Hmm... its weird indeed...
Music sounds a lot more compressed and colder running through the Direct connections.
It may be something the X-FI is doing, I don't know
But yeah, I'm running music through the Xbox 360 instead until I get the Coaxial sorted.
My ears are very sensitive though. I can tell small differences. Whereas people sometimes can't tell 128 to 192kbps, and 192 to 256kb/s, I can, if the files been converted right