OK let's try this again. On 12/1 SIRI will issue 273M shares to redeem the 7% convertible bonds issued at the merger. Going forward this will cut interest expense by $35M or $8.75 per Q. This will improve profits. At the end of Q3 Siri had 5.6B shares outstanding. When these shares are issued the share count will be 5.9B. SIRI said it would close its ABS buyback on 10/1 and will have 3 months more of buyback by 12/31. Maybe the share count falls back to 5.7B by 12/31.
Some of the 273M shares have already been shorted and will be used to off set the short. Thus you should see a dip in the 12/15 SI number reported just after Christmas.
The real question is what happens to the shares delivered to the BONDHOLDERS WHO DID NOT SHORT THE STOCK. If they hold SIRI as an investment then the price will remain stable after the conversion. IF THEY DECIDE TO SELL, then you will see a potential large decline in the stock because there are few buyers other than the company. I would expect the company to be a large buyer but Federal law would prevent them from buying enough to prevent a fall.
We all just have to wait and see what happens.
WW the people who loaned the shares were the hedge funds that owned them. Lease payments are a big source of income for long term holders.
Let's see if your question makes sense. SIRI had 5.6B plus shares outstanding at the end of Q3. In three weeks it will issue another 273M shares bringing the total outstanding share count to 5.9B. Liberty owns 3.3B leaving 2.6B outstanding. Multiple 2.6B by 5.5 and you get 9.1B. You want SIRI to buy 90% of the outstanding shares. So multiply 9.1B times .9 and you get 8.1B.
Just explain to me how SIRI would be able to borrow 8.1B? It has about 1B in FCF so maybe in six to seven years it can do what you project. Unfortunately, you are living in a dream world. Take a look at what Wahoo said below. The company has bought back more than a BILLION shares and the stock is still stuck at $3.50.
Here is a hint Blue. When the stock goes back down to $3.00 buy some (average down) and when it goes to $3.50 sell the $3.00 shares and enough of your high priced shares to break even. Keep doing it until you are out even. Stop dreaming and get a plan
Isn't SIRI merely tracking the S&P as it has been for the past 6 months? We will grind higher here for a while but they can't stop a correction between now and the end of the year 38.2% of a 220 point move.
The BOJ is trying the same trick. Buy bonds, depress the value of your currency so that exports increase, the cost of imports go up and you have inflation at a manageable level. It didn't work the first time so following the definition of insanity we will do it again and expect a different result. Good Luck. On Fri the yen fell from 109.21 to 112.32 or 2.85%. There is a thought it could fall to 120 per dollar. This actually makes sense since the most recent low in the yen was 145 and the high was 75 so a 61.8% retracement would be 120. The assumption is always that buyers or shorts would show up to cover at 120. But what if the yen falls too far to fast and people don't buy it. You are looking at a potential free fall that could create a crisis in the world's banking system. Can't happen you say...except it has happened in two countries this past week.
I have told you that the strong dollar has hurt commodity prices and this has impacted the currency of resource based economies. The ruble has collapsed in recent months but how it has collapsed is troubling. When oil prices collapsed, Russia went into recession. The Russian central bank tried to prop up the ruble in Aug. by selling dollars and buying rubles. Standard procedure. It failed. In Sept. the bank bought 1300 tons of gold to prop up the currency. Standard procedure. It failed. On FRI it was expected to raise interest rates 50 basis points. It raised rates by 150 basis points. Another failure. The ruble tanked 3%. Brazil did the same but its currency fell 2.9%.
No one sees the strains in the currency markets or the banking system. At some point they will and Flabby will have his day. You don't want to be there when it happens. 2.74/2.76 is still on the table.
I noticed the speculation that even The Duke must think the current downtrend is over and questioning whether I have backed off my $2.74/2.76 prediction. The current downtrend may be over but the price action of the S&P is troubling to say the least. I remember a quote I read somewhere where the author said that bubbles reach unimaginable extremes and then they double again before they burst. We are getting very close to those levels. The Fib rules (Flabby) have been around since the 13th century and about the time you think they have been repealed, they rear their ugly head and leave you with a lot of paper losses. We have moved from 1821 to 2018 or 197 points without a meaningful retracement. People have remarked that they have never seen a rally like this. Twelve straight days up with no retracement. There is talk of 2200 or more but you might want to notice that we did not break the 2019 record which at least leaves open a double top or what is known as an inside reversal pattern where we set a new high tomorrow and then close below 2018. That is what started the 9.8% decline on 9/19. However, if we keep going up, Flabby will have his day at some point and that could well manifest itself in a move like the 2010 flash crash or a 1987 event.
