So what happens next in this little story. It is all fairly predictable. In Q3 Frear made the point that the average price that SIRI paid was 3.49. Now it spent $4.03 on 96M shares. That probably raised the average price to 3.52 or 3.53. JM is comfortable and now that SIRI is below $3.50 he is happy just to acquire the shares at a leisurely pace again. Frear said that the company would do a BB at slightly more or less 2B a year. With FCF set to rise to 1.4B, SIRI could do 1.8B a year and only use up $400M a year from the revolver. The revolver has 1.41M left in it so that is 3.5 years from now. On the other hand, JM doesn't want a total collapse in SIRI so expect the company to attempt to cushion the decline on the way down. Everything is pointing to 2019 as the year of decision. If you need a little more confirmation, Frear said SIRI would be using 200M in cap ex funds this year to design the next generation of sats that would be placed in orbit in 2018 & 2019. Who told you about the 2016 capex costs? Any idea why the next generation of Sats is so important to JM's plan or why he can't execute the game plan until 2019.
In the macro environment, the S&P topped out at 1947, below the 1973 we predicted. There is a 25% chance we rally back to 1973 and a 75% chance we fall below 1812. Oct. is a long way off. SIRI didn't rally after the CC so i didn't get a chance to short it. Two weeks ago i told you SIRI was headed to $3.34. We hit 3.40 on FRI.
I assumed we would rally off that number. I no longer assume that. Things are getting ugly quickly. We have a better chance to rally off of $3.09 which is where we are headed.
I never got to JM's plan. Maybe next week. Has the minnow gone MIA? The Broncos need to win the turnover battle by 2 to stay competitive. Enjoy the Super Bowl.
Did it ever dawn on any of you brilliant people that The Duke may have advised some companies on the legalities of a BB so I know how these things unfold? Nope, never crossed your mind. You all went to Harvard Law and know more this stuff than me or you all read Wrongway and believe.
So let's understand the subtle way JM knocked the underpinning out from under the stock and why it sold off so much. First, it said that once it broke $4.00 it no longer considered it a bargain so it cut back purchases. The code to the HF was that if you believe all those analysts who saying SIRI is going to go to $5.00 you are as dumb as the people on SA because I offered $3.68 for SIRI and I'm not paying more than that even if I am using other people's money. This notion was only reinforced when Frear said, once the price fell below $4.00 we stepped our purchases in Jan. to $200M. Now if you are a HF who was holding for $5.00 and management just told you it ain't happening, what would you do? Three of the last four days saw volume over 50M shares. But then JM decided to turn the knife on the hedge funds. Freer said they barely spent any money out of the revolver in the Q, that leverage remained at 3.3X and he saw no reason to go to 4X just to BB shares. Translation, we have other uses for our funds so BB will be restricted to FCF unless a real bargain develops so the current $3.72 is a good price to get out because this is about as good as it is going to get. Then he followed it up by saying that the BB will probably go on past the time when the NOL's are used up which is almost two years from now. Translation, you guys ain't seeing $4.00 again for two years so if you are looking for a dead money stock you got one until 2019 so sell today for what you can get or stick around for the long haul. The HF got the message and dumped which was JM's plan all along. As I told you, the only way JM could reach 80% was to get the long term HF to dump their shares which is what he did.
But it gets worse. The company boasted that it repurchased 500M shares this year. The repurchase should have raised the EPS. It is called financial engineering. If you earn the same amount of money but reduce the number of shares, your EPS magically increases. That equation seems to work for everybody but SIRI. But here is the real kicker. The analysts assumed 12 cents, then 11, then 10 and got 9. This years EPS is 15. Obviously, that is some kind of inside joke so expect those estimates to be cut sometime soon.
But the real surprise was the amount spent on BB and the number of shares purchased. SIRI only spent $396M to buy 92M shares. The average cost was 4.03 per share which based on a 3.44 closing price means the company wasted $50M of stockholder money last Q. This was about what I predicted, though I was basing the estimate on a SIRI having bought back more shares. The good news was that SIRI didn't use up too much of the revolver and basically used FCF to repurchase the shares...a good sign but one which caused the sell off.
