Another Million Pixels Killed Discussing Herbalife

disclosure: I can’t actually verify that this post is a million pixels  – I just pulled that number out of thin air.

A few weeks ago, in the wake of Bill Ackman’s vocal assault on the company, I wrote a counter-post titled “Why Bill Ackman is Wrong About Herbalife.”   That post put me in contact with hedge fund managers on multiple continents, radio producers, television producers, smart individuals, MLM legislation experts, professors, $HLF distributors, and a whole bunch of other opinionated people.   I was especially impressed that the level of commentary in my own blog’s comments section stayed pretty civil, intelligent, and enlightening.  I received a number of “random” emails telling me that I was wrong, and a number telling me that they agreed with me, but almost all were intelligent, well thought out, and polite.

My goal in that post was to get across one key point – that I believed Ackman’s extreme “confidence” was misplaced.   This is not to say that Ackman is wrong, that Herbalife is The World’s Gift to consumers or business people, or even that Herbalife is not a pyramid scheme.   Simply:  Ackman’s hubris in declaring that he had a price target of zero and stating “This is the highest conviction I have ever had about any investment I have ever made, full stop,”  was unfounded, in my humble opinion.*

Yesterday, Bruce Craig,  “a consumer fraud litigator with the Wisconsin Department of Justice who has tried a number of pyramid cases” penned a post on Seeking Alpha where he highlights the lack of a black & white standard in the FTC’s regulation of multi-level-marketing.   There’s a lot of “grey” in the rules, which seems to irk Craig, who concludes:

“It is assumed that the appropriate regulatory authorities have obtained the necessary underlying information to assure compliance with market regulations and have promulgated clear standards, which deal with potentially illegal conduct. I feel that the Federal Trade Commission and the Administration have failed their duty in this respect. The investment community, and the public in general, deserve and should demand a substantive and legally sufficient examination of the issues raised here and a legal standard, which will protect the investing public and prospective participants in these highly questionable business offerings.”

As I described it to one investor who contacted me, I think that the FTC is taking the “pornography” approach in defining pyramid schemes.  For those of you who are confused, this isn’t the same as the SEC’s pornography approach (zzzzzing!) – I’m simply referring to the old adage that pops up when people debate what is or isn’t pornography: “I know it when I see it.”   I think that’s a decent analogy for how the FTC is approaching pyramid scheme legislation – they don’t have a strict list of *quantitative* rules that will automatically qualify/disqualify a company for “pyramid scheme” status because they don’t need such a strict list – they know it when they see it – hence, their guidelines and subjective language, which we can parse and analyze at length (fruitlessly??)  if we so desire.  I do not desire to continue to do so, precisely because of that subjectivity, although the comments section of my earlier post contains input from Dean William Keep, who co-authored the 2002 FTC paper with Peter Van Der Nat which Bill Ackman leans so heavily on in his presentation. (note: Dean Keep commented under two different names: 1) “William Keep” and 2) “BusSchDean”  if you are looking for his comments).

Also worth reading for anyone involved in this saga is Bob Chapman’s letter to investors in which he takes an aggressive stance contra-Ackman, as an Herbalife bull.

Tracy Coenen penned a list of questions that are likely to be on Herbalife’s “to answer” list during their analyst day on January 10th.

Here’s another question that needs to be answered – the case of the magical math. (note: he has some flaws in his process, but if you do the math, his conclusion is still sound: the numbers don’t make sense assuming “logical” assumptions about “active leaders” being a fully contained subset of “all leaders”.)

This also seems like a good time to remind my readers that you are not paying me for investment advice.  As such, I am not giving you any investment advice or trading advice.   I will emphasize again, though, that Herbalife is definitely not a “buy it for the grandkid’s IRA account” stock for me, which is to say, I’m not buying it to put away for 30 years.   It’s a *trade*.    I dramatically trimmed my long position yesterday (Wednesday), and expect to continue to adjust my exposure (in either direction) as both the facts and the price of the stock change.   Readers should not expect to be kept up to date on my trading positioning.

Finally, I think there’s another interesting sub-story here, and that is the trading-mechanics behind how Ackman locked up his borrow for his short position.  If any of my readers have intelligent thoughts on this, I’d love to hear them.  My instinct is that someone is going to get hosed: either Ackman if he didn’t lock up borrow (seems unlikely?)  or his counterparty for the stock loan.

related:

Why Bill Ackman is Wrong About Herbalife

Bill Ackman’s Facts About Herbalife

Bob Chapman: “Herbalife: Why I Made It a 35% Position After the Ackman Bear Raid”

Bruce Craig’s Seeking Alpha Post: “Lack of Information From Federal Agencies”
-KD

disclosure: at the time of this writing, I have a small long position in $HLF.  I am also short some $HLF Jan 22.50 puts

* this is part of his thesis, of course: the “self-fulfilling prophecy.”  Ackman even admitted as much when he said that he timed his presentation to coincide with the big January re-order period for Herbalife:  he admitted that he was trying to negatively affect their business.

 

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