Last year, investors were bracing for the unknown. The U.S. government could not pay its bills, and stocks tumbled as people bought gold and silver. And many took out huge sums of cash in anticipation of a government collapse. Here is an example of the public sentiment at the time:
But what if the August 2 deadline to raise the debt ceiling comes and goes without a compromise? The effects of a government default are usually described in general terms: It'll be bad, say most economists, really bad. Or in abstract terms: Investors are likely to lose confidence in the U.S. The dollar will lose its "special status."
Yesterday, I wrote an article examining the difference between buying metals versus Apple (AAPL). Ultimately the investors who chose Apple profited compared to those who chose either gold or silver. And over the year the market in general, as bad as it was, outperformed metals in the end:
However there are still a lot of skeptics. Usually that investor is also buying 10 years worth of food and living supplies. He/she fully expects the government and financial system to collapse. However most people don't fit in that small segment. And now that metals have come down in price recently, there is a new investor interested in that market. Shareholders in stocks like Sirius XM (SIRI) are questioning what to do now:
Where do we go from here? That seems to be what many Sirius XM investors have been asking themselves lately. With a week that opened and closed right around $1.85, the back and forth across a few Sirius XM message boards has been speculation on two questions. Why? And where do we go from here?
Over the last year, Sirius has beat silver, but not gold. Anyone looking at this chart might think that it would be smart to sell Sirius and buy silver. However there are two things to keep in mind. First since it is an election year, it is highly unlikely that 2012 will be a repeat of 2011 for stocks. So I do not see the metals going sky-high over the next year. And second, Sirius is undervalued based on the uncertainty of a Liberty (LMCA) buyout, according to the above article. The average target price is $2.50.
The entire market rallied Friday, yet Sirius was down. But this uncertainty will not last forever. And it is during these times that an investor can capitalize on other peoples' fear. Just ask any of the Sirius shareholders who bought when the company was on the verge of bankruptcy several years ago:
Some of those investors got the stock for as little as ten cents a share. At the current price of $1.85, that is a gain of 1,750% in a little over 3 years. To give you the magnitude of this gain, consider that if Apple were to go up that much in 3 years. The price would be over ten thousand dollars per share.
But for new Sirius XM investors the story is different. With a recent high of $2.41, the shares have fallen 23%. And there is the fear of a technical "Death Cross" on the horizon. This occurs when the 50 day moving average falls below the 200 day MA. This does not affect retail investors, because they can use their current knowledge of the situation to evaluate whether to sell or not. But for the institutions and funds, many will lose their shares in a mechanical sell-off, which then causes the shares to fall further. Most machines are set to sell when the cross occurs, unless the machine is re-set. According to Yahoo, as of June 29, the 50 day MA is at $1.99 which is still two cents above the 200 day MA of $1.97:
You can see the damage (although temporary) when there was a Death Cross last October combined with the retirement of some bonds and a complex shorting situation. The 50 day EMA has already gone below the 200 day EMA. Most analysts look at the EMA as a prediction of a trend. In October the EMA crossover happened at the bottom of the drop. Because of this I think the Death Cross is already baked in to the current price. And unless this is combined with a lot of bad news, we should be at or near the bottom.
The Death crossover is opposite of a "Golden Cross". The machines will buy when the 50 day MA crosses on top of the 200 day MA. This happened in January when a positive announcement about subs combined with a Golden Cross. The shares jumped up 24 cents from $1.82 to $2.06 in four trading days.
The second quarter ended Saturday. And there is a very good chance that any good news will start leaking out beginning Monday. It was the day after Q4 2011 closed, that CEO Mel Karmazin made his historical January announcement mentioned above. And it caused the biggest short squeeze that I have ever witnessed. So if you are long or short on Sirius right now, I would not bet your rent money. Long term the company is an excellent investment. Short term it will go either way depending on actual news. I am long, and I am betting on some good news.
Disclosure: I am long SIRI.
Additional disclosure: I will continue to buy Sirius stock on the dips.