Date: 12/30/2022
Author: Mr. X
My colleague Corey Snyder is great at what he does because of his finely developed quantitative approach. The best way to look at his analysis – especially the DRAGNET trading system – is to see it as the capstone to the pyramid. It’s the culmination of years of experience, research, and algorithmic development.
However, one must still be aware of the basic narratives and political battles taking place. Political analysis, fundamentals, and, increasingly, awareness of social media, are necessary before you make any big decisions. These things are the building blocks of the pyramid.
Political awareness is necessary because despite having a supposedly capitalist economy, the American government picks winners and losers. This is why I’ve written in the past about “Top-Down profits.” When it comes to which companies succeed and which fail, or even which cultural trends take off and which are suppressed, it’s all coming from the elite down. Everything is ultimately downstream from power.
Perhaps the greatest example is what’s happening to Elon Musk and Tesla [TSLA]. I warned on Halloween that the Powers That Be would come for the TecnoKing and they obviously have. Even after TSLA’s gains yesterday, Tesla has fallen from over $227.50 a share on October 31 to just under $122 a share. Earlier this week, it was below $110 a share.
The problem for Elon Musk is threefold.
- The Electric Vehicle (EV) sector is heavily dependent on government support and incentives.
- The people who buy EVs tend to lean progressive, and progressives are more willing to boycott companies or disassociate from people due to political differences.
- TSLA relies on access to both the Chinese and American markets at a time when the U.S. government is demanding that companies choose between the two.
It seems that each day, Elon Musk is revealing more about the way intelligence agencies were using Twitter to control narratives and guide global public opinion. The #TwitterFiles have led to a firestorm online, and some conservatives on the Hill have taken to championing Musk.
The problem is that conservatives, almost by definition, are reluctant to use state power to back their supporters. They don’t know how to develop patronage networks. Progressives do. That’s why they tend to be more politically successful in the long-term, and why many companies, even in industries like high-finance, tend to lean left when it comes to which party they support. Musk’s new allies probably aren’t going to help him very much. His new enemies will punish him.
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Musk may be playing some game of 4-D chess or 5-D interdimensional Scrabble that the rest of us just don’t see, but sometimes the easiest explanation really is the best. Musk is taking on something that’s practically guaranteed to make him toxic to people that matter. There is the possibility for true greatness if Musk can turn Twitter into a platform that can support independent content creators, capture the short video market dominated by TikTok (now a more popular website than Google), and develop an independent revenue stream through verified users. Yet all of this takes time, and investors can’t help but be nervous when Musk is becoming personally involved in decisions about who is or isn’t let back onto Twitter.
The good news is that there doesn’t seem to be a true replacement for Twitter. Twitter’s various rivals (Mastodon, Gab, Parler, and Donald Trump’s Truth Social, among others) have all become political echo chambers. Politicians, journalists, CEOs, and companies are still on Twitter.
However, there’s a time limit here. Musk himself says that the company is practically heading towards bankruptcy, and Tesla’s declining stock price means that he has less capital to work with. He’s also facing opposition from journalists who accuse him – with some reason – of making arbitrary decisions about who is and is not banned.
However, sometimes companies find themselves in the crosshairs not because their leaders picked a fight, but because they are going to be used as scapegoats. That’s the situation with Southwest Airlines Co [LUV]. It was up 3.7% during the trading day yesterday, but is down more than 8.5% for the week. Cataclysmic failures in handling blizzards have infuriated customers and, more importantly, drawn the attention of the federal government. Southwest Airlines was also uniquely flawed in its response, which means they can’t just pin it on the overall industry.
LUV is getting no love from its own pilots’ union. “The impact of Southwest’s operational collapse being felt by passengers and crews over this holiday was not a surprise to anyone but the leadership of Southwest Airlines,” said the Southwest Airlines Pilots Association. “It was unacceptable and the worst of the effects were absolutely preventable.”
Even yesterday, the airline canceled more than half of its flights, showing that the company still hasn’t managed to develop an effective response. The main problem appears to be the company’s scheduling software, which is very different from the way most airlines operate. In short, LUV doesn’t use the “hub” model. The hub and spoke model may mean that there are fewer direct flights, but it also means that you have more flexibility. Lacking that flexibility, Southwest’s entire system broke down in a crisis.
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Transportation Secretary Pete Buttigieg, who clearly has higher political ambitions, is now a political target for progressives. Rep. Ro Khanna (D-CA) blasted the Secretary on Twitter, saying that he had failed to follow recommendations from progressives that airlines should be fined and penalized for canceling flights. “We need bold action,” said Khanna.
Conservatives are also piling on, pillorying Secretary Buttigieg for his comments in September that “I think it’s gonna get better by the holidays” because “we’re really pressing the airlines to deliver better service.” So much for “Mayor Pete’s” thoughts. Progressives are eager to shoot down the presidential prospects for someone who is regarded as a moderate within the party. Conservatives are ready to slam anyone in the Biden Administration for any reason.
Secretary Buttigieg is thus desperate to be seen as doing something – anything! – to get both parties off his back. The Transportation Department has pledged it will investigate Southwest’s “unacceptable rate of cancellations and delays.” The likely result of all of this is going to be more government regulation of airlines, including pressure not to lay off workers or cut expenses. All of this is also happening against the background of a pilot shortage – exacerbated by COVID-19 rules – and a possible strike by unions that feel they have the advantage.
Some are looking hungrily at LUV’s valuation after this short-term decline. That may be a mistake. Washington doesn’t have a solution to a problem that it helped create. The result is that they are going to make operations for airlines in general, and Southwest in particular, far more difficult. The structural factors that are making air travel less efficient, especially the shortage of qualified pilots, don’t have easy solutions. Instead, expect unrealistic mandates and threats from politicians that will simply make the problems worse.
Transportation stocks in general are not booming as many who thought they would after the great post-COVID “reopening.” Even the “reopening” itself may be in jeopardy and the American government can’t get reliable figures. When it comes to transportation, investors must never underestimate the ability of politicians to make things worse or to carry a grudge. Above all, politicians want simple headlines and bumper sticker solutions to complex problems. That means trouble for airlines and for suddenly controversial companies like Tesla [TSLA]. Tread carefully on this last trading day of 2022.
Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com to bring you news on what those with power are debating, planning, and doing.
