File 014312
Amanda Ens Bank of America Merrill Lynch Financial Trading Recommendations Email (File 014312)
Email correspondence from Amanda Ens at Bank of America Merrill Lynch to Jeffrey E. and Richard Kahn regarding financial sector trading strategies and market analysis following the 2016 election, including recommendations for XLF call spreads and commentary on regulatory expectations.
Summary
Amanda Ens sends a series of emails in November 2016 discussing financial sector trading opportunities, specifically recommending XLF (Financial Select Sector SPDR) call spreads with analysis of market positioning and regulatory outlook. The emails reference the Future of Financials Conference, analyst Erika Najarian's price target increases, and positioning data from Nigel Tupper, while discussing anticipated policy changes under the incoming Trump administration regarding financial regulation and their potential impact on bank valuations and returns on equity.
From:Sent:To:Subject:Attachments:Ens, Amanda11/17/2016 6:05:47 PMjeffrey E. [jeeyacation@gmail.com]; Richard KahnFinancials: buy XLF Mar17 $22 call with $26 KO for $0.87 with full premium rebate on KOimage001.png; Future of Financials Conference Takeaways.pdfImportance: HighOur Financials Conference was this week and client attendance was up by 66% from last year. Yes, banks/financialsmight pull back at some point after this run-up but we would be buyers on any pullbacks and we continue to see furtherupside from multiple expansion and earnings growth. Our analyst raised her price targets by —11% across the board. Thelong 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 premiumrebate if knock-out occurs.This prices attractively given flat call skew and if XLF breaches $26 and this knocks out, at least you get yourpremium back.Please find our Financials report attached.Future of Financials conference hosted 90 public and private companies at our Future of Financials conference. We areraising our price objectives across most of our names. Three primary reasons why we think there is upside remainingafter 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, AmandaSent: Monday, November 14, 2016 12:05 PMTo: 'Jeffrey E.'; 'Richard Kahn'Subject: RE: Financials trade for MondayWe continue to see buyers of XLF today. Funds are underweight financials in all regions, valuations arereasonable, 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" analysisare more underweight Financials, on average, than any other sector and are underweight this sector in allregions of the world. If earnings continue to improve and yield rise, which is often the case in an upturn in ourGlobal 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 tobond yields) tend to outperform our "Bullish On Bonds" when bond yields rise. The sectors that tend toperform best as bond yields rise are Energy, Tech, Materials, Banks, and Diversified Financials. Of thesesectors, the laggards this year have been Banks and Diversified Financials. With a PE of 15.9x and a PB of2.0x, Global valuations are reasonable. Also, Risk is near all-time lows in terms of PE in most regions. Nowthat macro and earnings data have triggered the beginning of a rotation, Value becomes very relevant.HOUSE OVERSIGHT 014312From: Ens, AmandaSent: Friday, November 11, 2016 4:04 PMTo: 'jeffrey E.'; 'Richard Kahn'Subject: Financials trade for MondayIt's not too late to buy financials as a medium term trade. They've run up a lot this week but we're gettingendless calls from generalists asking which banks to buy — there is still more upside to the sector. Banks alsoprovide some offset to your bonds if interest rates continue to move. Our financials sector specialist thinks XLFcould have another 20-25% upside given its many levers to the Trump trade: less regulation, higher interestrates/steeper yield curve, higher vol, economic growth, etc. The regional banks are asset sensitive and more of apure play on a rates move but we view the larger cap banks as having even more upside to the Trump Tradegiven 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 rolledback (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'salso the tax read-through: tech is already relatively tax advantaged @ 22%; Industrials are at 30%, Financials at29%. 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 whichmay send US growth higher and that's a good thing for financials for a wide variety of reasons, fromemployment to wages to loan growth and credit quality (even if somewhat offset by higher rates). It doesremain to be seen exactly how much of this expected policy actually gets done, but at the moment, investors arewilling 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 theelection would seem to indicate that investors have concluded that nearly every piece of financial regulationwill get put into a shredder on day one of the new administration. The incoming administration has fueled thatwith comments about rolling back pieces (or more) of Dodd-Frank in particular. I can see making the case forthat to the American public by saying that banks need less regulation in order to get more capital flowing intothe economy to drive growth. Not only does that mean that the E is likely too low (meaning that the P/E is notas high as it seems) but it could help improve ROE's as well which could increase the multiple of that higher Einvestors are willing to pay. Note that while ROEs could go higher, it's unlikely that they can get back to thepeaks...Regards,AmandaAmanda EnsDirectorBank of America Merrill LynchMerrill Lynch, Pierce, Fenner & Smith IncorporatedOne Bryant Park, 5th Floor, New York, NY 10036HOUSE OVERSIGHT 014313The power of global connectionsTmBankofAmerica<s-ss-40*Merrill LynchThis message, and any attachments, is for the intended recipient(s) only, may contain information that isprivileged, confidential and/or proprietary and subject to important terms and conditions available athttp://www.bankofamerica.com/emaildisclaimer. If you are not the intended recipient, please delete thismessage.HOUSE OVERSIGHT 014314