Bears Sell Sirius XM Short Right Into The Strong Hands Of Liberty

| About: Sirius XM (SIRI)

Every two weeks Nasdaq releases short data from earlier in the month, and as of September 25th, the short data has been disseminated for Sirius XM (NASDAQ:SIRI).

For readers looking at this data there are important things to understand. First, this data comprises all of the short interest at the close of the day three trading days prior to the settlement date listed. Second, this short data number includes all shares short at the time, hedged or unhedged, and are not all "naked" shorts betting on a sharp decline in share price. Third, by the time the short data is released, the information is from a single day nearly two weeks prior. It's old information and that should be carefully considered when using it to make estimations or predictions of current or future events.

With that caution in mind, let's take a look at the latest short data released by Nasdaq for Sirius XM.

After hitting a low point of roughly 260 million shares short on 8/15, Sirius XM has seen its short interest increase by approximately 7.5%, to nearly 299 million shares. This is an increase of roughly 39 million shares sold short. While it is typical to see such an increase with share price appreciation, the fact of the matter is that on 8/10 the share price closed at $2.48 and on 9/11 the share price closed at $2.49. For all intents and purposes, these prices can be considered equal.

So we have 39 million shares entering the market as short positions, and absolutely zero movement in the share price. Where did they go, and what could that potentially mean in the future?

To answer that, consider the form 4 filings from the same time period. As investors in Sirius XM well know, Liberty Media (LMCA) has been buying up shares in pursuit of de jure control of the company, and yet the share price has not budged from all of this buying pressure. Perhaps the shorts are the reasons why?

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In looking at the table in the image above, two things should be clear with some simple math.

From 8/15 until 9/11:

  • Insider sales for Sirius XM totaled 19,095,030 shares.
  • Purchases by Liberty Media totaled 106,119,937 shares.

Assuming Liberty purchases nullified all sales by insiders, Liberty still had overall purchasing effect of 87,024,907 shares. Were all of these shares dumped by holders of Sirius XM within 1 month? Not if you consider the short data and assume Liberty's purchases gobbled them up. The additional short count of 39,179,257 was easily swallowed by Liberty's remaining purchases, and subtracting these from Liberty's purchases yields a final purchase count of 48,845,650 shares from existing holders.

Fellow author Spencer Osborne had an excellent article dealing with what may have happened on a technical level that allowed Liberty to gobble up these shares as sellers attempted to either sell, or short, the peak as Sirius XM crested near $2.60 and began to fall in price. Such peaks are usually perfect points for bears to initiate short positions with intentions to cover as the share price drifts lower, and for bullish traders to lighten up or sell out and wait for a new bottom to re-enter. What better place to pick up shares if one needs a large amount of them as Liberty Media did? As moving averages drifted up and bollinger bands tightened, Liberty was able to secure the vast majority of the rest of the shares it needed to come within a stone's throw of control of Sirius XM, all without moving the share price. Brilliant indeed.

While knowing what happened is all well and good, how might this affect the share price going forward? While it is difficult to say what the short interest is currently, as that data will not be available for another two weeks, if it is assumed that these shorts have not covered their sales on the short trip down to the $2.35 area Sirius XM recently made, they present buying pressure going forward. A share that is short is a share that needs to be purchased in the future. Another move by Sirius XM, perhaps from Q3's numbers, or from 2013 company guidance, or from an FCC "go ahead" to Liberty on its request for permission to go to a controlling stake, could end up in another short covering spree like was seen in early August. That rush by shorts to cover contributed to sending shares up some 25% in only a few days.

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This is something that is important to consider. Shorts have sold right into Liberty's hands, and Liberty will not be divesting itself of this position any time soon. Because of this, these shares are not in the hands of traders, and not in the weak hands of retail longs who might sell on a moment's notice. They are, for all intents and purposes, removed from regular trading. That could present a problem for those currently holding short positions, and they may not find suitable prices at which to cover at a profit until the next jump up. With 2013 guidance due to be released soon (many expect October for this) as well as Q3 numbers rolling in by next Monday, and an FCC response many believe is a shoe in for Liberty, those with current short positions may want to consider covering here for a wash, lest they find themselves at the mercy of another potential run.

Disclosure: I am long SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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