Southwest Will Never Be The Same Again

I was a road warrior. Jo and I honeymooned, using frequent flyer miles to fly first class from Fort Myers to Honolulu. After our honeymoon, we had enough miles for nine more trips.

I enjoy Southwest Airlines. They started small, operating within Texas, and were unique and reliable. Flight attendants, with hot pants and boots, and a great sense of humor made them a fun airline. They’re now the 4^th largest US airline, while still maintaining much of the unique culture.

This Newsbreak headline, Southwest Will Never Be The Same Again, caught my eye:

“Whatever you thought you knew about Southwest Airlines is about to change.

The airline…revealed a dramatic turnaround plan, scrapping its unique playbook of more than 50 years in favor of an airline that largely resembles most of its peers.

…. Executives laid out plans for assigned seating, extra-legroom seats for purchase,…and other behind-the-scenes initiatives designed to increase revenue and turn around an underperforming stock price.

…. Despite pressure from an activist investor, Southwest is not giving up its famous two free checked bags.”

Activist investor??

AP News reports:

“Elliott Investment Management, a hedge fund urging Southwest Airlines to dump its CEO and chairman.

The move gives Elliott, the Paul Singer-led investment fund, more leverage in its proxy fight heading into a meeting with Southwest officials….

Elliott said in a regulatory filing that it owns more than 61 million shares, at least 10% of Southwest. …. That gives Elliott the power to call a meeting at which shareholders could vote on board candidates.

Elliott has proposed a slate of 10 candidates, including former CEOs of other airlines, for Southwest’s 15-member board.”

AP adds:

“(Quoting Elliott) ‘The urgency of change is underscored by the substantial continued deterioration in Southwest’s performance.” …. Elliott has previously called for the replacement of CEO Robert Jordan and Chairman Gary Kelly, whom it accuses of causing Southwest to lag behind changes in the airline industry.

…. Elliott has previously pressured other companies that it deemed underperformers to make management changes. Starbucks announced Tuesday that it was replacing its CEO about two months after Elliott began advocating for new leadership.”

AP explains the battle:

“Southwest had contemplated an overhaul for months, but the push for radical change became even more important to management this summer, when Elliott Investment Management targeted the company for its weak financial performance in recent years.

The hedge fund blames Southwest leaders, portraying them as hidebound and insensitive to changing consumer tastes. Elliott…wants to replace Jordan and most of the Southwest board.

The hedge fund dismissed Southwest’s turnaround plan as too little, too late.

…. (Quoting CEO Jordan) ‘We do not believe that a proxy fight is in the best interest of the company, and we remain willing to work with Elliott on a cooperative approach.’

Before Thursday’s event started, Southwest announced a $2.5 billion share-buyback program designed to make existing shares more valuable.”

Here’s my scorecard.

An activist hedge fund with 10% of Southwest’s stock demands major changes to improve revenue and their “underperforming stock price” – including controlling 2/3 of the board of directors. Southwest tries to mollify them by announcing changes and a $2.5 billion share-buyback.

Damn right Southwest will never be the same again, but not for the reasons mentioned; they’ll probably end up worse. Hedge funds have little regard for the long-term health of their holdings.

Southwest’s most recent annual report indicates $11 billion in cash. Outstanding bond/debenture debt is $8 billion with interest rates ranging from 1% to 7 3/8th%. In the last two years, they bought back over $10 billion in stock and will add another $2.5 billion to the total. Maturing debt through 2025 is $2.9 billion. Might they be smarter using the money to pay off the debt instead of rolling it over?

Perhaps their “hidebound and insensitive” management is too conservative for a hedge fund that prefers to quickly extract as much cash out of Southwest as possible before unloading their shares. What happens when Southwest needs major upgrades to their fleet?

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The Tip Of The Iceberg

The Southwest saga is part of a HUGE problem that must be addressed, and quickly. Hedge funds are gambling trillions, turning their holdings into stratospheric high-risk ventures threatening our country’s entire financial system.

Wall Street On Parade (WSOP) explains:

“According to a report at the U.S. Treasury’s Office of Financial Research (OFR), the Gross Notional Exposure at hedge funds has skyrocketed by 24.5 percent in the span of one year: from $22.946 trillion on March 31, 2023 to $28.579 trillion on March 31, 2024.

Gross Notional Exposure (GNE) is defined…as ‘the sum of the absolute value of long and short exposures, including those on and off the balance sheet.’

The OFR was created under the Dodd-Frank financial reform legislation of 2010 to keep bank and market regulators informed of growing risks, in the hope of preventing another financial crisis like that of 2007-2010 from occurring.

Unfortunately, Wall Street’s lobbying, bullying and regulatory capture has exponentially outstripped the clout of the OFR. As a result, all the public can do is read about the potentially catastrophic risks inherent on Wall Street today at the OFR’s website and wonder when the next blowup and Fed bailout will occur.

…. The largest megabanks on Wall Street…are the major source of providing that leverage to hedge funds.”

Source of leverage?

The hedge funds are buying stock with trillions in margin debt – incredibly risky! Should stock prices move down, they’ll be faced with a margin call and must come up with cash to meet margin requirements, or they will be forced to immediately sell holdings, driving the stock price down further (think crater). Hedge funds will demand management take short-term action (panic) to boost stock prices, with no regard for the long-term health of the company.

WSOP explains:

“A Wall Street Regulator Is Understating Margin Debt by More than $4 Trillion – Because It’s Not Counting Giant Banks Making Margin Loans to Hedge Funds.

