Last Sunday The Duke entered a World Series Of Poker Circuit Event at The Horseshoe in Baltimore. The Duke cashed and finished 14th in that event.
Yesterday, The Duke was one of 437 people who entered The Main Event in the same tournament. The Duke was one of 140 who survived Day 1 and will be playing in Day 2 today.
The Duke will return next week with his commentary on the market but here is a hint. In 2007 there was an initial selloff in the market which was followed by a massive relief rally. Everyone felt safe at the time. The pattern is repeating itself. Watch for 2032 on the S&P which is the 61.8% fib retracement level of the S&P high of 2134 to low of 1867.
You just learned a difficult lesson. Online brokers do not have the capacity to handle extreme volume and they often crash when the market is making a major move up or down. You need to have your order in and live with the consequences. I had a 150,000 share order in the premarket and regular market at 3.48. Was executed at 9:28 when the stock collapsed. Just sold at 3.69 on a fill the gap move. That is how you play these moves down. I suggest you stay away from the stock for a while.
The bottom is not in.
You asked me how I felt about selling out my SIRI. I feel pretty good. How about you? I'm glad you will be buying. So will I. But at a much lower price than I sold. That is the way the game is played, if you haven't figured it out yet. Enjoy the ride at a loss of 2,500 per penny.
BB are tightly controlled by SEC anti fraud rules. They are run by a specialized desk at JPM and the trades are reviewed daily a by compliance officer following strict guidelines written by some guy like the Duke. Do you remember back in Feb 2014 when Wrongway wrote his brilliant article that SIRI was headed to $5.03 by year end. That is where he earned his name because he didn't have a clue and I got to laugh at him. If SIRI had gone to $5.03 it would have been prima evidence of stock manipulation which could have provoked an investigation. If you knew this, you would have been laughing at him too. Just a guy showing his ignorance while billing himself as a stock analyst. Here is the takeaway. SIRI will not sky rocket until after the BB ends without news to justify the move and all of you are praying the BB continues. Brilliant. That is why JM is laughing at you. The Road to Nowhere.
I got some questions from Philikup which I will answer over several posts. First wouldn't Stern's leaving help the company because it would save $80M a year. What underlies this question is the premise that SIRI is running a corporate welfare program where the company is losing money on Stern and is enjoying the losses so much that it wants to continue to lose money for another 5 years. You taking stupid pills for breakfast. SIRI earns money on Stern. SIRI's gross margin is 60% so to breakeven on Stern they need $140M in unique revenue. By unique revenue I mean revenue they would expect to lose if he leaves. But they make a profit so the minimum unique revenue would need to be $250-275 if they wanted to clear $80M in profit. Next year SIRI is supposed to increase revenue by 370M. Stern leaves and the revenue increase could be near zero. Couple the lost FCF along with an increase in Capex and things aren't great. See if you can figure out what happens to the PPS.
The Duke will be playing at the WSOP circuit event in Balt. next Sunday so no post next week. Buy at 3.63, short 4.09-4.14
What I find even more interesting is that none have you see that Malone offered $3.68 a share for the company in Jan 2014. The FCF belongs to the shareholders and the debt is a claim on future earnings of the shareholders. In other words JM devised a plan to purchase the company share by share using your money at a price BELOW what he offered to you in 2014. He is laughing at you while you are cheering his actions. I have long ceased being amazed by the level of stupidity of the average investor. So you reply, look at all the good things that can occur when JM gets 80% of the company. Unfortunately, there are also a whole bunch of bad things too but you don't know any of them. I will let you know about them as we get closer to 80%...a few tax things you never even heard of before. Revenge of The Duke...another title for the future. I doubt if JM will let me down.
