Not too get to picky but the correction low was 3.32 on 12/18/13. I have been saying that the fed has no idea what the consequences of its actions are or will be in the future. it is just a grand experiment and its originator has safely flown the coup.
This week we saw the first break in the saga of Curly, Moe and Larry over at SA when Little Stevie wrote an article entitled Deal Or NO Deal You Win. The title is dead wrong but in the article he made the first valid point he has stumbled upon in three years. It follows upon my dilution argument of last week. Basically he said that the C shares do not exist and if the deal is approved the conversion from SIRI to the C shares will come with a 20% discount. I was banking on 15% but within a month we should see a 30 to 35% decline in what people EXPECT the shares to be worth. Why? The shares are a creation of of thin air. It is a tracking stock and does NOT represent ownership and you will be banking on how the market views the operation of the mutual fund. Anyway Little Stevie recommended a No vote which is a break from Spencer. Does this mean Larry is out and Shep is coming back...inquiring minds want to know?
Little Stevie also predicted SIRI at $5 before the end of the year to rev up the fan base without explaining why. Stevie why don't you give you reasons for a change and answer The Duke's concerns in Part 1. can't wait to read that.
The Minnow trader and CN showed you how NOT to trade SIRI this week. You NEVER try and scalp a few pennies at the TOP of a trading range because if (WHEN) it corrects down you are trapped. 3.56 to 3.62 is nice until it doesn't work although both will tell you they didn't buy at 3.56 on THUR. You scalp at the bottom of the range not the top.
If you are long you should be angry at JM. You missed a rally that could have taken you north of $4. Hey Stevie how does SIRI get to $5 when JM put in an artificial top a at $3.68? The high volume on Thur was directly related to what I wrote in Part 1. Without news SIRI zig zags down lower like it did on FRI on no volume. WW is correct. Patience. I have been out since 2/14. You should be out also if you are a trader. There will be a time to get back in but the high 3.40's is not the place.
You guys tend to live for upgrades and downgrades and therefore miss the suble changes that are occurring around you. Go to the SIRI homepage on this site and click on Analysts Estimates and scroll down to EPS Trends. In Feb. the consensus earnings estimates for Q1 and Q2 was 3 cents. They have now been cut to 2 cents for BOTH quarters. What also happened is that consensus revenue has been revised lower for both quarters. Consensus is now at 1B for this quarter and 1.02B for next Q. When you consider that 2013 4Q was 1B, this translates into no growth in first six months of 2014. A few weeks ago, I ended my post by saying a slide in SIRI's share price was "inevitable". It happened on FRI and now you understand why it occurred and why I said that we could break below the correction low of $3.32.
This coming FRI will end the first phase of the pension driven rally in the market and the unending rally should show some signs of fatigue in about 10 days. We never got that minor correction that I predicted back to the low 1800's and that represents a significant problem for the market. We are now in the midst of a blow off top where rationality has been left far behind. You want some proof of that? When the rally started I gave you ten stocks to watch. I did a quick search of those 10 this week and 6 of the 10 have exceeded their one year estimates. Check out WYNN, CMG, and LVS for example. When you see multiple expansion at these levels and the notion that the market is cheap everywhere, it is time to take some money off the table. We hit 1883 this week and if you were paying attention you would remember I predicted the S&P would hit 1925 and the correction would start in the late 3rd or early fourth Q. It is difficult to reconcile those two predictions and I won't try at this point. In the near term you should keep you eye on a default that occurred when a Chinese company failed to make an int. payment. Chinese credit markets froze and the ripple effects are coming.
As everyone is distracted by LM's proposed takeover of SIRI , you can easily forget that SIRI is still a stand alone company and that the quarter ends in just three weeks. People will tell you that fundamentals don't matter in this environment but the Street is slowly coming to the realization that this "negotiation" is beginning to drag on like the merger. With that realization comes the necessity to focus on the macro environment and it is not a pretty picture.
Two weeks ago I told you J. D. Powers, etc were predicting a 5% increase in auto sales in Feb. and said "we shall see". Obviously, I didn't believe the estimate and true to form YOY came in flat. What was worse was that cheaters weekend allowed dealers to sneak some March sales into Feb. Looking back, we see that Dec & Feb sales were flat YOY and Jan. sales were down 3%. At some point some one will wake up and call this a trend but that may take a while given the euphoria on the Street. What is worse is that buried in the sales numbers is that dealer's inventory continued to expand. Six of the 8 major manufactures reported YOY sales declines and at those dealers lots 90 plus days of inventory are common. GM dealers inventory went up 25K to 805K units. Divide by 225k in monthly sales and you can see the problem. The mentality of auto exec's is much like this board..unbridled optimism. Don't worry the market will pick up in the Spring but in the background the four letter word is being uttered...CUTS as in production cuts. The CONTINGENT plans are in the works and few want to utter the words but autos have a year on them and at some point reality overcomes optimism.
