Last week Wrongway published an article on TU telling or hoping everyone would sell their stock to SIRI so they could buy more shares in the BB. He owned Aug 16 $3.50 calls. A normal person would want the stock to go up but not Wrongway. So what happened? SIRI started to rally on Wed and hit the $3.58 target I gave you on Sunday. In the comment section to his article I asked him to explain why analysts were cutting their EPS estimates for SIRI in 2014 & 2015 so he produced an article that showed EPS is unimportant to SIRI. A few weeks ago Certifiably Nuts wrote an article that said sub growth was unimportant to SIRI's price appreciation. Some things make no sense.
Last week a guy named nyrugrat (where do you get these screen names) said only a fool would try an predict the market. So let's see, I predicted that SIRI would hit 3.58-3.60 and it hit it on FRI and that the S&P would bottom between 1899 and 1907 and go to 1991 to the low 2000 level. It bottomed at 1904.78 and went straight up to 1965 so far before correcting down to 1956. So am I an educated fool, a lucky fool or a damn fool?
Easyazzz asked whether SIRI is going to $2.74? He is asking the guy who said SIRI had to hit $3.58 BEFORE it could go to 2.74. It is called a countercyclical rally within a long term downtrend. Anyone remember that The Duke went long at $3.09. Countercyclical.
There is a lot of things I don't understand right now. I will be on vacation next week and maybe when I return in two weeks I will have figured it all out. Maybe the market will have figured it out by then.
At this point Goldman notifies the Seller of the oil in SA that it has a $Billion and the oil gets shipped. When it arrives in New Orleans Goldman wires the money to the Seller. I get my crude, refine it and sell it at a profit. I give the $B plus interest to the MM and they give me back my collateral, the bonds, which I return to Goldman. Everyone has made a profit and everyone is happy.
What you should understand from this is that Treasuries are the grease that keeps the world economy going since they are the collateral that underpins most of the trade in the world. On a daily basis there are about 1.6 TRILLION dollars in repo out there. So what is the problem you ask? Here is the problem. The Fed bought 20% of the Treasuries in its QE program taking them off the market. The US government deficit shrunk this year so there is less supply then anticipated. People are getting nervous and are buying more bonds so there are less in circulation. All in all the world's credit markets are beginning to freeze up because the demand for collateral is outstripping supply. The Fed never saw it coming so they recently allowed banks to borrow the Treasuries they hold to keep wheels of commerce going. Unintended consequences. Everywhere I look, credit is drying up or becoming more expensive when you can get it. The Fed can't do another QE program because there is nothing to buy out there without messing up world commerce. It is a mess and when the stock guys figure it out there should be some waterfall drops in the market as everyone heads for the exits at the same time. The World According To Duke. We will see how it plays out.
There are many things that drive the market and the world's economy but few people really understand what it is. I have conned myself into believing I understand how it works. I may be totally wrong but I can tell you that Bernutty and the Fed agree with The Duke so if I have it wrong, I'm in good company. It is all about cheap credit and money flow into the market. That is what QE is all about. The Fed surpressed interest rates (ZIRP) and flooded the market with money by buying bonds (QE) and the money found a home by being invested in the stock market and made everyone rich. Its Hollywood so everyone lives happily ever after, except there are unintended consequences to dumb policies and the Fed didn't understand the consequences.
I told you that the bond boys see a recession while the stock guys see a booming economy. So why are interest rates on the 10Y dropping into the danger zone at 2.35% now as I predicted a few weeks ago. It has to do with a bleak picture that is unfolding in world commerce that is barely being discussed.
World commerce depends on the treasury market and something called the overnight repo market. So how does the repo market work and why is it necessary. Let's say I am a refiner in Louisiana and I want to buy a tanker with a billion in oil for my refinery. The oil is in Saudi Arabia but it won't be shipped until I pay so where do I get a $billion. I borrow it. I go to Goldman and say I want to borrow a billion. They say they know a money market fund that will loan me a billion because I will pay a higher rate of interest than is currently available. But they want collateral. They want Treasury bonds so if I default they can sell them and get their money back. I don't have treasury bonds but Goldman does so they lend them to me so I can pledge them to get the billion. I agree to buy them back from the money market (repo) and give them back to Goldman when I sell my refined product. I give the bonds to the money market and Goldman gets the 1B.
There was a time, back in the Dark Ages, when I thought I understood the stock market. The period was known as BQE, Before QE when things actually made some sense. Today things make no sense, at least on the surface and the explanations we get are less than illuminating. If you are a somewhat literate investor you know the stats. Consumers account for 70% of the economy and housing is one of the biggest drivers of the recovery since it creates jobs and consumer purchases...furniture for that house you bought.
So this week we got the important reports on the nation's economy. Here is how Yahoo summarized the reports, "Earlier retail sales for July were reported flat, missing estimates and the weakest readings since July 2011....A weekly U.S. report showed a decline in mortgage applications volume to a 14 year low despite lower mortgage rates...
