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
Well, the praise was brief but extravagant, specifically “this is the best managed pyramid scheme in the history of the world,” which I at least would be proud to have on my resume, but I might be in the minority there. What do you think Ackman’s goal was in this morning’s 340-slide, nineteen-hour Herbalife presentation featuring phrases like “Shane’s going to come up here and talk about the accounting again” and “now I’m going to bring on our lawyer for the next 200 slides” and “here’s where it gets really interesting: shipping and handling,” and, at the 2 hour 28 minute mark, “feel free to go to the men’s room, ladies’ room, it’s at the top of the stairs, but I’ll keep going”?1 Ackman thanks several team members for working tirelessly for a year or more on this presentation, and if you watched all of it you have a pretty good sense of how they must have felt.
One model of this fight is that Ackman and Herbalife are attempting to wage regulatory battle by proxy. Presumably some SEC and FTC lawyers are watching this and the respective hopes are:
- Ackman hopes that the Federal Trade Commission will conclude that Herbalife is a pyramid scheme and shut it down, bringing the stock to zero-ish and making him a zillion dollars on his short position, and
- Herbalife hopes that the SEC will conclude that Pershing Square is a market-manipulation scheme and shut it down, causing HLF’s stock to soar.2
Neither, either, or both of these things could happen, I suppose; the FTC and the SEC are their own dogs and so you could have each running around investigating one of the protagonists here. But generally relying on a regulator is sort of a dicey proposition; even if you’re right, the regulator may have better, or possibly worse, things to do with its time than inflicting pain on your adversaries. So what does that leave you? Read more »
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 »