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Sirius XM Cramer Wars Part II

by: Brandon Matthews August 25, 2008 | about stocks: SIRI    

Brandon Matthews

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There has been a lot of reaction to my latest SiriusBuzz article regarding Jim Cramer, Goldman Sachs (GS) and a whole bunch of Sirius XM (SIRI) convertibles they hold. Seeing as the article deals a lot with perspectives, I’d like to offer yet another perspective. I realize that I may be beginning to sound like a person who needs heavy doses of medication with this one, but see if you can follow me on this…

Let’s assume that Cramer is in fact a Goldman puppet, as many have speculated in the past. I am not saying he is, but for argument's sake just go along with it. What if ( and I stress “what if” ) Goldman holds too many of these convertibles? What if Goldman is looking to dump these convertibles but as yet has found no takers? What if, in an attempt to create a market for these converts, they talked Cramer into a new line of thinking, knowing he would announce them on national television? “Buy! Buy! Buy! The converts! “

The problem is that near as I can tell, Goldman Sachs is the number one holder of these convertibles. Next in line is Bank Of America (BAC), although they hold a miniscule position, comparatively. The implication I’m of course making is that Goldman itself would have the most to gain from these proposed convertible sales, and Cramer’s recommendation to purchase these converts benefits his former firm more than any individual investor. Broker calls client, explains how Jim Cramer recommends them as an investment also, and “BAM!,” trade is executed.

With Sirius XM’s credit rating looking to improve near term, the value of these convertibles in the open market declines, which means a drop in Goldman's portfolio. By keeping the stock price suppressed, if that is in fact what these bond bullies are doing as Cramer suggests, the convertibles become more attractive to buyers. Imagine the sales pitch of offering for sale a plus 4.00 stock for 1.40 a share, at a predetermined time that the bond bullies decide to cover. A separate argument could then be made that this is the reason that Goldman has been accumulating shares while lowering their price targets.

It’s just possible that Goldman knows these convertibles are a losing proposition for Goldman, and would like someone….anyone... to take them off their hands. I know I’m not making friends with any of this, but as an unsophisticated investor, I’m doing my best to improve my understanding of sophisticated investments.

Position: Long SIRI, no position GS, BAC

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This article has 37 comments:

  •  
    Aug 25 06:42 AM
    Hello... SEC... Anyone home?
    Reply
  •  
    Aug 25 07:27 AM
    Nothing would surprise me Brandon. This basically supports the trading strategy of doing exactly the opposite of what Cramer says. More ammunition for Cramer's indictment and his inevitable meeting with Bubba in the shower. Sooner or later he will be reeled in by soemone cutting a deal with federal prosecuters. His buddy Eliot can't protect him any longer.
    Reply
  •  
    Aug 25 09:03 AM
    I have seen Cramer's video where he rather blithely says we should all buy the converts rather than the common. Now Mr Matthews blogs on the subject....
    When I first saw Cramer my immediate reaction was HEY, WAIT A MINUTE!! My understanding from reading the 8K's that SIRI filed first week of August explaining the issuance of the converts was these were UNREGISTERED PRIVATE PLACEMENTS, issued under Rule 144A, available ONLY to qualified institutional investors, and NOT AVAILABLE to retail investors like you and I. So my feeling is all this discussion is moot.
    I haven't until now expressed this thought elsewhere. I invite comment from those of you who have some real insight on this subject, not the many of you who (like Cramer in this case---I think!) have no real knowledge!
    A
    Reply
  •  
    Aug 25 09:06 AM
    Anyone like Cramer that pumps and dumps stocks like he does needs to be investigate.
    Reply
  •  
    Aug 25 09:22 AM
    Sure, there is a lot of garbage out there regarding Cramer, people get emotional. Still, my point in writing this post is apart from the wild Yahoo message board. The real questions behind all of the talk about Cramer is this, is he a good or bad person? Is he someone who deserves to be a force? Is he an entertainer or a stock picker? Whose interests are most important to him? For me, the answers to these questions are very clear. People have a right to ridicule him. To talk about some crazy ideas that people come up with as a general way to disparage people who attack Cramer is frankly distracting. So my last question is, in letting TheStreet.com reprint some of your material, TheStreet.com really being Cramer's machine, are you in Cramer's pocket?
    Reply
  •  
    Aug 25 09:25 AM
    Wait till sirrius partners with i-tunes and tivo to listen click and store on the go. here a song you like? click and add it to your sirrius device on the spot then have it emailed to your laptop or a freind as a gift. It will be billed to your i-tunes account with a spiff to sirrius for gaining the business. music doesn't sell music, people(personalities) do.
    Reply
  •  
    Aug 25 09:28 AM
    wait untill sirrius partners with i-tunes and tivo. Here a song you like? just click and have it added to your mobile device and emailed to your laptop or a freind as a gift. billed to your i-tunes account with a spiff to sirrius for gaining the business. Music doesn't sell music, personalities do. already can digitally record sirrius songs on sat tv recorder
    Reply
  •  
    Aug 25 09:48 AM
    When listening to the Kramer/Karmazin interview from Cramer's show 9I think it was a week ago,) Cramer distinctly said (A couple of times) that in his previous trading days, he would buy the converts and short the stock as much as he could. I have a feeling that is just what GS is doing. Whether Cramer himself is doing this, one can only guess.
    Reply
  •  
    Aug 25 09:50 AM
    BURTBECK, You are correct that the converts just filed are a private placement and not available to the public, but sold only privately to "qualifying institutions" and "Hedged" by shares lent by Sirius at the time for all potential bond buyers. Those are not the Bonds / Converts being discussed above. GS does not have the business for those bonds nor do we know who has purchased them yet. The issuance or purchase period is yet to expire. End of the month I believe.

    The bonds that GS does own are Sirius 2-1/2% converts expiring in Feb. 09 and are unsecured by any of Sirius' assets. They are convertible at a $4.41 / share rate, meaning share price would have to be considerably higher for anyone to convert. They were issued in Feb. 04 ($250 Mil) and March 04 (50 Mil). Needless to say these bonds were shorted a long time ago by GS who does hold $127 Mil of these converts or 42.3 % of the 300 Mil face value.

    GS also holds around $73 Mil of the $400 Mil, 1.75% converts the XM has coming due in Dec. 09. I am struggling to see what their investment in these converts has to do with their manipulation of the stock price at this time.
    Reply
  •  
    Aug 25 10:29 AM
    cos1000: Good morning! I appreciate your input re the cvt issues that are being discussed. I have long been aware of SIRI 2 1/2% due 2/09 and now the XM 1.75% issue due 12/09.
    My question on these cvt issues is the same---IS THERE A PUBLIC MARKET? I have never seen one-- no Moody ratings, no quotes, no listing on quantumonline.com, no listing in Moody's monthly big red Bond Record, etc etc. Further, I have just 5 minutes ago had a phone conversation with the FI Dept at my large national brokerage and they can find NOTHING to help me on my question "How can I buy these bonds?" They say any unregistered 144A private placement issuance would not be on any of their data bases, and they suspect these cvts were originally so issued.
    Can you amplify? CUSIP numbers would indeed be helpful.
    Reply
  •  
    Aug 25 12:22 PM
    Feb 2009 Converts Cusip 82966UAC7
    Reply
  •  
    Aug 25 12:43 PM
    XM's Dec 2009, 1.75 % Converts Cusip are 983759AC5
    Reply
  •  
    Aug 25 01:31 PM
    By the way the 1.75% converts have been renegotiated to 10% still due in 12/09 but not forced to fund upon the merger. This was a pre-merger agreement.
    Reply
  •  
    Aug 25 01:58 PM
    BURTBECK, as far as I can see the private sales are through a "derivative" process utilizing hedge funds. The share borrowers, Morgan Stanley Capital Services, Inc. and UBS AG, London Branch as the actuaries of the transactions. The shares borrowed, refers to the "convertible arbitrage" transaction that the buyers of the "13% Notes" have when buying the Notes and Hedging their investment in the Notes by "Shorting" the underlying equity. In this case SIRI. Unless your a qualified buyer under the terms of the bond offering, you will not be able to purchase this bond, period.