So let's try and put this all together, understand what JM's plan for the future and why SIRI had such a violent sell off. Let me remind you of three things I told you. First, when I predicted that SIRI would go past $4.00 before the Q3 CC in Oct. I told you that this was being done so the insiders and HF could dump their shares. Every time an insider dumped shares I reported it and you said Duke don't know nothing. I also told you to forget about $5.00 because the company was NOT REQUIRED TO BB SHARES and they would simply stop buying and let the price fall. Ditto Duke don't know nothing. Then I told you that the only way JM could get to 80% was to get the long term HF to dump their shares which meant bad numbers. Duke don't know nothing. Enjoying $3.42? It is going to get worse. Back in June, 2014 I explained in detail how BB actually work. Remember climbing the ladder and letting the air out of the balloon? Everything happened as i said
This week JM revealed his long term plan for SIRI and the stock tanked. I know, you didn't see it and you don't understand it but it was right there in plain sight. Don't feel bad no one else saw it either, otherwise they would have written about it before I got the chance. BTW, JM never said a word. We are knee deep in the political season so all the talking was done by JM's surrogates and as usual it was hidden in plain sight. Where was it disclosed? In the CC, but as usual, it was disguised in Wall Street speak that no one understood. So we will try and decode it all for you once we look at the Q results but here is the upshot. The company touched on all the themes I have been writing about for the past few months and the HF didn't like it. Hence the sell off. But like all fairy tales it has a happy ending...maybe, if all the pieces fall together.
So let's look at the Q. It was dreadful. The company continued to increase it penetration rate which went up from 77% to 78.2%. This is what lead to the increase in subs and to a slightly higher churn. The company said to expect penetration to average in the mid seventies but they said the same thing when the rate was at 67. So ignore what they said. The rate is heading into the mid 80's as SIRI will need to increase penetration to offset the increasing deactivations.
EPS was again 3 cents but actually fell from Q3. Let's understand exactly what happened. On a Q v. Q basis revenue went UP but income went DOWN. The only reason SIRI hit the 3 cent mark was that it income was above 2.5 cents and they were able to round up. So how bad was EPS for the year. When the year started consensus was 12 cents. It finished at 9 cents same as last year. It gets worse. The analysts were projecting 10 cents for the year going into the CC because they thought income would be 3.2 cents rounded down to 3. Instead they got 2.6 rounded up to 3. Big difference, and you thought it was a great Q.
Today's post was particularly depressing so I thought that we should turn to the blogosphere to lighten up the mood. That is a nice way of saying we are checking in with the Three Stooges for some laughs. Let's start with Rick from MF. Back on 1/15, Benzinger did a story on SIRI where they reported that a securities firm named BMO had just upgraded SIRI to buy. It flashed across the PR wire and our ever vigilant Rick whipped out a story entitled This Just In. BMO Turns Bullish on SXM. You can find his article on this website. Great, right. Anyway, Rick isn't the brightest bulb in the world or he would have said, who is BMO? Five minutes after the initial release, Benzinger sent out a correction saying BMO had upgraded Sirius XM Canada, not the SIRI you invested in. Rick never caught the correction and the story is a testament to his genius.
Back on 12/23/15, Stephen J. Wrongway Published an article called SIRI: An Exceptional Opportunity for 2016. It was originally published in the fee only section of SA and turned up in the free section this week. SIRI was comfortably over $4.00 on 12/23 and Wrongway predicted a 25 to 50% appreciation in the stock for 2016. That is why he is Wrongway. He said don't worry about a decline in new car sales because used car subs will keep SIRI growing forever. Also, don't worry about SIRI not being able to borrow to keep the BB because the FCF will grow forever. He never mentioned the NOL being used up in 2017/18 and SIRI's FCF plummeting by 35% because he thinks the NOL's are inexhaustible. But if you really want a hoot, in the disclosure the eternally optimist says he owns various options and may begin shorting SIRI against those options. Read this stuff, it will cheer you up. In fact this stuff is so good for a laugh, even The Duke couldn't make it up.
