The purpose of all the speculation in Part 1 is to merely point out that the execs can control SIRI's PPS by focusing on the past quarter which I expect to be okay but not great or cast things in a negative light by talking about a slowdown in new cars sales. That cat will be out of the bag soon enough or as one auto exec said last week, the YOY sales numbers really get difficult in the second half of the year (thanks to Chrysler giving away its cars pre IPO).
Sometimes the best forecast is the simplest one. The low in SIRI during the regular market was 3.81 on Feb. 23 and March 26. It resisted my prediction to fall into the 3.70's on two occasions...not a good record on my part. The stock seems to be tracking the S&P, no significant reversals even as the data gets worse. It appears as though the HF have this set up for a run at its $4.18 recovery high. Much like the S&P I look for a run at the high, a double top and then a significant fall as the market corrects. This would be the time to reduce you long term holdings. The question is whether Roger went to the well one time too often.
In the meantime, keep your eyes on Greece and the payment due on May 12 and the CSI. Stats show the Chinese are opening 3 MILLION new brokerage accounts a week. At some point things that go straight up, come straight down. This week a story appeared that said any Chinese market crash would be contained. They say the same thing about Greece. Everything is foreseen, everything is contained. Cordero is predicting 2600 on the S&P. This is when you have to start worrying.
Conferences calls are usually easy to predict. A CEO gets up there and extols the virtues of his company, emphasizing all the positives and glossing over the negatives and the PPS goes up. In SIRI's case they evade answering the negative questions by saying they don't have the data or aren't interested in releasing it...see the ill fated Hispanic programing project.
Last week I noted that SIRI had failed to release its sub numbers for Q1 and there was Drunken offering his instant analysis. You see according to Drunken, SIRI didn't prerelease the number because SIRI is in a BB and good numbers would drive the share price up and reduce the number of shares the company could purchase. It is an interesting theory as long as you don't think about the recent past. In Jan. SIRI was in the midst of a BB and yet it prereleased 4Q sub numbers that drove the PPS upward.
Anyway, while we are on the subject of missing data, has anyone noticed that neither the auto industry or its surrogates, LMC Automotive, Kelley BB, Edmunds or Trucar have issued any new car sales estimates for April. In the past there has been a mid-month projection and an glowing end of month update. In mid Feb. the report was an 8.9% increase. Then the slow down hit and we came in 5.6% up YOY. Last month we got no mid month projection. The end of month report was YOY was to be down .3. The actual was up .6 as fleet sales masked a YOY decline in retail sales. This month we have dead silence. A search yesterday revealed no projections even though sales should be out on Fri. There are only so many times you can pull forward fleet demand with incentives.
The real wild card for the CC is that Comcast dropped its bid for TWC on FRI and Charter and TWC are in negotiations according to the WSJ. The question is whether this puts SIRI in play for another JM takeover bid or has the 1.5B that SIRI borrowed since last year taken it out of play. While you figure that out, does this mean JM wants SIRI's price up or down?
Our markets are not immune from the miscalculations of others. Friday's sell off was attributed to the actions of the Chinese and Grexit fear. More TZ thinking. Last week was a perfect week if you knew how to play it. Mon was a down day and TU 4/14 started out down but rallied in the afternoon. Why? The $6,500 IRA contributions started to hit. Big up day on 4/15 as the laggards got in and the boys raised the prices. Thur. was flat to allow the last of the money to get in and Fri was hit day so every sucker is now a loser. Happens every year. Remember it next year and make some money. Same as the 3/15 pension scam.
