Trump's tax plan is here — here's how Wall Street says to trade it

• Joe Ciolli
 

• 41m
• 18,770
 

Wall Street has lots of ideas for how investors can trade for Donald Trump and Steve Mnuchin's tax plan.Alex Wong/Getty Images

Corporations aren't the only ones set to profit from the Republican tax plan released on Wednesday.

You can too — if you know where to look.

Just focus on the so-called Trump trade, which involves betting on the areas of the market poised to benefit most from the pro-business policy overhaul being touted by President Donald Trump.

Investors have already started piling back into the trade after a long hiatus, as they start to hope for real progress on the policy front.

But don't worry; you haven't missed much yet. There's still a great deal of upside potential to be realized, especially since these same Trump-linked strategies retraced all of their postelection gains — and then some — as investors lost confidence in the president's proposed policies.

Here's a quick primer on what matters to investors:

• The key measure investors are focusing on involves a lowering of the corporate tax rate to 20% from 35%. Trump has pushed for 15% in the past, but that's being increasingly viewed as unviable.
• The repatriation tax holiday for companies holding trillions of dollars overseas. They'll be allowed to bring that cash back to the US at a lower-than-usual rate. It could spur investment in the US, but it's also very likely to wind up being used to pay dividends and buy back shares.
• Another element that investors could trade on is the ability to immediately expense capital expenditures.

The two most straightforward Trump trades involve buying stock in two types of companies:

1. Those that pay the most taxes and
2. Those that hold the most cash overseas.

Lucky for you, both Goldman Sachs and JPMorgan have baskets tracking both groups.

For more detail, here's a breakdown of how those two firms, plus two other Wall Street titans, recommend investors play tax reform:

View As: One Page Slides

Goldman Sachs, part 1

Business Insider / Andy Kiersz, data from Bloomberg

Overview: The chart above shows a Goldman-curated basket of 50 companies that pay high taxes, spread across a variety of US industries.

After a postelection surge, the index saw all of its gains relative to the broader market erased by mid-March. Now, amid rising optimism around some sort of tax cut, it's been ticking up in recent weeks. 

Top recommendation: Figure out which companies pay the most taxes, then buy their stocks and don't look back.

Goldman Sachs, part 2

Business Insider / Andy Kiersz, data from Bloomberg

Overview: The second big component of the tax plan, a repatriation tax holiday, will incentivize multinational companies — which make a large portion of their earnings overseas — to bring cash held internationally back into the US.

The chart above shows another Goldman index containing the stocks with the highest earnings reinvested overseas. After losing their postelection gains, they recovered before spiking in recent weeks on increased policy optimism.

The firm estimates that a lowering of the corporate tax rate would result in multinationals repatriating $250 billion of a possible $920 billion untaxed overseas cash in 2018. In terms of the specific sectors that stand to benefit most, Goldman highlights tech and healthcare, which combine for roughly 85% of the total overseas cash for S&P 500 companies.

Top recommendation: Figure out which companies are reinvesting the most earnings overseas, then buy their stocks and don't look back. Large-cap tech and healthcare are a good place to start.

JPMorgan

JPMorgan US Equity Strategy & Global Quant Research

Overview: While JPMorgan shares Goldman's view that highly taxed companies will benefit from the tax policy, they will also get a boost from the immediate expensing of capital expenditures (capex). That's expected to benefit asset-heavy industries, most notable energy and industrial companies.

To help better understand the effect of the newly-announced 20% corporate tax rate, take a look at JPMorgan's analysis from last week around a cut to 25%. Such a trimming would boost the S&P 500's earnings by $11.40 a share to $143.40. That, in turn, would add more than 150 points to the index, which is fresh off a series of record highs.

And with the stock market serving as a handy signaling device for the likelihood of policies being introduced, JPMorgan also sees areas of the bond market impacted by the repatriation portion of the tax plan.

"Tax reform that repatriates foreign cash and eliminates interest deductibility would greatly reduce US corporate bond supply and should thus on net tighten credit spreads," analysts led by Jan Loeys, the firm's head of global asset allocation, wrote in a recent client note.

Top recommendations:

1. Buy stocks of companies paying high taxes
2. In the event of immediate capex expensing, buy stocks of companies in asset-heavy sectors like energy and industrials over those in asset-light sectors
3. Keep an eye on the potential for tighter credit spreads

Bank of America Merrill Lynch

Bank of America Merrill Lynch

Overview: A big part of Bank of America Merrill Lynch's Trump trade analysis focuses on small-cap companies tracked by the Russell 2000 index. The firm notes that small caps, which are more domestically focused, soared after the election on expectations that the president would pass pro-US business policies. BAML also highlights the fact that these same stocks have since dropped considerably, reflecting a mounting lack of confidence.

