$1B bet AGANST a pryamid scheme (HerbaLife)

[Mermaidman]

I almost speculated on HLF for a short-term play when it hit $26 a few weeks ago, but chicken'd out.

 

[Markbnj]

If nameless person decides to sell their 100 shares of XYZ before I replace them, the brokerage house simply moves shares around so my "loan" is owed to a different person who owns shares. It's all done in the computer.

I never really understood shorts, either, so this thread was great for me. Thanks for the simple explanations.

Your quote above caught my eye because all along as I read I was thinking: what's in it for the lender? Someone mentioned the lender getting a $5 fee, but if lending those shares for $5 causes the lender to miss an opportunity to sell before suffering a $40/share loss it wasn't much of a deal.

Under "ordinary" market circumstances you would expect that if I want to borrow an asset in the hopes of leveraging it I would have to provide a return for the lender. The return justifies the lender's risk. Based on your explanation above it seems there is no market of shared risk and return. Instead you have the asset owner's steward, which also serves as steward for a lot of other owners of the same asset, playing games by shuffling things around to make it appear that there is no risk of loss to the asset owner, along with the potential for gain to the borrower, and a fee for the steward. How can the lenders of the shares, in actuality, be insulated from the drop in value that allows the borrower to win the game?

 

[Baked]

To me, this is just a case of pot calling keddle black. A hedge fund guy calling a direct selling guy a pyramid schemer? Hilarious.

 

[Vdubchaos]

Me neither. Just skimming the replies to you, I STILL don't understand and may never understand.

Here, let me explain entire Wall Street to you:

Once upon a time, in a village, a man appeared and announced to the
Villagers that he would buy monkeys for $10 each.

The villagers, seeing that there were many monkeys around, went out to
The forest and started catching them. The man bought thousands at $10
And, as supply started to diminish, the villagers stopped their effort.
He further announced that he would now buy at $20 for a monkey.

This renewed the efforts of the villagers and they started catching
Monkeys again... Soon the supply diminished even further and people
Started going back to their farms. The offer increased to $25 each, and
The supply of monkeys became so small that it was an effort to even find
A monkey, let alone catch it!

The man now announced that he would buy monkeys at $50! However, since
He had to go to the city on some business, his assistant would now buy
On behalf of him.

In the absence of the man, the assistant told the villagers. "Look at
All these monkeys in the big cage that the man has collected.
I will sell them to you at $35, and when the man returns from the
City, you can sell them to him for $50 each."

The villagers rounded up
All their savings and bought all the monkeys.

They never saw the man nor his assistant again, only monkeys everywhere!


Now you have a better understanding of how Wall Street works.

 

[OverVolt]

So what you guys are trying to say is paradoxically the "short herbalife" trend is a ponzi scheme?


:awe:

 

[Blackjack200]

pretty much.

the actual act of shorting increases the supply of shares on the market, thereby tending to lower the price of the shares. if enough people short, the prices will lower quite a bit. and if some shorting wizard says publicly that he's shorting some stock or another, you'll get that big number of people shorting.

Comment removed.

 

[Jimzz]

To me, this is just a case of pot calling keddle black. A hedge fund guy calling a direct selling guy a pyramid schemer? Hilarious.

Nice try HerbaLife, not gonna join.



:sneaky:

 

[nanobreath]

How can the lenders of the shares, in actuality, be insulated from the drop in value that allows the borrower to win the game?

All short sells are covered some kind of equity. This equity is called margin and must usually be in cash or some other security. The margin must be equal or greater than the value of the outstanding shares. So that if you want to borrow say 100 shares that are $100 each, you would have to put up $10,000 in margin. When the shares go up to $110, you have to increase your margin amount to $11000. If you cannot liquidate enough assets to sufficiently increase your margin, the shares are bought to cover and then you owe them the difference between your margin and the amount they had to pay to buy the shares.

 

[OverVolt]

Reading through this thread is depressing. That is not how the stock market works.

