The Short Story
When a stock is down, and trading like the SDARS equities have been, the “shorts” always seem to become a popular subject. People speak of market manipulation, and seem to run off an a tangent that those that are short are the source of all of the problems that has an equity on the down side.
With this merger, there are many reasons to short. While shorting equities is something that I personally am not prone to do, I do understand the concept and the market. I simply make a choice not to short very often. Specific to the merger, there is an arbitrage play that potentially has a lot of people shorting Sirius. The strategy is to go long XM and Short Sirius (This strategy requires that the merger pass). If an investor were to do this, they will basically lock in the arbitrage spread upon the merge.
With the Department of Justice already having issued their decision, it is almost a foregone conclusion that the FCC will at some point follow suit. Thus, there are many who like the guaranteed spread, and short Sirius while going long XM.
Another short strategy that has existed for quite some time comes from those with convertible shares. The short the stock to lock in the spread on their convertible shares. Most convertible shares are held by institutions.
Others simply short the stock because it is an easy play when the equities are trading in a channel that carries a virtual cap until the merger decision happens, and the companies give some sort of guidance. Equities that are locked into ranges minimize the risk on the short side. When they get to the bottom of the channel, the shorts cover.
Sirius satellite Radio has been on the REG SHO list lately, and some people express concern over this. In simple terms, there is a failure to deliver the shares that have been sold short. The short investor is “naked” because he sold shares that really “in theory” do not exist. A short sells shares to another investor that buys them. Those shares are “borrowed” by the Broker from another account and then sold to the buyer. The problem arises when the brokerage house does not have any shares to borrow. When this happens, it is termed a failure to deliver. If there are too many failures to deliver, the equity gets placed on the REG SHO list.
No all of this short discussion leads to the next thought that often happens when the subject of shorts arises. The short squeeze. While many think that a high level of shorts will necessitate a short squeeze, this is not the case. Yes, to a certain extent, a small short squeeze can happen, but in my opinion, it is not very likely in the current situation with Sirius. Sirius currently sits below the 5, 10, 20, 50, 100 and 200 day moving average. This means that, on average, people that have bought this equity over the past 200 days are down. The longer people are down in an equity, the more likely they are to accept a break even proposition. The 200 day moving average sits at about $3.30. On a technical analysis side, there are several resistance points standing in the way of a short squeeze. The strongest are at $2.90 and $3.30.
If those that are in the equity feel a stronger and stronger desire to simply break even, there will be plenty of shares on the market that the shorts can use to cover. By definition, a short squeeze needs to have a scarcity of sellers to be effective. The real effective point of a short squeeze for Sirius, in my opinion, is between current prices to just under the $4.00 price range. At anything above $3.50, tired longs could well be willing sellers, and once those shares hit the boards, the short squeeze will taper off. Thus, it is my opinion that those hoping to see a concerted run (above $4 and towards $5) fueled by shorts scrambling to cover will not be very likely to happen. Simply stated, too much time has passed in this merger process. Had the DOJ ruled last November, and an FCC decision was expected in December, the short squeeze could have had much more potential.
Right now, shorts have a few safety nets in place. An equity in a channel, two strong resistance points, no announcement by the FCC, and longs that are battle fatigued. A merger announcement will take away some of that safety, and a pop on the news is expected. If the street feels that a decision is 1 to 2 weeks away, the shorts will have already begun covering next week, and until that FCC announcement happens, they are fairly insulated from the equity running away on them.
Time on a merger decision is likely quite soon. This will have shorts considering when to lock in their profits, but with all of those safety nets in place, they can still have a measure of confidence. At this point, they are trying to call the bottom, and realistically, the bottom is quite near to current levels.
For those that think the merger will solve the short situation…..there will be short traders who will also try to call the top of the pop on an FCC announcement, and the cycle can start again. The solution is solid company performance, and a clear demonstration the profits are happening sooner rather than later.
Some people are not fans of technical analysis, but one thing is certain. The equities have many investors who have been locked into an equity position that has had a ceiling for so long that it becomes hard to imagine that ceiling going away. These equities are trading on perceptions more now than ever before.
Readers who want more detail on my opinions on this subject can tune into the latest Sirius Buzz Radio show titled Satellite Radio Investment Perceptions
Position – Long Sirius, Long XM
How about the fact that the fundementals continue to deteriorate each month and that XM seems content to keep spending money like they are rich? Also that the credit markets have gotten worse?
It isn’t the shorts it is that.
how about this….