Bottom line, if I am correct about what is going to happen we are staring at a 300 point drop in the S&P, starting fairly soon. If I'm wrong, we can all have a big laugh about it and I'm sure you will never let me forget.
Let's move on to SIRI. Last week I predicted that SIRI would hit 3.83/3.85 during the current upturn. No one should have expected that before the CC. There is an outside, very outside, possibility of 3.91. The high should come this week after the CC on TU or WEN. For planning purposes this will be the high you are likely to see in SIRI for a significant period of time unless you think I have this whole bear market thing wrong.
Last week I mentioned two special circumstances. We just dealt with the CC. The other was to look for JM to support the stock at 3.35 and 3.65 because of margin calls. On three separate occasions the stock closed near 3.65. Twice the stock rallied to 3.73 and once to $3.69, evidence that the $3.65 special circumstance was working. If we get the 300 point sell off in the market, here is what you are looking at in SIRI. SIRI fell .75 from 4.20 to 3.45. If you take the .75 and multiply by 1.382 and 1.5, you get 1.04 and 1.13. That gives you bottoms of 3.16 and 3.07 if we get the kind of sell off I'm predicting. JM and the BB slow the rate of decline down but be powerless to stop it.
I expect a rally on TU because the HFs need to dump their remaining shares before the decline. If we get the rally, you should view it as the second coming of HS and act appropriately.
OK, a few more tips on trading. I did four trades this week. Two on the long side and two on the short side. I'm an equal opportunity player. They were all scalping operations. My goal is to make 2-4 cents per trade. I look for the market to be up big or down big. I make sure SIRI is moving in the same direction and then did my buy or sell before 10:30. I had a set profit goal in mind and and made sure I was out by days end. SIRi moves 3%. Get .75% and be happy.
There are some more points I want to make about trading the bear market. Think of last weeks post as the introduction to the course and today as the intermediate lesson. But before I get there, I want to deal with Flabby and the trends. If you remember last week, I pointed out that we had had a 322 point decline and Flabby was predicting the following rebounds based on 38.2%, 50% and 61.8%, 1935, 1973 and 2011. My prediction was we would see 1973. Things were looking pretty bad for Flabby and The Duke through Thur but Kuroda came through for a 47 point rally on FRI and we hit 1940. We are past the 38.2 level with 1973 in sight. The market has slowed down somewhat giving me a chance to get ahead of it. I expect the current rally to be over within the next two weeks and for the S&P to hit 1973 but not make it to 2011. The current rally will mark the final chance to distribute shares at a somewhat reasonable price before the bear market kicks into high gear. The rally will mark the end of the Denial phase of the market and the plunge into the bear market will be breath taking. Specifically, the sell off is likely to look like a normal correction to the advance that just ended but is going to pick up steam as we break 1900. Once we break the old low of 1812, look for some waterfall drops to bring us into bear market territory and an unexpected end to the drop. Just before the drop ends, we will enter the ACCEPTANCE phase of the bear market. Flabby gives us a clue where that bottom will come and we will get a better read on it once the rally ends. But for now let's see what he is saying.
The initial thrust down was 322 points. If we multiply that number by 1.236, 1.382 and 1.5, we get the following numbers, 398, 445 and 498. Now subtract those from 2134 and you get 1736, 1689 and 1636. Those are the possible endings for the next leg down. I am throwing away 1736 because the bear market isn't official until we break 1707, so 1689 is the likely target.