But what could cause such a scenario? The BOJ set off the latest sense of nonsense and most people cheered the latest round of QE. People have forgotten that QE is an experiment but it worked for the US or so we are told so Japan is trying it. People forget there is one significant differences. The US dollar is the reserve currency so Bernutty never had to worry about a collapse of the US dollar. What do I mean. There are 85M barrels of oil sold EVERY DAY. To buy them you must pay in dollars. That meant you sold your local currency and bought dollars to pay for oil. That propped up the dollar even as the FED sought to weaken it.
But what about the 176M shares the company repurchased during the Q to take share count down to 5.6B you ask and the fact that we still have 2.2B left in the BB. Absolutely fantastic except you seem to have forgotten that four weeks from tomorrow the company will redeem it 7% convertible bonds and issue 273M new shares. Therefore, if it wants to keep its share count at the same level as it was on 9/30 it will have to purchase those shares on the open market at a cost of 936M (273M x $3.43). But SIRI only has a little over $100M in available cash so it is back to the bond market where SIRI qualifies to borrow 1.2B because its leverage ratio falls to 2.9 after the CB are converted to stock. No problem you say, borrow the money, buy the stock back, keep the share count even with Q3, earn 10M more in Q4 and due to rounding we can report 3 cents in Q4. Good theory but you forgot the interest expense associated with borrowing the 1.2B which will be 18 to 20M. So now SIRI has to earn 30M MORE IN Q4 than Q3 to get to 3 cents next quarter. Right? No, wrong.
To report 1 cent more in profit next quarter SIRI would have to earn 30M more in NET INCOME. What does that word NET mean (I smell a trick here and I thought Halloween was over). Remember, SIRI always has to reduce its income by 40% due to taxes because it is working off the NOLs that were reported as income in 2012. So lets say SIRI earns 50M more next quarter in income (not revenue) next quarter. It will then reduce that number by 20M in imputed taxes so the profit is 30M. Then it will pay 20M in interest leaving 10M in net profit. That would leave 10M more in profit. This Q's profit was 136M which would make next quarters 146M. Divide 146M by 5.6B shares and you get 2.6 cents and get to report 3 cents in profit. The only problem is there is no way SIRI can increase profits by 50M in a quarter so this is an exercise in futility. The analysts have SIRI earning 2 cents next Q same as the last three Q. Do you see why?
So another CC has come and gone. Everyone said it was great,but where are the upgrades? The truth was this CC, like all the rest this year, was an endless treadmill to nowhere where the unknowing think this was a great quarter but the numbers tell a different story. Income doubled to 2 cents from a penny last year and in raw numbers was a 136M vs 63M. Great you say but the 2013Q3 had a one time charge of 107M for debt extinguishment. That reduced 2013 Q3 by a penny so from an operating income standpoint both years earned two cents in the quarter. To accurately compare the gross income numbers we have to take the after tax numbers for the 107M writeoff which is 60% of 107M or 64M. Add that to the reported 63M and operating income for 2013 Q3 was 127M. So to summarize, without the one time extraordinary charge in 2013 the comparisons would have been 2 cents in 2014 vs 2 cents in 2013 and 136M in income this year vs 127M last year. You want to know why the stock has gone nowhere.
I know you want to tell me to ignore earnings per share, this is a media company and the important number is FCF. Interesting thought but you are making that argument only because you haven't looked at the FCF numbers. Q3 this year was 267M, last year was 245M. An increase but hardly blow away numbers. The big increase was in EBITDA where the quarter was 381M vs 295M last year. That is nice but the I in EBITDA is interest which EBITDA conveniently excludes and SIRI's interest payments have increased due to the 1.5B it borrowed on 5/1/14.
For every good number there was a bad number. ARPU was up and costs were down. But this year SIRI added 433,000 new subs in Q3 vs 513,000 last year. Churn increased from 1.8 to 1.9% and the conversion rate dropped to 41% from 42%.
