International Bancshares is a Texas bank with significant exposure to Mexico and NAFTA-related trade.
Should Trump win, International Bancshares would almost certainly see a selloff; its business model thrives on free trade.
The bank's CEO endorsed Trump, adding to the bank's reputational risk. Mexican depositors would likely punish the bank by pulling funds if Trump wins.
With the bank near 52-week highs, the price on this Trump insurance policy is right.
As you probably know if you read my Daily Briefings, I'm bullish on Donald Trump's odds of winning the presidency. The US media is making the same errors it did in saying he'll lose now as when they panned his odds of winning the Republican nomination.
In any case, the election has narrowed to about 60/40 odds according to betting sites now, and Trump certainly has momentum in the polls. So, if things continue as such, the market may start to see more of a Trump panic in the coming weeks.
Assuming Trump wins, there should be a sharp short-term hit to certain stocks that would be vulnerable to Trump's rhetoric. Mexican discount airline Volaris (NYSE:VLRS), which I've profiled previously, is one such example. The outlook for US-Mexican aviation would certainly dim at least in the short run if Trump wins, and the stock is somewhat overvalued even if the Trump effect doesn't kick in.
Another way to fade the Trump win is to go after the companies along the border that benefit from close relations with Mexico. I've been digging through the filings and reading books on the border's maquiladora factories to try to figure out who is potentially exposed.
My take is that the most hard-hit US cities would be those right on the Texas-Mexico border that benefit heavily from trade and migrant workers. We're talking Laredo, McAllen, and to a lesser extent Brownsville and El Paso. I particularly want to be short McAllen if Trump wins.
Now how can we get short a city specifically? There obviously aren't shares of McAllen, Texas Inc. listed, but there are ways to target a regional economy. Perhaps the easiest is to go after a local area's banks. Thanks to FDIC data, we can pinpoint who has the most exposure and go hunting. Here's Hidalgo County, Texas, home of Nafta-boomtown McAllen:
The largest bank in the market, not shockingly, is controlled by a Spanish firm, BBVA (NYSE:BBVA). This is to be expected, given the huge Hispanic population in Hidalgo County. BBVA is far too big for this exposure to make a particular difference to them. Next up, you have Lone Star National Bancshares - which is a troubled bank, according to the OCC; the company has been implicated in banking for drug cartels in Mexico. Alas, Lone Star isn't public, so we can't short it.
Next up, we have International Bancshares (NASDAQ:IBOC), with 13.4% of the market in Hidalgo County. With 29 offices in Hidalgo County, it has plenty of exposure to McAllen, which is exactly what we're looking for. The list goes on, but nothing else has such a large concentration in McAllen and is publicly-traded. The other exposed players, such as Texas State Bankshares, are privately-held. So International Bancshares is the way to play.
And oh is it so. A further dig into International Bancshares finds a bank profoundly exposed to NAFTA, Mexico, and the continued presence of unfettered free trade. A Trump win would potentially be devastating for this firm. And the bank's president endorsed Trump. But we'll get to all that in a second.
Why Short McAllen, Texas?
To put it simply, McAllen has quite possibly been the biggest single winner out of US cities thanks to NAFTA. McAllen, and Reynosa, Mexico on the other side of the Rio Grande, constitute one of the fastest growing metropolitan areas on the continent.
In the 1990s, the decade NAFTA was made into law, McAllen was the second-fastest growing metro area in the whole of the United States, outpacing even other such Texas growth stories as Austin/Round Rock. McAllen only trailed Las Vegas, as McAllen grew 49% in size over the decade. And unlike Las Vegas, it didn't crash subsequently.
The McAllen metropolitan area grew from 283,000 people to 569,000 between 1980 and 2000, a more than doubling in twenty years. By 2010, that figure had tacked on yet another 200,000 new inhabitants. Including Reynosa, also booming, on the Mexican side of the border, the area is close to 2 million people now.
And the economy is profoundly dependent on maquiladoras (low-wage Mexican factories along the US border), and trade - mostly the importation of those goods into the US and distribution to points further along. In other words, this is a boom city built almost entirely on the arbitrage of labor prices between the US/Canada and Mexico for goods such as automobiles, household appliances, and consumer electronics.
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