$1B bet AGANST a pryamid scheme (HerbaLife)

[Hugo Drax]

I wish him luck. Once he kills Herbalife may I suggest he go after Sentsy next?

More like it will kill him. Between the cost of borrow, and other players who want to burn him by putting the squeeze on.

 

[jagec]

Isn't it more the fact that if you're good enough to beat the market, then you're going to charge enough $$ in compensation that the ROI is usually less than indexed funds for actual investors?

You've got to have a track record of beating the market before you can demand that kind of compensation. So your earlier backers do pretty well. Once you're hot shit, though, your ROI starts dropping as your salary rises, and the odds that you'll screw up increase.

 

[Apex]

Article about this from Motley Fool a few days ago:

http://www.fool.com/investing/general/2013/01/18/the-short-heard-round-the-world.aspx

Interesting battle. Others are taking sides.

In an intriguing twist, the skirmish between Pershing Square and Herbalife erupted into a much larger conflict. Robert Chapman with hedge fund Chapman Capital Partners went public with his skepticism about Ackman's position. Daniel Loeb's hedge fund, Third Point LLC, bought an 8.2% stake in Herbalife. Loeb directly challenged Ackman's assertions, calling them "preposterous."

Bronte Capital's John Hempton, no fan of Herbalife, stated that Ackman "did not check the facts." Just this week, billionaire Carl Icahn announced that he bought a small position in Herbalife. If Honey Boo Boo ran a hedge fund, she'd probably be taking sides as well.

 

[Argo]

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?

Afaik, you pay interest rate, so you can keep stock for as long as you continue ie doing so.

 

[some_guy]

Originally Posted by edro
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?
Afaik, you pay interest rate, so you can keep stock for as long as you continue ie doing so.

To the best of my understanding:

When someone shorts a stock, the the person's brokerage firm has to find some stock to sell. If I were long herbalife in my margin account, my brokerage could loan my stock out without telling me.

But there is a catch. If the stock is in a cash account, which does not allow margin trading, the stock can not be loaned out. (And there are circumstances when stock can not be loaned out in a margin account, like if you are not using the margin and the stock is fully paid for - see Hugo Drax post two posts down for more complete understanding. The forest through the trees is this HLF thing is kind of interesting to some people like me.)

During the last crisis there were people saying change your account to a cash account to not let the hedge funds feed into the selling so they would not have available shares to short.

So I suspect the hedge funds that are long Herbalife have their stock in a way that does not let others short their shares. If enough of the stock becomes not shortable, there can be problems for someone who wants to be short and perhaps those already short will have to buy.

There are times when brokerages facilitate more shorting than there are shares to short and that is breaking the law.

As far as "paying the interest rate," more exactly, a shorter will pay the dividend though gets interest paid to him for the cash proceeds of the sale, though today the interest rate that is paid is less that a lot of dividend rates. (This may not be true in all cases.)

There are times when a stock can not be shorted because there are not available shares to short.

 

[T_Yamamoto]

Spelled pyramid wrong.

 

[Hugo Drax]

No, if you have a Margin account they cannot touch your shares as long as they are fully paid securities and you do not have a margin debit.

They can only loan out shares that you have pledged as collateral when you borrow against the equity for purchasing stock on margin loan.

That is called re-hypothication. And brokerage firms can only loan out up to a max of 140% of your margin debit in securities. The rest of the fully paid securities are segregated and cannot be touched for the firms own obligations or loan department.

ie: if you have 1,000,000 USD in stock, and you borrow 10,000 dollars to purchase stock. The firm as allowed by SEC regulation could take up to 14,000 dollars worth of stock as collateral and use it for it's stock loan department(for short sellers). with the rest 986,000 being segregated and not loaned out

Stipulated in SEC 15c3-3

Brokerage firms make money on the interest you pay for borrowing to buy stock and the also make money on the interest people pay to borrow your stock 🙂


Let me add the risk of shorting a stock like HLF. Lets say you have stock in HLF and you pledged it for collateral, now a short seller has borrowed your shares to sell short. Now this individual is short and has an outstanding short HLF position.

You decide to pay your margin debit or sell other stock to cover it and you now have no margin debit (ie all your securities are fully paid for) Guess what, now your brokerage firm has to return the stock back to you (ie HLF) and the short seller can be forced to cover his short position, and have to pay whatever the prevailing market price is for HLF is at the moment.

