Madeleine Albright and Herbalife

Presented without comment.

Hewlett Packard Pension Fund - a final post

I have written three posts on HPs pension fund. I also wrote to HP outlining several of my main concerns.

HP filed a 10K and gave me a detailed response to other concerns. They also hired external audit people to check.

First observation: A good proportion of the gains were from total return swaps on very long US government bonds. I thought that unlikely - but many of my blog readers (correctly) guessed it.

Second observation: All my other concerns appear groundless. (I am not going to bother detailing them as they were groundless.)

I was wrong. It happens a lot unfortunately.

Kudos to HP on transparency

I have written many letters to companies before - most to very dodgy companies. I have never received a response as transparent as HP. Kudos to them.

As for Gretchen Tai. Her asset management looks pretty good.



John

Bill Ackman enters the city of Stalingrad

A few days ago I wrote a post describing shorting multi-level marketing schemes as akin to the Battle of Stalingrad.

Little did I know that Bill Ackman was shorting well over a billion dollars in Herbalife stock. [If you need the figure you can back work it out from comments in this BBC interview.]

Ackman has publicly said his target for the stock is zero - and the size of his position (huge both with respect to the company and his fund) and the ferocity of his attack means that his only honourable out is the total collapse of Herbalife.

Moreover Ackman is a very wealthy man controlling funds considerably larger than Herbalife's resources. He has said he can't be bought off. The only way Herbalife is going to get rid of him is by totally defeating him.

This is the hedge-fund equivalent of Stalingrad. Someone is going to lose big. And the victor will be so bloodied that the word victory will sound hollow...

For a short-seller who is as risk-averse as me watching this is pure hedge-fund porn.







John

PS. I am utterly convinced by everything in Bill Ackman's presentation except the final conclusion - that Herbalife's stock will collapse. I took a long position on Christmas Eve. I suspect that Herbalife is so profitable and so powerful they will see Mr Ackman's attack off - and the easiest way to do that is to buy back stock (and make the stock go up). Mr Ackman has given them the incentive to return their huge (but tainted) profits to shareholders (and I plan to be a recipient shareholder).

PPS. Ten years ago Ackman's old fund (Gotham Partners) wrote a defence of a multilevel marketing scheme called Pre-Paid Legal Services. They were long (which turned out OK in the end). The PDF document was called: "A Recommendation for Pre-Paid Legal Services, Inc". If anyone has a copy of the original PDF I would appreciate it. These days the report is only remembered because Gotham wrote the bullish report and sold stock into the subsequent rise. Elliot Spitzer investigated (an investigation that went nowhere).

J

Fushi Copperweld: A Christmas present from the China Development Bank and Abax Captial to arb funds

For the record: I lost on this one. See SEC filing...


Fushi Copperweld - a small cap Chinese stock specializing in bimetallic wire - is going private - purchased by "Green Dynasty" - a vehicle funded by Abax Capital and China Development Bank. The deal was supposed to close in the week of 11 December 2012 according to a press release filed with the SEC.

It never closed.

The following Monday (before market) Fushi released an update regarding the merger. The press release has so far not been filed with the SEC. To quote: "[b]ased on information provided by Green Dynasty, the Company anticipates closing of the transaction by or on Monday, December 24, 2012."

If the deal closes it will be a nice Christmas present from the Chinese to various arb funds because this deal has had a fat spread for much of its existence.

History of this transaction

This transaction has history. It was first proposed by the chairman in November 2010 at $11.50 - but later withdrawn. The Chairman came back with a $9.25 offer and revised that offer to $9.50 which was accepted.

The stock is not without controversy. Muddy Waters (of Sino Forest fame) has alleged Fushi is a fraud. Bronte was short a small amount well before the Muddy Waters announcement (and shorted the original $11.50 offer) because the accounts were a little unusual. This was a stock on which we won-some, we lost some.

Even if the company is a fraud that does not mean the deal will not close. There were credible allegations of fraud against Harbin Electric and the accounts were decidedly funky - but the deal did close and many shorts (including Bronte) received a nastier than usual flogging.

Moreover Harbin was taken private by Abax Capital backed by China Development Bank. The same combination taking Fushi private. That I am short again (and in this time in quantity) indicates that I am some kind of masochistic sucker for punishment.

