If Banca Monte dei Paschi di Siena has any more really bad news to announce, now might be a good time to get it out. Read more »
Guy Who’s Short Herbalife Says Guy Who’s Long Herbalife Saying Guy Who’s Short Herbalife Saying Herbalife Is A Fraud Is A Fraud Is A FraudBy Matt Levine
One day Herbalife will either be put out of business by consumer-protection regulators or it won’t. If it is then Bill Ackman will make a lot of money and Carl Icahn will lose a lot of money, and if it isn’t Ackman will lose a lot of money and Icahn will make a lot of money, and in the meantime everyone will shout that everybody else should be investigated.
That’s proceeding apace. Ackman yesterday:
In a statement late Tuesday, Pershing Square Capital Management’s Ackman said that he was pleased that the NCL was requesting an FTC investigation and believes it will show that the company is a pyramid scheme.
We regret that the National Consumers League has permitted itself to be the mechanism by which Pershing Square continues its attack on Herbalife. If anything, it is Pershing Square that should be investigated by appropriate authorities. Its actions are motivated by a reckless $1 billion bet against the company based on knowingly false statements about Herbalife.
Now Herbalife may or may not be a pyramid scheme but I’ve always thought that demands to investigate short sellers are unfair and one-sided. People who say mean things about stocks they’re short are always accused of manipulation. People who say nice things about stocks they’re long – which happens all the time – are rarely accused of market manipulation.1
An important truism in the financial markets is that there’s no such thing as a “toxic asset,” tout court; everything is toxic/dangerous/Bad at some (high) price and attractive/safe/Good at some other (much lower) price and there’s a wide area in between where things mostly live and you fight about their pricing. You can apply that insight to junk bonds or CLOs or really any number of things, and you should, but today it’s sort of fun to apply it to Herbalife. As far as I can tell the argument over Herbalife goes something like this:
Herbalife opponents: Herbalife is a horrible pyramid scheme that preys on disenfranchised, mostly poor and minority people and convinces them to part with their life savings through misleading advertising and high-pressure sales techniques.
Herbalife supporters: True! And … ?
Opponents: And therefore it will be shut down by the FTC and the stock will go to zero.
Supporters: That’s … wow, that’s just hopelessly naive. I’m gonna go buy some HLF.
Today CNBC’s Herb Greenberg has a good statement of the “horrible pyramid scheme” case, which of course has been most memorably taken up by Bill Ackman, who is betting a billion dollars on “shut down by the FTC and go to zero.” And last week Bronte Capital’s John Hempton gave the classic statement of the “hopelessly naive” case.1 As one Herbalife shareholder put it when I asked if he thinks HLF is a pyramid scheme, “in the colloquial sense, yes; in the legal sense, no.”2
Bill Ackman Unimpressed By Business Model Of Selling Diet Shakes To Your Friends; Diet Shake Salesman Unimpressed By Business Model Of Being Bill AckmanBy Matt Levine
What is the best line from Herbalife CEO Michael Johnson’s amazingly hostile call with CNBC this afternoon, in which he maintained that Bill Ackman is wrong that Herbalife is a pyramid scheme? I think the two leading contenders are:
- “Mr. Ackman’s proposition that the United States would be better when Herbalife is gone? The United States will be better when Bill Ackman is gone.”
- “Our customers are sometimes called distributors. That’s the only confusion that we have.”
Oh that’s the only confusion is it? That’s … confusing. “You’re a pyramid scheme; you only sell products to your distributors.” “No we’re not, we sell real products to real customers.” “Oh.” “But we call the customers distributors.” I’m looking forward to a confusing exchange of press releases.1
Johnson’s claim is that the whole presentation, and the leak thereof to CNBC, are about market manipulation: “an extraordinary number of puts” on HLF are due to expire this Friday, he claims, and Ackman’s presentation tomorrow is designed to basically juice those puts going into expiry (and, one might add, year-end). That … I mean, sure, whatever.2 Read more »
David Einhorn’s $7.7 billion hedge fund Greenlight Capital Inc. disclosed a short position of 4.4 percent in the shares of Daily Mail and General Trust Plc, which publishes the U.K.’s second-biggest selling daily newspaper.
Greenlight’s bearish bet on London-based Daily Mail and General Trust, disclosed today on the website of the U.K.’s Financial Services Authority, was the biggest short position revealed by any hedge fund against a U.K. company under rules that took effect last week.
And yet there’s also this:
What are you doing, England? Don’t you know that when David Einhorn is short a stock, that stock goes down? There are rules here you know; today’s mild drop is not enough to comply. Read more »
Europe is doing various terrible things about short selling today, and go talk about them in the comments, but this whole thing is really boring isn’t it? It’s like the “price gouging is grrreat” arguments that spring up like weeds after natural disasters;1 there’s the thing that politicians do to Convey Emotion and then we over here in the blogs are all “aha that thing is emotional but wrong!” and we all feel good and rational. So let’s, there’s nothing to stop us, we are in fact good and rational and the politicians are in fact emotional and wrong, as we and they always are, so there’s nothing wrong with patting ourselves on the back a bit when it’s demonstrated particularly clearly. I guess.