Conference Calls are a lot like campsite revivals. Every thirteen weeks the faithful gather to listen to the preacher (CEO) spin his web of half truths and slanted facts so they can have their faith in the company's stock renewed. It is a glorious spectacle to behold. Analysts show up by phone to throw softball question to the CEO and receive the latest company propaganda in return. Ultimately, everyone agrees that the entire world is rapt in joy and happiness, things are only going to get better from here on out. Finally, they finish up with a few incantations and adjourn, promising to meet again in thirteen weeks to see if they can trick the stockholders yet again. It usually works. When it is all over, some guy like The Duke pours over the statements that have filed with the SEC and says things aren't as great as the company says, but his warnings are lost in the snow storm of the joyous propaganda.
Let me give you an example of what is going to happen on Tuesday. Freer is going to stand up there and say with a straight face that the BB was successful again. We repurchased 140 odd million shares for 570M and this continued to our promise to return value to the shareholders. The The Duke will come along next Sunday and tell you that these bozo's spent an average of $4.05 for the shares which means they already LOST $50M in shareholder money, they ran up 300M more in debt and added 21M more in interest expense. It is a grand spectacle
The company has already released most of the 4th Q numbers and projections for next year except for EPS so on the surface things look meaningless unless they unveil SXM-17 or is it 18. If you are looking for something meaningful look at the filings. Focus on these factors. 1. Compare the self pay sub adds this year to Q4 last year. 2. Check out how much more they borrowed this Q to fund the ill fated BB. 3. See if they spent more than the usual $550M on the BB. 4. See how much of the NOL was used or wait till Sun and I will do it.
Let's start with the overall market. We are working with our 1468 point move and a 322 point correction. The 38.2%, 50% and 61.8% retracement of the move gives us 123, 161 and 199 points. If you add these numbers to 1812, you get 1935, 1973 and 2011. This implies that the current rally still has some time to go and could carry us through some or all of this week. We could also open tomorrow at 1935 and drop from there. Right now I think 1973 is most likely but why guess. The bulk of the rally is over so forget playing it unless you already own the SPY. What about SIRI? $3.45 clearly was the interim low and kudos to LR who covered at 3.46. I got 3.51 and will live with it. I also went long at 3.51 but dumped that at $3.75. Why? Let's see what Flabby says. We had a 75 cent decline from 4.20 to 3.45. One way to calculate Flabby is to take 38.2% of 75 which gives you 29 or .5 which gives you 38. Add these to 3.45 and you get 3.74 and 3.83 respectively. It is possible that the rally in SIRI is over at 3.77 or it could extend to 3.83/3.85. The weekend was coming up and I was happy with 3.75 so it was exit time for The Duke. Here is another way to calculate Flabby. The short term base is .89. Take this times .382 and .5 and you get 34 and 45. Add this to 3.45 and you get tops of 3.79 and 3.9. Take 1.22 x.382 and you get 46 or 3.91. $3.83 is probably the right one but the key is to get out early and get ready to short.
SIRI has two special situations that impact the trade. 2/2 is the CC so it might give us a HS type short. 3.65 and 3.35 are collateral calls for JM so expect those to be support points in the future. Hence my 3.34 call.
Finally, the world is being impacted by major trends. Commodity currencies are blowing up. See Russia, Canada and Brazil. US banks have massive NPL's from the energy sector which are impairing capital. Europe is being torn apart by the refugee crisis. Italian banks and China banks have massive NPL's. If one of these implodes, 1574 is buried.
Trading a bear market is fairly simple. The overriding rule is that Flabby rules. There are definable support and resistance levels on the way down which can be calculated. The same is true for the tops in the rip your face off rallies. You simply have to be aware of where these level are for BOTH THE OVERALL MARKET AND THE STOCK YOU ARE TRADING. The overall market determines when we are going to fall or rally and most stocks just follow the pattern. The key is to calculate the flabby point for your stock and ride it up or down to that point before you get on or off and switch to the opposite side. The key for SIRI traders is to know that SIRI tends to track the S&P almost perfectly so it will be our guide. One caveat. There is something called a special situation which can impact a stock. Lastly, and this is the key, on the way down, we don't want to anticipate that support will hold. We want to be late to the party and be sure that support actually DID HOLD. We give up a few pennies for safety.