The fundamentals are not deteriorating necessarily. There is just nothing in terms of guidance to base anything on until a merger decision happens. Cash flows, and metrics are still scaling each quarter.
that being said, the shorts are not the cause either. The shorts are simply an effect of a stock stuck in a trading channel.
I would not say that XM is “spending”. Actually, they have cut back on expenses. they have some exisying deals that are not cash flow friendly, but all new activity is very measured IMO.
The short position is simply a trade. It can have impacts, but IMO, those impacts are not as huge as people make them out to be.
Credit markets are worse, but I do not see this as a stumbling block. The mergeCO will get the credit they need without much problem IMO
Tyler,
You are naive and hipocritical to say that the fundamentals arent deteriorating but the stock isnt being manipulated. Anyone who says the merger has value and is shorting the stock is being manipulative.
Who in their right mind that bought a stock before the merger is thinking of selling now that it’s approved and the stock is worth even less? It doesn’t make any sense whatsoever.
It’s all short sellers who catch a few stop losses along the way from the weak hands who bought during the time between announcement and DOJ approval because shorts have succesfully managed to break and confidence by outselling everyone.
Watch the daily charts and tell me thats normal trading… theres no way you can do that. Especially on this volume.
There is obviously few buyers which makes no sense but is likely because most people have their money in already and don’t want to invest more because it’s getting manipulated. It’s not because people don’t want to invest at these levels.
If you have money invested higher (example 3.75 before the merger was announced) why would you not want to pick up more if you have waited this long.
To me, the REG SHO list means that it’s pure manipulation and scare tactics. That’s all it is. It’s manipulation because they know that the investor is beaten down so they are terrorizing the stock. Shit like this should be illegal because they aren’t shorting because of a fundamental reason. They are shorting because they can steal $ off of retail because of investor perception (which you detailed in your webcast).
People say it increases liquidity, blah blah… the matter of fact is that right now it’s reducing liquidity because they are so many shorts that nobody wants to buy. They have effectively removed the buy side by making the stock look bad so they can say “look we met our target”.
To be clear, I don’t think a short squeeze will happen either because of lots of the reasons you detailed above.
All of this has to do with this joke of a merger process.
I am from Canada and I can honestly say that our government has done stupid things but I can’t remember a regulatory process that has been nearly as ridiculous as this.
The funniest part is the amount of respect competitors (under the guise of various organizations) get in the regulatory process. How many times do you need to hear the NAB stance from 18 different sources? What a joke.
The government has become a facilitator (intentionally or not) for the big investment houses to terrorize the stock.
Sirius intentions,
>>>>>You are naive and hipocritical to say that the fundamentals arent deteriorating but the stock isnt being manipulated.
I am not saying that the equities are not being manipulatied. Manipulation of these equities is quite easy. Particularly with the light volume over the last couple of weeks. Manipulation is a fact of life in the stock market.
>>>>>Anyone who says the merger has value and is shorting the stock is being manipulative.
This is not always the case. The arb play of going long XM and sorting Sirius is a strategy to guarantee a profit. It is not manipulating, it is playing the arbitrage. Those with converts that short are not manipulating, they are simply locking in a profit. Does the activity have an impact on these equities? Yes, but it is not manipulation in the classic definition. Manipulation in the classic sence is something like putting in small buys to get a small pop happening, and then shorting a much largee stake.
>>>>>Who in their right mind that bought a stock before the merger is thinking of selling now that it’s approved and the stock is worth even less? It doesn’t make any sense whatsoever.
Most longs who bought prior to the merger are in at prices above $3.50. Now with the equity not touching that level for quite some time, they may well sell just to get into something that does not take so long to materialize. Personlly, the shares I have re shares I intend to hold for quite some time. Others may not be so patient. Nearly all of my other investments have outperformed SDARS for at least the last 2 years.
>>>>>It’s all short sellers who catch a few stop losses along the way from the weak hands who bought during the time between announcement and DOJ approval because shorts have succesfully managed to break and confidence by outselling everyone.
Short sellers do have a bit of control. This is what I have been speaking of. When a stock has a channel that it trades in, it becomes an easy play. Traders can work this equity with little fear at this point.
>>>>>Watch the daily charts and tell me thats normal trading… theres no way you can do that. Especially on this volume.
It is not nrmal trading. I have seen many tings over the years with the SDARS equities. In the past, there was a fear to short because any positive move could spike the stock. Now that is not the case. The lack of a merger decision has tied the hands of this stock.
>>>>>There is obviously few buyers which makes no sense but is likely because most people have their money in already and don’t want to invest more because it’s getting manipulated. It’s not because people don’t want to invest at these levels.