So, yes, Spain is continuing its ban on short sales of stock for another three months, to reduce volatility, though it seems to have increased volatility,2 because that is how you pantomime “deep concern” to … someone … and “blind panic” to the financial markets. And Europe more broadly has a ban on (1) naked shorting of stock and (2) naked CDS positions that goes into effect today; some things to think about that include:
- The regulation is a mess and is causing freakouts among banks, hedge funds, lawyers, etc.,
- it is hard to imagine it not being bad for the European government bond market, and
- the word “naked” has two different values in that sentence.
One slightly different read of the pan-EU rules is that they are less about their ostensible emotional purpose – “don’t anybody say anything mean about European governments or banks” – and more about market-structural stability. Read more »
The Journal has a nice article about David Einhorn today, making the point that he can move stocks with the sheer power of his disapproval. Not even disapproval, really; a raised eyebrow will suffice, as it did for HerbaLife. Imagine his parenting skills.
But you get the gist: on average (er, median), an Einhorn seal of disapproval lops 4.9% off a company’s market cap in one day, and 13% in a month. You can argue that he is just excellent at picking stocks that are about to drop precipitously, but the repeated one-day success seems like pretty clear evidence that the market is reacting to, rather than independently fulfilling, his predictions.
So, first off: this is a great skill to have! I think that in part because I am very lazy and have always imagined a hedge fund manager’s job as being to come into the office, point at a stock, say “that one,” and go home for the year while the stock he picked makes him rich. I don’t think it works that way, though; stocks tend to move for reasons in the external world unrelated to your simple desire to make yourself rich, so you have to spend your days, like, doing research and stuff. But when your desire to get rich off a stock pick makes it so, that is metaphysically delightful.
There’s this interesting article in the Journal today about how quickly and expensively short sellers managed to find shares of Facebook to borrow, including a graphic showing that like 150 million shares were shorted on Friday, at -10% to -40% rebates, which, what? Anyway you should read it; I for one was surprised that that much borrow came online so quickly and so share the Journal’s suspicion that some of the locates given by prime brokers were a little aggressive? Or something.
I’m less willing, though, to view the basic transaction the way the Journal does:
The role of the firms in enabling short sellers in Facebook’s stock shines a light on a long-standing Wall Street business that has the potential to create conflicts of interest. Even as one arm of a brokerage firm is getting paid to drum up interest in a stock, another part of the firm could be earning big profits by helping bet that the stock will fall in price.
“In general, Wall Street has conflicts of interest, and conflicts of interest are profitable,” said Daylian Cain, a Yale School of Management professor of business ethics. “It’s hard to navigate them when there are millions of dollars at stake.”
Two things are worth noting here. First of all, this is the sort of “conflict of interest” that comes inextricably from being a market intermediary: some of your clients want the one thing to happen, others want the other thing to happen, and the things are often – normally in secondary market trading – mutually exclusive. Read more »
Wouldn’t it be fun to be the kind of guy who could swoop into an earnings call and be all “aren’t you just a giant fraud?” and freak everybody out and cause the stock to plummet? I feel like that would be fun. I am not that kind of guy, which is just as well, because I sort of go around assuming that selling (1) weight loss drugs through (2) network marketing just automatically makes you a giant fraud,* so I would probably use my powers irresponsibly.
Anyway David Einhorn didn’t do that at all! He asked some perfectly reasonable questions of weight-loss network marketer Herbalife. Here is a comically anodyne description:
Herbalife Ltd. (HLF), the maker of nutritional supplements and weight-management products, fell the most in more than three years after hedge-fund manager David Einhorn asked executives why it has stopped providing information tracking certain groups of its distributors in its filings. …
Chief Financial Officer John DeSimone told Einhorn on the call that when he took over as finance chief in January 2010 he decided to stop breaking out information on distributor groups as it isn’t “valuable information to the business or to the investors.” Herbalife “can easily provide the exact same breakout going forward,” DeSimone told Einhorn.
“That sort of follow up” would be “helpful,” Einhorn said on the call.
I guess it’s time for me to stop being amused when China does not-especially-Communist things, but still, I giggled a bit when I saw that China is liberalizing its short-selling rules at around the time that Western Europe is tightening its rules. Because freedom on the march, or whatever, though as David Keohane at FT Alphaville points out, China’s short-selling thingie is pretty solidly in the state-sponsored capitalism camp.
It’s not entirely clear to me why China is liberalizing its rules; the answer seems to be “so that financial institutions can make more money charging hedge funds for stock borrow,” which I guess. Another possible answer could be loosely of the form “China is tired of Americans and Australians making all the money shorting Chinese fraud companies and wants domestic investors to get a crack at that action.” More generally, if you have capital markets beset with fraud, you want to provide incentives to catch that fraud. And if you’re looking to get foreign capital and are worried about embarrassing incidents, it’s nice to have at least some of those incidents taken care of within the family – by Chinese speculators catching Chinese frauds – rather than being exposed to the wider world.
Of course the same incentives exist in Europe, where companies with pretty opaque balance sheets bounce around not telling you whether their balance sheets are filled with fake trees, in the form of Greek bonds, or real trees, in the form of, I don’t know, Swiss francs. Which is why lots of people aren’t that keen on short selling bans on financial stocks in Europe. And yet European regulators seem to disagree. Let’s strain ourselves to justify that a bit shall we?
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