Why fraudulent Chinese companies were taken private

There is a theory as to why some Chinese companies with fraudulent accounts were taken private. About a decade ago you could not buy industrial land around Shanghai and other cities unless you had a business to put on that land.

So people invented fictional businesses to buy real land.

Later they reverse merged those fictional businesses into the US and sold shares in the fictional businesses. In some cases the land appreciated enough to make the stock worthwhile even though the accounts are fictional. I know this to be true in at least one case (a case on which I lost money). I am not sure whether it is true of Harbin but Harbin Electric did own lots of land.

There is another reason why Chinese companies are taken private. And that is the operation was originally the children of Chinese elites ripping off Western stock markets (by selling fraudulent stocks). When that no longer worked they had no shame. Now they ripped off Chinese banks by getting them to finance LBOs. I know of at least one fraud run by a child of a central committee member that received a bid from a well connected Chinese private equity fund.

Back to Fushi Copperweld. 

The Fushi Copperweld saga is long running. Now it is a simple question of whether the deal will close and today is the day of truth.

It is likely to close. It is not over until the fat-lady sings - but she is clearing her throat.

But imagine it does not close. Then it will likely be because the fraud allegations are substantially correct and the stock should eventually trade at pennies. There will be a few arb funds with some 'splaining to do. (See this disclosure from Centaurus Capital for an example.)

Boiler plate

When examining situations like this its best to read the boiler plate.

The boiler plate in various disclosures has changed recently.

A press release dated 28 June 2012 and filed with the SEC says categorically:

There is no financing condition to completion of the merger. Mr. Fu and Abax have secured fully committed debt financing from China Development Bank Corporation Hong Kong Branch to finance the transaction.

The press release of 11 December 2012 says that the deal will close "this week" (a week now well and truly past). However it introduces a new paragraph into the boiler-plate forward looking statements.

A number of the matters discussed herein that are not historical or current facts deal with potential future circumstances and developments, in particular, whether and when the transactions contemplated by the Merger Agreement will be consummated. The discussion of such matters is qualified by the inherent risks and uncertainties surrounding future expectations generally and also may materially differ from actual future experience involving any one or more of such matters. Such risks and uncertainties include: any conditions imposed on the parties in connection with consummation of the transactions described herein; satisfaction of various other conditions to the closing of the transactions described herein; and the risks that are described from time to time in the Company's reports filed with the SEC.

The press release of 17 December 2012 - the one not filed with the SEC - but which postpones closing until 24 December says:

"As previously announced, on December 11, 2012, the Company's stockholders approved the Merger Agreement.  Green Dynasty has advised the Company that it is in the process of effecting the satisfaction of all conditions to draw all necessary funds pursuant to the facility agreement with the China Development Bank in order to consummate the proposed merger.  Based on information provided by Green Dynasty, the Company anticipates closing of the transaction by or on Monday, December 24, 2012."

"Effecting the satisfaction of all conditions necessary to draw all necessary funds" is a somewhat weaker statement than "there is no financing condition to completion of the merger".

All I can say for the arb funds involved. This better close. Or you are holding a very weak hand indeed.

But then I have never seen a deal fail so near the line. It should close and by close of business today the stock will have disappeared and shareholders will be entitled to receive $9.50 per share from the clearing corporation. And I will have lost a few pennies on my short (just in time for Christmas).

Whatever happens - I hope you all have a merry and safe Christmas (or festive season if Christmas is not your thing).




John

PS. After market now. So far the fat lady has not sung...


PPS: On Friday - just before closing - the market got a little jittery about this. Check out the one-day chart. Someone panicked. (I was shorting earlier in the week.)

Hewlett Packard's total return swaps

I have just been sent a list of the total return swaps in the Master Trust for the HP Pension Plan. These TRS (standing for Total Return Swaps) were interlaced with tens of pages of other assets and not in the pension plan form 5500 but in the (separate) Master Trust form 5500.