The market got a little ahead of me. I was hoping the rally wouldn't happen until this week so we could be prospective but the market is the market so lets look at what happened, why it happened and get ready for the next leg down.
Overall, the market went from 666 to 2134 or a gain of 1468 points. A perfect drop of 23.6% of the gain would have taken us to about 1800 or 334 points. Life ain't perfect so the drop stopped at 1812 which is close enough. At the same time SIRI was descending to the 61.8% retracement of it 1.22 intermediate gain or $3.45 which I gave to you last week. The two points hit almost perfectly and hence the current rally. The way to have played it was not to anticipate anything. We aren't heroes. But once it started, you buy the SPY, cover your SIRI short and go long in the low $3.50's. I know, great advice in retrospect.
But let's look to the future.
My theory is that bear markets unfold in three distinct stages. The first stage is called denial where investors cling to the old notion that the bull is still alive and that this is just another in a series of BTD opportunities. It worked for seven years so why change now. The investment community writes all sorts of feel good articles about the bottom being in, this is short term volatility, no one can time the market, the US economy is strong and you need a long term horizon. They do this while they are selling to buyers on every sucker rally. The second stage is acceptance. That comes when the market enters official bear territory and if you are long, you realize that you have been duped by the WS hype machine. At this point you are told that the worst is over so you might as well hold on. Finally as this thing drags on longer than the initial 4-6 month period comes capitulation where investors stop opening their monthly statement, make jokes or plot the demise of their broker. The really dumb people dump at the bottom and I certainly don't want any of my B&H buddies doing that so just hang on. Clearly, we are still in the denial stage and we in the first of the rip you face off rallies to bolster the defiant bulls.
One last bit of background before we get there. I play both sides of the market which means I will be going long at perceived bottoms and short at tops. Inherently, if you go long at a bottom and miss it, your capital is tied up for the duration of the bear market, you take a loss or hope the next rip your face off rally gets you out even.Talk with the minnow, he is the expert on this problem. The big mental change for most of you is recognizing that the trend change in the market makes shorting the safer bet and is the one that most pros are doing at the moment.
There are a couple of Wall Street rubrics attached to all bear markets. The first is that the market takes the escalator up in a bull market but the elevator down in a bear market. This was proved this last three weeks. The theory is that on the way up, the market seems to honor support and resistance points creating a stair step look. On the way down, people are far less likely to catch a falling knife so support levels are less likely to hold and the market shots to some unknown bottom. That was the past three weeks.
The second rubric is that bear markets bankrupts both bulls and bears. The bull part is obvious. Bears tend to get killed because they short at bad levels and then get caught in a rip your face off rally that has them second guessing whether the bear market is over. They inevitably cover just as the market turns back down and manage to repeat the process over and over, going BK in the process.
Bear markets are some of the most profitable to trade because of the giant up and down moves that occur in them. Catch just a couple of them with enough shares and you can make your year. Miss and you lose your shirt. We are going to try and give you some rules to make your year but let me be clear about one thing. If you are a B&H guy, just ride it out. This is not the time to become a trader on the fly.
So let's start with a little background. First, we are not in a bear market yet. Officially, that won't happen until we break 1707 but there has been enough technical damage to the market for us to trade like its a bear market. Second, assuming that we are headed to an official bear market you need to have some predetermined markers where you think the market COULD turn into a bull market. As we approach those markers we want to cover and go neutral because the rally off the bottom will be vicious. As we sit here today, I expect the bottom to be 1574 and for this to be a typical 9 month bear ending in Oct.
Lastly, Lipper reported that 500 BILLION had been withdrawn from the SPY ETF. As I explained to you on 12/13, the manager of the ETF had to sell 100 BILLION dollars of the stocks that make up the S&P 500 each day (read SIRI) just to meet withdrawals. This explains the increase in volume in the stock. The question you should be asking is why the stock didn't fall further? Answer, the BB. Here is the problem. SIRI can buy more stock on a daily basis and halt the decline. But that uses up the available funds more quickly and when they are gone they can't be replaced. No one call sell a junk bond today. You want the worst case scenario. The company keeps spending 100M a month over and above FCF. By late summer, SIRI's debt exceeds 6B (projected to happen in July) auto sales go south and EBITDA drops to a projected 1.5B. Volcanic explosion. S&P cuts SIRI bonds to junk and lowers its rating on the stock. 15% decline in a day. Debt kills and you are cheering the BB.
