Stern's decision is a no win for SIRI. If he stays he just continues the status quo. If he leaves, where do you think SIRI would open? Do you think any analyst has forecast his leaving? How many downgrades would there be. How would the FCF be impacted. How would the BB be impacted. Stern quit his TV gig on AGT. He WAS NOT FIRED. Why did he give up the project and THE MONEY? Is he about to do something that would be in conflict with his AGT contract and so he ended it. Was Mel telling (warning) us about something when he said Stern would be a perfect fit for NFLX? SIRI has been above 4 for four weeks in a distribution pattern. If Stern left would there be such a huge stock overhang created that JM could purchase the next 19.5% he needs at prices under $4.00. Would the tracking stock and the implied arb situation facilitate this objective? I'm expecting a new high in SIRI before Stern's announcement. Will it mean anything if he leaves.
The market churns higher. The inventory to sales ratio hit 1.38, the highest since 2009. Macy's, Nordstrom and JC Penny's all reported disappointing sales. High, middle and low end consumers have stopped buying. Base metals like copper and zinc are at six year lows and so is oil. Freight rates for international containers, trucking and railroads are at 2009 levels. The market is being lead higher by an ever decreasing number of stocks. Does this mean something? Do investors understand?
No answers, just questions. I will be traveling next week. Maybe we will have answers in two weeks. Happy Thanksgiving.
The auto industry has already responded to the looming rate increases by introducing a new loan. Up until last week the maximum loan term was 7 years. Now the maximum will be raised to eight years to keep the payment at what the industry believes is a manageable level for consumers. New autos depreciate 20% when you drive them off the lot and auto loans front load the interest payment under the Rule of 69's.In plain speak, most of the early payments are interest and the late payments are almost all principal. With autos depreciating quickly in the early years, buyers will have negative amortization for the first 6.5 years of an 8 year loan. The auto companies will roll the unpaid loan balance into the next car loan but with rising prices and interest rates are subprime borrowers about to see the last chance to buy a new car? Or maybe we can do a 15 year loan?
There is a guy on the board called the stableboyofwallstreet. Any idea why he picked this name? He seems overly concerned with my short at $4.13 so I can allay his fears. I covered this week at $4.05. I expected a trip into the 3's but when we didn't break 4.02 the hand writing was on the wall. Duke's first rule of investing is no one ever went BK taking a profit.
I told all the traders out there that FRI was the last day to square off your positions. If you didn't do so, you should do so this week. The Stern decision is due within three weeks and only a fool would want to get caught on the wrong side. If he stays, we will have a short. If he goes, a massive buying opportunity will emerge. Why would any trader try to front run the decision?
Investors like to play the rationalization game. It is famous here in SIRI land. For those of you who didn't major in psychology, rationalization is a process where you turn every negative into a positive. The famous one that I see is when the stock falls everyone says that is great because the company will be able to buy back more shares and I will become richer sooner. So now the stock has spent four weeks over $4.00. Why don't I see people in anguish over this development because the higher prices will cause the company to buy less shares thereby delaying when you get wealthy? If the stock goes back down, will the development be cheered?
Speaking about the BB, the company went $287M deeper into debt last quarter to do the BB. We are now almost two months into this Q so the company is almost another 190M deeper in debt. Do people realize that this can't go on forever and with the Fed about to raise interest rates, SIRI's interest costs on the revolver will explode?
There was another Form 4 filed this week. Steve Cook, an officer and head of EVP, Sales and Automotive exercised an option and sold 500,000 shares at $4.15. The option was granted in 2009 at 6.2 cents and had until 2019 before it expired. Cook is a long term investor in SIRI. He has 10872 shares of SIRI in his IRA. Why are all these sales taking place in Nov.? Do these guys like to pay taxes? If they waited five weeks, the payment would be due in April 2017 rather than April 2016. After reading this will they fire their accountants?
The fed is about to raise interest rates a quarter of a point. It is a given although the Street has pegged the chances at 42%. On FRI, the Fed scheduled a meeting for 11:30 tomorrow morning. Will they make some sort of announcement after the close tomorrow or they just coming to see the annual Christmas tree lighting on the Mall.
Why would anyone think that higher rates could be good for auto sales? The quarter point is only for prime borrowers. Subprime will go up 1%.
Each week I come here to offer my views on SIRI and the market. Some say duke thinks he knows it all but such assertions are far from the truth. There is a lot I don't know or don't understand so I figured it was time to discuss those questions I can't answer.