I got some interesting questions last week that I want to address. Someone asked me why I post on this message board rather than on SA. Notel told you that SA actually contacted me and ask me to write for them. I considered it for 5 days and then announced in a post that I would be staying on this board. There are many reasons. First, I don't need the money. Second, I don't have to deal with editors. Third, I enjoy the rough and tumble of this board. The Duke has always been insulting someone, Brandon Matthews (BM), Homer (Mr. Obvious), the njguy, the oldgeyer, the three stooges and now Wrongway and Drunken. Hopefully, it adds some levity to the dry stuff that is a Duke post. Finally, Duke's post are meant to educate and infuriate. I mentioned my post on how a BB is conducted. Did you know that BBs are controlled by various fraud statutes of securities laws? When I wrote that post in June 2014, I wasn't guessing. I simply took the law, put into English that you could understand and added a few investment banking terms like mining and climbing the ladder. You were getting a lecture without knowing it.
The second report was something exotic called inventory to sales ratio. Basically sellers are always optimistic about future sales so they order stuff. The theory is you can't sell it if you don't have it in stock. The danger comes from ordering more than is sold. Inventory piles up and future orders are cut back to right size inventory in Street speak. A rising ratio signals trouble since inventory is backlogged and sales have fallen below projection. A ratio of 1.5 signals recession. We hit 1.37 in July with auto sales showing the largest inventory increase of any category. Looks like Frear is going to get his flattening, although the question remains what happens when investors wake up to the reality.
Before the CC, I wrote a post entitled Why. The issue was why was SIRI getting all the analyst publicity and upgrades when it was about miss earnings. SIRI missed earnings but the upgrades continued unabated. Funny how no one caught Frear's predicting of declining auto sales in the second half.Do you guys ever read anything other than the hype/ Here is a flash for you. Go to the main page for SIRI and hit analyst's estimates. It shows that 30, 60 and 90 days ago they were predicting SIRI would have 11 cents EPS in 2015 but that 7 days ago they lowered it to 10 cents. No press, no one noticed but then you weren't supposed to see it. In the days after the CC 185M shares of SIRI were dumped between 3.95 to 4.00. So was that a distribution pattern from those who read the CC to those who bought the raised guidance hype.
Frear made another point. We are returning money to shareholders. We have purchased 1.5B shares at a cost $3.49 per share. Let's see if that is true. When I sell my shares to the company am I a shareholder or a former shareholder. So let's reword the double speak. We have purchased 1.5B shares from former shareholders who dumped the stock because it hasn't gone anywhere in 2 years. We are using all the FCF and future FCF to do this so JM can acquire 80%.
It was a typical week in SIRIland. The company bought 11M shares at a cost of $43M while the it sunk $14M deeper into debt. The stock finished unchanged for the week. The assembled masses forgot about the disappointment of another sub $4.00 close and thought with joy that the company had gouged itself on more its own shares. Riches would soon be bestowed upon them, they thought, the same dream they have had had for two years, if only the company could buy a few more shares. Drunken was seen running in the street yelling any time now, any time now. No one knew if he meant that $4.00 was coming or maybe $3.00 or maybe that he was finally thinking about getting off the escalator to nowhere, but no one gave serious consideration to the latter because everyone knew Drunken and the rest of the unthinking had fallen victim to the disease of Wall Street double speak.
During the CC Frear was asked why the company had raised the self pay subs to 1.6M but had left the total sub add at 1.8M. He responded that the company expected a flattening of auto sales during the second half of the year. If you notice, which you didn't, that SIRI agrees with The Duke that second half sales are about to decline. But Frear left the door open to speculation. What does the term flattening actually mean. Does it mean flat vs last month sales, flat vs last year same month sales or falling flat on your face as in the sales being so bad that 2015 sales are flat vs all of 2014. All are plausible but in the realm of Street double speak, the insiders know that you will put the most optimistic spin on it. You are programmed that way. It is about psychology and they know what you want to hear. Flattening sounds different than falling off a cliff.
We got two reports this week.showing the auto industry is in trouble. Subprime borrowers defaults continue to rise for the fifth straight month and are getting dangerously close to 2007 levels. The question arises is there still a sucker to buy this toxic paper
The problem is that you are under the FALSE ALLUSION that the company MUST keep buying as the price goes up. Remove the support of the 2.2M shares a day buy and the price plummets.
In macro news I have been pontificating about six key issues over the past nine months. The implosion of China, a Greek BK, the collapse of commodity prices, the increasing strength of the dollars, multinational corps would see a profit collapse as the strong dollar hit profits and finally an implosion of subprime lending. We have fallen 7 straight days as the market has had to grapple with the first five items that were unimportant until they became important. The above is merely the symptoms of a larger unrecognized problem.