I read your comments and I have no idea what you are doing. The minnow is trying to buy the dips. Ohno, I hope you are storing his posts. We will probably be laughing about them for years. Frank you covered? This is a market where smart investors are no longer buying the dip. They are shorting the rip. You continue to hold your shorts until the Fed acts. Cashin thinks it will happen soon. More QE even though it doesn't work to save the market. My view is that Yellen won't act until we are much lower. Maybe, I should write a post on how you trade a bear market. For the B&H crowd, just hold.
I know, you are still clinging to the quaint notion that one of the Three Stooges will write something worth reading or someone else will cover this.You got about as much chance of that occurring as you did at winning the Power Ball Lottery. So you are stuck with me. It was a bad week for the auto industry although it slipped by all of you unnoticed.
First, a MS analyst, Adam Jonas, stated that the auto industry was in the biggest credit bubble ever and it was about to pop. He suggested that investors start monitoring auto repayment histories and changes in credit availability as initial signs to the coming downturn in auto sales. I will translate the gibberish for you. Subprime loans are about to implode, reducing their availability and thus auto sales will pull a Wiley Coyote.
Wait it gets better. Fitch then put all the auto manufacturers and suppliers (SIRI is an auto part) on watch for possible downgrade because of surging inventories and the possibility of declining credit availability. More code words.
Hey, I'm just getting started here. Then two Illinois Fiat Chrysler dealers sued Fiat under the Federal racketeering statute (RICO) alleging that Fiat tried to bribe them into filing false sales reports to inflate sales. The company allegedly offered them cash and more deliveries of its fastest selling models to commit fraud. This brings into question all those great sales numbers Fiat has been reporting.
Then to top off the week Deutsche Bank announced an internal investigation into whether its brokers had lied to auto subprime bond buyers about the demand for the bonds in order to keep the interest rate low and to stimulate demand. The investigation was done under the SEC self policing policy where the bank hopes to mitigate the fine.. Lawyers for the bond buyers should be working this weekend to crank out the lawsuits. The problem for the auto industry is a negative feedback loop. Fraud means no one will buy the bonds and subprime loans will disappear.
I thought that it would be appropriate to give you a range of potential lows in the stock that we are likely to see if my prediction of 1574 on the S&P comes to fruition. A quick note. The software program is often set a couple of cents higher or lower than the Flabby number to throw you off. Here is an example. The previous high in SIRI in 2013 was 4.18. It then corrected down to 2.98 in Mar/Apr 2014. If you understood Flabby and that one of the prime numbers was 1, you would have known that a possible ending point for the uptrend was 4.18 plus or minus .02. I could have told you then, but since The Duke don't know nothing you wouldn't have listened anyway. Besides, it is fun watching you guys lose money and saying what is going on, this is ludicrous.
So lets get back to the exercise. Using the short term base SIRI has already exceeded a .382, .5 and .618 decline. A full 1% decline takes is to 3.31, a 1.382% decline is 2.98 (notice how this brings us to the 2014 low), 1.5% brings us to 2.86 and 1.618 gives us 2.76, which is The Duke's guess. You thought I just pulled these numbers out of thin air.
Now lets go to the 1.22 intermediate base. A 50% decline brings us to 3.59, (what was Fri's low?), 61.8 brings us to 3.45 (check out the ask on the SIRI home page on this site) 1 would give us 2.98 and 1.382 gives us 2.51.
If you want some really bad numbers look at the long term where a 38.2% means 2.63 and .5 is 2.15. You get a range of 2.51 to 2.76 if the S&P declines to 1574. As long as you are prepared for this possibility, then by all means hold on to your stock. My prediction for SIRI's next stop is $3.34.