SIRI reports in 9 days. Anyone notice that unlike last quarter SIRI has not preannounced sub counts for Q1. Here is a little math for you. In mid Feb., people were predicting Feb auto sales would be up 8.9%. They came in 5.6% up with a slowdown in late Feb. The slowdown in sales continued in Mar. SIRI can't live with flat auto sales for long. Last year it added 1.6M new subs, but when you apply a 1.9% churn to that number it losses about 30,000 more subs PER MONTH than it did last year. The Law Of Big Numbers. That said, I think SIRI had enough trial subs to get through this Q in reasonable shape. I see playing the stock in two ways. We could see weakness going into the end of this week as a correction into the $3.70 unfolds. I would be a buyer on that weakness. If the stock reverses tomorrow, I would rather wait for the number in 9 days and buy in an upticking market for a trade. The options are predicting a big move into the $4.20 range. Use this as a chance to reduce your holdings. The market is poised for a 6-8% correction. It would be better to miss the trade than be in the correction.
Anyway, the Chinese real estate bubble is deflating since a ponzi scheme of ever increasing prices with no income stream is doomed from inception. So the Chinese have taken a page from Bernutty's book and encouraged investors to put their money in the market. The Chinese workers have been encouraged to put their money in the market so the CSI has doubled since July. First one in, first one out makes the money. I have little doubt that all the money going in the CSI was based on careful, prudent investing. Anyway, the Chinese govt. decided that the market was going up to fast so they opened the Hong Kong market to Chinese investors. Here is how it works. Companies in China would list on the CSI and the Hang Seng in Hong Kong. The share in HK were called H shares. Mainland Chinese could only invest in the CSI but not on the Hang Seng in HK. The Chinese bid up shares on the CSI relative to the same shares in HK. Then a couple a weeks ago to relieve pressure on the CSI (read Bubble) the Chinese permitted two way trading on the HK market. Mainland Chinese could trade on the HS and Hong Kong residents could trade on the CSI. The HS exploded up 9.5% in a week. No bubble here. To control the mess they created, the Chinese raised margin rates and allowed shorting of stocks causing the HS to sell off. That should work for about a week. Creating one bubble to deal with another. TZ thinking.
Greece is simmering. I got this one exactly backwards. I thought the Europeans would try to preserve the status quo and Greece wanted out. Turns out the Greeks are raiding the pension funds to make payments to the IMF while the EU is doing everything to force Greece out. The EU believes that a Grexit would have little impact on the system and would stem the populist movements in Spain, Italy and France. You heard the same confidence before Lehman. Some had written the credit default swaps and derivatives on Greek bonds. That means some bank loses big. More TZ thinking
Speaking of there being no other investments other than stocks, nothing could be further from the truth. There are European Bonds with negative interest rates and people are lining up to buy them. Let me be sure that you understand what a negative yield bond is all about. The Swiss 10 year has a negative 25 basis points. That means if you bought one last week with a face value of $10,000 and hold it to maturity, the Swiss government will give you back $9,750. So you are buying a guaranteed loss not to mention that inflation could further erode the value of the $ 9,750. Sounds like a deal to me, buying guaranteed losses. So why are they doing it..the hopes of capital appreciation. A few months ago Swiss bonds had a zero coupon, no interest for 10 years. So now that zero coupon is more valuable than a minus 25% coupon and you can sell it for $10,250 and get a capital gain. Everyone is assuming there is someone more stupid then they were and the negative 25 will turn into negative 50. At some point it will stop and everyone will ask, how could these guys be this stupid. TZ thinking. German bonds are negative yield out to 8 years and SPANISH BONDS are negative to 6 months. Utter stupidity.
Talking about /insanity, the Chinese have decided to substitute a stock bubble for a real estate bubble. The Chinese growth miracle is built on a mirage but no one wants you to think about it. There are few consumer high end goods in China so people save and invest in real estate. It makes them feel wealthy. The country side is littered with ghost towns built to house a million people even though 25,000 live there. You have 6 lane roads to deal with 10,000 total cars and high rises where no one lives. The apartments are sold to workers in the big city who think they are wealthy. To keep the illusion going an apartment with no occupants is worth more than one occupied. It is not like you would want an income stream. The world sees growth. I see misallocation of scarce resources.
It is good to be back after a three week hiatus. During that period the market and economic analysis entered the Twilight Zone. If you didn't notice the transformation, don't worry, you weren't suppose to see it. Rod Serling would have been proud.