Money is on the sidelines. The news will happen at some point, and buyers will step in. They may miss part of the initial pop, but there will be plenty of shares available to buy at any point in time.
>>>>If you have money invested higher (example 3.75 before the merger was announced) why would you not want to pick up more if you have waited this long.
Some will average down. Many are into other equities. With a near term pop to the $4’s, how worth wile is putting more money into this? Other equities provide better gains in shorter time, without a programmed “channel” because of the merger.
>>>>>To me, the REG SHO list means that it’s pure manipulation and scare tactics. That’s all it is. It’s manipulation because they know that the investor is beaten down so they are terrorizing the stock. Shit like this should be illegal because they aren’t shorting because of a fundamental reason. They are shorting because they can steal $ off of retail because of investor perception (which you detailed in your webcast).
People can get into a ton of trouble for failures to deliver. However, regulators rarely seem to take the stand that is needed. A play on fear? perhaps this is part of it. All I can say is that there is virtually no eqity that is safe from people who will take advantage of any edge they can get.
>>>>>People say it increases liquidity, blah blah… the matter of fact is that right now it’s reducing liquidity because they are so many shorts that nobody wants to buy. They have effectively removed the buy side by making the stock look bad so they can say “look we met our target”.
It is indeed frustrating. A long investor needs to determine a value of this company when profits begin to show. At that point many question marks will be answered. The merger will help to get there, but I fear we are not done seeing some funny activity on these equities
I agree with your statement about the arb play, and the converts, I forgot to mention that. So I have a question about what you think there.
Is the arb play driving down the stocks because the bigger the arb play the more shares are short, the more shares sold without buyers the bigger the decrease in price.
Also, I think that manipulation in the classic sense that you defined is happening.
The only reason people are looking elsewhere is their confidence has been shattered because the way the stock is trading doesn’t even make sense due to manipulation.
Aside from energy, ag, select tech and gold all the other opportunities are short.
I think by not acknowledging that it’s solely a play on fear of the retail investor is a misrepresentation.
People can do their own math and say there will be x billions in cash flow (or not) but no matter what they think they can’t push a stock like the big boys. They manipulate public perception by misrepresenting the stock in reports (downgrading after a positive, and widely regarded as unlikely, merger decision) and then making the stock look like it actually is performing like that with price action (short side).
Tyler, in addition to my comments asking about how the arb is in fact dropping the share price, do you think that if the merger is approved before options expiry there is a more or less likely chance of a squeeze assuming some guidance comes out at the same time?
I am going to cry foul if this approval also comes one day after options expiry.
Tyler,
Any comments on the last 10 trading days?
FCC approval date?
Do we just have to sit here and watch out stock go down for no reason each day?
>>> I am going to cry foul if this approval also comes one day after options expiry.
Crying foul will get you nothing; there is no conspiracy. There is no deliberate attempt to make option holders lose money.
The nature of options trading is that most people who trade them do it in an extremely high risk manner — I do it frequently, but with the knowledge it is gambling — which is what you were doing when you bought your calls expecting the merger to close at a particular point in time.
It is frustrating to sit and watch as options expire; I’ve done it many times (and in fact, hold a good number of calls today that are in the same boat). But this is the risk you take when you buy them.
At this point, it is unclear to me that even near-the-money option holders are going to be bailed out by the merger. It really looks as though the markets have realized the merger doesn’t materially improve these companies’ prospects (which is correct, IMO).
That part was mostly a joke hippo.
I don’t own any very near term calls, I picked up some sept 3s calls and I own some leaps. I just want to see the incremental buying volume from all the calls in the money because I don’t think lots of those shares are available for purchase which is why they are on REGSHO, etc. If those shares are available it might make them less available for shorting after they are purchased from the institutions who are doing all the writing.
I certainly agree that the merger may not bail out option holders and it’s likely the price will get held below 3 even if it did go through so that the SIRI options stay out of the money. As more money from the sidelines flows in this may be harder to do.
To add to what I was getting at above, you don’t think it’s moderately suspicious if both decisions are made the monday after options expiry?
To me that’s pretty suspicious because someone wants control of those shares… even if it’s for shorting…
One last thing hippo, This had more to do with your opinion about merger synergies etc.
You don’t think that the companies can reduce SAC?
You don’t think that combined entity has more bargaining power with the automakers and distributors?
You don’t think that the A la carte pricing will be acretive?
You don’t think they will be able to retain more consumers with a combined marketing campaign and product offering?
You don’t think long term savings in terms of infrastructure are also a positive. (I suppose if you think they will go BK first that’s moot).
You don’t think the chances of SDARS standard in cars has increased dramatically with the merger?
