Recalls are just another marketing tool. They try to sell you a car or another repair that they discovered while they were doing the "covered" free recall.
Let's see if SIRI gives us an entry point this week.
I thought the Yellen incident was very telling. She was trying to diffuse the correction by saying it was confined to small areas of the market so feel free to buy, buy, buy. Notice she picked stocks that only the most speculative investors held. So what happened. They sold off but have now recovered. The Fed has created a monster. People honestly believe that stocks will never have a meaningful correction. This goes beyond complacency and if we get a correction people are not prepared to sell. This could get ugly pretty quickly..as in multiple day waterfall drops.
As for the WSOP, I made the second day of the Monster stack tournament. There were 7800 entrants and we were down to 1200 people. A loose player lead out in front of me so I decided to come over the top with a KQ of spades. Unfortunately, the big stack woke up with pocket tens in the big blind. The initial raiser folded and I was only a 51/49 dog. The flop came K4J so I was a big favorite. The turn brought an Ace and the river a Q for runner, runner back door straight. Tough to take that late in a tournament.
Second tournament. 11 hours in, about 80% though the field at 1:30 in the morning the button puts me all in with K 10 off. I'm in the big blind and look down to pocket aces. A no brainer call. He flops the 10 and hits the third 10 on the river.
Third tournament. 11 hours in, about 80% though the field. The button moves all in. I wake up with pocket kings so it another no brainer call. He has AQ offsuit. He hit the Ace on the river. There is a fine line between cashing and not cashing at these events and if you can't make your big pocket pairs stand up, you have great bad beat stories to tell. Hence my reference this morning to the cards playing themselves.
If we get the correction, you will need to exercise caution. I expect it will last several months so don't move to quickly.
I think you have hit the nail on the head. Technology is moving faster than SIRI and telephones plus the connected car may supplant SIRI unless it has a plan that I don't understand at this point. As for LM, I have long held the view that JM will milk the liquidity out of the stock, load it up with debt, and then turn it loose.
Content is king but Stern won't be there forever and the NFL will go to the highest bidder. SIRI used to be a trading stock but now I can't even find an entry point. I have abandoned SIRI as a long term hold until it reinvents itself.
My view is that 2Q GDP will surprise to the downside. Wouldn't it be interesting if we found ourselves in a recession that no one saw until after the numbers were published. We are at stall speed with little room for error.
So far so good with the BTD. I try and hold nothing longer than 48 hours. I hold too much cash and deploy ever DIMINISHING amounts. It doesn't bother me the way it does you. It might be that you are a bigger gambler than I am. Be careful in the coming week(s).
No one is going to see this coming.
There is also a flashing red light for the market as a whole that indicates we are approaching a top in the S&P. The timing is about right for the correction that I predicted would take place late in Q3 or early in Q4. If you listen to CNBC, various pundits will tell you there is no way to predict a market top so stay invested for the long term. There is a key metric that everyone is looking at but they don't want to share the metric with you. If everyone knew the metric there would be no suckers buying the dip that day and where would that leave us?
So what is the metric that everyone is looking at but no one is willing to mention in polite conversation? The rate on the 10 year bond.
A little background on bonds if you forgot. In the bond world price and rates move inversely to one another. In english that means if people are buying bonds and diving the price UP then the rate will DECLINE. Bonds move at a glacial pace so day to day means nothing so you have to pay attention to THE TREND. Back on 12/31 everyone was saying GDP would accelerate to 3.0-3.5% and the 10 year closed at 3.03. This was the highest rate in 3 years and meant the bond boys (another BB) were buying the story. Back then everyone expected expansion with higher rates and lower bond prices. Funny thing happened along the way, the bond boys no longer buy the improving economy story. They are buying the 10 year aggressively and driving the rate DOWN. On FRI the 10 year closed at 2.47. It has rallied off this number four times but a lower rate means trouble for stocks.
So what is the trigger for a sell off? The 15 month cycle low was 2.40 on 5/29. What the Street is eying is a close BELOW that number. If it happens it will send a SELL signal to market technicians that and show something is wrong with the broader economy.
I see Yahoo has a new policy in not bumping posts to the top. That makes keeping in touch difficult. Will return between 5&6 to answer questions. Change is everywhere.
