Chris DeMuth's State of the Markets November 2023

Episode Summary

Executive Summary: Andrew Walker and Chris Demuth discuss merger-arbitrage opportunities and regulatory risk, focusing on Spirit/JetBlue, iRobot/Amazon, and broader antitrust dynamics. Demuth argues regulators have become overly aggressive and economically destructive, while courts remain more grounded. He is generally optimistic on Spirit, skeptical of the government’s market definitions and expert models, and views iRobot as another example of a fixable but politically fraught deal.

Main Topics: Antitrust regulatory overreach (Priority: 5/5): Demuth argues the FTC/DOJ have become ideological and excessively aggressive, creating uncertainty and deadweight friction for businesses even when deals are economically rational. Spirit Airlines / JetBlue merger trial (Priority: 5/5): The bulk of the discussion centers on the ongoing Spirit trial, with Demuth assessing the judge, the government’s case, market definition, and likely outcomes. Market definition and expert witness critique (Priority: 4/5): They debate whether the relevant market should be point-to-point, metro-based, or national, and criticize the government expert’s methodology and assumptions. Aircraft shortages and competitive entry (Priority: 4/5): They discuss whether the aircraft shortage and limited supply should affect antitrust analysis, and whether ULCCs can realistically replace Spirit capacity if the deal closes. Consumer harm vs. consumer benefit netting (Priority: 3/5): They question whether antitrust analysis should offset harms to some consumers with gains to others, concluding it is a weak legal argument even if economically intuitive. iRobot/Amazon EU review (Priority: 4/5): The hosts examine conflicting Reuters and Bloomberg reports on the EU’s stance, highlighting how regulatory signaling can move merger-arb stocks sharply. Charlie Munger’s death and legacy (Priority: 2/5): The episode closes with a reflection on Munger’s life, partnership with Buffett, and the value of ego-free long-term collaboration.

Key Arguments: Demuth believes FTC/DOJ behavior makes antitrust a pure friction cost for society and that agencies are losing credibility while courts remain more rational. He argues the Spirit case is weak substantively because the government’s theory is overly narrow and could be used to block almost any merger if accepted. He thinks the judge appears engaged, humble, and unlikely to blindly defer to the government, though a literal reading of the law could still create risk. He is surprised JetBlue did not more aggressively challenge market definition, which he believes could have seriously weakened the government’s case. He argues airline competition is dynamic and capacity can shift; ULCCs and international entrants could fill gaps if Spirit routes become available. He says the government expert’s model and analysis were flawed because they ignored deal-induced entry and allegedly fit the data selectively. He views the consumer-harm/consumer-benefit offset argument as a political and legal weakness, even if it makes business sense. On iRobot, he thinks Reuters may have misread or oversimplified the EU process, and that regulatory objections may still be fixable through remedies. He suggests distressed merger targets like Spirit and iRobot are being treated by regulators as if they are strategically important crown jewels, which he sees as ironic and inconsistent with their weak standalone prospects.

Data Points: Podcast date: Wednesday, November 29, 2023 - The discussion is framed as a monthly market update during the Spirit trial and iRobot EU review. Spirit trial timeline: 1 day of defense remaining; closing arguments on December 5 - Andrew notes the trial is near completion, with final defense testimony on November 30 and closings a few days later. Judge age: 81–83 - Demuth jokes that the biggest trial risk could be the judge’s health over Thanksgiving. JetBlue share of national market: ~4% - Andrew references that JetBlue is a small player nationally, underscoring the market-definition issue. Spirit share of national market: ~3% - Used to argue the combined firm would not be dominant under a national definition. Reuters report timing: November 24, 2023 - Reuters reported the EU would give unconditional clearance for iRobot, which later appeared wrong. Stock move in iRobot: $30 to $40 intraday; then $40 to $35 - Andrew cites market reaction to Reuters and then Bloomberg/EU objection news. Potential JetBlue price increase example: $100 to $110 - Used in the consumer harm vs. benefit discussion to illustrate netting logic. Potential consumer benefit example: $690 benefit vs. $10 harm - Andrew describes the expert’s framework for offsetting higher-value consumer gains against lower-value consumer losses.

Pivotal Quotes: "If they can block this, then they can block anything. Then it’s just unlimited." — Chris Demuth: On the danger of accepting the government’s narrow market and harm theory in Spirit/JetBlue. "We’re so glad that when people are in the boardroom, like the third person in the boardroom is there thinking about the regulators." — Chris Demuth: Criticizing Lena Khan’s pride that antitrust is top of mind for dealmakers. "The biggest risk is that the judge has an unhealthy Thanksgiving dinner, and we have to reassign the judge halfway through the trial." — Chris Demuth: A joking but pointed comment about the judge’s age and the trial timing.

Implications: The episode suggests merger-arb outcomes hinge on judicial pragmatism more than agency rhetoric. Investors should focus on market-definition disputes, remedies, and whether capacity can shift fast enough to blunt antitrust concerns.