When I left you I was discussing the March auto sales numbers. We were expecting a decline of 0.3% YOY but got a 0.6% increase instead. The analysis that accompanied the numbers is an example of the economic twilight zone we have entered. The number must have been bad because it came with excuses. First, the weather in March caused the poor sales number, then there was one less selling day vs last year and one less Saturday. Okay, but somehow we beat last year by 8,500 sales. Then things really get weird. We are told March had the highest SAAR number at 17.15M since 2009. So was March a good month or bad month? Then to top it off, they told us that Q1 sales were the best Q1 since 2009 as sales beat last year's Q1 by 211K. If you follow the numbers, that means when the weather was really bad in Jan and Feb we beat last year by a 100K per month but as the weather improved in March it was a deterrent to sales. If you actually understand this reasoning, then you fit in the TZ.
We see the same thing in the macro analysis. WS economists told everyone we would see 3% GDP growth in Q1 and achieve escape velocity. That prediction has become a joke with the new prediction at 1.4% on the Street even though the Atlanta Fed GDP number showing 0.1%. The culprit...the weather. This will be the sixth consecutive Q1 miss by the Street. The culprit is always the weather. You think that after 6 years someone would figure out that we get cold weather and snow in the winter but every year these guys are surprised by the weather. Everyone expects bad Q1 numbers so what is the solution. We are told to ignore the fundamentals, the Fed has your back, there is no other place to put your money. TZ thinking. Maybe they should cancel earning season.
Brilliant legal analysis on your part. Here is a hint, stick to what you know, whatever that may be, and stop practicing law without a license. You want to know what makes SIRI's argument ludicrous. They are still playing pre1972 music on the air...catch the 60's channel, dumbo. They haven't stopped playing the music and other won't over this small amount of pocket change.
You shouldn't be surprised by the poor sales numbers in March. I have been telling you to wait until the March sales figures to see the true state of new car sales. So what happened. In March of 2014, we got the first whiff that Chrysler might go public in the fall and dealers were told to pump up sales. If you had a pulse you became a candidate to buy a Jeep Cherokee, C's most profitable model. Forget about cost, no one was allowed to leave the showroom in their old car. Cherokee sales soared, C started to report 20% year over year sales and management cashed in during the IPO in Oct. Competitors met the C incentives for a while but this just pulled sales forward into 2014 and gave us a hangover in 2015. Happy Jan 1.
But should you have seen this coming? Of course. The Durable Goods numbers were out this week and that is where you should have looked. Back in Dec. we had a small decline in Auto and Parts manufacture. The decline continued in Jan. but Feb. was the real tell...auto manufacturing fell 3% YOY and this week's numbers extended the decline to four months. This is not good news for SIRI land.
Everyone knows what Field Of Dreams means. Build it and they will come. The corollary is hitting Auto Land right now. The corollary..they can't buy it if you don't build it. April will be the real tell so let's watch those numbers. SIRI should still have a good Q since this hit the back end of the Q and their were plenty of subs in the promo funnel. Q2 is where it could start to hurt.
I predicted that Spring would not be a happy time for investors. Spring came and we has four down days in a row before a slight uptick. It is too early to call a trend change but the latest sell off did some technical damage to the DOW and S&P. The key to understanding the change is that currency conversions had adversely affected profit (who could have predicted that) and some of the world's problems, Yemen and Greece, can't be solved by central bank intervention. The stage is set.
This is my first post in three weeks. It was interesting to watch the speculation that I had been banned by Yahoo for writing something coherent on one of its message boards or that I had given up my Sunday posts. Over on SA, Cracked Nuts has written an article since Feb 9, and no one noticed he has been gone. Wrongway hasn't written one since 2/13 and all the readers of SA are celebrating his departure. Everyone needs a rest for excessive optimism. His final words were, "the price of SIRI is going parabolic". Brilliant insight.