The market rallied on the news since the prevailing investment theory is that bad news is good news and this will delay the Fed from ending QE or cause it to delay raising interest rates, or both or none of the above but anyway it is all good so buy stocks.
The Yahoo article carried an explanation of why the retail sale numbers weren't as bad as they looked from Nick Reich CEO of Earning Scout. Here is what he said, "When you talk retail, one does not necessary mean the other." If you understand that gibberish let me know what he meant because The Duke doesn't have a clue. The next morning I watched the Chief Economist from Wells Fargo explain away the numbers in English that I could actually understand. You see consumer spending is no longer important to the economy and housing is even less important. Betty Lu was confused to hear this so she asked well what is going to drive the economy? The economist said, business investment. Alexis Steele said, but there is no indication businesses are investing in plant or equipment. The Economist said they aren't but soon they will, so just buy stocks and everyone nodded in agreement.
I am not sure why you are asking the questions. Japan's economy is a basket case. Soaring inflation and a contraction in the economy that is greater than the government predicted due to the sales tax increase. Everything is playing out exactly as I predicted which is why the IMF just cut worldwide GDP for the second time this year.
Since we are on the issue of topics you won't read over at SA, Ford Equity Research cut its rating on SIRI to SELL on 8/1. They echoed the frustration that S&P has with SIRI's earnings. "Recent changes to analysts' forecasts and variances between reported and estimated earnings provide important information about a company's future performance. Earnings forecasts for SIRI have been decreasing which portends a deterioration of future earnings growth."
What is this earnings forecasts have been decreasing bit? Go to Earnings estimates on this site. Consensus for SIRI was in 2014 and 2015 was cut after the latest CC by a penny. Shouldn't Wrongway be addressing why consensus is being cut even with all the BBs and glowing analysis he writes. Or maybe a topic of conversation should be how higher interest rates or a recession would impact auto sales in 2015. Sorry, I forgot SIRI is insulated from all this.
Last week I told LR that the market would rally from a 1899-1906 base. It started FRI. This will be the last rally before the late third Q early 4th Q sell off I predicted in Jan. We will get close to the old 1991 high and could go over 2000 like the NAZ hit 5000. For SIRI it means we get to 3.58-3.60..a 50% retrace of the fall from 4.18 to 2.98. At that point it becomes a short.
I'm looking forward to the day when I am not the bearer of bad news on a weekly basis.
Of course, that is only part of the story. Why would credit dry up for C&D borrowers you ask? It is those junk bonds I have been talking about. You see all those subprime loans get bundled up into junk bonds by Wall Street to yield seekers. That is what the term "securitization of subprime loans" loans. Junk bonds are a mixture of A, B, C, and D paper. The more A paper, the safer the loan but the smaller the interest rate. A paper pays less than C/D paper. So you want yield with safety. You buy a bond with 80% A paper, 10% B paper and 10% C&D paper. You read the prospectus which disclosed the auto co. underwriting practices and loan origination criteria. That is all fine except if GM isn't following its own criteria that A paper isn't any safer than the D paper and you swear never to buy another bond issued by GM. That is the risk to GM and ultimately to SIRI as an auto parts supplier to GM and the whole auto industry.
Since we are on the topic of junk bonds, lets look at a story the WSJ carried on 8/7 entitled Junk Bond Exodus Accelerates. Here are some quotes. "Investors pulled a RECORD 7.1B from junk bond funds in the week ended Wednesday...The outflow is the fourth consecutive weekly decline. The average junk bond yield hit 5.78% up from 5% last month...(An analyst) said high yield borrowers would likely wait to issue debt. It doesn't benefit anyone to bring deals right now..Everyone is a bit nervous.
The problem for SIRi is two fold. The auto co. will have trouble recycling the suprime loans they are generating and SIRI will have a problem selling it bonds to finance BB #3. Do you ever wonder why The Duke is the only person who discusses subprime loans and junk bonds? I do. Next time you read one of those glowing analysis over at SA ask them how the junk bond exodus or subprime lending problem could impact SIRI. I would love to read their IN DEPTH ANALYSIS.
But the subprime buyer starts to worry about the payment. The dealer says don't worry. The Fed has lowered interest rates and we now have 84 month loans which didn't exist when you bought you last car. What it all means is you can get this baby today at the same payment as your making on your current 4 year old car. The deal is done. The problem for the borrower is that he has taken out a loan for 130% of the value of the car and when he drives it off the lot the auto will depreciate another 30%. But subprime borrowers are savy. They don't care because the junk bond buyer is going to get stuck with the tab. The borrower has no money and you can't get blood from a stone. Why do you think I have bad credit and #$%$ were you thinking when you gave me this new car for my 4 year old car and my signature on a piece of paper?
