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From: «Ens, Amand Sent: 3/16/2017 6:27:30 PM To: jeffrey E. [jeevacation@gmail.com]; Richard Kahn Subject: Buy hedges for May expiry Attachments: image001.jog; Woo - Cause and Effect - 13-Feb-2017.pdf; Woo - Year Ahead - 16-Nov-2016.pdf Importance: — High David Woo (BAML head of FX, Rates and EM Strategy, very highly regarded across our client base) is back from meetings in DC with senior policymakers. Bottom line: sees market pullback over the next 6-8 weeks on near term policy disappointment and recommends buying protection such as S&P puts — very cheap and market is priced for perfection right now. May 15“ expiry 100%/90% SPX put spread costs 1.7% (6:1 gross max payout) David Woo takeaways ° #1 focus these days is tax reform - if they don't get it done by Jan 2018, it won't happen at all, and then Republicans would be out of a job when midterm elections come ° ACA has to be completed first — and it was a mistake to tackle this before tax reform. Obamacare difficult with only 52 seats in the Senate but Ryan has gone too far to back away from ACA and refocus on tax reform as a priority. McConnell’s ACA target is mid- “Apri and then they can start to focus on tax reform 2H April at the earliest. itior e next 6-8 weeks on bad heeclines, data rollover (consumer confidence) e Still eo term bullish e 95% tax reform still happens this year (2H17 or Jan 2018) because Republicans know it has to happen this year or they are sitting ducks in 2018 and potentially unelectable for 6 years ° Predicts no progress on tax reform over the next 6 weeks and then Republicans rally together to get behind a new plan and get it done (enter Woo’s VAT proposal) — with market messy in the meantime ° Trump is obsessed with the stock market — when he sees it trade lower, he will act e Regarding valuation adjustment tax (VAT) vs. border adjustment tax, Woo favors a 5% VAT over BAT ) Why there is a <10% chance current proposal of BAT will get passed 7 Paul Ryan/Keven Brandy’s proposal implies USD will appreciate +25%. Ryan is telling retailers this will happen but this is completely unrealistic and has serious consequences. Why this cannot happen: ° $20tn in non-USD assets owned by US households - $5tn hit on country’s balance sheet ° EM has ~S4tn in USD-denominated debt — increase of $1tn in EM debt and hurts US investors ultimately e ~30% corporate profits are overseas (S400bn — so $100bn hit to EPS) — even exporters get hit — counterproductive ° Commodity prices are in USD — hits purchasing power of rest of world in commodities — would see oil in the mid- $30s — hits Russia, Brazil, even Exxon e 60% of central bank reserves are in USD — this would go above 70% - would foreign CBs want to hold this much when the US economy is 25% of global GDP? Yields would need to increase ) BAT could get hung up with WTO (3-4 years.) Under BAT, wages are deductible (imported goods taxed as a share of total value but domestic goods taxed on only profits) — trade partners like Canada, Japan would take this to the WTO and we would wait 4 years for a verdict fe) 5% VAT is WTO compliant and has several benefits 7 VAT levels playing field for US imported vs exported goods (no longer see BMW’s cheaper in the US than Germany) HOUSE_OVERSIGHT_014717