With these stocks now sitting at a discount to the rest of the market, the firm has a couple of options trades it sees as an effective hedge to further downside now that the tax plan has arrived.

And, as with the Goldman charts above, you'll note that the small-cap Trump trade has recovered slightly over the past few weeks.

Top recommendation: Purchase bullish call contracts on Russell 2000 options, relative to their S&P 500 counterparts, as a tax-reform hedge.

Citigroup

Citigroup

Overview: The Trump trade commentary provided by Citigroup this past week focused largely on the repatriation portion of the proposed tax plan — most notably what the windfall of cash would mean for share buybacks.

In short, it will be very positive for repurchases, which have helped keep the eight-year bull market afloat by generating share gains even during periods devoid of strong fundamentals. For evidence of that, look no further than the chart above, which shows the relative outperformance of companies heavily involved in buybacks.

Citigroup estimates that US corporations are holding a whopping $2.5 trillion of cash overseas.

Top recommendation: Buy stock of the companies with the most cash stashed overseas, because they're the ones with the most to spend on highly lucrative share buybacks.

SEE ALSO:

A mystery trader can't stop betting that the stock market will go crazy

More: Policy Politics Tax Reform Wall Street 

House prices in Beijing are falling fast as attempts to curb speculation start to bite

DAVID SCUTT 

SEP 27, 2017, 9:02 AM

Jonathan Pow / Barcroft Media via Getty Images

House prices in China’s capital, Beijing, fell heavily in the September quarter, driven by a push by government regulators to curb heightened speculative activity.

According to the Caixin website, citing data from the research arm of 5I5J Group, the average price of existing homes in Beijing fell 5%, continuing the slide that began in the June quarter.

The fall corresponded with a sharp reduction in property sales which tumbled 73.7% from the same quarter a year earlier. According to survey, turnover alone fell 43.7% in the quarter to 2.06 million units based on measurements using online contracts, the lowest quarterly total since 2015.

The sharp decline in turnover and prices follows a series of measures introduced by Beijing’s municipal government to quash speculative activity in the city’s property market.

Since October last year, it has raised borrowing costs and minimum downpayment requirements for mortgages for second homes. It has also introduced requirements for non-local buyers to provide tax or social security payment records for at least 60 consecutive months and increased scrutiny on “strategic divorces” as ways to squeeze speculation out of the market, said Caixin.

“In the spirit of central government’s directive that ‘homes are for living in, not speculating on,’ the real estate market in Beijing will continue to be under tight control, thus the existing home market in Beijing is likely to remain tepid in the near term,” Hu Jinghui, vice president of 5I5J Group’s research arm, told Caixin.

The measures introduced in Beijing mirror similar efforts from authorities in other large cities to curb rapid price growth seen since the middle of 2015.

Previously limited to large tier-one cities initially, restrictions on both buyers and sellers have been rolled out across an increasing number of centres in recent months, including in smaller cities, in an attempt to limit speculators from moving from one market to another.

Selling restrictions introduced by several regional cities over the weekend saw shares in listed Chinese property developers tumble on Monday, casting doubt on the outlook for building activity in the period ahead.

You can read more here.

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Boeing scored a big victory against its Canadian rival, but it may start a nasty trade war

• Benjamin Zhang
 

• 13h
• 12,474

Benjamin Zhang/Business Insider

• The US Department of Commerce has proposed a tariff of 219.63% for each Bombardier C Series airliner imported into the US.
• Boeing filed a complaint in April alleging Delta's order for 75 of the Bombardier jets is a result of ultra-low prices subsidized by the Canadian government.
• Delta and Bombardier say Boeing doesn't have a product that is comparable to the C Series.

On Tuesday, the US Department of Commerce issued a preliminary ruling that would levy a 219.63% tariff on every Bombardier C Series airliner imported into the US.

The US International Trade Commission will issue a final judgment on the Commerce Department's proposed tariffs in early 2018.

Tuesday's ruling comes as a result of a complaint Boeing filed in April alleging Bombardier's landmark 2016 deal with Delta Air Lines is the result of abnormally low prices made possible by Canadian government subsidies. Boeing contends that Bombardier's subsidized sales of the C Series airliner in the US came at the detriment of its 737 NG and 737 MAX models.

"The US Department of Commerce today affirmed that Bombardier has taken massive illegal subsidies in violation of existing trade law," Boeing said in a statement. "Subsidies enabled Bombardier to dump its product into the US market, harming aerospace workers in the United States and throughout Boeing’s global supply chain."

Benjamin Zhang/Business Insider

Bombardier responded in a statement, calling the ruling "absurd and divorced from reality." The Montreal-based airplane manufacturer also hit out at Boeing, accusing it of manipulating US trade laws to stifle competition.

