There has been a lot of buzz regarding the short interest drop in Sirius XM shares of late. If you believe the NASDAQ, which would seem like a reasonable thing to do, you may be as quick as I was to come to the conclusion, that the number of shares shorted has declined by nearly a third.

Unfortunately, the numbers I feel, do not add up. Leading up to the merger there were nearly 160 million shares reported short on July 15th. That number ballooned to over 310 million on July 30th and then dropped to only 209 million shares on Aug 15th.

Settlement DateShort InterestAvg Daily Share VolumeDays To Cover
8/15/2008209,124,306103,062,5782.029100
7/31/2008310,672,18277,266,3334.020796
7/15/2008159,958,33924,495,8166.53002

The problem that has been eating at me is that the stock itself has not behaved like a stock should have, if such massive short covering had actually occurred. In fact, the stock declined in this period, as it has subsequently done for the latter part of August.

Some speculated that the reason could be associated with the merger arbitrage play. I cannot accept that either. At the time, Sirius was on the Regulation SHO list and as such, created a situation in which there no shares available to short. This was in fact the reason that Sirius had to offer the shares in the borrowing agreement. As we all know from the recent convertible offer, there were an aggregate 262,399,983 shares that were going to made available for the sole purpose of being shorted against, of which 183,679,988 shares were immediately used for that purpose.

Taking a closer look at the sharp increase that occurred between 7/15 and 7/31, it is conceivable that the increase was simply the pre-existing short interest of 160 million plus most of the 184 million shares available under the share borrowing agreement which would equal 343 million shares. As the merger was actually consummated in the first week of August, this is much more likely, in my opinion.

The next logical question one must ask becomes; What happened to the rest of the shorted shares? I believe the answer lies in the NASDAQ's own website. I propose that the information is wrong, and is based on the former CUSIP number that SIRIUS shares were registered under. I believe the new Sirius XM shares have not yet been recognized for these reports, or if they were, have been reflected inaccurately due to the merger date falling on or around, the short interest report date.

That makes sense on paper, but does it hold water? A simple check of the NASDAQ site of insider and institutional holdings of SIRI reveals the message: "There is no information available for this security". That is one heck of a clue if you ask me! I translate this to mean that they in fact do not have sufficient information on the new security based on its new CUSIP number. It stands to reason then that the short interest they are reporting may in fact also be incorrect, as it took several days for most people to see their shares converted in their own accounts, at the beginning of the month of August.

I would not be surprised to learn at all, that short interest has actually increased and that naked shorting is again running rampant. Unfortunately, considering the NASDAQ's delay in reporting this information, we may not be able to confirm any of this until nearly the middle to end of September.

Position: Long SIRI