The central bank thesis was to blow an asset bubble by creating free money through QE. The idea was that if the market went up people would feel wealthy and spend more by increasing debt. Good theory, worked in the 1990's. What CB's failed to understand is that the baby boomers are aging and downsizing and millenials are saddled with student loan debt. The credit bubble in China has burst so they are buying fewer commodities, hence the downturn in prices. People are fleeing into dollar based assets driving the dollar higher causing our exports to drop and profits to drop. A wave of deflation is upon us. If investors see this then what you have seen so far is the tip of the iceberg. The transports and DOW are below their 200DMA. The Russell 2000 and Apple joined them. The 200 DMA on the S&P is 2063 and intermediate term support is 2045.
Media stocks dropped 10% this week. Disney, Fox, CBS, TWC and Viacom. All of these stocks has aggressive BB programs and through dividends and BB were returning more than 100% of FCF except D which was 92%. The BB programs didn't prevent the sell off.
SIRI has said that it can carry 4X leverage without fear of a downgrade and S&P agrees. But what does 4X mean. To determine the maximum you can safely borrow you multiply TRAILING EBITDA by 4. The trailing EBITDA is 1.5B but I will be generous and use forward EBITDA which I told you was 1.65B. Lets multiply 4 times 1.5B and get 6B and 4 times 1.65B and get 6.6B. The maximum SIRI can fund in long term borrowing is 6 to 6.6B. SIRI currently has 5.1B in long term debt so the max it can borrow is 900m to 1.5B before it maxes out its credit card. If you divide a mid point of 1.2B by 200M you can continue the BB for 6 more Qs. Brilliant reasoning. It is the basis of the Barrons article you are slobering over. There is only one slight problem you all forgot. SIRI announced a new capex program beginning in 2016 and extending into 2017. It needs to replace its sats so they can handle those telemetrics you crow about. There are 6 sats up there and 10 years ago each launch cost 200M. They also keep a spare on the ground so the real number is 7. You are looking at 1.5B to 2B in capex soon. FCF is about to decline and if you want to keep the BB going at its present pace the funds from the NEXT borrowing will last a year.
So we are set for a year. Did anyone notice what was not mentioned at the CC...Stern's contract. If Stern leaves, everything changes. FCF and EBITDA plummet next year and SIRI risks a credit downgrade because it no longer meets the 4X credit leverage mandate. No one has actually explained any of this to you.
Last year in June I wrote a thread entitled The Road From Fantasy To Reality. I outlined how BB work. Remember climbing the ladder and letting the air out of the balloon. I pulled Part 1 last night. You can find part 2 by going to topics and change the default 3 months to all. It did not print on the current board. If you reread it you will see why SIRI has never gone to $4.00. If SIRI goes above 4, SIRI could just stop buying and we would fall back to 3.
There were a couple of interesting points that came out of the CC but no one has touched on any of them in the press. The first is that SIRI bought 144M more shares for about 560M during Q2. Lets analyze the numbers. There are 66 trading days in a normal Q so SIRI is buying 2.2M shares a day. The stock finished the period from CC to CC pretty much unchanged in PPS and Freer boasted SIRI has acquired 1.5B shares since the BB began at an average price of 3.49. What he is really saying is that we have bought back 23% of the float without impacting the price because when we started the BB in 2013 the stock was at 3.85. All of you fools who thought the BB would raise the price ain't got a clue. He further SIRI would continue the BB at the current pace.
Let's take a look at what that implies. SIRI started the Q with 482M in cash and ended it with 294M in cash which is a decline of 188M. Frear said SIRI had 370M in FCF in the Q. What that means is that SIRI spent every penny it earned in FCF and an additional 188M to BB its stock. There are 91 days in a Q so SIRI is burning through cash at a rate of 2M a day. The company is literally BKing itself as all of you cheer. If you want to confirm these numbers look at the cash flow statement that shows a negative 188M for the Q.