I think it’s hard to deny ALL of these… some could be argued.
I also agree that substtantial FCC concessions are a risk (but unlikely) and I think that refinancing the XM bonds will result in slightly higher interest expense (which would still be manageable).
SiriusIntentions, Dont bother with him He will go arround in circles, and give half truths or give what he believes, as fact. Examples: He tried to say Stern has 1.2 million listeners when it is a fact, his loyal listenership while at Viacom was just over 12 million not 1.2. His fanatical listeners were estamated at between 3.2 and 3.6 million (the lower number being the extremely fanatical the higher being the less extreme). He tries to say SIRI did not want growth because the radios cost to much, so they would have rather not, have had the growth Stern brought to them. He says They had 2.5 billion in losses sence Stern came to them and analyst were only calling for 500 million per year. He forgets to include the subsidy cost for the OEM ramp up in penitration, He also forgets to say the same analyst that were estimating the cost also were not even close to their estimates on growth. He then tries to say that these fanatics that joined just for Stern will leave in 40 months, like they are the average subscriber. Try, it is more likely then not, they would stay as long as Stern does (60 months at least).
He cant admit when he is wrong. He will not go down your comment and answer each part. He will skip the parts that prove him wrong then try to return to a point that you proved him wrong in 5 or 6 post earlier that supports his arguement at that point. It is why it takes 30 post to prove to him he is wrong on something a simple as SIRI/XMSR did not compete strongly for each others CURRENT subcribers. Now I know the DOJ had all the documentation from both companies to show this, and thats why they said they did not compete in the least for each others current subcribers. This is something most people with some common sense would find it easy to figure out, but it took Hippo/frontMed 30 post to realize nothing. Because he still believed in his false position.
I just want to hear his opinion on the line items I was talking about. If he doesn’t think all those things are enough to “save” the companies then that’s fine by me I just want to see if he sees value in those points.
He has already said he thinks if the merger is approved then they will go bankrupt.
He has made himself out to be such a nut, that even when he puts a intelligent statement out, like his last one. Alot of people already start out to distrust it, and him.
I still want to hear from him if he thinks there is any value in those items. If he sees no value in any of those items and he thinks that the merger is in fact detrimental then he is right that the companies will potentially go BK.
SiriusIntentions, that is your privlege here. What I dont get though is if you get false information how does that help. If you were to ask someone for directions to someplace and they give the wrong ones, does that help you get to where you are going.
I just want to hear what he thinks because:
-if he says no to all of those items then that’s his fair analysis that the companies might be in trouble if lots of people stop buying cars
-if he says there is synergies but the companies are still going bk then I just think that his analysis is flawed
-if he thinks theres are synergies but they are offset by fcc conditions then that may be a risk until FCC forms a decision
I guess I just want any details to understand what he thinks rather than a blanket statement that they are goign bk.
If he states things that I think are flawed, he is still entitled to his opinion and I can still form my analysis based on what I think is different.
I just want to understand what he thinks the underlying problems are.
>>> You don’t think that the companies can reduce SAC?
I sure think it is a possibility; however, I also think it could go the other way. The fact is we do not know enough about what their plans are to make any real assumptions about SAC. For example, without knowing whether they will build a dual mode receiver, and without knowing what the subsidy would be on it, it is impossible to know what may happen with SAC.
Everyone seems convinced that marketing costs will come down, but we just cannot say that at this point. They are going to own two valuable brands, and it is unclear how they will choose to use them. My personal view is that marketing cost savings will occur, but be much smaller than most people expect.
>>> You don’t think that combined entity has more bargaining power with the automakers and distributors?
Nope, I don’t. There is no reason I can think of that the OEMs would be likely to accept less money from the merged company than from them individually; they don’t NEED satellite radio; satellite radio NEEDs them. The GM price tag would likely come down when the deal is renegotiated next time anyway. As to distributors, they aren’t really part of the picture — Sirius is paying through the nose to have port installs in a few Toyotas, but this relationship will be going away in the next couple of years anyway.
Can you think of a compelling reason to believe OEMs will just cut what they charge?
>>> You don’t think that the A la carte pricing will be acretive?
Absolutely not. It was a huge mistake, and will destroy ARPU. There is no chance, IMO, for ala carte to produce as much ARPU as the current setup. No way at all.
>>> You don’t think they will be able to retain more consumers with a combined marketing campaign and product offering?
Well, more marketing is better, but both companies have been grossly incompetent in their marketing to date. So, if they’re going to throw twice the money at it, there should be SOME benefit — but that sort of flies in the face of all the synergies predictions about marketing costs coming down.
