A tremendously unrealistic idea.
It's the equivalent of someone in Cleveland thinking they could land Rondo with their trade exception.
Why does Denver do this trade? There is no reason whatsoever.
Well, there are few reasons where this could be plausible (maybe not this exact deal, but some incarnation of it), but I think it is unlikely unless it happened later in the season and Denver is a huge disappointment.
First, Smith is a headcase, and has given the coaching staff a ton of headaches. At some point, they might just decide enough is enough, and try to move on and get some value for him.
Second, Denver was rumored to be in financial trouble earlier this offseason. They are over the luxury tax, and getting rid of Smith's salary for Sheed's contract could really help in this regard.
Third, they love Aaron Afflalo, and he is probably the starting SG for the forseeable future. They still have use for Smith off the bench, but it doesn't make him untouchable.
Now, I don't think Sheed and a pick is enough to pry him away, but if there is another falling out with the coaches, I could see something like Sheed, Davis, and a first being pretty enticing, and at the very least competitive with the other offers they are going to get for him.