So how long can this continue. If SIRI burns through another 188M this Q, its cash at the end of the Q will be 106M which is as low as it can go and still be a going concern. So expect another bond offering before the end of the Q or the BB will slow to just the FCF generated on a Q basis.
The question becomes just how much can SIRI borrow before its credit rating gets lowered by S&P. Contrary to popular thinking or non thinking, you can't borrow an infinite amount.
As smart investors, we all know that at the beginning of each year SIRI issues conservative guidance so that the company can say it beat guidance and raise guidance later in the year. But do you realize the consequences of SIRI's policy. The analysts figured out the game along time ago and have come up with their own realistic guidance that they publish for their institutional clients. It is like there are two sets of books out there, one kept by the company where every thing is new records and one kept by the analysts where things are just average and ho hum.
Let's take some examples. The company said self pays adds this year would be 1.2M but has raised guidance twice and now is at 1.6M. The Street has always been at 1.65M so SIRI just got to where the analysts were 6 months ago Same with revenue and EBITDA. SIRI had revenue at 4.35B and just raised it to 4.5B. The Street was as 4.47B six months ago. Company EBITDA was 1.495B, raised to 1.652B. The Street has always been at 1.65B. But when you get to FCF things really get crazy. SIRI started at 1.2B and has raised guidance twice to 1.3B. The Street started at 1.4B but because of the royalty settlement it has lowered guidance to 1.3B. In the bizzaro world of SIRI land you have the company raising guidance on FCF while the Street is lowering guidance all because there are two sets of books being kept on SIRI.
There are real consequences to having two sets of books. The first is that people like you keep saying SIRI had a great quarter, beat all its metrics and the stock never goes up. To the Street SIRI had another quarter with no unexpected numbers and isn't surprised that the stock is going nowhere fast.
The second consequence is even more devious. Unsuspecting buyers see SIRI raising guidance and pile into the stock after the CC because they see raised guidance. They get trapped between 3.95 and 4.00 and when the stock falls to 3.63 they are happy to get out even. SIRI builds its own resistance level each Q.
I noticed that three of last week's four parts were removed. I seem to have more readers than even I imagined. We shall stick to the teaching part of the post to see if that meets muster this week.
One of the things that has always characterized SIRI investors is that they live in a fantasy world feed by their own lack of knowledge and exacerbated by the lack of knowledge by other commentators on SIRI. There have been hundreds of posts about a SIRI short squeeze and I have explained countless times that that would never happen because the CBH doing the shorting NEVER were required to cover their shorts. A few weeks ago the board was abuzz with talk of a dividend for shareholders but I explained to you that the dividend being referred to was between the subsidiary and the parent within the current holding co. structure.
One of the missing parts from last week referred to Rule 10b-18 which limits the amount of shares and time in which a company can repurchase it shares on the open market during a buy BB.. Most of you live in this fantasy world about what the BB will accomplish because you have never heard about 18 as we call it. I would also suggest that you never heard of 18 because none of the other commentators who write about SIRI knew about its existence. The stupid leading the blind.
So I thought I would teach you today how a BB is really conducted so you can move from fantasy to reality. Let's start with some definitions. The term MARK stands for the AVERAGE PRICE the company hopes to pay for the shares during the course of the BB. Here I think SIRI's mark is 3.25. Shares bought BELOW the Mark are called "GOOD SHARES", while those bought ABOVE the Mark are called BAD SHARES. The idea is to have enough good shares to offset the bad shares to stay under the mark. The term MINING refers to EXTRACTING as many shares as possible from a given trading range before having to move to the next trading range to begin a new MINING operation.
Okay dummy, now you have a chance to buy 42,000 at 3.95. don't miss the opportunity. Now how much money do you have left?
I love it when the blood drains out of the face of someone I am talking to. It means the light has finally gone on and they are beginning to understand where I am headed. The games is rigged but no one understands how it was rigged and even the regulators didn't see it. What is even worse is that there was no criminal behavior because even the operator was unaware of the problem.