    There were 262.4 Mil shares lent to the share borrowers to the Share Borrowing Institutions to consummate the 13% Bond sales for XM. There are 183.7 Mil shares available (lent) for the purpose of "shorting" and supporting the XM 13% convertible bond sale concurrently. In addition for every share involved in the lending process and utilized by the purchasers of the bonds, the share borrowing institutions agree to purchase an equal "long" stock position for every share shorted by the bond holding institution (this is meant to minimize the shorting activity). The rest of the shares are held by the share borrowing institutions for sale to the public from "time to time" as they institutions decide and will announce. In all cases when the in 2014 when the bonds mature the shares must be returned to Sirius Xm Radio by the borrowing institutions.

    In short, without the details, you can see how confused this transaction is to the average: "I Like The Product" Investor. So Cramer and anyone else can just scream out when they see the 13%, "Buy the converts" but there is now way to do that. The bottom line for this company and the common shareholder, will be for them to increase all of their revenue streams available in such a way as to totally overwhelm their debt obligations. Over time paying off the debt and then buying back shares will result in long term increased shareholder value.
    Reply
  •  
    Aug 25 02:18 PM
    1. Let's not be stupid here. Jim Cramer is a television personality and has been for seven years. He makes more, a LOT more, money from his media projects than he ever did as a money manager, and he would be out of the TV business and in prison if he was participating in some sort of price manipulation scheme. HLS grads are not usually that stupid, notwithstanding Alberto Gonzales, Client Number 9 or Tom Cruise's character in A Few Good Men.

    2. Following from point one, saying "Jim Cramer recommends X as an investment," is like saying, "Ben Stein says you should own a variable annuity." (He does, and sales of variable annuities are not picking up.)

    3. General Electric and its various subsidiaries surely have some sort of policy that discourages its employees from using company property to further massive securities fraud schemes. That may even extend to Jim Cramer having all or most of his money in blind trusts or something, since, you know, he talks about stocks and stuff.
    Reply
  •  
    Aug 25 02:30 PM
    Someone Should Ask Jim Kramer--How Often He Has Contact with Mel Karmazin, and Anyone One Else--That Has A Financial Interest In Sirius Stock, Or Other Financial Instruments.

    And I Don't mean the CASUAL Day Trader, Or Audience Member--I Mean People That hold SUBSTANTIAL Sirius Stock, Or Debt.
    EMIL J KOVACH JR
    Reply
  •  
    Aug 25 02:45 PM
    cos1000. So what is the bottom line. Stock will not go up until shares are bought back, debt paid down and subs rise and how much and when. Is news after labor day going to do anything? I wont sell but I am not convinced that this will not take a very long time and much more pain. Why are puts and calls up in the 20+ dollar range for Oct?
    Reply
  •  
    Aug 25 03:27 PM
    I'm not an expert, but given the current SP, your probably tracking some old outstanding put and call contracts for XM. Otherwise that's not what I'm seeing for Sirius Xm contracts.

    217738, As far as the stock price, my outlining of the stock lending on the recent converts at the time of merge was simply to clear up the confusion about these shares. They are not as dilutive as everyone has described, hyped, and shorted the stock on. If you want to buy these 13% notes, you can't. If you want to use these lent shares as a retail investor to short the stock: "Forget about it", period. Of course your and my explanation of what the company needs to do is obvious to raise the price of the stock. The company, after the FCC appeals date, around noon on the 27th of August, and after Labor Day needs to announce plans for the Debt, plans for the Debt, and plans for the Debt refinancing, along with solid well defined guidance on merger, increased revenue programs, an Oh Yeah, all the new toys to listen to their content on. By the way did I say they need to define a way to explain their plans for paying down the DEBT.
    Reply
  •  
    Aug 25 06:11 PM
    @wardo "already can digitally record sirrius songs on sat tv recorder "

