Traders on a (JetBlue) Plane, and the Drudge Report

Not to make this All JetBlue, All the Time, but I’m interested in how the stock market reacted last week to the developing problems at JetBlue. If you look at the jblu-stockfive-day chart, the stock had been down in the days leading up to the February 14th episode, ignored the news that day, and then traded smartly higher the next day.

Why? Because Goldman Sachs analyst Robert Barry upgraded JBLU to a Buy before the market opened on the 15th. He predicted in a research report that the carrier’s margins would surpass most other airlines in 2007, largely on the back of its embrace of Embraer 190 jets.

Fair enough, but the stock didn’t trade down after that news either. Why didn’t JetBlue stock fall materially last week — as it almost certainly will on the open on Tuesday — despite the developing storm around it?

Good question, and one that should get market efficiency theorists mulling. It seems a classic example of a loud and less important short-term signal — a Buy upgrade — overpowering a less-loud but more important longer-term signal — airline passengers angry and rebelling at a company’s mistreatment of them.

The stock is almost certainly going to trade down on Tuesday, and traders are going to be largely wrong-sided. Granted there has been action in the company’s put options — the June 7 12.50s have 20,490 open interest — but there has been remarkably little sign that traders correctly called this one, despite ample evidence as early as the day after that they were focusing on the wrong things.

So, what can we glean from all of this from a trading point-of-view? Well, one rule might be to assume stock mispricing when looking at discount airlines: There were no traders on the JetBlue planes, because traders don’t fly discount airlines. They assumed that lowly, non-fractional-jets owners must have this sort of thing happen to them all the time.

A second rule might be to fade any business scandal that makes the front page of the Drudge Report. Matt had this one early, often, and aggressively.


  1. As I spent my whole day at the Jetblue terminal at JFK on Thursday, I thought this very thing to myself. I’ve never seen such a mess, a mess that will certainly cost the airline big time over the coming months (and presumably will be reflected in the upcoming earnings release) both in terms of money and reputation. I thought of either buying some puts or just shorting the stock outright on Thursday (during their rise after the upgrade), but wasn’t able to get a trade in that day. I still think it’s a good play to the downside given the apparent shortsighted traders on the stock.

  2. If customers stopped flying a carrier becauase of poor service, there wouldn’t be any carriers or passengers left. This isn’t going to make one person stop flying JBLU. That’s why the stock didn’t budge. Short away.

  3. I agree that this incident isn’t going to put Jetblue out of business or stop people from flying them, but it will definitely cost them in the short term to clean up this huge mess and the stock will certainly suffer as a result of that. Thus it is an attractive short I believe over the next few months.

  4. This is going to end up where it ended Tuesday. Net effect: zilch.