I'm glad you missed me but more mundane things intruded. The Land of The Duke has been inundated with work which is positive for Christmas bonuses and most of my predictions dealt with the Spring so it only made sense to give them some time to unfold.
There has been an interesting development in Autoland involving the Field Of Dreams Corollary so I figured it was time to reappear. I happen to watch those commercials that get interrupted by college basketball games and it seems that one car brand is having trouble selling its autos. If you watched closely you would notice that Buick is offering up to 16% of MSRP as cash back if you buy an Enclave or Lacrosse that have been in stock the longest. The Commercial says that could me $8,300 back in cash. You mean they ran out of suckers to shell out $50K for a Buick. No news there. But what the commercial is saying is that one division of GM has seen sales slump and is willing to do anything to dump the metal.
But are there other signs of a slowdown in auto sales. Back in mid Feb. Kelly Blue Book and LMC automotive were predicting an 8.9% increase in Feb. auto sales. It came in at 5.6%. The second half of the month saw soft sales. The trend continued in March as Kelly predicted a YOY DECLINE of .3% in sales. But they quickly shifted the focus by saying the quarter had been the best since 2007 and this March had one less Sat. This year May will have an extra Sat. but no one will mention that.
In the broad market we witnessed the divergence between reality and the market manifest itself in a broad selloff on FRI. The jobs report beat expectations but in the upside down world of bad news is good news, good news is terrible because the Fed has no choice but to raise rates. All this angst over a quarter of a point. The key to understanding is not to look at one day in the market. What you should be focusing on, is the divergence in policy approaches in the world's biggest economies. When all the world's markets were setting new highs, everyone was pulling in the same direction..loosening monetary policy by cutting interest rates or doing QE. Today you have a major divergence as the US and England are tightening while Europe and China are loosening. The rest world is still stuck in the QE stage.
The problem is that the only dog that matters in this little divergence is the US dollar. You have to understand that 90% of world trade is denominated in dollars and 80% of all international loans by the corporate sector have to be paid back in dollars. As the dollar becomes stronger, commodity prices weaken because importers can't afford to carry inventory in their warehouses and pay interest on expensive dollar denominated loans. So they liquidate inventory and buy LESS. Prices drop because demand drops. The suppliers still need to pay off their debts in rapidly appreciating dollars so they produce even more of the commodity to sell which drives the price even lower. Just look at the charts for lumber, oil, or copper. The higher the price of the dollar the more urgent it becomes to pay off your loan. This explains what is happening in oil. Along the way a whole bunch of firms go BK, our exporters get crushed and people lose their jobs.
World markets are starting to diverge. The FTSE has put in a triple top and has rolled over while the DAX and Nikkei are making new highs. We may have one more rally before we join the FTSE. The spring will not be pretty.
The subprime issue is deeper than just funding drying up for perspective buyers. The DOJ has an ongoing investigation into the securitization of subprime auto loans which started in July, 2014. Look for the results of that to be made public this summer with indictments and fines. The Cliffs Notes on the investigation is that the banks packaged up the subprime loans and sold them to yield starved pension funds. The only problem was that in the prospectus they described the lending standards they used in making the loans. Or let me rephrase that. The prospectus described the lending standards the banks were supposed to use, not the lax standards they actually used which is why some of them are imploding. Anyway, it is securities fraud at its best. The problem for the auto industry and SIRI is that when the report is released the funding for subprime loans will dry up and so will new car sales in that segment of the market.
One of the more interesting divergences in SIRI commentating market is that while I have written a dozen articles about subprime lending there hasn't been one mention of it over at SA where it is a steady beat of glowing positive articles.
Speaking about divergences and SIRI, did anyone catch the article put out by D Bank when it initiated coverage on SIRI with a $4.00 price target and a hold on the stock? The bank seems to see a pattern of slowing growth for the company which is what we have been saying for a while. What D failed to recognize is that the extension of paid trial subs from 6 months to a year is masking the real slow down in sub growth. At some point that will catch up with the company. The conversion rate falling to 40% is the sign of the underlying problem.