…. The Bank for International Settlements (BIS) (reports), the Prime Broker operations of Goldman Sachs (GS), Morgan Stanley (MS), and JPMorgan Chase (JPM) were each servicing more than 1,000 hedge funds as of 2022. Prime Broker services include making margin loans to the hedge funds. The BIS reports also notes…about these hedge fund clients:

‘As for opaqueness, the assets of a quarter of hedge funds are not fully independently valued, comprising 38% of hedge fund assets, making it more difficult for PBs [Prime Brokers] to trust the fund’s stated asset values, especially in adverse market conditions.'”

WSOP looks behind the curtain:

“Just three megabanks provided a combined $1.832 trillion in credit to ‘Qualifying Hedge Funds’ as of March 31, 2024. This represented 79 percent of all such loans, which had a total value of $2.31 trillion.

…. The fact that the Office of Financial Research is simply ‘monitoring’ this potentially explosive situation while the federal banking regulators for whom it conducts its research allow this dangerous and incestuous situation to grow, is simply more evidence of completely captured regulators.

It’s not like federal regulators don’t have sufficient evidence that hedge funds and deposit-taking banks create a dangerous, combustible mix.”

Risk Taking Galore!

WSOP explains “too big to fail” banks know their losses will be paid by taxpayers.

“On September 24, the Office of the Comptroller of the Currency (OCC) released its Quarterly Report on Bank Trading and Derivatives Activities for the second quarter of this year.

…. The shorthand for this report should be the ‘Casino Report.’

Increasingly, the report showcases how much dangerous trading activity the brokerage firms on Wall Street have been able to muscle into their federally-insured banking units where the deposits of millions of average Americans reside.”

Explaining their massive profits from casino-trades versus banking operations:

“…. The Securities and Exchange Commission (SEC), whose job it is to provide regulatory oversight of stock trading in the U.S., is not allowed to peek inside federally-insured banks to see what is going on with stock trading. This appears to be a feature, not a bug, of the megabanks’ refashioning of the landscape of Wall Street.”

House Of Cards

It won’t take a Cat 5 hurricane to destroy this house of cards, just a small blip.

Since the repeal of Glass-Steagall:

• Derivatives in the top banks are near $200 trillion.

• The SEC isn’t allowed to peek at what is going on with stock trading.

• Taxpayer-backstopped casino banks are making massive margin loans to hedge funds.

• Hedge funds are demanding that businesses do their bidding with little regard to the long-term health of the business.

• Congress and regulators do nothing to mitigate the risk.

Southwest isn’t the problem.

Wall Street will continue to take more risk, suck as much current and future profit (via borrowed money) out of US companies as possible. When they see grey clouds, they’ll all start bailing – too late! When the collapse happens, the market will crash, hedge funds will crash, banks will crash and the fallout will make the Great Depression look pale by comparison – with the taxpayer on the hook.

Healthy companies need to be able to reinvest in equipment, upgrade, and modernize to stay competitive. You can’t do that when you are mortgaged to the hilt.

What must be done?

• Reinstate Glass-Steagall immediately.

• Make it illegal for corporate stock buybacks.

Meanwhile, China smiles and waits patiently. Got Gold??

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On The Lighter Side…

The Evansville Nut Club has sponsored their annual Fall Festival since 1921. Congratulations are in order, “The West Side Nut Club Fall Festival is the official 2024 winner of the #1 Fall Festival in the USA!”

They also set the record for the largest half-pot drawing in the US, $2,000,070. Some lucky winner went home with just over $1million. It wasn’t us. I tip my hat to the organization; they put their share back into the community. We went to “scholarship night” when grandson Braidyn graduated and they provide thousands in scholarships to the city youth. We were proud, Braidyn earned some of that scholarship money.

Jo and I bought our tickets, happy to support a good cause. Indiana law allows winners to remain anonymous, so we don’t know who won.

The weather was perfect for the closing Saturday parade, there were thousands of people there, and a good time was had by all. We enjoyed the treats from our favorite food booths.

The weather was interesting. We got a lot of rain in the aftermath of the hurricane and the temperature literally dropped overnight. We turned off the air conditioning and put the heat on later in the evening.

Quote of the Week…

“What has been holding this Wall Street house of cards together this long is the New York Fed’s willingness (even eagerness) to throw trillions of dollars at the problem at the earliest sign of a hiccup. The fly in this ointment is that the New York Fed is literally owned by these same Wall Street mega banks whilesimultaneously creating emergency bailout programs and then outsourcing the work to the banks being bailed out.

If ever there was the perfect design for a replay of the Hindenburg, this is it.”

— Pam and Russ Martens, Market Bubble Set to Explode

And Finally…

Jo sends along some retirement quotes for our enjoyment:

• “Age is an issue of mind over matter. If you don’t mind, it doesn’t matter.” – Mark Twain

• “Retirement: no job, no stress, no pay!” – Unknown

• “Retire from work, but not from life.” – M.K. Soni

• “It is better to live rich than to die rich.” – Samuel Johnson

• “The trouble with retirement is that you never get a day off.” – Abe Lemons

• “You have to put off being young until you can retire.” – Unknown

• “In retirement, I look for days off from my days off.” – Mason Cooley

• “The company gave me an aptitude test and I found out the work I was best suited for was retirement.” – Unknown

• “A retired husband is often a wife’s full-time job.” – Ella Harris

• “The best time to start thinking about your retirement is before the boss does.” – Unknown

• “Retirement, a time to do what you want to do, when you want to do it, where you want to do it, and how you want to do it.” – Catherine Pulsifer

And my favorite:

• “There is a whole new kind of life ahead, full of experiences just waiting to happen. Some call it retirement; I call it bliss.” – Betty Sullivan

Until next time…

Dennis Miller

“Economic independence is the foundation of the only sort of freedom worth a damn.” – H. L. Mencken

 

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