Over the years I have told you to think of SIRI as an auto part not a radio station. Once the auto is sold you start thinking radio subscription but a slow down in new car sales goes right to SIRI's bottom line, FCF and sub totals. Think The Duke is alone? Part two will tell you who else sees the problem and it might surprise you.
As WW would say, you need patience. I feel a buying opportunity is upon us. We shall see.
Finally, you holdings are being diluted. The A shares get two shares of the new C shares for each A they own. and you wind up owning 39% of the new C shares. You a supposed to believe that you own 39% of the company but there is NO COMPANY so you own 39% of a tracking stock that tracks the performance of the LM family. The idea of giving 61% of the shares to the A holders is that JM has been working with them for years and by having a stake in the C shares it will give them an incentive to buy your shares as you sell them.
The whole idea behind tracking shares is that institutions are more capable of understanding LM business goals, are less likely to interfere and need less protection than retail investors. Now you understand what this deal is all about and if you still like it then vote for it.
What about the idea that LM will make you money? The problem is you don't really understand the question. The real question is will LM make you more money than something else. If you get out and invest in the next AAPL you will do better, if you choose JCP, you will do worse. What you get with the C shares is a mutual fund of LM holdings. If you like that, go for it, but the SIRI you have doted over for years will be a debt bloated caricature of the company you once knew.
Fri was a small taste of what is coming in the market. The pension money is secretly underpinning a rapidly declining fundamental picture. The weather rationale is floated as a smoke screen but at the first sign of trouble the DOW tumbles 150 points in 15 minutes. What happens after 4/15 is anyone's guess. SIRI is trading with a 8 cent range over 9 sessions. At least for The Duke there is no money to be made so the trades occur elsewhere. The stock is telling you a deal is imminent which confirms what the April 19 options are saying. The question still remains whether investors will understand the deal and whether the Courts will allow it within LM's time frame.
As for The Duke, here on Sun.as usual.
The problem for Spencer as it is for all the people over at SA is without a legal background they wouldn't know a reorg if it hit them with a 2 by 4 between the eyes. So this morning The Duke is going to give you the Cliff Notes version of Reorg for Dummies so that you can understand what is happening and JM's short term and long term strategy.
First every reorg is slightly different and this one has some unique features to it. You all understand that under the C shares you will no longer have voting rights but the changes are much more significant than that. Currently, even though LM controls SIRi by its 533% ownership stake the BOD and officers have a fiduciary duty to all of you. You saw this in the way the price was set for LM's shares in the BB and the way this issue is being handled. That also means that LM can't make SIRI take on corporate debt unless it furthers SIRI's business interest. That is the problem for LM. The C shares solve the problem because you will not own any of LM businesses. The C shares are a tracking stock not an ownership stock. LM owns the company so the BOD owes its fiduciary duty to LM and not to since you are no longer shareholders. That means SIRI's money can be spent on whatever LM wants and there are no shareholders derivative suits because you aren't a shareholder.
Second, the 076 ratio that Spencer keeps talking about is really a disguised reverse split. Mel pledged a no reverse split policy so that long term holders who bought above 5 had a reasonable expectation of getting even. Whether it is harder to go from 4 to 5 or 48 to 60 is a matter of conjecture but it just looks harder. But that is only part of the reverse split strategy. The real idea is that 10,000 shares of SIRI go to 760 and LM is hoping that the the small holding retail investor dumps his shares so an institution will buy them. Institutional holders own 83% of the A shares and LM wants to get rid of you crazies ASAP and I don't blame them.
It was just last month that Spencer was explaining the LM deal to you. In his mind it was a ratio deal and the price of the C shares could be tracked as a per cent of LMCA. Here is what he told you. The ratio of current shares was o.76% and to figure out the value of the C shares could be computed by multiplying the A share value by .02533. The Duke has told you for weeks that Spencer doesn't understand the transaction. So lets see how that valuation fraction has worked out for Spencer. On 1/3 when the deal was announced LMCA was 146.33 and SIRI was at $3.57. On Friday LMCA was at 137.16 and SIRI was at 3.61. So how did SIRI go up when LMCA went down? The arb is over. The answer is that there really is no connection between the A share price and SIRI's price because if the deal is struck the C shares will be priced differently than the A shares.