The other issue with short selling is harder to locate stock will have high borrow rates, it can even go as high as 50-60% APR if it is classified as a hard to borrow stock. And it can happen overnight.

ie your paying 7% to borrow HLF for short then two days later BOOM 48% APR.

And if a short squeeze situation occurs, in addition to being forced to cover you can easily go broke from one day to the next. So what Ackman is doing playing with fire, especially with a stock like HLF.

I forgot to add, if your short stock and it goes ex-dividend. Guess who pays the dividend, you do it comes out of your pocket. 🙂


So to make money shorting, you have to be right but at the right time and be very well capitalized.

 

[lothar]

More like it will kill him. Between the cost of borrow, and other players who want to burn him by putting the squeeze on.

So what's the status on this Herbal Life thing now? Who's on one side and who's on the other?
So far, I know it's Ackman vs. Daniel Loeb and Carl Icahn.
Anyone else? Is David Einhorn short on Herbal Life as well or is it only Ackman?

If Herbal Life management announces a buyback, that could be the ultimate short squeeze for Ackman.
Lol, I just watched the 30 mins CNBC interview between Ackman and Carl Icahn.
http://video.cnbc.com/gallery/?play=1&video=3000143591
You could hear all the people on the floor doing "ohhhhhh" and "ahhhhhh"
Analysis:
http://video.cnbc.com/gallery/?play=1&video=3000143732

 

[some_guy]

So what's the status on this Herbal Life thing now? Who's on one side and who's on the other?
So far, I know it's Ackman vs. Daniel Loeb and Carl Icahn.
Anyone else? Is David Einhorn short on Herbal Life as well or is it only Ackman?

If Herbal Life management announces a buyback, that could be the ultimate short squeeze for Ackman.
Lol, I just watched the 30 mins CNBC interview between Ackman and Carl Icahn.
http://video.cnbc.com/gallery/?play=1&video=3000143591
You could hear all the people on the floor doing "ohhhhhh" and "ahhhhhh"
Analysis:
http://video.cnbc.com/gallery/?play=1&video=3000143732

Conversations like that one between Ackman and Icahn don't happen very often in public.

 

[Jimzz]

HerbaLife is a scam but like bernie madoff they have to many people making money off it on the top to allow it to fall.

 

[SSSnail]

LOL@ Ackman vs. Icahn smack down. That shit was funny. It's like Jerry Springer for the ultra rich.

 

[some_guy]

Testosterone wars that have nothing to do with HLF.

Bad blood.

There seems to be a lot of money out there pushing the stock price around today.

 

[Jimzz]

Damm its all over the place today. Up a few % to down 10%+ and now showing around 5% down.

EDIT
This may have something to do with it...

FTC Says: Pyramid Scheme, Prepare To Be Busted
http://blogs.wsj.com/corporate-inte...-prepare-to-be-busted-2/?mod=msn_money_ticker

 

[Blackjack200]

Holy schnickities, maybe Ackman was right!

http://www.latimes.com/business/mon...cement-investigation-20130204,0,2687411.story

FTC is indeed investigating.

 

[Hugo Drax]

Holy schnickities, maybe Ackman was right!

http://www.latimes.com/business/mon...cement-investigation-20130204,0,2687411.story

FTC is indeed investigating.

HLF has too many politicians in its pocket. The company is an obvious pyramid scheme if you read Ackmans report.

The problem is they have lobbyists and cash is king when it comes to politicians and enforcing the law.

 

[Blackjack200]

Well, I think almost all MLM firms are pyramid schemes, but some of them seem to be tolerated.

 

[Jimzz]

HLF has too many politicians in its pocket. The company is an obvious pyramid scheme if you read Ackmans report.

The problem is they have lobbyists and cash is king when it comes to politicians and enforcing the law.

THIS!!!

Same thing with bernie madoff. Several people knew it was to good to be true and 1 person even proved it and was screaming it was a scam yet it went on for years more.

 

[KlokWyze]

Borrow 100 shares of stock that is worth $100/share today and sell for $100/share = $10000 for you. Over next month the stock drops to $50/share. You still owe someone 100 shares so you buy them back @ $50 each and return them to whoever you borrowed them from. You just made $5000.