On a brighter note SIRI hit a new recovery high of $4.04, which it promptly gave up. As WW noted. SIRI's timing was impeccable. The new loan being announced on the day of poor auto sales. The question is whether the breakout on Mon was by those who knew about TU announcement.
Everywhere you look in the world and the market things are diverging from the normal or the expected. It is the new normal and the unintended consequences of QE. It is just that no one understands the underlying causes of the problems. So we use old explanations to explain the new problems.
Last week I ended my post by saying sarcastically that auto sales were expected to be up 8.9% because even in the face of terrible weather people went out to buy new cars, at least according to the pundits. TU brought a different story as sales were up only 5%. Everyone trotted out the weather excuse but the weather was a "known, known" as Donald Rumsfeld used to say and should have been taken into consideration in making the 8.9% projection. Something deeper is going on under the surface, but no one wants you to know about it.
I started to write about the inherent problems of subprime lending in the auto market in July and its consequences are now manifesting themselves.
Last month I told you that more than 8% of the subprime loans made in Q1 2014 were in default by the third quarter of 2014. That stat caught the eyes of bank regulators and the Office of the Comptroller of the Currency (OCC) sent out a warning to all the national banks it regulates. In Feb. the Director and Asst. Director used speeches to warn of the dangers and compared the problems to subprime lending in housing. At least one bank got the message. Wells Fargo was the second largest provider of subprime loans to the new car market. 48% of its new car loans were subprime. In mid Feb. it said it would cut that back to 10%. It is likely that the cutback in subprime funding had a greater impact on sales than the weather but no one even mentioned it as a reason. We will see how Mar. plays out and whether the true reason for the slow down in sales makes it into the press. Anyone have a guess which bank is the largest subprime lender in the US.
If you guessed the SPANISH BANK, Santander then you get a gold star.
The market has a way of ignoring unpleasant facts. If the Chinese economy was so strong in Q4 and was about to hit its 7.4% GDP number why did the Chinese central back have to lower interest rates in November to stimulate the economy? Things are great in China. Yesterday, on a Saturday, the Chinese lowered interest rates again. The bulls say that means more stimulus so stock prices are headed higher. The bears say it shows the Chinese GDP numbers are fake. Oil prices have fallen 50% while Chinese GDP grew at 7.4% in Q4. That makes perfect sense as long as you don't think about it.
We always miss the warning signs. In Jan. there was no new high in the market. The first month since late 2012 without a new high. Ignore it, we had new highs last week. There is an old Dow theory that says new highs in the Dow should be confirmed by new highs in the Dow Transportation Index. During the new highs in late Dec. and the ones last week there was no new highs in the Transportation Index. This is curious since oil prices were falling which should increase profits in transportation. The bulls say ignore it. It is an old theory and transportation is an old technology. Charles Dow is rolling over in his grave. It is a negative divergence that can't be explained.
The S&P traded over a 17 point spread last week. That is almost impossible in a non holiday week. SIRI mimicked the S&P and traded between 3.85 and 3.91 for most of the week. The bulls say stimulus from the Chinese and the ECB QE will propel the market higher. The Duke has his eye on March 16, which is the day the pension money flows into the market. Every thing else is window dressing and maybe the true story will unfold after that date.
Feb. new car sales this week. Apparently, everyone ignored the storms and went out to buy a new car. The comparisons become harder in Mar because C began giving them away in Mar 2014 when they announced their IPO. That will be the test.
