A New Villain Emerges - Micro Edition
A New Villain Emerges - Micro Edition
Bagholder Trade Update: Framing the Risk / Reward
“Whenever politicians get involved, expect the Irrational to become Possible” - Le Shrub
US Steel - Shame about the name…
Event-driven Investing can be profitable and provide solid risk-adjusted returns, as long as one uses sensible Risk Management. Otherwise, event-driven trades can be very dangerous and turn even the most conversative investors into Bagholders.
Whenever I feel the urge to warn people about Event-driven Investing, the Market does it for me:
According to the press, Biden is preparing to block Nippon Steel’s takeover of US Steel (ticker: X, soon to be renamed XXX). Its share price dropped c.20% since the news hit the tape.
There is absolutely no anti-trust or regulatory reason why this deal should get blocked:
Nippon Steel is the 4th largest steelmaker in the World, buying the 24th largest steelmaker
Furthermore, Nippon Steel committed to a $4bn strategic investment program, without which, US Steel will have to shed legacy blast furnaces and will fire thousands of workers…
So why would the deal get blocked?
Unfortunately for those steel workers that are about to get fired, it’s an Election Year and every vote counts…
…and the only reason why “US Steel” is an Election Topic is precisely because it has the word “US” in the title. If it was named Pittsburgh Steel, I bet you none would care…
…as for CFIUS, the Committee on Foreign Investment in the United States, they seem to have missed the memo that Japan is the closest ally of the US in its fight against China. Go figure!!!
This is obviously a completely irrational decision, but this is Politics and if there’s one place more ridiculous than Wall Street, it’s Washington!
Which brings us back to our “Bagholder Trade”…