We are coming up on the two year anniversary of a famous event in SIRI history that brings with it universally unanswered questions. Back in Oct. 2013 SIRI had topped at $4.18, just a coincidence, and I had predicted that SIRI was headed down to $2.90 to close a gap that had remained open when the stock broke $3.00. I also said to expect rallies at 3.65 and 3.35 because these were the numbers where JM would get collateral calls based on my experience. There were the usual catcalls led by Drubken when I made the prediction but the stock had closed down at $3.68. On Sunday 11/23/13, Barrons ran a cover featuring SIRI and saying that SIRI was headed to $5.00 in the next year.
The board was a buzz with headlines saying that The Duck is cooked and everyone spent the day exchanging their favorite Duck recipes. There was duck ala orange, roast duck, hunan duck just to name a few. I explained to everyone that JM had planted the story to avoid the impending collateral call and that the hedge funds would sell into the upside the next morning. WW commented that there was nothing new in the article.The stock opened at $3.85 the next morning, hit a high of $3.86 and sold straight down, closing the day at $3.66 with 127.8M shares changing hands. All the Duck recipes disappeared from the board. The stock fell to $2.98 five months later.
Why do investors believe this stuff? Analysts on the Street get paid a million a year. Their research is sold to hedge funds for six figures. When they release an upgrade to the public are they doing out of the goodness of their heart or for some other reason. Why do 9(% of the stocks have a target price higher than the current price. When was the last negative story on SIRI?
There is more to the story, but it is much too early to reveal the ending. The foundation has been laid and the structure will take time to build
Last week we had a quiz and I was disappointed by the audience participation. The question was what was your hero, the guy with 21,000 Nov. $4.00 options going to do? You seemed to have hooked your dreams to a loser since he spent $210,000 to buy SIRI at $4.10 (option cost without commission included) with a close at $4.10 on FRI. The answer to the quiz is that he would have shorted SIRI above $4.10, like when it hit $4.18, so he could deliver the shares he has to purchase on FRI if SIRI closes above $4.00 on FRI. If SIRI is below $4.00 he will cover the short as the options will expire worthless. The other possibility is that he entered into a forward contract with SIRI at a small profit to take the shares if he is forced to buy them. Of course, I believe that this is a married call situation and that he has shorted SIRI many times and used the calls as an overhead hedge against the short. If I'm right, he is hoping for SIRI to be below $4.00 on FRI.
Back in Sept. with the S&P at about 1940 I gave you three scenarios for the market. I said behind Door 1 was that the market would quickly descend to the 1867 bottom of 8/24, form a double bottom and then have a V shaped recovery leading to nominal new highs. Then we were in for a 40% correction. Three weeks ago I said the peak would happen within two weeks. The peak happened 10 days later at 2116. We didn't get the new highs. So far we have lost 4.5% down to low of 2022. Things don't look good for the open given what happened in Paris. I hope the grieving can find some comfort. I'm not prepared to say the bull market is dead just yet.
A final thought on the tracking stock. Remember the convertible bonds of 2009. The tracking stock acts as the same sort of shorting mechanism to restrain SIRI's price. History does tend to repeat itself.
OPM and a profound belief that you will ride the coattails of the billionaire to wealth. How touching. When you finish this part Google Sirius XM debt and look up the chart saying Debt to Equity Ratio. At the being of the year it was 3.4. At the end of Q3 it was 88.7. High number is bad. It is the highest since 2009. What do you think it means?
When the tracking stock was announced I said it would facilitate a spinout or an RMT. The only one who understood what happens in the interim was WW but I doubt if even he saw the grand design First the RMT can only take place when LMCA acquires 80% of SIRI and the tracking stock almost insures that this will be the route that is chosen. To those with other idle speculations, I caution you against practicing law without a license. JM is not paying any taxes so your cherished takeover is officially off the table. Second, the tracking stock ALWAYS trades at a discount to the stock it tracks. So what does that mean. It means that arbs will come in and BUY LMCA and simultaneously SHORT SIRI creating a risk arb. situation. This will put a cap on the price of SIRI relative to the price of LMCA so that LMCA can continue to accumulate SIRI at a reasonably low price without the kind of upside potential that you think is coming. In simple terms SIRI will probably trade over a 60-80 cent range over the next two years once the range is set by the tracking stock. You can expect this range to hold unless we have a bear market until the 80% is attained. Secondarily, many HF will find that waiting two to three more years range bound is unacceptable and will dump their shares into the waiting arms of the company. I know you can live with that. Here is what you don't see. The tracking stock will not be issued UNTIL NEXT YEAR and JM will time its issuance when SIRI is trading in the mid 3.50 so that he can acquire the remaining 20% below the 3.68 he offered in 1/14.
