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Ens, Amanda
11/17/2016 6:05:47 PM
jeffrey E. [jeeyacation@gmail.com]; Richard Kahn
Financials: buy XLF Mar17 $22 call with $26 KO for $0.87 with full premium rebate on KO
image001.png; Future of Financials Conference Takeaways.pdf
Importance: High
Our Financials Conference was this week and client attendance was up by 66% from last year. Yes, banks/financials
might pull back at some point after this run-up but we would be buyers on any pullbacks and we continue to see further
upside from multiple expansion and earnings growth. Our analyst raised her price targets by —11% across the board. The
long term rotation from bonds and div stocks into sectors like financials is only beginning.
Vol is higher on the week; what prices well now:
Buy the XLF March 2017 $22 call with $26 Knock-Out (continuous) for $0.87, with a full premium
rebate if knock-out occurs.
This prices attractively given flat call skew and if XLF breaches $26 and this knocks out, at least you get your
premium back.
Please find our Financials report attached.
Future of Financials 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)
From: Ens, Amanda
Sent: Monday, November 14, 2016 12:05 PM
To: 'Jeffrey E.'; 'Richard Kahn'
Subject: RE: Financials trade for Monday
We continue to see buyers of XLF today. Funds are underweight financials in all regions, valuations are
reasonable, earnings are improving and financials tend to outperform when bond yields rise.
Vol is higher today — refreshed pricing below.
Buy an XLF 17March2017 call spread:
• Buy the 105% call / sell a 110% call with a 115% at-expiry knock-in
• Total premium: 1.86%
Global Positioning in Stocks: Nigel Tupper notes the 4000 funds in our "Positioning in Stocks" analysis
are more underweight Financials, on average, than any other sector and are underweight this sector in all
regions of the world. If earnings continue to improve and yield rise, which is often the case in an upturn in our
Global Wave, then the unloved Financials sector has the potential to continue to outperform.
Global Quant Panorama: "Bearish on Bonds" stocks (which tend to move in the opposite direction to
bond yields) tend to outperform our "Bullish On Bonds" when bond yields rise. The sectors that tend to
perform best as bond yields rise are Energy, Tech, Materials, Banks, and Diversified Financials. Of these
sectors, the laggards this year have been Banks and Diversified Financials. With a PE of 15.9x and a PB of
2.0x, Global valuations are reasonable. Also, Risk is near all-time lows in terms of PE in most regions. Now
that macro and earnings data have triggered the beginning of a rotation, Value becomes very relevant.
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From: Ens, Amanda
Sent: Friday, November 11, 2016 4:04 PM
To: 'jeffrey E.'; 'Richard Kahn'
Subject: Financials trade for Monday
It's not too late to buy financials as a medium term trade. They've run up a lot this week but we're getting
endless calls from generalists asking which banks to buy — there is still more upside to the sector. Banks also
provide some offset to your bonds if interest rates continue to move. Our financials sector specialist thinks XLF
could have another 20-25% upside given its many levers to the Trump trade: less regulation, higher interest
rates/steeper yield curve, higher vol, economic growth, etc. The regional banks are asset sensitive and more of a
pure play on a rates move but we view the larger cap banks as having even more upside to the Trump Trade
given the above points.
Buy an XLF 17March2017 call spread:
• Buy the 105% call / sell a 110% call with a 115% at-expiry knock-in
• Total premium: 1.75%
All eyes are on Sunday's 60 Minutes interview with Trump. Market is pricing that all regulations will be rolled
back (very optimistic). Any hint that this is not true could lead to pullback on Monday.
Note on tech: we're seeing FANG used as a source of funds with the rotation from growth into value. There's
also the tax read-through: tech is already relatively tax advantaged @ 22%; Industrials are at 30%, Financials at
29%. Next year, tech could benefit from a repatriation tax holiday but that is viewed as more of a Q1/Q2 trade.
More thoughts on financials:
With respect to the economy, the market is certainly indicating that there will be a large fiscal stimulus which
may send US growth higher and that's a good thing for financials for a wide variety of reasons, from
employment to wages to loan growth and credit quality (even if somewhat offset by higher rates). It does
remain to be seen exactly how much of this expected policy actually gets done, but at the moment, investors are
willing to take a certain amount of growth on faith.
So those are positives for financials before we even discuss regulation. The move in the financials since the
election would seem to indicate that investors have concluded that nearly every piece of financial regulation
will get put into a shredder on day one of the new administration. The incoming administration has fueled that
with comments about rolling back pieces (or more) of Dodd-Frank in particular. I can see making the case for
that to the American public by saying that banks need less regulation in order to get more capital flowing into
the economy to drive growth. Not only does that mean that the E is likely too low (meaning that the P/E is not
as high as it seems) but it could help improve ROE's as well which could increase the multiple of that higher E
investors are willing to pay. Note that while ROEs could go higher, it's unlikely that they can get back to the
peaks...
Regards,
Amanda
Amanda Ens
Director
Bank of America Merrill Lynch
Merrill Lynch, Pierce, Fenner & Smith Incorporated
One Bryant Park, 5th Floor, New York, NY 10036
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