The S&P dropped from 2019 to 1821 or a total of 198 points. A 76.4 retracement of the loss would be a 151 point advance that would take us to the 1972-1974 range. If we get a close above that number I would be more inclined to agree that the decline is over. We should get a test of that range tomorrow, just in time for SIRI's CC on TUES.
Okay, so that all very interesting you say but what does 76.4 have to do with SIRI, you ask? Back in Oct 2013 I predicted an intermediate decline in SIRI when the stock was at 3.85. In March of this year I told you the intermediate decline had morphed into a long term decline and that the stock was likely to bottom in the 2.74/2.76 range. We used Flabby to come up with that number. We started with the 2010 flash crash low of 1.27 and then took the recovery high of 4.18. When we subtracted the low from the high we got 2.91. 50% of that number is 1.45 and when you take 4.18 minus 1.45 you get 2.73. Hence the Duke's 2.74/2.76 call. If you don't like it blame Flabby, not me.
Anyway Flabby is a convenient way to estimate how high a stock will go on a breakout or breakdown. You look at the previous move and then multiply by 1.382, 1.5 or 1.618. Lets say a stock is trading between $5.00 and 5.50 and 5.50 is a resistance level. When the stock breaks 5.50 , it is common to predict it will go to 5.69 (1.382) of 50 cents, 5.75 (1.50) of 50 cents or 5.81 (1.618) of 50 cents. Think about it and you will get the hang of it.
So what about SIRI and 76.4% you ask AGAIN. SIRI corrected down from 3.65 to 3.14 or 51 cents. Multiply 51 times 1.764 and you get 90 cents. Take 3.65 less 90 cents and you get 2.75. Interesting coincidence. If you don't like the number, complain to Flabby, I'm just the messenger. Enjoy the CC.
This week the Street had its eye on the 1905 S&P level and on Monday we came close to that level but closed under it. Just when it looked like the market might fail at that level, fed governor James Bullship floated the idea of extending QE which propelled the market through the 200DMA. There will not be an an extension of QE. Then on WEN with the futures down 105 at the European, someone floated a rumor that the ECB COULD vote on a plan to buy corporate bonds in Dec and MIGHT actually begin buying them SOME TIME next year. Even though the rumor was quickly denied, it had its intended consequence and the DOW was up 200 or some such. Everyone says the downtrend is over. We are above Flabby's 61.8% retracement level so it is safe to buy stocks again. Maybe, but then again, maybe people don't really understand Flabby.
Let's deal with a could of things first. I thought we would have a 20-25% decline off of my PREDICTED TOP of 2020. We got a 9.8% initial drop off of a real top of 2019.26. Major rallies within a downtrend are common and while this one is more than I expected, one learns to expect almost anything with the new normal. Bullship and the ECB rumor were just continuation of the Draghi "we will do whatever it takes' mantra of leading the market. At some point, just like the boy who cried wolf too often, this kind of poker bluff will get called by the market and we will see if the Emperor has any clothes in his closet.
As for the idea that Flabby has signaled the all clear to BTD, the Duke begs to differ. Every investor knows Flabby's PRIMARY RETRACEMENT NUMBERS. 38.2, 50, 61.8 and 100%. But did you know that there are two ugly ducking step sister numbers that never make the headlines? The numbers are 23.6% and 76.4% and when you are dealing with crazy markets 76.4% has more relevance than 61.8%.
The second possibility is that SIRI could beat the 2 cent projected EPS. So how could they do that you ask? The last two earnings reports have contained made up paper losses that cut EPS by about a half a cent each time. If you remember when SIRI and Liberty did they 500M BB agreement it contained a contingency and that turned the contract into a derivative contract. When the price of SIRI fell at the end of each quarter in COMPARISON TO THE PRICE AT THE CLOSE OF THE PREVIOUS QUARTER, SIRI had to record a paper loss. Those paper losses have disappeared because the Liberty BB closed in the 2ndQ and I'm not aware of any one time charges in this Q. Next SIRI might surprise on the revenue line. Last Q the analysts were expecting revenue at the billion dollar level but it came in at 1B 35M (1.035B). This was the biggest positive miss in ten years. Usually revenue is within 5M of the projection. What caused the surprise. No one explained it. This time The Street is looking for flat sequential revenue at 1.040B. Can SIRI surprise again on the revenue line. Finally, SIRI's outstanding share count should fall from 5.7B to 5.5B. If you go back to my explanation of rounding on earnings you will see that SIRI would need a 138M profit for the Q to post a 3 cent profit. Without the manufactured paper losses SIRI profit would have been in the 120-125 range in Q1 & 2. So it is within the realm of possibility to get to 138M. Some companies play with the numbers to report a higher EPS. SIRI has a history of doing just the opposite so why would this time be different?