Yesterday, Spencer wrote an article entitled LM Speaks Out About Charter and SIRI in which he basically junked the 02533 A price ratio valuation. Here is what he said. "At the time the proposed deal was announced it valued SIRI at 3.68. Because this is a stock swap the focus should be on what portion of the C shares will be held rather on the price itself". It would have been nice if you understood there was no relationship in price between the A & C ahares from the beginning and that the A shares were being shorted as a PROXY for the C shares. If Spencer had read The Duke's analysis on 1/5 you would have known this and not made a fool of yourself for two months.
If you read the Duke's bio that Faulkner posted this week you now know that The Duke is a member of the DC and VA bar. What was left out of that bio is that The Duke is also admitted to practice before The US Tax Court over in DC. From this you should surmise that The Duke knows a little bit about an area of the law known as Mergers, Acquisitions and Reorganizations (MAR).
It should have been apparent to all of you a long time ago that I am an attorney who specializes in cutting edge issues tax, credit and collateral. I would not be able to write about these issues if I didn't do this for a living. My knowledge gives me a unique perspective into what is happening in SIRI because it isn't the kind of knowledge that the average investor will ever acquire during his lifetime. This knowledge also allows me to tell you with absolute certainty that people like Spencer, Faulkner and CN do not understand the intricate issues that I write about on a regular basis.
Let me correct a couple of things since Faulkner always gets things wrong. I don't live in a condo.I happen to personally own the entire office building that houses my law firm and six other tenants. It is a condo and if Mr Faulkner knew how to do a google search he would have seen it.
Second, I go by H. David Soble and haven't used Harold since I left for college.
Finally, don't worry about retaining my services. There is no one on this board that would be require the type of service that I provide and you couldn't afford the hourly fee.
If you are interested in reading The Duke, you are welcome to do so. If you are not interested, then simply skip my Sunday posts.
The end of the month is on FRI and that ushers in cheaters weekend in the auto business. Never heard of cheaters weekend? Here is how it works. When a month ends on FRI the results of the month are not reported until Mon. So let's say you are an auto dealer who is short your quota in Feb. What do you do? Backdate a few contracts from next weekend to Feb 28 to solve your problem. Forget March, it will take care of itself...maybe. In honor of cheaters weekend JD Powers announced that Feb auto sales will be up 5% over last year. We will know in 10 days.
I like to look at the options for some clues about the future of a stock. Two weeks ago I did a short midweek post about 30,000 plus contracts that were purchased for the $3.50 mid April SIRI call. The price paid was 18/19 implying that the buyer is expecting some news on the buyout that would take SIRI's price significantly above the 3.68 level. We are almost two months into this thing so the timing seems right to me though I anticipate another sell off in the stock before the announcement.
The buyout news has hidden what is really happening in the stock. If you go back to the period just before the announcement on 1/3, SIRI was in an intermediate downturn and was in a trading channel between 3.36 and the Santa Rally top of 3.62. The momentum of the buyout has worn off and a close look at the stock's price shows it has resumed its up and down pattern within the channel. We will see if the stock can break the channel this week but if it fails to do so, then a retest of the bottom of the channel is inevitable.
This week saw Japan announce its 4th Q GDP. The expectation was for growth of 2.8% but the real number came in at 1%. The theory of Abenomics was you use massive QE to depreciate the yen so exports would surge and the resulting profits would be spread between the exporting companies and its loyal workers. Exports did go up but the companies earning the profits forgot about sharing the profits so wages have remained stagnant. The part that Abe overlooked was that when you depreciate the yen by 25% all your imports go up by 25% or more which might be important when you are an island nation that imports food and fuel. So Japan has inflation that it wanted but stagnant wages. The imports have risen faster than the exports so Abe has turned Japan's balance of payments from a positive number to the largest negative balance of payments in the country's history. Not bad for 15 months in office. I can't wait to see what comes next.
We know the answer to that one...the consumption tax kicks in on 4/1. You might have thought that The Duke overstated its impact so let's go to the official prediction. This week Japan's govt. said the tax would cause a recession and that GDP will contract 4.1% in Q2. People actually voted for this policy. Will wonders never cease.