The problem with the little story is that GM's underwriting criteria doesn't allow for the creation of the downpayment or for all this other stuff to be rolled in to the balance. Dealers have been known to fudge salary numbers but it is all part of the game in moving the metal. It has happened before and it will happen again. Auto companies will be found not to have followed their underwriting guidelines and dealers will have failed to follow federal guidelines in the origination of the loans. Standards will be tightened. There will be no loans given to people with C&D credit. New car sales will fall and SIRI subs will suffer. It is a pattern that repeats itself over and over. The investigation will take 6 to 8 months. Put it on your calendar.
Siri is a unique stock. It starts out as an auto part and only morphs into a radio stock once someone purchases a new car or activates an unused radio in a used car. To fully understand what is happening in SIRI, you have to follow the auto stocks. Few people do.
This week there was a significant occurrence in auto land on a subject that The Duke touched on in last week's post. Any idea what it was or how it might impact SIRI? The US Attorney for NY issued a subpoena to GM's financing arm to investigate GM's subprime lending practices. Specifically, it is looking at GM's underwriting criteria, origination practices and securitization of subprime loans. No other auto co. received a subpoena.
The auto industry uses subprime lending on 30-35% of all new car loans but GM's usage is the highest at over 40%.
Let's learn a little bit about subprime lending. FICO scores go from 300 to 850. Every lender uses slightly different numbers but here is generally accepted practice. Subprime FICO scores run from 300 to 650. Scores between 600-650 generate grade A loans or what we call A paper, 550-600 B paper, 500-550 C paper, 450-500 D paper. Below 450 is F Paper. Ultimately, this paper is the substance of junk bonds but we will get to that later.
If you are a subprime borrower you are going to pay a higher interest rate for your loan than someone with a FICO score at 780, Triple A paper. But a C/D guy is going to pay more than an A guy. So what has been happening in subprime land? According to Bloomberg subprime borrowers have had the unpaid loan on their old car paid off by the dealer and rolled into the new loan. Also rolled in are such goodies as title, taxes, destination charges, processing fee and the famous undercoating and extended warranty fee. Let's not forget the downpayment. That gets created out of thin air and added into the loan amount.
So your a subprime borrower and the dealer offers you a car for free, sign and drive it off the lot. What is not to like?
There is some support in the S&P between 1899-1906. We will see what happens tomorrow. If 1900 doesn't hold you are looking at 1865.
I do not publish articles. The only place to find The Duke is here on Sunday morning. After a big correction in SIRI I see the stock returning to the 3.25 level by the end of the year and being at 3.75-$4.00 at some point next year.
Contrary to my critics thoughts, I am bullish on the stock long term, but we have some pain to endure first.
Enjoy the lake. 75% in cash is about right for you. Nice play on SIRI. Haven't touched the stock since I got out in May. There are always other sandboxes to play in with larger trading ranges than SIRI. We shall see if that correction comes because SIRI still has potential after a meaningful correction.
The Fed has always been more interested in the stock market as opposed to the real economy. Bernutty bought into the wealth effect which only exacerbated income inequity in the country. I find it interesting that a Democrat would renominate him and then nominated a disciple to replace him. I thought the Dem represented the poor and impoverished.
SIRI has been following the BB pattern I outlined in May. The guys have climbed the ladder and let the air out of the balloon so many times that I lost track as to often it has occurred. I like the term zombie stock. BTW there is quite a bit of chatter that we will rally this week to new highs before the market rolls over. You should be careful since it is possible we get one more buying spasm. It would fit with my theory that the sell off won't start until Sept-Oct.
I am pretty much in sync with everything you wrote.
Things are not good in SIRI land but few people understand what is happening. Certainly no over at SA. I look at Yahoo's removal of SA as a public service akin the eradication of smallpox from the globe. Auto sales for July were great but came in lower than expected. Forget the numbers. You saw the first articles that auto sales may have peaked in July and are headed down. Those articles are correct but no one understands why this will occur in two months.
Here is the reason. Over 30% of new car sales are going to sub prime borrowers. Wall Street packages these loans into JUNK BONDS and sells them to junk bond funds and unsuspecting union pension funds because of the yield. Right now there is no market for junk bonds which means danger in a couple of months. The auto companies buy financing 3 months ahead so things are fine until 9/30. Then they won't be able to sell the loans they originated this Q which means many fewer sales to sub primes in Q4. That is one of the reasons GM is falling. F to follow.
Last Oct. I predicted SIRI would have 5 waves down and close the gap at 2.90 that has existed since 12/31/12. I later predicted SIRI would hit 2.74/2.76. The Barron article, the LM buyout and the BB have interrupted the pattern but not changed it. Let me be clear to all my readers that my prediction has not changed.
As for Wrongway's March $5.03 prediction and his $4.00 after the CC prediction shouldn't you be demanding an explanation? Anyway I told you SIRI would break out from the 50DMA, 200DMA trap. The 50 day is at 3.38. The stock at 3.31. It is too early to buy or short. Patience. Will return this evening to answer questions.