So for the optimists out there, this is the best I can do for you...a couple of possibilities. I guess we will both have to wait for the CC and see if a trick or a treat shows up in your Halloween bag.
I was sitting there thinking about today's post when in walked my ego and said Duke we have a problem. Our readership is way down and people are saying you never have a kind word to say about SIRI. It is not my fault that I've been so negative about the stock. Back in Sept. 2013, I warned everyone that SIRI would miss its EPS in the 3rd Q CC in Oct. which happened. Then with the stock at $3.85 I told everyone it would begin a 5 wave down cycle that would close the existing 12/31/12 gap at 2.90. So far we have had four waves down and gotten down to 2.98. When we hit $3.09 I told everyone to go long and we played five swing trades between 3.09 and 3.24/25. Then when it broke 3.25 I said it would top out at 3.59/60 (actual 3.65) and to short it at 3.59/3.60. I think we have done pretty well. My ego said that may all be true but you are perceived as having a negative bias against SIRI. So I asked, you want me to become a mindless cheerleader like WRONGWAY and predict that the stock is going to $5.03 like he did in March, or $4.00 after the 2ndQ CC or on 8/26 that the SI would skyrocket, only to see it fall 6.3%? My ego responded, no I'm not asking for you to deal in the theater of the absurd like WRONGWAY. By now everyone has figured out he got his degree from UNC with a major in African American studies. Why don't you just stretch the truth a little, I think they call it literary license in polite circles and see what you do.
So with the words from my ego ringing in my ears, I'm going to give you two surprises that could occur at this week's CC that could drive SIRI's price higher. The first is very simple. The company announced a third 2B BB months ago. By now the second BB is completed, but there has not been a funding of the third BB through a new issuance of bonds. The CC would be the perfect time for the announcement.
It was a good week for Flabby but what does the future hold for the market. I told you last week that I didn't expect the 200DMA on the S&P to hold and when it didn't we would get a technical sell signal. Bingo down to 1821 or a 9.8% drop from the 2019 top. That is a 198 point drop. We rallied back to 1898 or 77 points or about 38.9%. Close enough in this market. 1906 is now resistance as former support turns into resistance. In Siri land we hit 3.33. The move down was 41 cents from 3.65 to 3.14. The recovery was within 1 cent of a 50% retracement. Close enough.
I told you the structure of the decline would tell me a lot about what to expect in the future. First, I'm expecting a second fall that will take us below the 1821 semi bottom but given the massive BTD performance this week I expect the next leg down to be less than the first which means the overall decline will be in the 15/20% range rather than 20/25% I originally predicted. Secondly, the first leg down took about four weeks to complete which means the second leg down should be completed in the same time frame or less. That leaves us with about 6 weeks until the end of the year when we will get a feel good rally to repair the damage.
As for SIRI, 2.38 is now off the table. Much will depend on the CC and whether we get the much anticipated headline about the 5% dilution that will occur on 12/1. There is always conflicting forces driving the PPS in SIRI land. For now I will stick with my $2.74/76 call.
Friday brought another legal loss for SIRI. We talked about the Turtles case in Federal Court a few weeks ago but there was also a similar case pending in a California state court where various record labels had sued SIRI for royalties on pre 1972 recordings. The law involved the same statute as the Federal case. But in the state court the judge backed SIRI's interpretation of the law and had agreed to use a jury instruction favorable to SIRI. The record companies asked the State Court judge to reconsider her ruling in light of the Federal Court ruling. This is akin to asking God to change the Bible. Never going to happen except it did so SIRI is going to lose that case also. Great week.