    I think you are mistaken, at least with XM content on Directv you can not use any of the recording features of a DVR/Tivo
    Reply
  •  
    Aug 25 06:33 PM
    Cos.................ag... thank you for your in depth, cool-headed, hard work, and advice. You are our liferaft in a sea of angry waves. killer.
    Reply
  •  
    Aug 25 06:35 PM
    above........darn computer!................ read........ again, thank you...
    Reply
  •  
    Aug 25 08:41 PM
    cos1000: Thanks again for your input. You are academically correct that SIRI has a big challenge in paying down debt and should prioritize such a project. But I believe that is a long way off---I believe it is entirely possible they will first need to take on MORE DEBT just to stay in business. The less than $500M cash on hand going into the merger will not last long at the rate of negative cash flow the proforma operation experienced FH08. Monthly bills cannot be paid with Mel's blathering. They need to do everything possible to race toward cash flow positive ASAP.The $400M in so-called synergies must be very quickly realized. I don't think the market appreciates what a gigantic burden $3+Billion LTD is ( interest alone now is way more than $100M annually) --and the convertible feature will not come into play if the stock does not more than triple from present level. In other words, maturity dates require either payment (with what?) or refinance (given the lousy financials, quite a challenge). Any debt paydowns will not be before 2010 earliest and stock buybacks quite a bit later.
    I believe the post Labor Day guidances must give line-by-line and quarter-by-quarter specific goals that are realistic and PROVE 2009 CF positive, not just more hype and platitudes. I sure will be tuned in!
    Reply
  •  
    Aug 25 10:19 PM
    I understand the "what if" position except for the fact that what has been quietly missed is that there is more upside for GS then is most "commonly" known. See GS has to
    1- Stand behind the GS analyst
    2- While holding a Convicted Sell Rating they were holding almost 1 million shares.....
    3- But then once they show that the only good thing about this transaction (merger) and still if you can believe it, all the while still touting a Convicted Sell Rating THEY - GS!.... Actually have bought hundreds of thousands of more deflated shares shares sold in panic on their recommendation to sell ASAP!....
    4- they stayed safe still playing the ARB game, coupons at one end and shoring up "long' on the other end conveniently provided by a GS Analyst sell rating....
    5-They looked like they are just bond holders but there not... they could convert the bonds or lose a % if -WHEN the stock moves from this low point......... and they know it will, hell they started this run on the stock with one Rating change....

    Just check PLEASE!!! the GS holdings before the merger then check the recent record of the last two weeks on GS holdings...PLEASE!...T... WRITE AN ARTICLE on how a company can say to their customers.SELL SELL SELL! so we can buy buy buy!!!!... then tell me if there isn't something up!!!!

    Thanks RONQ NNJ
    Reply
  •  
    Aug 25 11:25 PM
    RON NNJ: What is your source for GS owning "almost 1 million shares" and now "actually bought hundreds of thousands more (of) deflated shares sold in panic on their recommendation to sell" ???
    I'm having a hard time believing this.
    Reply
  •  
    Aug 26 09:03 AM
    Burtbeck, as of June 30th the form 13F link to the FCC:

    sec.gov/Archives/edgar...
    Reply
  •  
    Aug 26 09:03 AM
    Sorry I have the FCC on the Brain: SEC
    Reply
  •  
    Aug 26 10:39 AM
    cos1000 and RON NNJ: Thanks, cos, for your continuing help. This gets sort of interesting. The five stockholdings do add up to about 5M shs, which on 6/30/08 was about 3.3 percent of SIRI shares outstanding. My next questions are (1) how many might be routine trading desk inventory, which does not represent an INVESTMENT decision, then (2) how many might be held by GS as nominee for investors like you and me, also not a GS 'investment'?
    Looking at the entire filing, which of course is a mile long and has many hundreds of issues very many of which are in $$$ amounts that are 'peanuts' for GS, I just cannot believe GS would in effect have a proprietary unbelievably diversified inhouse mutual fund where every one of the issues listed in the filing represents a conscious bullish investment decision by the highly paid GS hotshots. What say you on this thought?
    Reply
  •  
    Aug 26 02:35 PM
    All Cramer is on the TV for is two things; entertainment, which is good for the advertisers that pay his and his bosses salary, and to be a front man for the corporate big boys who buy and sell stocks buy the millions. Being the Wall Street Guru that he has been for years, he has to have plenty of inside information, so there is no way he couldn't have know about the infamous bond situation. It seems that the big boys wanted to short the Sirius XM stock all along at the little guys expense, with the help of their front man Cramer.
    Reply
  •  
    Aug 26 02:36 PM
    All Cramer is on the TV for is two things; entertainment, which is good for the advertisers that pay his and his bosses salary, and to be a front man for the corporate big boys who buy and sell stocks buy the millions. Being the Wall Street Guru that he has been for years, he has to have plenty of inside information, so there is no way he couldn't have know about the infamous bond situation. It seems that the big boys wanted to short the Sirius XM stock all along at the little guys expense, with the help of their front man Cramer.
    Reply
  •  
    Aug 26 04:13 PM
    cos, the 13%'s are not converts. they are straight notes at 16%ytm...
    Reply
  •  
    Aug 26 05:33 PM
    jswede, thanks for picking that up. My aug 25th 1:58 PM post all is the same as described but not for the 13% Senior due 2014 with some maturing earlier in 2013. These are paid twice a year on Feb 1 and Aug 1 with an annualized rate as you say. They are also unsecured.

    The above description that I used for 13% notes are actually for the XM recently filed and currently being offered are the 7% Exchangeable Senior Subordinated Notes due in 2014.
    Reply
  •  
    Aug 26 07:09 PM
    BURTBECK, The one thing that has been pointed out to me about the 13F is that it does not show their current short positions that they hold for any of the companies they own. Just puts, calls, prn in bonds, shares held and market value as of the filing date. Without this information its hard to tell their near term strategy, but clearly it does show their long interest into the success of these companies.

    I did a break down on put / call ratios and they represent a bullish hedge for siri and a bearish trend for XM. I put little weight in this assessment without knowing their overall "short" interest in each.
    Reply
  •  
    Aug 26 09:35 PM
    cos1000: I continue to think the vast majority of the shares listed in the 13F are held by GS as nominee for beneficial owners apart from GS. These would be all the various types of institutional investors as well as a few wealthy retail types with accounts at GS.

    I think I have my decimal point OK and if so the total adds up to (my corrected total) 9.513 million shs pre merger 6/30/08., about 6.3% of the company. Note GS is not listed as owner in the Yahoo "insider" pages, which supports my above thinking.

    If they are in fact true beneficial owners of these shares and are same time involved in a shorting strategy, all short positions up to this 9.513M share total are "against the box", are a 'wash', and pointless.

    My bet is the GS company DOES own the $127.7M mkt val of the 2/09 cvts as an investment and any shorting of the common ---arb activity against this position--- makes sense, although even the sagacity of holding the cvts is mitigated by the slim 2 1/2 percent coupon and the big market price movement needed to get to $4.41 conversion.
    Reply
  •  
    Aug 26 09:43 PM
    I'm sorry! Big mistake---9.513 M shares is a big number but is only a VERY TINY percent of the 150BILLION shs SIRI had outstanding 6/30/08.
    Reply
  •  
    Aug 26 09:46 PM
    It's been a long day! Make that 1.50 BILLION.
    Reply
  •  
    Aug 27 09:59 AM
    Burt and Cos............. thanks for the above info,statistics, and indepth study of this shorting issue. Very helpful to me.
    Reply
  •  
    Aug 27 05:15 PM
    Brandon is a lucky fellow. He stirs the pot with a second rate conspiracy theory and two extraordinarily informed readers bring their knowledge to the table for a worthy read.
    Reply
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