It has been only two weeks since SIRI announced its intention to do a third BB but there are some flashing red lights impacting SIRI and the market in general. Frear has always made the point that he never expects SIRI bonds to be investment grade but the recent rating for the bonds put them in the lowest rating for investment grade bonds. I expect that will change with the next issuance, IF SIRI IS ABLE TO FIND A BUYER FOR THE NEW ISSUANCE. Over the past two weeks, we have seen a dramatic shift in the bond market...a flashing red signal of potential problems ahead. The WSJ reported on FRI that last week saw the largest outflow of funds from high yield bond funds (read junk bond funds) in the past year. 2.38B was withdrawn and this followed a 1.68B withdrawal the week before. The article ended by saying "that some companies have taken notice with some borrowers delaying scheduled debt sales and others cancelling planned debt deals."
What we are seeing throughout the entire debt complex from the worst junk bonds to even investment grade bonds is a reluctance of investors to commit new funds. The best borrowers can still borrow but at higher rates than two weeks ago but for companies like SIRI the investment window is closing. If this trend continues or if it accelerates in the coming weeks, you will see the number of BB in the market drop dramatically and one of the key drivers in the relentless upward trend in the S&P (share BB) will disappear. In SIRI's case, I would consider this a positive development though I recognize few of you would agree with me.
The second key metric is subs. Everyone has assumed that the change in the GM contract was the reason for the sub par 266K increase that the company reported in Q1. Back in Nov. I explained why GM's inventory problem would lead to hit in SIRI's sub numbers in Q4 and Q1. The idea was quickly dismissed. The company missed sub numbers in Q1 and the idea that had been so quickly dismissed became the working rationale for the miss. Interesting how that worked out.
Both S&P and the Duke think SIRI's problem may go deeper than the GM contract. Seven years ago SIRI was a new technology, a novelty if you will. People bought a new car and found sat radio in it. They bought a sub or they didn't. What people failed to realize is that the new car buying public is just a small fraction of the buying public or put another way the same small group of people are buying new cars. On average they keep their cars about 6 years which means that a good share of new car buyers have already made a decision about SIRI. This has lead to an increase in switchouts. A person cancels a paying sub to take advantage of a free sub in the new car. This renders the new car sales a less reliable indicator of sub growth and pushes the key metric for sub growth down to used cars where conversion is much lower. SIRI better hit its target of 380K to 420K or the realization about my switchout theory is likely to gain traction.
Finally, I will be looking at how many shares SIRi acquired under the current BB to ascertain when the BB will end. Hopefully, SIRI will give us a clear update but if it fails to do so we can compute it from the cash flow statement.
No estimates on these numbers. In poker we like to say the cards play themselves. In this case the numbers will play themselves and be reflected in a new PPS.
The CC is now just 48 hours away and there has been little commentary about what to expect. That may just be a reflection of the muted expectations that most people have about Tuesday. The stock has been stuck in a tight trading range for months which should have come as no surprise if you read my May post on how BB really work. Since then SIRI's 50 DMA has risen to 3.36 while its 200 DMA has dropped to 3.49. As the two numbers compress it leads to a high likelihood that we will see a new trading range established this week.
I will be focusing on three numbers that I think are the key metrics. The first is revenue. We already know that SIRI will break its streak of 11 consecutive quarters of double digit revenue growth. Revenue is projected to be 1.02B which is up a scant 22M over last Q and 8.5% over the 940M in Q2 of 2013. Things are actually worse than they appear. This Q has been boosted by 25M in revenue from the Agero acquisition in Dec. so if we were just comparing apples to apples we would be saying SIRI's core business is producing 995M in revenue vs 940 last year or an increase of just 6%. Part of this can be explained by the new GM contract but I suspect that it also reflects an increase in retention discounts. Bottom line is that SIRI better meet or beat top line revenue or its PPS will suffer.
So what does it all mean? Here is what Moody's said on 5/2 after the new bonds were issued. "The incremental debt elevates total leverage to 4.1x approaching the upper threshold for CFR, but Moody's expects EBITDA growth to result in a reduction to less than 4.0 by FYE 2014.
SIRI has no borrowing power left so this BB is smoke and mirrors or as I expect SIRI will go ahead and borrow 1.5B. This will lead to a 5.5x leverage which will be reduced to 5X leverage when the converts are redeemed.
I suspect that the ratings agencies will take a dim view of these excessive leverage ratios which will lead to a downgrade of SIRI debt. This will immediately lead to an increase in SIRI's short term revolving debt interest rate and potentially a reduction in the amount it can borrow under the revolver.
The bottom line is whait I predicted would happen. LM is loading SIRI up with a toxic debt level before it gets ready to spin it out next year. By the time the spin out occurs I expect debt levels in SIRI to approach 6X levels. This is a level that will make it difficult for SIRI to ever pay off its loans as an increasing amount of EBITDA goes to interest.