Market corrections occur due to black swan events or the concurrence of unintended effects of multiple bad policy decisions. In this case the foundation of the coming severe correction falls under the latter. The Fed will continue to taper which will drain liquidity from the system while Japan goes into recession. The pension/IRA money that is supporting the market will disappear and maybe we can throw in a crisis in the shadow banking system in China. Sounds like a recipe for a 20% correction in the late summer/early fall to me.
We hit 1847 this week but only backed off to 1825 rather than my predicted 1800/1810. Let's see if we hit the lower number this week before we break the record with the pension money.
I see that we have a new member of the board, some guy named Permabutt, and that the level of discourse has has materially increased in the past week. Let me begin by saying that the posts of Permabutt are extremely well written, logical, and with perfect sentence structure. His topic de jour is that you would benefit from voting Yes for the C shares and that JM will make you wealthy. I will be voting against the proposal so I thought it would be appropriate to discuss my reasons.
LM has been in control of SIRI for over a year and has influenced the stock for over two years. Let's see what it has done. First, it sought control of SIRI by buying another 10% of the stock to gain control. It could have made a tender offer for the stock but instead chose to acquire the interest through forward contracts (FC). It is widely accepted that the FC's saved LM hundreds of millions in comparison to the forward contract approach. The money LM saved would have enhanced shareholder value. So was the use of the FC just a shrewd decision or something that deprived you of value. Depends on which side of the deal you resided. The second thing LM did through the SIRI board was to institute a buyback. People said that this increased shareholder value by reducing share count. At the same time, it meant that LM would recover part of the 1.7B it invested in SIRI without losing control. If carried to its logical conclusion, the BB was done so that LM would have recovered its entire investment in SIRI and control the company for free. I don't see how saddling the company with billions in debt to do the BB materially helped the shareholders. Finally, SIRI did the Agero purchase. This may be important in the future but the development of Agero will be costly. The connected car is the future of radio but LM plans to use SIRI's FCF and leverage to enhance its future rather than prepare SIRI for future challenges. Maybe JM will make you money, but he doesn't have SIRI's best interests at heart.
The fundamentals for SIRI continue to deteriorate. I began to warn you about an inventory build up back on dealer's lots back in late Aug and again in Oct. The problem has now gone mainstream. On 2/12 Reuters published an article entitled "US Car Sales Slowdown Triggers Discount Wars". The first sentence read, "A one-two punch of bad weather and over production has ignited a price war among US car dealers and manufactures." The YOY decline in auto sales will be repeated in Feb.and a miss in the 3 cent SIRI profit projection is now assured. The takeaway from the CC was that SIRI has gone from a 67% penetration rate to 70% but that will simply slow the sub rate decline. 75% penetration on the horizon. Agero will produce profits sooner than expected but that doesn't impact the negative drag in Q1 or 2. If you don't mind the low 3's or worse than hold thru the problems.
I told you that I hated SIRI last week and I dumped my gazillion share at $3.60 on WEN. Let me assure you I never get the bottom or the top of a move. On the rare occasion when that happens it means I have made a mistake. I figured that was it for SIRI for a while. On the other hand, The Duke has always been a sucker for stocks that open down 5% for no reason. I was dumb enough to think SIRI would be UP after the TWC announcement on THUR. Shows how much I know. When SIRI was trading at 3.47/3.48 shortly after 8 AM I threw in a bid for 150,000 shares at 3.41. I did not expect to get a fill. Big surprise at 8:48. This was a pure gap fill play and the stock was dumped a little before 1PM on Fri at 3.55. Duke's rule 2 in action. I'm not trying to impress you by mentioning the share number. My long time readers know I never have mentioned the shares I trade. I did it this time merely to show you that I do have skin in the game and that 150,000 shares was a small play. Everyone has a different budget and level of comfort. I expect SIRI to have another big move within 2 weeks. Play opposite the move. Gap fill.
I predicted a vicious rally in the market but this rally just proves that the market is not healthy. On the DOW we hit an interday low of 15340 on 2/5. Seven sessions later we hit an interday high of 16175. 835 points in 7 sessions. The S&P: 1737 low, 1841 high over the same period. The fuel for the rally is the pension money and the late money that wanted to buy the big dip when it occurred. They got their wish. It is also a signal that trouble is coming. This week we should see a pullback to the 1804-1810 level before the upward level and new all time highs are reached. This pattern will be seen as constructive but it just sets the stage for the complacency that always precedes every major correction.