^

Be careful guys. Its a wizard.

A wizard is someone who claims to have great knowledge, but never discloses it!

"I fully understand how it works, this is not how it works, it works by... oh look at the time, gotta go!"

 

[sandorski]

Haven't heard that name in over 20 years. Surprised it still exists.

 

[JechtShot]

Is this basically Network Marketing like USANA and Ariix? I have been approached so many times to get in on this lol.

 

[edro]

Nice try HerbaLife, not gonna join.
:sneaky:

 

[manimal]

thats like betting on Notre dame to lose a big game.

 

[rise]

Seems like a very very big gamble. Unless Ackman has good reason to believe the FTC will take some action or that there's something big about to go down, he's gambling the entire hedge fund on this...

High risk, high reward, he could make billions..... but he could lose billions just as easily.

Herbalife seems like a pyramid scheme to me, and I wouldn't even consider taking part in it (or buy the products), but I don't know if the FTC will consider it a pyramid scheme and take action.

If he owns that large of a stake though, isn't it easier for him to crush the share price?

 

[Blackjack200]

^

Be careful guys. Its a wizard.

A wizard is someone who claims to have great knowledge, but never discloses it!

"I fully understand how it works, this is not how it works, it works by... oh look at the time, gotta go!"

"Great knowledge"? lol. Let's try 'basic understanding'.

I don't claim fully understand anything, in fact, I don't buy individual securities because I don't believe I can analyze them better than the professionals on Wall Street.

I'm not explaining "how it works" because any explanation I'd try to give would be incomplete, at least partially incorrect, and outside my area of expertise.

The suggestion that the hedge fund manager is practicing Short and Distort is pretty far fetched.

Do his short positions drive the price down? In the short run, yes. Is he trying to influence the market with his opinions? No doubt. But the suggestion that he can drive the market down with nothing but his own position and bluster is preposterous. This is a company with $4 billion per year in sales.

Read this paragraph from the end of the article:

Herbalife's stock dropped roughly 35% immediately after Ackman raised questions in late December. But shares have roared back recently.

Since Herbalife announced that it hired an investment bank and law firm, the stock has gained more than 35%. Shares are now down just 14% below where they were when Ackman outlined his bet against the company.

So his massive $1 billion bet moved the shares a whopping 14%, mostly, I would bet, on speculation that the FTC will crack down. If that doesn't happen I would not be surprised if the stock came right back up to where it was.

 

[child of wonder]

There's a guy that drives an old Escalade with a big Herbalife sticker on the window and he goes to every baseball game my son does so one of his kids must also play. I laugh my ass off every time I see his truck.

HERBALIFE GOT ME THIS 2001 Cadillac Escalade!!!

 

[Blackjack200]

If he owns that large of a stake though, isn't it easier for him to crush the share price?

He doesn't own any stake at all. What he has is $1 billion in cash and an IOU for 20 million shares of HLF. What ability does that give him to crush the price?

BTW, HLF is up $1.25 today, so that's $25 million in losses for Bill Ackman. I'm not saying that because I think a one day price movement proves my point, just to illustrate the massive swings these guys see on a daily basis. There's a lot I don't like about the hedge fund industry, but I have to admit the management really has guts.

 

[Phoenix86]

He doesn't own any stake at all. What he has is $1 billion in cash and an IOU for 20 million shares of HLF. What ability does that give him to crush the price?

BTW, HLF is up $1.25 today, so that's $25 million in losses for Bill Ackman. I'm not saying that because I think a one day price movement proves my point, just to illustrate the massive swings these guys see on a daily basis. There's a lot I don't like about the hedge fund industry, but I have to admit the management really has guts.

I love how you say "that's not how the stock market works" then you post something that's exactly not how the stock market works.

Please continue.

 

[Blackjack200]

I love how you say "that's not how the stock market works" then you post something that's exactly not how the stock market works.

