By Relmor Demitrius
One June 25th, this Friday, the Russell family of indexes will have its yearly reconstitution event. This event adds and deletes companies on their Russell index’s and tracking funds. Sirius XM Radio (NASDAQ:SIRI) will be one such addition. It is not 100% official, as the official list doesn’t come out until next Monday, but its about as sure a lock as you can get in this type of situation. Sirius XM was listed as an addition on the first two lists released, one on June 11th and the other on June 18th. This is good timing for a stock that has been in an uptrend now since 6/9/10. The equity has been moving up into this planned buy.
Russell reconstitution is usually a high volume event that can result in massive volatility of price movement on that day. On Friday, over 200 million shares, maybe much more, must be purchased. Last year the market dumped these Russell shares, now the company enjoys the benefit of the reverse of that scenario. One of the best advantages of being added is these shares will now not trade anymore. They are used for exposure, not to be traded around. This is great news for Sirius XM investors as any reduction in the tradable float can help sustain price levels and reduce downside volatility. I believe Sirius XM will be added to the Russell 1000, which is a list of the top 1000 companies, based mostly on market cap but not entirely, which would require even more stock to be purchased. The more lists they are on, i.e. Russell 1000, Russell 3000, Global funds, mid cap funds, etc.. the more shares will need to become available. It has been speculated as many as 500 million shares may be required. But who’s going to sell them the shares?
With over 200 million shares short and prices rising, you could add that to the 300 to 500 million shares needed for the Russell rebalance, and you can see the potential for upside movement. Will these shorts close? A good portion of this short position is trapped under the $1 mark based on the time short interest began to increase. The highest the majority of this short volume can be positioned is at 1.10/1.15 area. Once again this is based on the time of the increases in short interest and the trading volume by price. Timing, volume, everything suggests much lower. Are these shorts dumb money? Are they new bondholder hedges created when Sirius XM bonds exchanged owners? I would buy Sirius XM bonds completely unhedged. At these price levels on the equity, a hedge on a bond is a dumb play. You can erase huge gains by having your hedge get so far out of balance with its intentions, the secure income of a bond can be an illusion of value. I know that the Sirius XM bonds issued in the merger deal were hedged. Sure, at over $2 a share. With massive debt due in 2009. Totally different animal now.
So back to my question. Who’s going to sell them the shares? Since 40% of the common isn’t available to be traded here, owned by Liberty Media through its Liberty Capital tracking stock (NASDAQ:SIRI), the large retail ownership level can be an interesting factor on just what price most of these shares get filled. With 90% of the available float owned by retailers, it looks like the retail investor is going to have a lot to say in where these shares are found. Market makers might not find them very agreeable to sell at these levels. If institutions can’t be found that will sell under $1.20, this stock has potential to quickly move up and try to find enough retail sellers to fill these orders. Normally the Russell rebalance isn’t a huge bonus, its nice sure, but not huge. This has huge potential due to the large short interest and the high retail share ownership, as well as suppressed volume and price trading that has been occurring as of late. With all these factors in play, it should be an interesting couple months for sure. Will these gains hold? Hopefully a new higher range will be established and the uptrend will continue. Retraces seem to be the norm with this stock, but since March 2009, the norm is also a higher base over time.
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Disclosure: Long SIRI
Excellent synapsis. Went very well with my coffee!
Agreed!
I guess there still trying to “talk up” Sirius XM stock.
No talk can move this stock. Very ignorant comment. I report the facts, with logical explanations. Try debating an issue. Visit our forum and I would love to debate with you.
You know a dream is like a river, ever changing as it flows.
And a dreamer’s just a vessel that must follow where it goes.
Trying to learn from what’s behind you and never knowing what’s in store
makes each day a constant battle just to stay between the shores.
And I will sail my vessel ’til the river runs dry.
Like a bird upon the wind, these waters are my sky.
I’ll never reach my destination if I never try,
So I will sail my vessel ’til the river runs dry.
Too many times we stand aside and let the water slip away.
To what we put off ’til tomorrow has now become today.
So don’t you sit upon the shore and say you’re satisfied.
Choose to chance the rapids and dare to dance the tides.
Garth Brooks Siri on it’s way to $3
Relmor,
Moving up!!! Are you kidding?
I agree with your brilliant analysis. However, you miss out one crucial factor. Shortists are able to employ the tactics of creating fear in the market and make the panic retail investors to part with their shares. Wednesday’s trading was a good example. They managed to quickly short the shares down from $1.06 to almost $1.00 within about an hour. Hence, the panic retail investors then sell off their shares to them. The shortists got them on the cheap and covered their positions. They may repeat this again on Thursday. Be alert if this happens and fall into their trap.
I make an error in the last line of my comment. It should be “don”t fall into their trap”.
Great insight!!!! Couple this with what should be a solid Q2 on the earnings front. I agree it should be an exciting month ahead!