Two other issues we have been following reared there ugly head. I told you to watch the rate on the 10Y and if it broke 2.30 there was trouble ahead. It broke it a few weeks ago but on WEN we got as low as 1.86% before going back above 2%. These are recession levels or worse. Then over in sub prime land we hit 38.93 in JNK on WED. We have to go all the way back to 6/24/13 or 17 months to find JNK that low. What it means is that junk bonds imploded AGAIN and people pulled new offerings because there is NO MARKET FOR THEM NOW.
So did anyone figure out why SIRI rallied on WEN when the market was down 400 and why it moved from 3.19/3.20 at 3:00 PM all the way to 3.28 before the close? It has to do with the way long/short hedge funds are structured. The fund is usually 80% long, 20% short and SIRI is a favorite short. These funds got clobbered in the sell off because they are leverage 10 to 1. They were facing margin calls so the quick way to meet the margin call was to cover the short they had in SIRI and other stocks. The money in their short account was IMMEDIATELY credited against their margin call and they weren't forced to sell any more stock. Of course, the MM knew what was going on and took them to the cleaners...hence the 8 cent pop in an hour.
First, the banks continued to do some direct sub prime lending on their own so they could collect the full 20% interest but not at such high aggregate levels so as to attract the attention of the regulators. The next step was to fund the newly created finance companies with their Triple A rating. If the finance companies were truly Triple A they should have been able to borrow at 5/6%. But the banks were really a partner of the finance companies in this little subterfuge so they charged them 12% and the finance companies then lent the money at 20%. Everyone made money and the banks successfully hid their true exposure. You see when the sub prime borrowers don't pay, the finance company would be able to repay the banks, and the banks will write off the loan. Bad business you say, but if things really get bad the fed will step in and bail out the banks with your money. The banks are running a casino and they can't lose. So you are saying how does The Duke know this? Dumb question. Who do you think did some of the legal work to set up the finance companies?
So what does the Chrysler IPO have to do with this. If you looked closely at the monthly auto sales figures you would notice that although sales are up 5% YOY only three companies have increased their sales, Toyota, Nissan and Chrysler. Toyota and Nissan because of the drop in the yen and redesigned products. C is different. Their auto sales are DOWN YOY but Jeep and Ram Trucks are way up. It has been fueled by sub prime because Jeep and trucks have huge profit margins. Chrysler wanted to show big profits before their IPO and so they made loans to any one with a pulse if you bought the high profit truck. They will lose millions but they just got billions in their IPO so who cares?
Midweek brought news that HBO would offer it shows on line at a monthly rate. What this means is that it will bypass cable and keep all the profits for itself. Cable is doomed and Malone had a heart attack that wasn't reported. ESPN next?
With all the triple digit moves in the DOW this week to capture your attention, you may have missed some of the headlines that will impact SIRI and Liberty so I thought it appropriate to review them and offer my views. Monday brought a pair of headlines that were seeming disparate but were actually related. The first was an issue that is near and dear to The Duke's heart. Federal banking regulators announced that they were opening an investigation into the explosion in sub prime lending in the auto industry so that they can better assess the risks to the banking system. Maybe they should have read The Duke four months ago to know there was a big problem brewing. The second headline was that Chrysler went public with much fanfare and thus they successfully traded millions for billions. Do you see the relationship between the headlines?
Let start with the sub prime issue, the banks exposure and what the bank regulators will find if they UNDERSTAND BASIC MATH. The regulators are concerned because sub prime debt has gone up 50% since 2011, the numbers of accounts 60 days in arrears is up 7% over last year and repossessions are up a mere 70%. They have just realized that there could be a problem to the banking system since 30% of new car loans are sub prime.
Here is what they don't understand at this moment. Banks make a ton of money off of the higher sub prime interest rate. But it was sub prime that caused much of the melt down in the housing market in 2007. The banks knew that they couldn't do as much direct lending to sub prime in the auto industry post 2007 because the regulators were watching. So what they did was to encourage people to set up finance companies which would act as an intermediary to facilitate the sub prime loans. Here is how it worked.
I think you may be over thinking this thing. The trend is down and this could last for a few more weeks. If you want to go long, think about 2.98, 2.88 or 2.76. SIRI was due for a bounce which is why I cautioned every to stay short which was another way of saying don't buy here.
You are correct. It would make more sense to start from the bottom up but Bernutty was appointed by a Republican and Obama did not dare to put in his own appointee during the crisis. The trickle down theory goes back to Reagan/Stockman era.