Please continue.

lol, okay. $25 million in unrealized losses, but losses just the same, or would you like to dispute that?

 

[Phoenix86]

Yes, he hasn't lost anything so it's not losses at all.

Potential losses at best, but he had potential losses the second he placed the short call. He also has potential gains. None of which are on the books.

Are you also an accounting wizard?

 

[baydude]

I hope Herbalife does go down. Then hopefully all these other "network/multilevel marketing" business opportunities will disappear with it.

 

[KeithTalent]

Yes, he hasn't lost anything so it's not losses at all.

Potential losses at best, but he had potential losses the second he placed the short call. He also has potential gains. None of which are on the books.

Are you also an accounting wizard?

It's an unrealized loss. We would show it on our books as an unrealized loss (if it was an inventory position, but same principle).

KT

 

[Mark R]

Is it a set amount of time, or can you rebuy at any time you want?
Can he just wait forever? Does he incur losses while he waits for it to drop, or is his only loss the initial investment?

If you short a stock, you can rebuy the shares at any time (assuming you can find a seller- which you usually can). Exactly the opposite to how if you buy a stock, you can sell your shares at any time (assuming you can find a buyer).

If I want to short 1000 shares of ACME Inc. I have to find a long-term investor who will be prepared to let me have some of his shares (so I can sell them), in exchange for a daily borrowing fee. The longer I hold the short position, the more fees I have to pay to borrow the shares (just like if you borrow money for longer you have to pay more interest).

Let's say I'm currently short of 1000 shares of ACME. ACME decide to pay a dividend of $1 per share to shareholders. LongTermInvestment Inc, who I borrowed the shares from, is still expecting their dividend (but I've sold the shares, so they won't get it). To make up for that, I have to pay them the $1000 dividend out of my pocket.

Finally, stocks always tend to go up with time (because of price inflation). If you invest for the long-term, you'll always tend to turn a profit (at least in terms of numbers). If you are short, then this natural inflation works against you (although it is typically less than the daily borrowing fee).

If the price of the stock goes up, then someone who is short the stock loses out. These losses can be unlimited. (If you buy a stock, the most you can lose is the amount you invest - if you a short a stock, there is no maximum to how much you can lose, and it can far exceed your original "position").

If I buy 1000 ACME at $100 each. If the stock craters to 0, I'm out my $100k.
If I short 1000 ACME at $100 each, and the stock rises to $200, I've lost $100k. But what happens, if over a weekend, ACME announce the cure for cancer, and I wake up on Monday morning at the stock is now at $1100. I'm now totally boned, because I'm a cool $1 million out of pocket. At which point, LongTermInvestment Inc are going to get a bit worried that I can't pay, so I either have to pony up $1 million cash as collateral for the loan of stock, or I have to cut my losses and eat the loss.

 

[Phoenix86]

It's an unrealized loss. We would show it on our books as an unrealized loss (if it was an inventory position, but same principle).

KT

Maybe I'm splitting hairs here but wouldn't he have to own the stock for it to be unrealized?

Either way, my original point stands.

edit: I'm definitely splitting hairs.

 

[Blackjack200]

Yes, he hasn't lost anything so it's not losses at all.

Potential losses at best, but he had potential losses the second he placed the short call. He also has potential gains. None of which are on the books.

Are you also an accounting wizard?

I didn't want to go into detail because the financial industry is massivly complicated and I always feel like I can make a mistake or omit something, or my understanding is outdated.

But interestingly, you've wandered into an area of at least semi-expertise for me. Five years ago I worked as a portfolio accountant, reconciling cash positions and P&L for hedge funds. Those recs are performed daily, the managers need to know how much liquidity they have and which of their investments are performing. That's true for long and short positions in the stock market, and all futures positions which are even more abstract.

At the end of the month we would prepare a statement of P&L and cut an NAV for the fund. The P&L broke out realized Gain/Loss and Unrealized Gain/Loss, but ultimately they both counted the same when figuring performance.