Most of you noticed that SIRI didn't react this week to the upside when the market rallied but went down when the market continued it correction below the 1867 Aug. low. LR correctly pointed out that F, GM, Fiat, AN and Carmax also did not participate. Nice pickup LR. Stole my point. Got any idea why they didn't participate?
In my 8/2/15 post entitled Pattern Recognition, I told you the story of my chance meeting with a member of the Nevada Gaming commission at Dulles Airport. I informed her of a pattern defect in the software that the Commission had recently approved for on-line poker in Nevada and then teased you by saying I would one day explain to you how software determines the price of SIRI. I have never gotten around to writing that post but today's post will give you a backdoor look at what that post would tell you.
By now all of you should know that Flabby stands for the Fibonacci math numbers that seem to rule much of advanced math thinking. The fib numbers rule much of the investment world as they form the basis for support and resistance levels. The problem that most people fail to comprehend is that there are THREE SETS of Fib numbers and the software that controls various stocks is continually switching back and forth BETWEEN the three sets so that you are never sure which one is in play. If they only used one set, then everyone would be able to figure it out and you would have known to sell at 4.18. Perish the thought. I will explain later.
In order to understand where SIRI is headed, if the Fed does not reintroduce QE. I thought we would do a quick primer on Flabby. Flabby has some prime numbers of 38.2, .5, 61.8 and 1. It also has some minor numbers of 23.6 and 78.6. These numbers are applied as percentages to a BASE COMPUTATION and the are subtracted from a top or added to a bottom. Most of you know the drill.
What you may not know is that in the world of stocks, the Fib numbers are applied to a short term base number, an intermediate term base and a long term base number. To cut to the chase, the short term base in SIRI is .89, the intermediate is 1.22 and the long term is 4.11. You get these numbers as follows: The top in SIRI was 4.20. The low for the year was 3.31, .89 difference. The intermediate term is computed off the 2014 low of 2.98. L. term off .09 in 2009.
We have been down seven days in a row. It is not hard to imagine that a counter trend rally will begin this week but it will be short lived. I expect the Aug. low of 1867 to be broken and for selling to intensify once that occurs. We are a long way from a bear market. A 20% decline off of the 2134 top is 417 points or about 1717. Unfortunately, I don't see that as the bottom. The first stop on the great unwind involves our old friend Flabby.
The bottom of the market in 3/2009 was 666, the top in 5/15 was 2134. The difference (2134 minus 666) is 1468. a 38.2% retracement from the top implies a 1574 level on the S&P. You should note that I'm not predicting that this is the bottom. It is merely a number that I believe we will hit at some point during the bear market.
Last month I told you that SIRI would gradually decline to 3.68. The stock had been above $4.00 for seven weeks. The prediction was met by catcalls from the usual suspects. SIRI dropped from 4.07 on 12/31 to 3.81 on Fri with a low in the after market of 3.78. The prediction of $3.68 doesn't seem so far fetched. $3.68 is just a way station. SIRI's high was 4.20. Its low was 9 cents. If you take $4.11 x .382 you get 1.57 which implies a low of 2.63. I will let Flabby speak for himself.
My long time readers know that I have never waivered from the prediction that SIRI will close the gap that persists at $2.90 and will bottom at 2.74 to 2.76. It should make for an interesting 2016
If you want to understand what happened this week in the market, I suggest you go back to my 12/13 post entitled The Lessons of History. It dealt with the Chinese banking system, a lack of liquidity in the markets and the transition mechanisms that cause stocks seeming unrelated to the Chinese banking problem to be sold off in concert with other stocks in the market. You saw that in SIRI this week.
