Originally Posted by By Jamie Dlugosch, Editor, InvestorPlaceWall Street likes to make money collecting fees on everything from advising on merger transactions to underwriting securities, but the big bucks can be made on their trading desks by taking positions in house accounts or collecting commissions on trades from institutional accounts.
To demonstrate just how this can be done, let us take a look at the trading action recently with from the approval of the Sirius-XM merger.
On Monday, Sirius Satellite Radio (SIRI) rallied on news that its long- awaited merger with XM Satellite (XMSR) had garnered the support of FCC Chairman, Kevin Martin. (Finally! As you can probably tell, I'm not a big fan of the the government regulation, see "XM-Sirius Merger: Regulatory Bull.") Now, with FCC approval, the bulls were of the opinion that SIRI would be off to the races.
Not so fast.
Deep in the inner sanctum of Wall Street darling Goldman Sachs (GS), could a plan been brewing to make the firm and a few of its best clientele money on the collapse of SIRI in the short run? I don’t know.
One Possible SIRI Scenerio
In my opinion here’s one possible scenario:
Analyst gets on the phone with trader says, “We have an immediate short opportunity with SIRI. Get on the phone with your best clients and tell them to sell this dog, now!”
Trader says, “What’s your basis?”
Analyst replies, “Merger won’t help in the short run, and they are running out of cash. Youth are buying I-pods not sat-rad. I’m working on the report right now.”
Trader: “Got it. I may need you to get on the horn with me to a few of our heavy hitters.”
So trader and analyst contact 20 of their best institutional clients, all of whom are managing a billion dollars or more in assets. They make their pitch and make sure that the trades are placed under the radar of the 32 million shares traded on average each day.
Done over the course of 3 days, these 20 clients can easily sell short say 2.5 million shares each without moving the market too much. In reality SIRI traded about 45 million shares on Tuesday and Wednesday last week.
Any big blocks within that amount would move the price, but only minimally as evidenced by the modest $0.20 drop of share valuation on those days. This was only a prelude to the big show that was to come on Friday.
On that day analyst releases his “conviction sell” report and all hell breaks loose. 90 plus million shares trade hands, and the stock drops nearly $0.50 in one day. More bleeding followed on the first two days of this week with SIRI now trading close to the analyst’s target.
Never mind that the report offers very little new insight into the valuation of SIRI. Instead, what we get are overly simplistic observations that have been well-known to the market for some time.
Here's What We Do Know
We know growth is slowing. We know the company may need capital. We know about increasing customer acquisition costs, we know that the merger delay hurt the company, and we know that a recession is killing discretionary spending.
None of this stuff is new.
What we don’t know is what this company will look like in the future with its only real competition being a weaker free radio platform. The play here is not to convince the young to ditch ipods.
Now the play here is content. It has always been about content and consumer willingness to pay for choices. SIRI has the content, and that is why they beat XMSR and that is why they will make money down the road.
This nonsense of a conviction sell is nothing but a pure manipulation to make money. How much money?
Well, if Goldman makes $0.03 per share and they traded 50 million shares last week, they made a cool $1.5 million.
That more than compensates an analyst who did nothing but overstate the obvious. Unfortunately that is how the game is played on Wall Street.
Nobody cares to pay for insightful comments about how SIRI will make money in the long run with this deal. Nope, it’s all about pushing a stock lower when you can and making money on the trade.
It is beyond me why anyone follows such tripe. Oh well, I still have faith in SIRI in the long run and this too shall pass. Those shorts have to cover at some point. Maybe they do so when the merger is finally announced.