A five parter from The Duke, what a great way to spend a Sunday morning.
The Fed has killed interest rates so bond buyers are on a desperate search for yield and sludge paying 7% is highly valued. But that is only part of the story. Greed and self preservation really are the key. Let's say you are a bond manager with billions under management and you still have a small shred of decency left in your soul so you care about your investors. This is just a hypothetical, you understand. Anyway all the guys who could care less about the investors buy the sludge and boast about the great rate of return. If you don't buy the sludge the investors will leave you and go to the guy next door offering the great return because they don't understand the risk and are only looking at the yield. Besides you need to keep that 20M salary, the estate in the Hamptons and your mistress. Everyone is doing the same thing so if you go down in the next implosion so will everyone else and you can share the same life boat together. Everyone is buying the same sludge so to stay competitive you do also. That is part of the equation. The other part is OPM standing for Other People's Money. If the ship sinks, the investors lose, not you, so who really cares. No one really knows when or if the implosion will occur and your job is to get yield for you investors regardless of risk and let the chips fall where they may.
The only fly in this perfect fantasy are the investors who honestly believe that you are motivated to make prudent investments and protect their principal while getting them a reasonable return. They are the suckers in the play, the believers. If they sell out in time they do well, if not, well no one saw it coming and then there are always new investors.
The SIRI BB's have a similar ring to the securization game. JM tried to steal the company from you at $3.68 in 1/14. You went crazy. He backed off and came up with a new strategy to steal company. JM is using your money(OPM) to BB the company. Frear said the average BB is 3.49 so far while you applaud.
The Street can create different levels of risk in various bonds by varying the percentage of loans of each category in the bond. If you want conservative bond, it will be loaded with prime borrowers, few subprime and even fewer deep subprime/no credit credit borrowers. The interest rate will be low but the risk of loss will also be low because the default rate among primes is low. At the other end of the spectrum are your subprime bonds which have a low number of primes in the mix, a substantial amount subprime and as much as 40-45 percent of deep subprime and no credit loans. The risk in buying these bonds is off the chart yet these are the bonds that have the highest demand. Insanity you say. You are buying losses. True, but now you understand a small part of what is going on.
The first thing in the process is that guys like The Duke write a Prospectus that precisely outlines the risk in each bond. We know the average investor isn't going to read the Prospectus and wouldn't understand it if they did. The guys who do understand the Prospectus are motivated by greed so they don't care what is in it. Therefore, we spread out the gory mess in great detail so we don't get sued later because we know that no one really cares. Then the rating agencies step in and put a Triple A rating on these various piles of sludge because because the risk is more than adequately disclosed, people can more than adequately determine the risk and the interest rate, in theory, is scaled to be proportional to the risk in the underlying loans. You get a higher rate of interest in the riskier batch of bonds. The truth is the rating agencies give this sludge a Triple A rating because of the fees that get from the issuers. It is called greed.
The question is why would anyone by this toxic mix. Greed and self preservation. It is about OPM. Lets say you run a bond fund or a pension fund or an insurance fund. You need a mix of bonds in your portfolio to balance the stocks you have.
Earlier in the week I had decided to write a post entitled Understanding The Auto Loan Securitization Process. The purpose of the post was to explain what drives the securitization process that I have alluded to on many and then to make a point about the SIRI BB situation. The announcement of the tracking stock dovetails and solidifies with the point I was going to make. So I'm going to begin with the original post I planned and then add a couple of paragraphs about the tracking stock. You know The Duke. I will get there eventually.
There is an easy to understand and a hard to understand part of the auto loan securitiztion process. The easy part involves how the loans are created. People come into a new or used car show room and want to buy a car but don't have enough cash for an all cash transaction. So a dealer offers them a loan that has been arranged through a bank, finance company or one of the auto manufactures finance company such as Ford Motor Credit Corp. The loans carry different interest rates based on the credit scores of the borrowers. Generally, there are four types of borrowers, prime, subprime, deep subprime and no credit borrowers. There are some gray areas but prime is 700 and above. Subprime is 650 to 550, with deep subprime being 550 to 450. Below 450 usually gets lumped with the no credit or disaster subprime where no credit might actually be better than having a score below 450. Some lenders have more categories but you get the picture.