"We are confident the USITC will conclude that no US manufacturer is at risk because neither Boeing nor any other US manufacturer makes any 100-110 seat aircraft that competes with the CS100," Delta said in a statement. "Boeing has no American-made product to offer because it canceled production of its only aircraft in this size range — the 717 — more than 10 years ago."

According to Delta, Boeing's only proposed alternative to the CS100 was to offer it a batch of second-hand Brazilian Embraer E190 regional jets. Oddly enough, the used Embraers that Boeing offered Delta were reportedly traded in by Air Canada.

How we got here

For years, the story around the Bombardier C Series program has been blighted cost overruns, developmental delays, and slow sales.

In 2015, Bombardier was forced to write down $4.4 billion. At the same time, the company took a $1 billion bailout from the Quebec government. In return, the provincial taxpayers took a 49.5% stake in the C Series. Even as it struggled to close a sale, Bombardier was credited with building an aircraft that's one of the most capable on the market today. The plane's operators say the C Series is delivering fuel economy even better than what Bombardier promised.

Benjamin Zhang/Business Insider

At the heart of Boeing's complaint is a deal that was widely seen as the order that saved the Bombardier C Series program from its demise.

Looking for a blockbuster sale to help build traction for the plane in the US, Bombardier went all-in on a pitch to United Airlines. Sensing the new competition, Boeing bit the bullet and gave United a whopping 70% discount on 40 737-700s. While large airlines like United never pay list price, 70% off is the aviation equivalent of a Black Friday sale price.

In January 2016, United announced the sale of 40 737-700s followed by an order for another 25 of the planes in March. (Oddly enough, United realized several months later that it actually didn't want any of these planes and converted them to orders for four of the larger 737-800s and 61 737 MAX jets.)

Finally, in April 2016, Bombardier struck pay dirt. Delta Air Lines ordered 75 C Series 100 airliners in a deal worth up to $5.6 billion. In addition, Bombardier and Delta agreed to an option for 50 additional jets.

With the Delta order, Bombardier not only found a US launch customer for the C Series but also had the blockbuster deal it needed to validate the attractiveness of the aircraft for other prospective buyers.

With the C Series, Delta has a long-range ultra-fuel-efficient, 100-seat jet capable of making money in markets where competition has depressed profits. In addition, the new Bombardier jet will allow Delta to operate mainline service in markets that traditionally were serviced by smaller regional jets.

From Boeing's perspective, how Bombardier netted the deal has it seeing red.

Bombardier

Boeing claims Bombardier sold the CS100 for just $19.6 million. That's far less than the $33.2 million the Chicago-based aviation giant says it cost Bombardier to make the plane — and a mere fraction of the CS100's $79.5 million sticker price.

Where do we go from here?

Should the proposed tariff stick, each of Delta's C Series jets would cost over $40 million, putting the future of the deal on shaky ground.

For Bombardier, the big decision is the USITC's final ruling in 2018, the aerospace-industry analyst Richard Aboulafia said.

If the USITC decides to allow the tariff to stick, it will need to show how it came upon such a punishment, Aboulafia told Business Insider.

"If they can't explain how they came to that conclusion, that's really dangerous because the Canadians are going to regard this as a slap in the face," said Aboulafia, who is the vice president of analysis at Teal Group.

Benjamin Zhang/Business Insider

That's because the dispute has now entered the realm of politics, with Canadian Prime Minister Justin Trudeau threatening to scuttle the country's plans to buy $5 billion worth of F/A-18 Super Hornet fighter jets from Boeing. British Prime Minister Theresa May expressed her concerns regarding the dispute because the C Series' wings are made in Northern Ireland.

In addition, a tariff on the C Series is also a concern for industry in the US. More than 50% of the Canadian jet is made using US-sourced components, including its prized Pratt & Whitney geared turbofan engines.

At its most extreme, using Boeing's logic that the C Series is a rival to the 737, the Canadian government could argue that Air Canada's and WestJet's orders for Boeing 737 MAX airliners were made to the detriment of the country's aviation industry.

"This is how trade wars get started," Aboulafia added.

The ultimate effect of Tuesday's ruling on the Bombardier C Series and US-Canadian trade relations remains to be seen.

"As the Brits say, it's still early days," Aboulafia said.

Get the latest Boeing stock price here.

SEE ALSO: Delta just raised its AmEx Diamond Medallion waiver from $25,000 to $250,000 — and customers are furious

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A mystery trader can't stop betting that the stock market will go crazy

• Joe Ciolli
 

• Sep. 25, 2017, 3:25 PM
• 28,463

Sometimes it can pay off big to bet on stock-market chaos.Facebook / Warner Bros.

Sure, price swings in the stock market have stayed locked near the lowest on record for the better part of two months. But that hasn't dissuaded one particularly aggressive trader from continuing to bet on a massive shock.