I think nobody, virtually NOBODY, will buy both services. I can envision, for example, a number of XM subscribers wanting to get the “best of Sirius” and vice versa. This is the reason I think they’ll back out on the dual-mode receivers, because they have to realize that the average consumer simply isn’t going to pay the tab.
>>>> You don’t think long term savings in terms of infrastructure are also a positive.
Sure, it would be a positive if it happened. But you cannot have the long-term savings in infrastructure and have dual-mode receivers at the same time. You get one or the other. At any rate, we’re talking many years down the road — XM has brand new satellites right now, and would not need to spend another nickel on satellites for 12 years or more. Sirius, OTOH, will have to spend a billion dollars over the next several years according to their current plans — so any real savings is more than 10 years off, which effectively makes it meaningless when discounted.
>>> You don’t think the chances of SDARS standard in cars has increased dramatically with the merger?
No. For the next several years, it is going to be an absolute mess trying to integrate the technology in a cost-effective manner. OEMs will still have to choose one or the other for the foreseeable future. It will be at least 4-5 years before there would be any change in the OEM arrangement — unless OEMs will halve the lead time on installs (which both XM and SIRI would like for them to do).
>>> I think it’s hard to deny ALL of these… some could be argued.
I guess you can argue about anything, but as you can see, there are great inconsistencies that have to be reconciled before one can conclude that any of these things is a net positive for satellite radio.
>>> I also agree that substtantial FCC concessions are a risk (but unlikely) and I think that refinancing the XM bonds will result in slightly higher interest expense (which would still be manageable).
The debt is a big problem, in that the combined company will have 3 Billion in debt and no real prospect for paying it off; in fact, they are going to have to raise more capital soon after the merger.
I know you guys want to believe the company line, but it simply isn’t reality. One need only read David Frear’s synergies analysis, which is immediately recognizable as the work of an absolute amateur trying to mislead other amateurs. No one who has ever done this work professionally would be sucked in by his remarks.
>>>> Examples: He tried to say Stern has 1.2 million listeners when it is a fact, his loyal listenership while at Viacom was just over 12 million not 1.2
I was going by the published figures after he moved to Sirius. How many listeners he had before he went to Sirius is immaterial. The question is how many he brought with him.
Once again, who is writing the half-truth?
Thanks for clarifying hippo, I can see there’s ltos of places where we differ now.
I think SAC will get slashed (but will be offset slightly by increased costs for dual-mode receivers when they are available)
I think the OEMs will negotiate down if Sirius/XM agrees to put it into more cars or make it standard and you’re right that the GM one will be negotiated down likely to the Chrysler/Ford/Honda/Toyota levels whatever those become.
I think ARPU will be neutral or accretive and if it’s neutral it will only be a result of increased conversion by 10%(?). So that 10% might be the portion of people not willing to pay higher than 6.99 which will now be captured. I doubt that out of existing subs, more people will take less than more.
Regarding debt, I think that once you have the subs you have the cash flow to pay it off and I think they’ll get that cash flow at a lower cost than as 2 seperate companies.
>> I think SAC will get slashed
As with all these costs it is fine to “think” they’ll be cut, but if you cannot put some kind of number on it, it is meaningless. SAC could get cut some, but increase some as well. When the companies come out and say, “After the merger we expect average SAC between the two companies to be (for example) $80”, then you have something you can work with. Until then, it is just sheer speculation (which normally proves to be unwarranted).
There is no reason at all to think that OEMs are going to negotiate down ANYTHING. Would you? If you were running DCX, would you make a concession to the “new” Sirius? If so, why would you do that? What would be your motivation? And what about the “new” Sirius would make it more appealing than the “old” Sirius?
I don’t know of anyone who listens to 50 or more different channels on satellite radio. It is really hard to see why anyone would subscribe to 50 or more. I think it is highly likely ARPU will go down somewhat. But again, it is anyone’s guess. So, do you REALLY want to continue to hold this slop based on a guess, given all the bad history these two companies have turned in?
As to debt, I’m not sure where you’re getting the idea they may be able to pay it off anytime in the foreseeable future. It just isn’t happening. They’ll have 3B in debt, need to borrow another billion in the next few years, and there is absolutely zero hope of repaying all that debt in the next 10-15 years, UNLESS they are able to sell some assets to do it (like SIRI’s spectrum and infrastructure, once it is decommissioned, for example).
A great deal of this is a person seeing what he wants to see. I’ve been there and done that with these two companies, and I could have made a hell of a lot more money if I’d not assumed management was “taking care of it”. They aren’t.