Fortunately, for all of you, none of you has a clue what is happening or understood a word i just wrote. So celebrate those BB's and tell Wrongway how smart he is with that $4.00 prediction and ignore what S&P might think because in your world things like rating agencies don't matter.
In my world things like bond ratings are important. At moments like this I am reminded of the old rubric...be careful what you wish for because you just may get it.
So far we have the easy part explained but what do those words "including in accelerated stock repurchase
transactions" mean. That the part everyone has conveniently skipped over because they don't have a clue what it means. Figured it out yet. Those words are referring to my old buddies, the convertible bond holders. You see that phrase means SIRI will use the BB to pay a premium to the CBH to buy back their shares before they hit the market in Dec. What SIRI is trying to do here is to avoid the headline that reads "SIRI shareholders to suffer a 5% dilution when convertible bonds are redeemed on 12/1." So how many shares will SIRI attempt to buy? The CBH are entitled to 273M shares. The SI is 318M. The difference is 35M so we know that their are a huge number of shares out there that have not been shorted and are available for purchase. Take a number between 50M and 100M. Your guess is as good as mine. Since SIRI will have to pay a premium to the CBH to get the shares let's assume the payout will be 180-360M to buy back those shares. Look at the ranges I have given you for LM and the CBH and you will see that between 1B and 1.2B will go to insiders. When it is all said and done there will be 800M to 1B left for open market purchases or about 3 months of purchases at our $280 level. So we are good to go until Nov. Great, except we are out of funds for any more BB.
But what about that leverage issue I mentioned. On 7/16 Rick Munarriz in SXM is Insatiably Cannibalistic wrote the following "It has also borrowed money to assist in its BB effort, but everything appears to be under control. SXM's target is to keep total debt at less than four times adjusted EBITDA and at the end of the first quarter that leverage ratio was clocking in at a modest 2.8".
So everything is great according to Rick, except that Rick and everyone else forgot that SIRI borrowed 1.5B on 5/1 to fund the current BB. This means that its current debt is 4.5B or 4.1x its adjusted EBITDA of 1.1B.
The second background point is that at the last CC, SIRI said it did not expect LM to participate in the current BB. The reason for this was the negative feedback LM got when it was selling SIRI shares at $3.66 when the shares were selling on the open market at 50 cents a share less than that price.
Third, the company said it expected that it would maintain a leverage ratio of no more than 4x of debt to estimated EBITDA. This is a tricky concept for the uninitiated so lets be sure everyone understands the concept. Companies can't borrow unlimited amounts of funds because they need cash flow to service the debt (pay the interest). Companies like to establish their own ratios and if the ratings services (S&P, Moodys and Fitch) agree then they bless the bonds with a favorable rating. If they think your leverage is too high, all sorts of nasty things happen. In this case the agencies blessed SIRI's 4X ratio. But how is that 4X ratio computed, you ask. Simple. SIRI estimates that will have 1.1B in EBITDA so it can borrow 4.4B before the wrath of the ratings agencies are unleashed upon it.
Okay, so that finishes our background and now we can analyze those 34 words. The easy part is that the new BB will consist of $2B. As you learned way back in 10/13 the announcement of a BB is just smoke and mirrors. SIRI is not under any legal obligation to buy any shares and the only BB that really matters is one that is funded. Remember when everyone fought me over that point in 10/13...back in the days when you didn't know I was an attorney and you were practicing law without a license. Anyway, I expect SIRI will borrow another $1.5B to fund this one. We also know that LM will be participating in this one. LM still has 1.2B invested in SIRI so I expect them to get 800M to 1B of this BB because they go nothing out of the current BB.
On Tuesday SIRI announced its latest buy back and nottal wrote, hey Duke what do you think of the latest BB. I knew there was no rush to respond. I thought I would give everyone else a chance to figure it out. It has been five days and your probably thinking what can Duke possibly say at this point that hasn't already been said? I'm sure you have all read the expert analysis over on SA and the Fool and so you have a thorough understanding of the BB. There is only one slight problem. No one over at SA or the Fool understands the BB or the short term or long term implications on the financial health of the company. So if you figured out what is going on then you would be the only one who has managed to do it.
Here is the key phrase from the press release. "Shares of common stock may be purchased from time to time on the open market and in privately negotiated transactions, including in accelerated stock repurchase transactions, and transactions with Liberty Media and its affiliates."
Thirty four words and no one understands their meaning. So what do you think they mean?