I thought I should deal with Duke's Third Rule of Investing since it is foreign to most of you. Investors can not imagine being out of the market but great wealth is built by avoiding what is about to occur. You will also see that being out of the market is not an absolute. I have three stock accounts. A retirement account, a regular account where I hold core positions and my trading account. Duke has always preached holding core positions in the stocks you trade since you know these stocks better than the rest of the market. We have had a five year bull run but I don't like what I am seeing in the market in the short or intermediate term. For me that means liquidating the stocks in my retirement account and in my core position account and going to worthless cash. This process started in Q4 and will end before 4/1. I am not suggesting that the market will crash on TU but the risk/reward profile of the market is not appealing to me. I am not suggesting that you follow my lead. The market may well move to 2100. It will just do it without The Duke.
My trading account is a totally different matter. Since I have no problem shorting, I harbor the ludicrous belief that I will be on the right side of the transaction as the carnage unfolds. Time will tell. SIRI in Part 4.
I have some new readers and I have been throwing around some concepts that need explaining. There is also a NEW RULE so old readers should not skip this. Duke's First Rule. No one ever went BK taking a profit. Whenever you trade you are going to make mistakes. Buy too high, sell too low, buy too early, sell too late. I have made them all. The only thing that matters is that you made a profit. String together enough profits and everything else will take care of itself. Rule Two. Gaps always fill. It is just the nature of the system. Play gap fills and you will retire. Show me a gap like the $2.90-94 that hasn't filled and my response is simple...give it time. Rule Three (New). YOU DO NOT HAVE TO BE IN THE STOCK MARKET EVERY DAY OF YOUR LIFE. You have to know when to fold them and that day is fast approaching.
I have referred to 3/15 and 4/15 as crucial days for the market. The tax code plays a massive, little understood impact on the market. The deadline for corporation filings is 3/15 and personal returns are 4/15. Small and medium sized corporations wait until the end of the year to see what their net profit is after the rules are applied. Doctors, dentists, lawyers are considered "personal service corps" and are taxed at a flat rate of 35%. Too avoid this they dump the net profits into pensions plans that go into the market between 2/15 and 3/15. These hundred of billions support the market. The process is repeated between 4/1 & 4/15 with IRA money and self employed funding SEP IRA accounts. Hence, no crash and Duke's vicious move higher prediction.
The 1929 crash scenario. This is a chart floated by an analyst that allegedly shows the market is following the same EXACT pattern that it did before the 1929 crash. All the money managers debunked the graph this week. The graph shows that a crash is likely after this rally. Is the graph correct. Yes and no. The decline will come later this year. No crash, but we are headed for a bear market correction.
The TWC deal collapsed for Charter, but the LM offer for SIRI is still on the table. The game isn't over as you have assumed, so let's see why Charter lost and what JM's next move will be. There were really TWO DEALS that everyone assumed were linked. First Charter would acquire TWC in a partial stock transaction. This would have diluted LM's 27% share in Charter, so LM planned to acquire more Charter to keep its stake at 27%. SIRI's borrowing power would have been used to fund part of the deal but it was never clear which part.
Two weeks ago a rumor was floated that Charter would raise its bid to "the low 140's" but it never happened. There are two possible explanations. First maybe the TWC shareholders said that would not be enough but the more likely scenario is the one I gave you...the market for leveraged products has dried up and Charter couldn't get financing. That is why Charter went the route of a hostile takeover with its own slate of BOD members.
At this point Comcast realized how weak Charter really was from a financial point of view. Some number near 132.50 was as high as they could go. At best the proxy fight and offer process would delay the takeover 4 months. The regulatory review would take 4 months so maybe the deal doesn't get done till next year. Too big a gamble. TWC wanted Comcast all along and Comcast was willing to pay. Comcast had worried about the antitrust issue but they decided that was one they could win rather than hoping Charter would win
So let's see where this leaves JM...fuming mad. He came up with the deal, shared its intricacies with Comcast so they would join him, thought he had them on his side and now they have stolen his prize. He has also had his image tarnished and people are laughing at him. That makes him dangerous for SIRI. A rationale person would walk away from SIRI deal but I don't see JM doing that at this point. Something will happen to restore SIRI's price to a higher level or restore JM's reputation. It is not over
Sorry Cat, you have The Duke mixed up with someone else. The Duke would never invest with JM and I rue the day he git involved in SIRI.
I actually write the stuff on Sunday morning. Things can change at the last minute. Thanks for the praise.
You are correct. SIRI has been a proxy for the S&P unless you traded it a million times.