Friday, October 27, 2017

Trade leading up to US tax cut bill

I have several positive expected return trades to put on in advance of the US tax cut bill.  Two each that should do great should it pass or fail, with the other two not doing so bad in the other case.

In case the tax bill passes:

1) Long AABA, short BABA should do great.  https://seekingalpha.com/article/4112372-bet-altaba-bet-tax-cuts.

2) Short some VIX futures right before the plan goes to the floor, as IVs will be bid up before the event, and VIX futures are almost always in contango anyway.

In case the tax bill fails:

1)  Long US t-bonds should do great, as i think a lot of the recent slide has built in an anticipated tax cut.  US Tbonds have been sliding even as European sovereign bonds have been rising, bringing the real yield difference between the regions to multi-decade highs.  I think US tbonds are ready for some buy-the-news action here.  You could short some German or Italian bonds as a hedge on the noise caused by global growth/inflation expectations.

2) buy oil MLPs like AMLP today on the breakout in WTI oil above 53, as I think MLPs have been hammered recently on the expectation that the relative tax advantage of an MLP will be negated if taxes are cut for all companies.  MLPs should jump if the plan fails, and may even rise slowly if it passes, as a buy-the-news play that already priced in passing in advance.  I plan to stick with this position for awhile as long as WTI doesnt break below 51.8.  Oil has recently moved to backwardation from contango, which is a bullish term structure.  US oil production has plateu'd for now, and sentiment is not longer hugely bullish as it was when OPEC was first cutting.  As far as I can gather, sentiment is rather pessimistic, while the trend is now up.  Energy stocks have been unloved on a longer timeframe, as well, not just in the last month or two that MLPs in particular have been rocked.  https://si.wsj.net/public/resources/images/BN-VS708_Dshot_NS_20171022230625.png

Good luck!