Before I explain it to you we will need to give you some background so that you are focusing on the correct issues. First, before I left I speculated that the current BB would end around 8/31. The current BB had 1.9B in it after the April LM BB. It started in March and I guessed the company was purchasing 280M per month. Take 280 x 5.5mo equals 1.54B. The other 360M was spent buying the 110M shares from the CBH in May. (Spike in SI). This announcement seemed to confirm that prediction. If the second BB wasn't about to end soon why would you bother to announce a third one?
Have you ever heard that the market is a discounting mechanism? In this case it can see ahead to 7/24 and has begun the repricing of the C shares. Sorry, but that is all that is going on here.
I have to admit I would be much more impressed with your reasoning if you worked this into a sequel to your Tom and Billy like ice cream debut.
Here is a hint for you. LMCA has recently changed it capital structure. You think that might have some small reason as to why the ratio no longer works? When you figure it out, let me know.
There is another number coming up in a couple of weeks that few investors know or appreciate. It is a paper written by a Yale grad, David Nichols, that deals in depth with the 64/65 month bubble cycle. Its main thesis is that if you study fed induced bubble scenarios, you will find that the market has always had a crash or significant correction in the period between the 64th to 66th month of the rally. Our current rally started off the bottom at 3/6/09. That puts the expected correction in a time period 7/6-9/6 which conveniently fits into the time period I predicted back in Jan. Anyway, it is all numbers that will be explained away or dismissed by those who don't like them, be forgotten if they turn out to be wrong or trumpeted if they turn out to be correct. It is the fate of being a number.
The Duke is off to his own mecca of numbers or in this case percentages. It is time for my annual pilgrimage to play in the World Series of Poker. There it is also a games of numbers...whether the odds will hold when you get them all in and are ahead or whether the odds fail in some crushing way on the river. Everyone who plays the game understands the numbers. We just don't know how they will play out on any given day.
I have a gambler's hunch that we will know a lot more about the numbers for SIRI and the market when I return in a couple of weeks.
The breakout this week above $3.40 brought out Wrongway and his $5.03 prediction again. He is another guy who doesn't understand numbers...namely that the buyout funds will be exhausted long before the stock could ever reach $4.00 let alone $5.00. The real question is whether we saw the top when we hit 3.49 this week. It is clear the breakout was engineered to scoop up another set of shares from the CBH that were holding out for the higher price. The sale on FRI at the open of 7M shares at 3.47 cost someone $25M. Over 200M shares traded in three days above 3.40, more than enough to satisfy the company at that level. Did you miss the top? Time will tell but I warned you about trading above the MARK. This is ultimately a game of patience and risk management.
The S&P is also facing its own numbers game. Last week I told you to watch the 1973-1976 as a place where we could start to see the beginning of a significant sell off. Even with all the new highs we only hit 1964 so we still have 9 points to go. I told you the fed couldn't print oil. The cost of gas at my neighborhood station was up 4 cents last week. It is the first of many increases to come as Brent goes through $120 and WTI through $112. That is the thing about numbers they do mean something unless you are the Fed who dismissed the increases in food and fuel as just noise. I guess the modus operandi for disliked numbers is just to dismiss them as inconsequential.
Speaking about the Law Of Big Numbers, CN wrote an article about declining sub numbers this week. It was a rehash of an article that I wrote four years ago. In 2010 you could take SIRI's penetration rate, churn rate and conversion rate and predict that when SIRI hit 25M subs the company would no longer be able to report ANY SUB GROWTH because of the Law Of Big Numbers. The company now has 21.6M paying subs and sub growth is projected to be 1.25M for the year. Add another 3.4M subs and apply the churn rate and you will see that sub growth extinction is two years away. It is a law, you can't change it even though you don't see it coming. That where Agero comes in and the company's future growth depends on it.
In the short run most of you missed the significance of last week's post...the numbers underlying the BB that is driving the stock's PPS at the current moment. Let me walk you through them again. under normal circumstances I expected the company to buy $280M of stock each month so the BB could be finished by 9/30. The BB started around 3/20 so that by now the company would have bought $840M in stock. But this is a unique situation and it appears the company purchased $360M in stock from the CBH. Put the two numbers together and the company has probably purchased nearly 1.2B of the 1.767B it set out to buy. You can lower the numbers a bit but we are 60% through the BB. On 6/24 we get another significant number, the early June SI. If the SI is up again multiple the number of shares by 3.30 and add it 1.2B. What it means is that the BB will end in Aug.