Anatomy Of A Rumor: Einhorn and Lululemon Edition

So here’s the situation: this morning, the WSJ published an article about how if hedge fund manager David Einhorn so much as sneezes in a company’s direction, their stock sells off with amazing regularity.

“The Wall Street Journal reviewed the performance of 22 stocks after they were mentioned by Mr. Einhorn in television interviews, investor conferences, other public events and letters to Greenlight investors. The nine companies where analysts and investors saw his comments as negative fell by a median of 4.9% on the same day, the analysis shows. Thirty days later, the median decline was 13%.”

The WSJ article also has a terrific interactive graphic where they overlay Einhorn’s inquisition of Herbalife ($HLF) on their earnings call earlier this year on top of the intraday stock chart.  That time, Einhorn didn’t even say he was short the stock (and has never confirmed as much since), yet the stock still got taken to the woodshed.

Anyway, that WSJ article comes out this morning, and then a few hours later, “magic ass-pants” maker, Lululemon ($LULU) is tanking on a “rumor” that Einhorn may have a short position in the stock.

Here’s what I had to say on Stocktwits about this price action:

@JFinDallas posted the (possibly relevant?  my Tweets think so!) classic chart about how the misunderstanding game of “telephone” can turn into a runaway train of misinformation:

I find, rather than speculating on rumors that are completely unfounded (and baseless, in my opinion, as I noted in the Tweets – I don’t think that Einhorn would want to be short LULU here, but I could certainly be wrong!), that it’s more fun to imagine how that graphic above could explain the anatomy of a rumor in LULU.

I mean, you can imagine Einhorn walking down the street, talking on his cell phone, yelling at a guy on the other end named Lou who keeps interrupting him:

“LOU!  LOU!   No!  TERRIBLE!”

Then some ambitious young would-be-Bud Fox walking by hears that and immediately calls his office:

“Guys – I just heard Einhorn yelling into his phone that LULU is terrible! We have to short this stock!”

Or perhaps it went something like this:

Einhorn calls his wife and asks her to bring his Lululemon shorts to the office so that he can change before his jog home.   The hedge fund remoras who have parabolic microphones trained on Einhorn’s office perk up when they hear the terms “Lululemon” and “shorts” but ignore the context and deduce that he must have a position in the stock.

Of course, it could just be good old fashioned manipulation, where some scumbag gets short LULU, a stock that was already kinda stretched, and then starts a rumor leveraging Einhorn’s reputation.

Then again, it’s always possible Einhorn actually is short the stock, and that the information is astute.

As my boss used to say, quoting The Godfather:

“This is the business we’ve chosen”

related:

Measuring the Einhorn Effect

On Einhorn and Herbalife

Herbalife Highlights Lazy Trader Nation

disclosure: no positions in $HLF.  Long $LULU from this afternoon, for a trade.

-KD

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