From: "Ens, Amanda"

From: "Ens, Amanda" To: "jeffrey E." <[email protected]> Cc: Richard Kahn Subject: Bearish trade idea on the Border Adjustment Tax Date: Wed, 01 Feb 2017 18:49:02 +0000 Inline-Images: image001.gif; image001jpg0ID27C803F87ACCOjpg; image002jpg01D27C803F87ACCOjpg Jeffrey, Expressing a bearish view through a best-of-put on XLY & XLP (Consumer Discretionary & Consumer Staples ETFs) takes advantage of low implied correlations to cheaply position you for potential downward EPS revisions in consumer names due to tax changes — as well as an overall market pullback. Trade: Buy 3 month 95% Best-of-Put on XLY & XLP for 0.55% (compares to buying individual puts at "11.3% and 1.0%) Since the presidential election, consumer discretionary and consumer stables ETFs have traded 11.50% and 6.00% from their respective lows. This is on the back of proposed tax cuts boosting spending and a generally buoyant market hoping for other pro-economic/stimulatory announcements out of Washington. But digging deeper into some of the proposed tax changes, there are potentially some winners and losers. Paul Ryan's tax reform blueprint includes a border adjustment tax, which would recognize domestic production and sales for tax purposes. Specifically, importers will have their domestic sales taxed, but will not be able to deduct their foreign production cost. Yesterday morning Peter Navarro, head of trade policy for the Trump White House, effectively endorsed the policy. BAML research estimates that this border tax would most detrimentally impact the consumer discretionary and staples sectors, forecasting that a 20% rate will decrease EPS by 28% and 31%, respectively. (Equity Strategy (Savita Subramanian) — Death and Tax Reform) cid:1109507085 We think a good way to play a potential correction in the consumer staples and discretionary sectors as a result of potential border tax legislation is to buy a best-of-put. This prices really well due to the post-election slump in implied correlations as the market rallied. Remember, correlations tend to move higher towards 1 in a big sell-off, which is good for this trade. EFTA01055553 Graph below is a measure of the average implied correlation between SPX and its individual stock components for JAN18 expiration. A lower implied correlation cheapens the cost of a best of put. Source: Bloomberg 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 Phone: Mobile: 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. EFTA01055554