If the lenders made loans and held them on their books, lending would grind to a halt. They would soon run out of money. So the loans are grouped together and bundled into a bond and sold to the public. That is the easy part to understand. Now we will get to the hard part. Now comes the securitization where risk is OFF LOADED to the public. Since interest rates vary among the borrowers from small (relatively) for prime borrowers to huge for huge for no credit score, the Street creates different types of bonds.
Why don't you tell that on Sunday. No one will believe me. They will say he is just a short.
This will facilitate a spin out or tax free exchange down the road. Should cause short term dislocation in the stock as investors ponder JM's next move.
Pop Quiz Time. Here are the closing BIDS on SIRI options for the next weeks. 11/13 9 cents, 11/20 11 cents, 11/27 12 cents. 12/4 10 cents and 12/11 12 cents. On the surface they look normal. Before Mel went on CNBC the 12/4 were at 5 cents and the 12/11 were at 3 cents. Mel let the cat out of the bag or so I think so they normalized. Still think it a mirage? Here are the ASK prices on the $4.00 PUTS for the next five weeks 11/13 2 cents, 11/20, 4 cents. 11/27 10 cents, 12/4 18 cents and 12/11 20 cents. Someone is expecting something bad in the first two weeks of Dec. and they don't want to get stuck buying SIRI at $4.00 or they are worried something bad could happen.
So our brilliant call purchaser has 13 days until he will be forced to exercise those options if SIRI is over $4.00.Right now he is dead even if you guys have it right. He controls 2.1M shares and will have to fork over $8.4M on the 20th. We know he can't sell the options because he would destroy the bid stack and take a loss. We know he didn't exercise because the open interest hasn't gone down. Unless the stock goes to $4.30 he has only two viable options. Hint. He is not going to exercise and hold. If he wanted to invest he could have just bought the stock at 3.85. Another hint. The Duke is still short at 4.13. Two answers, see if you can come up with either one.
I'm shilling for ESPN now. Tonight at 8:30 EST ESPN will air the final table of the WSOP Main event with a 15 minute delay. You will get to see the kind of poker I play with 7M at stake. Lots of interesting decisions. The chip leader Joe Mckinnon or something like that came slumming this summer and played against The Duke at the Main Event at the Horseshoe in Baltimore. Interesting guy. Thought he was a good poker player. He didn't survive the first day. Things happen.That what makes poker and the market interesting.
You probably saw Mel on CNBC. I thought he looked good and and I like the fact he is doing charity work. I have a special affinity for Mel. You probably didn't catch it put WW said that Mel always read The Duke. I remember the first time I suspected he did. I did my usual Sunday piece and used a particular analogy in discussing SIRI. That WED, Mel was speaking on the West Coast at some conference and he made the same point with the same analogy. Okay, so it is possible that great minds think alike and it was just a coincidence you think. I joked about it the next Sunday and everyone laughed. Two weeks later Mel was speaking at another conference and there was another Duke point with Duke's analogy. We were now into the Twilight Zone. By the fourth reference people began to believe. Corps want to know what is being said about them on social media and I've been doing this long enough that people know The Duke. Scary. CN recounted the story that SIRI contacted him to correct some error in his story. I try not to have any factual errors in my posts.
You probably read me last week and said Duke is just trying to stir up fear with his piece on Stern. No one else has such an outlandish idea. Now you see that Mel has the same idea as The Duke. HS has options. AAPL and NFLX and he likes money. He also wants to show that he can do it again which is why I think he goes to AAPL rather than NFLX. My only point being that when I discuss this stuff it might not be just something to scare you.
Mel made two other points. He is out of the market. The Duke is out of the market except for strategic trades. Probably means nothing. AAPL should buy SIRI. JM controls SIRI and he has other plans so that is a nonstarter as far as I see it.
My guess is that I am still read over at the E suite in SIRI. I am also gambling that my approval rating has dropped further after what I wrote in Part 2. The thing is that it is all based on SEC filings, but then again who bothers to read those things.
Four weeks ago I predicted that SIRI was headed above $4.00 and that prediction came to pass. Do you remember why I said that we would being going over $4.00? It would give the officers and HF's time to unload before the stock and market crashed in the near future. So we are now a little over two weeks past the CC and I thought it might be interesting to look at the Form 4's for insider sales since the CC. We have had 5 sales. Amble Lordi, a director, exercised two sets of options with an exercise price of 9 cents in each case. The first was for 100,000 shares and they were sold for prices between 4.02 and 4.05. The second was for 50,237 shares and these were sold at 4.14. Now let's move up the food chain and get to Barry Thomas who is a senior VP. He exercised two sets of options, one with an exercise price of 1.64 and the second at 2.48. The total number of shares exercised was 387,500 and these were unceremoniously dumped at 4.08.