China is an emerging market with a primitive banking system. The PBOC is in over its head. It is trying to create a Western style market economy using Communist principals and will likely fail. Presently, it is trying to reflate the economy by devaluing the yuan. This is being done to drive trade and cover up massive NPL's in the banking system. That would be the correct strategy in a vacuum. At the same time the PBOC is trying to stop capital outflows that are eating into it foreign reserves. Devaluation causes capital flows to intensify. The policy of devaluation is self defeating. It will only intensify the crisis and a large over the weekend will send the world's banking system into catatonic failure. The problem is that the PBOC doesn't understand any of this but then neither do you. QE brought complacency and leverage. In 2016 you will hear terms like currency crisis, carry trade unwinds, dollar shortages and problems in derivatives and credit default swaps.
Technically, we are still in the market pattern that persisted in 2015. We had a 6% decline last week but are above the Aug. low of 1867. The bulls still believe in a stick save. The market says something different. Last week people who understood the implication of the code words I used in the last paragraph were selling. They understand that 40% of the world's markets are already in bear markets and markets work in parallel.They also know that the Dow Transportation Index is down 25% and Dow Theory predicts that the Industrials will follow.
SIRI benefited from the Fed's QE in three ways. First, the Fed's policy of artificially lifting all stocks benefited SIRI like it did all stocks. That is a nice way of saying that SIRI was never worth $4.20 just as AAPL was never worth $800 (adjusted for the split). The Fed forced people into the market as the only game in town and prices didn't reflect fundamentals. Secondly, SIRI used the low interest rates to borrow for BBs that were being used to engineer higher profits and FCF rather than using profits to create a better product. Finally, the low interest rates led to splurge of auto buying that pumped up subs and profits. The unwind of these three trends began last week and are likely to have an outsized impact on SIRI's future PPS.
The second interview was with Jim Grant who writes Grants's Interest Rate Observer. His main points were that the Fed's QE program had pulled forward demand in the auto industry and unleashed a wave of sub prime borrowing that would lead to higher default rates and a reduction in auto sales in a few months. You may recognize that those same ideas have been postulated by the writer of this thread.
Finally, Mike Jackson the CEO of Auto Nation, the largest auto retailer in the country, was on CNBC and he downplayed the Dec. auto sales record. First, he revealed the auto industry used an "auto year" that included Jan. 2 & 3 in Dec. This meant that Dec. 2015 had three more selling days than Dec. 2014 so when you looked at the average number of cars sold per day, it was actually the same. Second, sales had been goosed by massive incentives from the OEMS and the dealers had to cut profits by 300 to 400 per car. Finally, inventories were higher than normal. Auto Nation dropped 10% that day. He was upbeat that sales would be 17M this year.
There were three interesting interviews on CNBC last week that tell us where the market and SIRI are headed in the near term. Richard Fisher, the former Dallas Federal Reserve governor admitted that the Fed had "front loaded" the market rally with it successive waves of QE and that now the Fed lacked any ammunition to deal with a market correction. The Bernutty theory that swept central banks around the world was that they would create a tidal wave of money that would be distributed to the banks through bond purchasers. The money would find its way into the market raising stock prices and creating a wealth effect. Ultimately, the wealth effect would cause people to spend money creating jobs and inflation and we would all live happily ever after. The plan was the work of a congenital idiot.
What the plan did was to lay the seeds for the global commodity surplus that is now destroying nations and currencies. It is all a matter of supply and demand. A concept that the Fed never understood. QE permitted bankrupt businesses to stay in business by being able to borrow at rates that were artificially low. They kept producing rather than going BK and hurt efficient producers by causing prices to be lower than they should have been. QE's low rates also enabled other inefficient producers to open mines and fields which had been too expensive to do under higher interest regimes. Fracking for oil in this country and extracting oil from tar sands in Canada only became economical because yield starved investors bought junk bonds that enabled these businesses to exist. The unintended consequences of QE is that while it sought to create inflation it was creating a surplus of production of commodities that would lead to a deflationary cycle.
The problem with levitating the market is that the Fed could only raise prices for a finite period of time. At some point you run out of bonds to buy or the dollar becomes worthless. We hit that point and without the Fed Put, the market tanked.