How we're trading X (US steel) - weekend market thoughts

Recap of Lulu and VSCO, earnings previews and some interesting trade set ups

Weird week. Every day we closed higher, but with more decliners each day. The first 10 days of December are normally odd, just because of end of year degrossing, but even saying that it was weird. If you were long the right stuff on the right days, you made bank, but if you were long the same stuff on the wrong days, the position blew up. While the index level vix seems to be finding how far into the earths core it can actually go, individual stock vol seems extremely elevated. Even the megacaps haven’t been immune, with Microsoft, Meta, and Amazon acting more like Tesla than Tesla did this week.

Now that we’re through the last NFP print of 2025, the only remaining known vol event is FOMC in less than 10 days. The NFP print was perfectly fine. It also clears the path for what the Fed is going to do in their December meeting (cut 25 bps and hint/announce a pause). The unknown is if they’re going to do something with QT/QE levels, and how the long end of the curve will trade post pause. Again, with the caveat that we’re more than a week away from the event, I think the long end trades up initially, maybe getting us to a yield of 3.9~ before rebounding to similar yields it enters the FOMC meeting at by the end of the year. Given how the European Union is looking, if the long end doesn’t find a massive bid into/after the meeting the dollar should continue heading higher. But again, 10 days is a long time.

On the index level, the above mentioned megacap strength on Friday means short term hedges should probably start to come off. The trendline that we’ve been on since August needs to be respected though, as every time we’ve broken that it’s led to an instant day of pain. My line likely isn’t perfect, but until we trade sideways for 2 - 3 days or have a major intraday reversal it’s impossible to hold bearish positions near term, at least through the front half of next week.

Remember, the Santa rally is really the last few trading days of month as the market basically stops selling anything because it doesn’t want to realize capital gains unless it has. So unless something unpredictable happens, its just the FOMC or the trend break that can cause us pain.

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Speaking of pain, you got to imagine arb funds neck deep in US Steel (X) are surely enjoying post Trump president elect life. His tweet saying he will block the deal if it is still on going once he assumes office near the end of January sent the stock down almost 10 dollars before it recovered somewhat.

I believe that outside of earnings there’s really 4 trades left in the year. Long end of bonds with FOMC, possible China stimulus getting announced this week, Video Games, and X. FOMC will be discussed more next week. China stimulus is pretty cut and dry, go long China if you think the government is finally going to do something, or at least China proxies. For Video Games I’ll talk more about my logic and timeline in a subscriber post that will be in your inbox by Monday morning. That leaves X.

The US Steel buyout is currently under review by CFIUS (Committee on Foreign Investment in the United States. After Trump’s tweet, the CEO of Nippon Steel (the buyer of X) said he’s confident the deal will go through. Listen, Japan is probably our closest ally right now, and will be for the next few decades as the world turns away from a European centered theater to an Asian one. Yet Trump has a lot of supporters in Allegheny county, which would continue to be gutted if (read: when) Nippon Steel does job cuts in 2 - 3 years. It makes sense for Trump to be against the deal not just from a political POV but also one of national security and build American/buy American.

CFIUS will ‘decide’ to approve the deal or not based on what the Administration wants and then back into the justification on why they decided to do what the admin told them to. Under Trump, that means block.

While Trump won’t assume office until the last 10 days of January, it would be a stunning and a huge violation of presidential decorum for CFIUS to decide this with hours left in the Biden term. Especially in the opposite direction of what the new administration wants (block the deal). No, if they’re going to approve the deal or at least send out tea leaves that they’re thinking about it, they’re going to do it by the end of the year. This gives us a tighter timeline than what some of algos and arbs in the trade are using.

I’m long shares and I will hold them until either A) we close below that steeper uptrend in the chart above, or B) Its the end of the day Monday 12/23. The reason for that deadline 2 weeks out is Wall Street laziness is only topped by people working in DC. They will use any excuse in the book to not work. If the deal is announced by then, it likely getting punted into the new year. That’s more than 2 weeks longer of a holding period and through a period of a lot of people away from their desk if news does break. I don’t want to deal with that.

I think the downside on a deal break is 30 a share. Upside is obviously the low 50s as it will become a TVM calculation if the deal is conditionally approved. If we get no news I expect in either direction I expect this name to drift around, mostly sideways, but with some beta to the broad market. I think the upside is worth the risk, especially because depending on how the deal breaks, it might not even get as low as 30, remember CLF wanted to buy them and put in an unsolicited offer randomly last year which kicked off this whole chain of events. They’re probably still interested. Though maybe not a $55 a share, but maybe at $50. There’s a non zero chance something weird happens like ‘CFIUS announces the deal can’t go through’ and within 2 hours CLF has put out an offer they’re looking into putting forward another offer to buy X. So who knows, the break price might end up being 35, not even 30. Though I’m not banking on it.

To recap: 2 week holding time (from Monday) potential upside is 2x more than potential downside. Sell if price action breaks uptrend line before then. Otherwise its a fantastic return for the holding period. Even if it ends up at 41 or 42 per share, you’re still looking at 260%~ annualized. Could other stocks do better in the same period of time? Yes, heck Reddit or Peloton might do that in a day, but I think X is worth the risk here for the defined period I’ve set out.

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I’m not entirely sure what’s expected to go on with China this week.