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➚ BUY: New slicers. The financial alchemy of securitization cannot be stopped. Recent weeks have seen novel bonds backed by home heat pumps, Subway franchises, IP addresses, and Sotheby’s art loans. It’s all “a bit spicy,” even for Janus Henderson’s head of securitized product.

➘ SELL: New Delhi. India’s stock market had its worst day in four years after Modi’s BJP party failed to secure an outright majority, dampening investor hopes for a continuation of his business-friendly policies. Blame the exit polls.

E*Trade may fire Roaring Kitty client over tweets… Paramount and Skydance edge toward merger… Jeffrey Katzenberg raises $460 million for venture bets… NYSE glitch shows Berskhire down 99%... Affirmative action ruling hits grants for Black women CEOs… Pickleball Ponzi scheme…

Nippon’s nerves of steel

THE NEWS

A Nippon Steel executive says a political decision to block his company’s takeover of US Steel would be a “nightmare” for unionized workers, leaving them vulnerable to a takeover by an American rival that would “slice down” the faded giant.

“I don’t think it’s going to be happy for US Steel and happy for its workers and happy for the United States as a whole,” Takahiro Mori said this week in an exclusive interview with Semafor in Washington, where he is pushing a $15 billion merger that faces dimming odds as the presidential election heats up.

Back in the US for the second time in three weeks, Mori is meeting with lawmakers and community groups in Washington, DC and Pennsylvania to talk up the economic and security benefits of a deal that he says will create a stronger competitor to China, which has flooded global markets with less expensive steel.

“The biggest risk in the steel industry today is an oversupply from China,” he said. A leaner and better-capitalized US Steel, “under the control of the US and Japan,” will be more competitive against Beijing, he said, urging a broader view of national security that prioritizes strategic realignment over stubborn retrenchment.

He also carried a veiled warning about the bipartisan turn in Washington (and Brussels and New Delhi and elsewhere) toward protectionism. “Business is business and politics is politics, and Japan’s government is watching this deal,” he said. “Many business leaders are watching this deal, and many allied countries are watching also.”

He stopped short of confirming that Nippon, a national champion in Japan, has asked Tokyo to apply diplomatic pressure, adding only that “we have some communication networks with the government. It’s a natural thing.”

He dismissed a split-the-baby idea where US Steel might be broken up, with Nippon taking its electric furnaces and mining assets and its blast furnaces being sold to Cleveland-Cliffs, which had submitted a rival bid last fall. “I don’t have any intention to negotiate with the other company,” he said.

The six months since the deal was announced have been a crash course for Nippon in US election-year politicking. Facing a voting public that’s deeply unhappy about the economy, Biden and Trump have made the US Steel takeover a campaign issue, both promising to block it if they win in November.

“This is my first experience” with campaign-trail politics “and I hope it is the last,” Mori told Semafor. “You can’t pick the timing. This was a once-in-a-generation chance to get into this market. While we have heard many noises, it does not affect the fact that this is the best deal for the United States, and best for us, and best for workers.”

He pointed to the 2011 takeover of Standard Steel, a Pennsylvania producer of steel train wheels, by another Japanese firm, Sumitomo, which is now part of Nippon. He said Nippon has invested $220 million in Standard Steel, which was losing money when Sumitomo bought it, and turned a record profit in 2022.

“I understand what President Biden said and former President Trump said. But this is a growth story,” Mori said. “If they rightly understand the effects of this transaction, then I think they may change [their minds].”

Investors don’t agree. US Steel stock is trading so far below the agreed price that a share bought today would deliver a 100% annualized return if the deal is completed by December.

LIZ’S VIEW

This deal doesn’t threaten national security any more than the sale of Standard, which was founded in 1795 and, at the time Sumitomo bought it, was the only maker of forged steel railcar wheels in the country. Its fortunes in the 13 years since then — all but two of them under Nippon’s ownership — show what can be gained from fresh capital and know-how.

Biden often says on the campaign trail, “don’t compare me to the Almighty; compare me to the alternative.” An American-owned company projecting US industrial might around the world does sound nice.

But that’s no longer US Steel, which is the 27th-largest global producer. Twelve Chinese companies produced more steel than it did in 2022, and what it does make is “mostly worthless to national security,” William Greenwalt, a former deputy undersecretary of defense for industrial policy, wrote in March. Nippon is promising new cash and technology to strengthen its commercial and industrial products, like food cans and oil pipelines.