In the US we do things entirely differently. Rather than relying on one guy's estimates of how hard those yak are working and their growth rate, we employ a whole army of people in Washington to imput millions of bits of data into super computers that will crank out an accurate GDP number. Like China, we know that the whole world is waiting breathlessly for the number, so about a month after the close of the quarter the government publishes what it calls a "flash GDP number". The flash number is total garbage since the government rounds everything up and assumes a optimistic projection on all the data it hasn't received as yet. The flash GDP is always too high but as soon as it is announced all the pundits say look how great the economy is doing so buy the market. Anyway, the flash GDP for Q4 was 2.6% growth. Since we know that number is total fiction the government tells everyone that there will be three revisions. We got the first revision this week to 4th Q GDP and everyone knew it was going to be bad. The economists have figured out how to play the game so they said it could be revised down to 1.8%. Of course, the government couldn't admit the numbers were that far off so it only revised the number down to 2.2%. The pundits on CNBC said see, things aren't as bad as people thought and there is no other place to put your money so buy the market. We will get a second revision at the end of March and GDP will fall to 2.0%. The economists will say ignore the number. Christmas fell during the winter months this year which explains why sales were down. The numbers for Q1 are showing improvement so Q4 is now meaningless. Buy the market. At the end of April we will get final GDP numbers that will show growth at 1.8% for Q4. No one will care because the government will report Q1 grew at 2.8% and we will be starting the process all over again. Buy the market. Things are improving.
Over in the corner the Chinese are laughing asking, why didn't they just lie back in Jan.?
There is no clearer indication of the demise of western technology than the way China and the USA report report GDP. The reports are awaited with breathless anticipation by investors and economists throughout the world because they show the health of the world's economy and therefore are one of the driving forces for stock markets.
So let's see how both countries go about assembling this vital data. China is a vast country and some of the western provinces are 5,000 miles from the capital. In these provinces there are more yaks than people and most of the population under 30 has left to work in sweatshops making Apple components. The only industrial development taking place is the new field the yaks plowed on someone's abandoned farm that was seized by his neighbor.
Anyway in China the central government sets a goal of GDP growth at the beginning of the year and demands that all the provinces report within three weeks of the close of each calendar quarter. China always beats its own deadline and reports 20 days after the quarter ends. Last year they set a goal of increasing GDP by 7.4% and they hit the number. So let's say you are out West, you know 5,000 miles away from the capital. Just how do you measure the growth of yak furrows or even better what does GDP actually mean since all the farmers are under reporting the size of their crops to cheat on their taxes. Anyway, you are a Communist Party leader and you like your cushy job so the government wants 7.4% growth so you tell them the GDP grew 7.4%. It is not like anyone is coming out to check. The central government collects all these garbage numbers and proclaims that China grew 7.4% in 2014 Q4. Then every economist in the West proclaims that China remains the growth engine in the world and every pundit on CNBC says there will be a soft landing in China. Buy the market.
In the financial world the patterns repeated themselves as soon as the Greek drama was resolved. The algos rocketed us another all time high at 2110, just 65 points from the magic 2175 that I predicted. One of the commentators I follow on a daily basis immediately revised his year end forecast saying we would be at 2630 on the S&P by this date next year. For those of you who might be math challenged that is a 24.6% increase from the close on Fri. and he doesn't see a 10% correction in the S&P at any point in the next twelve months. Here is a hint as to his identity. His forecast was published yesterday morning. That is the kind of euphoria I was pointing to last week WW.
It matters little to most of the Street's prognosticators that Christmas sales were BELOW 2013, that the Jan rebound did not materialize, that Goldman just cut 1Q GDP due to the weather or that Jan. industrial production including autos fell. As the prognosticator said we are hiring 250,000 more people each month to sell less goods, the ECB is starting QE next month and the market has never gone down while we had an active QE going on, and besides where else are you gonna put your money. The pattern always repeats itself. The problem is deciphering which pattern...QE will save the day despite the fundamentals or the euphoria is always greatest before the bubble bursts.
SIRI has a pattern that few remember. In the third week after a run up post CC, the stock usually sells off back down to the breakout point. The third week doesn't official start until the 26th but it is never to early to give you a heads up. The stock is looking weak with a triple top at 3.91 and low volume. I got off three trades last week. Two on the long side and one on the short side on FRI. They pay the same on both sides. Last week I said the stock would bottom at 3.80. I was off a penny. We are now just as likely to see 3.71 as 3.99. Show the same patience as the fed and you will be rewarded with a good entry point.