I continue on. I flipped the tab on my computer back to Fresh Deck Poker. They gave me 40,000 free chips to play and I get free chips for playing a certain numbers of hours. In six months of casual play my chip stack has grown to 4M chips. Great player, maybe but the truth is there are flaws in the program which I have figured out. I lay down hands I would never lay down in real life because I know they are traps. I beat the game because each site has its own design flaws and I figured them out.
So Pat asked the $64 question. How do you know all this? I told her I'm an attorney and as you know we have a little Silicon Valley in Reston Va. Our firm has incorporated a number of the software development firms. I've known the CEO's for 25 years and I can ask them questions and get answers that no one else can. The rest is just putting the story together...like I did with you.
You do know that the Naz is run by computers that use software. Right. Probably a story there. Involves Flabby. See if you can figure it out. To keep the poker game interesting, software designers will design alteratives. You may have two pair but there is always three to the straight or flush on the board so when you get to the river you are never sure if you are ahead or behind.
Going back to SIRI, Wrongway identified the great cup and handle pattern that is going to lead to the breakout above $4.00. Here is another possibility. Since 7/7 SIRI has traced out the left side of a H&S pattern. If the right side forms it would signal a sell off. Two patterns, which one develops. The Software Of SIRI. Sounds like a title.
The problem goes back to the design protocalls that were given to the software designer. He was told the open ended hit 23% of the time, but he didn't understand what that meant. So when he designed the program the three card flop with the Jack of spades, nine of diamonds may lead to straight 40% of the time while the three card flop of Jack of diamonds, nine of spades hits 6% of the time. Together they hit an average of 23% of the time but if I knew the flaw I would always bet the Jack of Spades and never the Jack of diamonds draw. But it gets even worse, there is a third card in the flop. My example had a five. What his has done unwittingly has programed the "good flop" Jack of Spades, 9 of diamonds to hit the straight 40% of the time when the 5 is a club but only 6% of the time when it is a heart. Or maybe the straight comes 45% of the time when the third card is a 5 but only 10% if it is a 4. The design flaws are endless and are being done without an criminal intent.
Do you ever wonder why some guys have 7 Million in on line earnings?
Here is what they are doing. They have bought sophisticated computer systems with pattern recognition software. The online site allows you to observe a table without actually playing the game. Although, there may be 500 tables in progress each one is being run with the same continuous loop software from the main server. Each table is plugged into a different part of the loop. Over the course of several weeks the computer sees every hand of the millions that have been programed and figured out the glitches. So when the up and down straight draw comes it is going to play the pattern that has a 45% chance of winning and discard the 5% chance. The player without the program plays both hands and is donating his money to the computer.
I'm not guessing what is happening. There are stories of pros with computer setups playing 20 hands at once and mentioning pattern recognition programs. It is on the internet but you guys don't read them.
You are right, but will explain how you just did that. Sure, I said. I just went to the commission's website and looked up membership. You are the only woman on the commission so Patricia it is. There is a bio for each member on the website. I can speed read at 2000 words a minute so I read your bio in less than 15 seconds. It says you an expert in water conservation and management and a senior fellow at the Brookings Institute. You are in Washington and you aren't the tourist type so you must have come to talk at Brookings. She said, I didn't even know they had my bio on the webste. But you are right. I flew in last night, gave my speech this morning and am flying home tonight. I said it fits your personality, you are not someone who wastes any time.
It is not often that I am sitting across from a member of the Nevada Gaming Commission and they would never listen to an outsider. But I had a captive audience so I decided to unload the bomb shell. You have a major problem in gambling in Nevada and you don't see it or understand it. Okay, I'm listening she said. Last year the commission approved on line poker for Nevada residents. You went through all the protocols and received assurances that the online game replicates the live game. The assurances were given to you in good faith by the licensee but they have it all wrong. There are flaws in the software because the software designer is not a poker player or not a good player and he/she didn't understand the implied odds of the game.
Let me give you an example so you understand what I am saying. Let's say I have a Queen Ten as my hold cards and the flop comes Jack of spades, 9 of diamonds 5 of clubs. I now have an up and down straight draw. The true odds that I will hit the straight are 23%. Those odds don't very if the jack is a diamond and the 9 is a spade. I have an open ended straight draw and the odds in real life never very. The problem is that the software designer doesn't understand this point.