Now let's get to some names that we all know and love. How about David Frear. He exercised 2 MILLION stock options at 2.13 and sold them at 4.02.
Our final Form 4 comes from our beloved CEO, Mr James Meyers and it might be the most revealing of all. After the CC in Aug. Jim exercised 6.3 Million options at 53 cents and dumped them between 3.95 and 3.98. I think we can safely assume that 25 Million he pocketed in Aug. should have tided him over for 90 days. (Duke you are dumb. You forgot taxes and the 53 cent exercise price so the guy only put 12 Million in his pocket after tax and no self respecting CEO can survive on 12Mil for 90 days). I stand corrected.
Anyway, Jim didn't exercise any stock options. He sold outright a total of 507,887 shares. He still owns 3.844M shares. BTW, how many shares does Jim own in his 401K? 5,355 proving he is a committed long term investor. People study Form 4's to see what management is doing. The CEO is selling while you tell each other to hold forever. It makes perfect sense to me.
This is your notice that the Land Of The Duke will administer a pop quiz at the end of today's post. Your participation in the quiz is NOT voluntary. By reading beyond this point, you hereby agree to participate in the quiz to the best of your ability. Cheating is fine and encouraged since your innate bias should prevent you from even considering the right answers as possible correct answers.
Recently, the durable goods numbers were released and they showed just about every category down except automotive which was up .4%. This was immediately hailed as further strength for new car sales by those who don't actually know what is going on in the industry. I'm sure you all read the CC for KSU so you probably already know what I'm going to write, but on the off chance you missed it, I will give you a summary. KSU is the stock symbol for Kansas City Southern. It is a railroad and so now you are wondering why I might be following a railroad stock? Railroads carry things like autos and what they had to say in their 10/16 CC was interesting.
KSU just had a bad Q. It's stock dropped 12% on 10/16 and they needed to explain what happened and what would be happening in the future. The CC must feature a slide show because when they got to SLIDE 15, they began discussing auto shipments for 2016. They are going to be facing a significant drop off in the first half of 2016. It seems a number of plants they service will be closing to retool and expand. Things will be picking up in the back half of 2016 and 2017 will be great with all the new capacity coming on board.
This also puts the .4% increase in perspective since it represents inventory build to replace the autos that won't be built by the closed plants. Finally, the last time plants closed was to retool the F-150. It took longer to retool than expected (big surprise there) and the inventory that Ford built to tide the dealers over did not match what the buyers wanted. Just something to watch in 2016.
Hopefully, not before I cover my short. Still remember 2009. Good memory. Shows I still have one long time reader.
We have also had a couple of other interesting declines since the purchase. On 10/7 we hit 3.97 but declined to 3.85 on 10/9. Then we had the famous decline from 4.07 to 3.90 on 10/21, the day before the CC. If the guy used the calls as a hedge to short, he could have made 400%, if it a pure long he is up 2 cents. What do you think is happening here/ Is he smart or stupid? If he is smart, then he shorted SIRI between 4.15 and 4.17 expecting a decline in the stock. If the stock goes down, he makes a killing. If it goes up, he exercises the option at a total cost of $4.10 and delivers the stock against his short making a small profit. The smart money is short. Which way are you betting?
Two weeks ago I gave you a Duke Nugget. I said Duke believes in the KISS principle. Four letters, two of them the same. There is a stock symbol that looks the same. AAPL which has an on demand music service that got 6.5 subs in a few months. AAPL is developing a new car, and WIFI is showing up in the legacy auto makers. AAPL has an eco system where young people want everything AAPl. HS sees himself as the King of Media and what better way to show it then build a new empire. APPL has 206B in cash so HS salary is a rounding error. Would you rather have AAPL options or SIRI. options? HS is looking at a Billion if he leaves SIRI. He controls his own library which he can bring with him for on demand access. Content? SIRI doesn't have exclusive sports. The NFL just signed with Tune IN and every one would partner with AAPL. HS will announce in early Dec and the options are not good. If you are a trader, I wouldn't go long after 11/20 until the HS announcement.
I went long at 3.96, sold out at 4.13 and went short at 4.13. My viewpoint may be subject to confirmation bias, so full disclosure is needed. The question is whether HS's attorney's see what I see. Time will tell.