Makes sense now. Quite simple really. Thanks.

Reminds me of subnetting, which is an easy concept to grasp, but almost everyone bungles the explanation of it. 😀

 

[preslove]

HLF has too many politicians in its pocket. The company is an obvious pyramid scheme if you read Ackmans report.

The problem is they have lobbyists and cash is king when it comes to politicians and enforcing the law.

Once an FTC investigation starts, there isn't much lobbyists can do for you. This will be up for the courts to decide, and it doesn't look good for Herbal life.

 

[Hugo Drax]

Once an FTC investigation starts, there isn't much lobbyists can do for you. This will be up for the courts to decide, and it doesn't look good for Herbal life.

Assuming an FTC investigation gets started or is in progress, assuming they follow through on the investigation, assuming they choose to find things or not.

Madoff was investigated by the SEC six times and cleared. the only reason he was caught was because of the financial crash and everyone trying to pull every dollar they had out and Madoff had no choice but to turn himself in.

The power of the almighty dollar is quite strong in keeping the law away from them.

 

[GagHalfrunt]

HLF has too many politicians in its pocket. The company is an obvious pyramid scheme if you read Ackmans report.

The problem is they have lobbyists and cash is king when it comes to politicians and enforcing the law.

Al Capone was paying protection money too. Eventually you run into somebody that wants to make a name for himself and who hasn't been bought off. With the exception of religion every major scam eventually comes crashing down and HLF is not any different. Of course it's a scam and the longer it stays in the news with Ackman and Icahn squabbling the more it's going to favor Ackman because that means that more people will start to take a closer look.

 

[Hugo Drax]

Al Capone was paying protection money too. Eventually you run into somebody that wants to make a name for himself and who hasn't been bought off. With the exception of religion every major scam eventually comes crashing down and HLF is not any different. Of course it's a scam and the longer it stays in the news with Ackman and Icahn squabbling the more it's going to favor Ackman because that means that more people will start to take a closer look.

The problem is how long will it take for anything to happen and can Ackman keep paying the carry costs to keep that short position open, avoid potential forced short covering,etc.. The longer he holds the position the harder it becomes to turn it into a profitable trade as the cost of carry erodes potential gains and keeps increasing the high water mark required to provide a gain.

The problem with a big short position in a small float stock is that you have to be right at the right time and it is extremely risky.

I agree with his presentation but the stock market has a tendency to stay irrational longer than you can stay solvent. (as john Maynard Keynes says)

There is a long trail of tears involving people who have shorted companies and ending up insolvent or losing a huge portion of trading capital because they were right but at the wrong time when shorting.

 

[GagHalfrunt]

The problem is how long will it take for anything to happen and can Ackman keep paying the carry costs to keep that short position open, avoid potential forced short covering,etc.. The longer he holds the position the harder it becomes to turn it into a profitable trade as the cost of carry erodes potential gains and keeps increasing the high water mark required to provide a gain.

Now you're arguing a different point. First you were saying that HLF was unassailable because they had money to spend and now you're saying that maybe Ackman can't hurt them quickly enough. Those two are not at all related. Whether Ackman is the person who drives the nail into the coffin or whether he gets squeezed and goes bankrupt leaving some other entity to lead to the downfall of HLF is irrelevant. HLF is a scam, everyone knows it's a scam and it WILL collapse like the house of cards it is no matter who they pay. Period.

 

[Jimzz]

Assuming an FTC investigation gets started or is in progress, assuming they follow through on the investigation, assuming they choose to find things or not.

Madoff was investigated by the SEC six times and cleared. the only reason he was caught was because of the financial crash and everyone trying to pull every dollar they had out and Madoff had no choice but to turn himself in.

The power of the almighty dollar is quite strong in keeping the law away from them.

Yep even judges have turned down plea deals setup by SEC due to them being so weak they are a joke.
SEC is a joke and many in the SEC are just working there till a better private job opens. So they can't be to strong or they will be blacklisted in the private sector.

 

[Phoenix86]

Once an FTC investigation starts, there isn't much lobbyists can do for you. This will be up for the courts to decide, and it doesn't look good for Herbal life.

This, you buy politicians off to prevent the investigation. Once the ball gets rolling you better be on firm ground.