Two months after the volatility vigilante made a humongous wager that the CBOE Volatility Index — or VIX — would surge from its depressed levels by October, the trader has essentially extended that bet into December.

The so-called rollover carries roughly the same maximum potential payout as before: a whopping $263 million.

And considering the trader lost only about $9 million on the wager over the past two months, closing the October trade and pushing it to December allows continued exposure to a huge upside at a relatively small cost, according to a person familiar with the trade.

Still, considering the VIX's propensity to trade near all-time lows, it's a risky bet. The so-called fear gauge has fallen 23% so far this year, and investors continue to pile into the short-volatility trade, which has evolved into one of the market's most crowded positions.

Let's unpack the trade:

• To fund it, the investor sold approximately 263,000 VIX puts expiring in December with a strike price of 12.
• The trader then used those proceeds to buy a VIX 1x2 call spread, which involves buying 263,000 VIX December calls with a strike price of 15 and selling 526,000 VIX December calls with a strike price of 25.
• For reference, bullish call spreads are used when a moderate rise in the underlying asset is expected. Traders buy call options at a specific strike price while selling the same number of calls of the same asset and expiration date at a higher strike.
• In a perfect scenario, where the VIX hits but doesn't exceed 25 before the December expiration, the trader would see a $263 million payout.
• It is possible for the VIX to spike too much. If it increased beyond 35.2, the investor would start to lose money since they used a call spread, even though they got the direction of the trade correct.
• For context, VIX December futures are trading at 14.07, while the spot traded at 10.71 as of 3:09 p.m. on Monday.
• All data is from Bloomberg and was reviewed by a person familiar with the trade.

There are a couple of potential explanations for the trade. The first is that the trader decided the prolonged low-volatility environment would end in the next three months. While it seems as though it could stretch on forever, even the longest stretches of subdued price swings have eventually given way to fluctuations.

It's also possible the investor is betting on volatility around some key upcoming events. The trade's December expiration will capture two Federal Reserve meetings, as well as a deadline for the government's debt-ceiling decision. There's a 60% chance the central bank will increase its benchmark interest rate by 25 basis points at the December meeting, according to Bloomberg's World Interest Rate Probability data.

While this mystery trader is making waves with large bets, they're not the only person wagering on a VIX spike. The trader known as 50 Cent — recently revealed to be affiliated with Ruffer LLP, a $20 billion investment fund based in London — rose to prominence with repeated bite-sized volatility bets.

Ultimately, a large payday awaits these brave volatility bulls in the event the VIX goes somewhat bonkers. And who knows — if the trade doesn't work this time around, maybe the audacious soul will extend once again.

After all, there's a possible $263 million payout on the line.

SEE ALSO: Hidden cracks are forming in the record-breaking stock market

NOW WATCH: There are cracks forming under the surface of the stock market

More: Stocks Stock Market 50 Cent Volatility 

Japan wants to launch a new digital currency: J-Coin

• Oscar Williams-Grut
 

• 7h
• 2,624

Mizuho Bank is leading the consortium that wants to launch J-Coin.REUTERS/Shohei Miyano

LONDON — A consortium of Japanese banks are set to launch a new national digital currency in a bid to wean citizens off cash, the Financial Times reports.

The FT says that a consortium led by Mizuho Financial Group and Japan Post Bank plans to launch the new digital currency in time for the Tokyo 2020 Olympics.

The new project, which has the support of Japan's central bank and regulators, aims to develop technology to allow Japanese people to pay for goods and services with their smartphone.

Cash currently represents 70% of all transactions by value in Japan but such a heavy cash dependency incurs costs for banks and governments. Banks must pay to handle, transport, and audit large amounts of cash, while governments risk losing tax revenue to undocumented cash-in-hand work or black market transactions.

The consortium of banks estimate that the adoption of a new digital currency could add ¥‎10 billion ($90 million; £67 million) to the economy, the FT reports. J-Coin will be exchanged at a one-to-one rate with yen.

Several European economies are moving towards a cashless society thanks to the success of digital payment methods: physical cash in circulation has declined by 27% since 2011 in Sweden thanks to the popularity of digital payments; Denmark wants to allow shops, including restaurants, gas stations, and clothing stores, to stop taking cash; The Bank of Korea has said it's aiming for a cashless society by 2020; and cash is now in the minority in Britain.

The move towards cashlessness in the Nordics has been helped by the popularity of payment apps like Swish in Sweden and MobilePay in Denmark, while the rise of contactless payments through debit and credit cards has helped in Britain.

Japanese banks are not alone in looking to develop their own digital currency. Leading banks including HSBC, Barclays, UBS, and Santander are developing a "Universal Settlement Coin" to make trade amongst themselves easier, inspired by the success of digital currencies like bitcoin.