Financial Gains due to Understanding Politics

Hello!

Most companies use to try to avoid politics whenever possible, but for some companies, the political environment can significantly affect their business, causing uncertainty, leading to implied volatility to rise. For those companies who try to abstain, it will not only set their business aspirations back, but it may also lead competitors getting an upper hand.

For those who have been paying attention to the relations between the US and China over the last year and a half, the political pressure on businesses is mounting.

China is using its economic leverage to put pressure on US companies attempting to do business in China. While the US, under the Trump administration, exercise its ability to stifle China by use of tariffs to counter its unfair trade practices.

Companies seem to be lost in the shuffle…

The two countries have been in countless negotiations while disputing several World Trade Organization cases, leading to foreign technology restrictions, while pressing closer to an all-out trade war.

As a result, the US has executed $550 billion worth of tariffs restrictions on Chinese goods. China has an answer back with their own $185 billion worth of tariffs on US products.

Companies Taking it on the China

Some companies have nowhere to run and get hit with the crossfire. Both Ford (F) and General Motors (GM) lost over $1 billion due to lost sales within the China market. Ford was forced to lay off 25,000 employees GM with 15,000 employees.

If that wasn’t bad enough, the automakers still have to import steel and aluminum from China, which are some of the most heavily tariff products.

However, not all companies are built the same, some are nimbler than others. Take, for example, the Stamford furniture company Lovesac (LOVE). The company wasn’t going to wait around to have all their profits squandered due to tariffs.

The company took quick and decisive action to move 75% of its manufacturing out of China and into neighboring countries such as Vietnam and Malaysia.

Here we have a great example of a business that could’ve been substantially hurt by the political environment, but instead of waiting for politics to change, took decisive action. As a result, its stock has rallied over 900% since March lows.

Where will Trump Attack Next?

Trump now has his sights set on the technology sector, threatening to ban the video app TikTok from the entire United States, citing that the app is a Chinese tool to spy steal data from American citizens.

Trump’s political threats have now created an opportunity for the tech giant Microsoft (MSFT) to step in and buy TikTok’s US, Canada, Australia, and New Zealand’s footprint. Microsoft is seizing the opportunity brought on by politics and a troubled relationship between the two countries.

Trump has fired back, saying he would approve the acquisition but gave both sides a deadline of September 15 to finalize the details.

The Hottest Social Media Platform

Almost everyone under the age of 30 has probably heard of TikTok, and more likely, uses the app. The video stream service hit the market in September of 2016, and since that time has acquired more than 100 million users in the US while boasting more than 800 million users worldwide.

The app gains traction extremely fast by applying an algorithm to select related videos so it can produce a continuous relevant stream of 60-second video clips. This is not a new concept, think of YouTube or Netflix (NFLX), but for short, engaging videos.

Basically, what TikTok is good at is taking content from a specific group of people, then figuring out which other type of people would want to see those videos and giving it to them.

However, as valuable as this technology is, a big tech company like Microsoft understands that the real value in the deal is being able to acquire vast amounts of user data and use it effectively to promote and monetize its other product lines.

This is the same type of asset Google has with YouTube, or that Amazonuses through its own data collection systems.

As you likely probably guess, China is far from happy about the proposed TikTok deal with Microsoft, stating that it would be equal to theft if the company was forced to sell due to President Trump’s suspicions.

In addition, Trump’s comment indicating that Microsoft would have to pay the US Treasury Department as part of the merger agreement has also confused many.

Since when does the government get paid when two companies merge?

Profiting from the Merger

Fortunately, for investors, situations like this are typically excellent news for shareholders. In most cases, the company being acquired will do so at a premium to the fair market value.

However, in this case, TikTok is likely going to be purchased for less than it normally would be due to the forced political pressure.

Meaning Microsoft will be able to acquire the company for less than it normally would. For this reason, Microsoft’s shareholders have seen their stock price move considerably higher since the announcement.

The prospect of the merger has caused implied volatility to rise, and as a result, increase the price of options. For shareholders it’s the perfect time to turn a stock position into a covered call position, allowing investors to not only profit from the stock movement, but then turn that stock into an asset that generates income, while at the same time hedging the stock in case the deal doesn’t go through.

This is precisely how smart investors hit it at both ends and make above-average returns, allowing their portfolio to grow while simultaneously keeping it safe.

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