenue ups=de; 2) potentially lower regulatory burden, particularly as new supervisor= 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 to.-performing S&P sectors and industry groups have all been finance-rela=ed (Banks, Financials, Diversified Financials) Source: Kensho Technologies 3 EFTA_R1_01918401 EFTA02666851  The Flow Show <http://rsch.ba=l.com/r?q=lOkdhk4kaufvRbmcQWmwEQ&e=dg.americas_equity_derivatives_=alescre,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 =utflow. Regards,=/u> Amanda</=> Amanda Ens=/b> Director I Global Equities Bank of America Merrill Lynch Merrill Lynch, Pierce, Fenner & Smith Incorporated This message, and any attachments, is for the intended recipient(s) onl=, may contain information that is privileged, confidential and/or propriet=ry and subject to important terms and conditions available at http://www.b=nkofamerica.com/emaildisclaimer. If you are not the intended re=ipient, please delete this message. 4 EFTA_R1_01918402 EFTA02666852  =AO please note The information contained i= this communication is confidential, may be attorney-client privileged,=may constitute inside information, and is intended only for the use =f the addressee. It is the property of JEE Unauthorized use, disclos=re or copying of this communication or any part thereof is strictly pro=ibited and may be unlawful. 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