Even if a steady supply of nonmilitary steel could be considered crucial, the Biden administration has welcomed foreign investors for other national priorities. Taiwan’s TSMC and South Korea’s Samsung have both received multibillion-dollar grants under the CHIPS Act to build semiconductor manufacturing plants in the US.

An irresponsible use of fiscal deficits, geopolitical uncertainty, changing demographics and the Net Zero transition are only some of the reasons why macro volatility will stay elevated in the next decade. It’s all covered in The Macro Compass, a free newsletter written by a former head of a $20 billion portfolio. Each issue is packed with analysis, insight, and macro news spoken in plain english – subscribe for free.

Is Bill Ackman’s empire more valuable than Blackstone?

Ackman’s deal this week to sell 10% of Pershing Square to a group of investors values the investment firm at $10.5 billion. That’s about 32 times its expected pretax profits of about $300 million this year, people familiar with the deal said. That’s more than twice the trading multiple of KKR or Apollo, and bigger even than that of Blackstone, which owns $1 trillion worth of businesses. Pershing Square owns eight stocks.

Private equity firms like Blackstone have to replenish their assets, raising new investment funds as they sell companies and return cash to investors. That’s time-consuming and expensive, and hinges on the dealmaking and fundraising markets being open, which neither is now.

Pershing Square won’t: The money it raises in an eventual IPO, as soon as next year, is its to keep, and investors can only cash out by selling their shares to someone else. “Permanent capital” is a precious commodity these days, especially as the traditional private-equity fund model is showing its age.

Lighter flavors can be seen everywhere. At gated property funds, like those run by Blackstone and Starwood, investors can take out a little of their money at a time — and they are, in droves. Life-insurance policies technically have to be paid back decades down the road. Pershing Square’s money never does.

Its lofty valuation also assumes that the money will keep coming in. Ackman is targeting between $10 billion and $25 billion for a new, NYSE-listed fund that will buy the same handful of stocks he owns in his hedge fund. He’s also weighing a fund that would wager on “black swan” economic events like his pandemic-era trades that turned $200 million into $4 billion.

As we wrote about last month, Ackman has been able to translate his center-right, social-media-enabled celebrity to financial gain. Shares of his Amsterdam-listed fund have risen sharply since he began speaking out in support of Israel and against what he sees as academia’s leftist bent — in spite of strict European rules that limit how much he can publicly shill for the fund. The US has no such rules, and Ackman is betting that his newfound fame and investing track record could bring in billions more.

Ackman is a rare thing in finance: A good investor with a giant public persona that he feeds and waters regularly. Most people who make embarrassing amounts of money don’t like to talk about it (the late Jim Simons comes to mind), and some with bad track records turn to chest-beating to make up for it.

— Intel CEO Pat Gelsinger, punching back at Nvidia boss Jensen Huang

Same whine, different bottle: The rise of private credit promised a more refined type of corporate lending, a clubby atmosphere free from the scheming and sharp elbows that defined the loan world for decades. Alas: Bloomberg reports that an education-technology company owned by Vista quietly moved some of its assets out of the reach of its lenders, a who’s who of private credit firms including Blue Owl, Oaktree, and Ares, who aren’t happy about it.

It could get messier yet: None of those lenders seem to agree what the loan is worth. Oaktree has it marked at 101 cents on the dollar. Golub pegs it at 97 cents, Franklin BSP at 91 cents, and Blue Owl at 84 cents, filings show. Unlike banks, where regulators are watching more closely, private credit funds have a lot of leeway to value their portfolios, and Semafor has reported the numbers are all over the map. That’s fine if the loans ultimately get paid back, but if things get hairy, it could leave some lenders taking painful writedowns and fuel infighting.

Border patrol: The Mexican peso’s sharp decline today, after a landslide win for the leftist Morena party, threatens one of the most popular trades on Wall Street. For months now, hedge funds have been borrowing Japanese yen from Tokyo banks and buying pesos. Near-zero interest rates in Japan — the world’s last major economy still offering free money — guaranteed easy profits for traders now caught off-guard by the peso’s worst day since June 2020.

If you’re wondering why a surprise election result hit Mexico’s currency but not India’s: the Indian central bank’s heavy hand. The IMF last year reclassified the rupee as “stabilized” by government intervention — mostly the central bank buying and selling dollars — that “exceeded levels necessary to address disorderly market conditions.” The rupee was down 0.5% today, versus a 3% slide for the peso.

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