This is the list:

Security ID  Description 1                Description 2                     Cost  Current Value
99QABN497    TRS FL BARCLAYS 20+ INDEX    P USD-LIBOR-BBA 3M 2011 DEC 01    -     - 
99QABN5B1    TRS EL_BARCLAYS 20+ INDEX    P USD-LIBOR-BBA 3M 2011 DEC 01    -     18,592,748 
99QABNCM9    TRS FL BARCLAYS 20+TSY       P USD-LIBOR 3M 2011 OCT 31        -     - 
99QABNCN7    TRS EL BARCLAYS 20+TSY       P USD-LIBOR 3M 2011 OCT 31        -     52,221,457 
99QABQ219    TRS FL UL BARCLAYS 20+ TSY   P USD-LIBOR3M 2012 FEB 23         -     - 
99QABQ227    TRS EL UL BARCLAYS 20+ TSY   P USD-LIBOR3M 2012 FEB 23         -     6,586,388 
99QABSRK6    TRS EL UL BARCLAYS 20+TSY    P USD-LIBOR3M-22BP 2011 NOV 09    -     23,247,808 
99QABSTE8    TRS FL UL BARCLAYS 20+TSY    P USD-LIBOR3M-22BP 2011 NOV 09    -     - 
99QABT767    TRS FL UL BARCLAYS 20+INDX   P USD-LIBOR 3M 2012 JAN 04        -     - 
99QABT775    TRS EL UL BARCLAYS 20+INDX   P USD-LIBOR 3M 2012 JAN 04        -     (10,219,797)
99QABTJ98    TRS FL UL BARCLAYS 20+TSY    P USD-LIBOR 1M 2011 DEC 07        -     - 
99QABTKA3    TRS EL UL BARCLAYS 20+TSY    P USD-LIBOR 1M 2011 DEC 07        -     (7,136,997)
99QABTWR3    TRS FL UL BARCLAYS 20+TSY    P USD-LIBOR 3M 2011 DEC 06        -     - 
99QABTWS1    TRS EL UL BARCLAYS 20+TSY    P USD-LIBOR 3M 2011 DEC 06        -     4,426,796 
99QABUZ63    TRS FL UL BARCLAYS 20+TSY    P USD-3M LIBOR 2012 JAN 09        -     - 
99QABUZ71    TRS EL UL BARCLAYS 20+TSY    P USD-3M LIBOR 2012 JAN 09        -     (4,403,910)
99QABXAB3    TRS FL UL BARCLAYS 20+       P US0003M -25BPS 2012 MAR 07      -     - 
99QABXAC1    TRS-EL UL BARCLAYS 20+       P US0003M -25BPS 2012 MAR 07      -     5,022,105 
99QABYJD8    TRS EL UL BARCLAYS 20+ TS    P USD-LIBOR3M 2012 MAR 28         -     (5,357,109)
99QABYJE6    TRS FL UL BARCLAYS 20+ TS    P-USD-LIBOR3M 2012 MAR 28         -     - 
99QABZA02    TRS FL UL BARCLAYS 20+TSY    P USD-LIBOR 3M 2012 APR 26        -     530,370 
99QABZA10    TRS-EL UL BARCLAYS 20+TSY    P USD-LIBOR 3M 2012 APR 26        -     -

They are all returns for the very long bond (entirely Barclays 20 plus year index).

The current value of these bears no resemblance to how profitable the position appears to have been in aggregate or how profitable it would have been over 12 months.

The 20+ Barclays index returned high teens percent during the year until October 2011 - which is consistent with the results achieved.

The 2011 results are thus mostly explained by a huge derivative position on the long bond as several of the commentators guessed.

Strangely the fund also carried interest rate swaps (separately disclosed) on which they lost money.

That said, the HP Pension Fund got almost entirely out of equities in 2007 and almost entirely into long bonds (via swaps) just as the yields collapsed.

The former was disclosed contemporaneously. The latter was not disclosed.

The result is impressive: at minimum a very well timed form of liability driven investing.


John

Clouds

The (very late) Go Betweens...

I was in the audience...




John

Trade total return swaps like Gretchen Tai: a follow up on the HP Pension Fund post

In my last post I detailed the very fine performance by Gretchen Tai, the asset manager for the Hewlett Packard defined benefit fund. I was trying to work out how it was achieved.

Being ignorant in these matters I did not even know the defined benefit fund had to file detailed accounts at the Department of Labor on form 5500.

My readers are smarter than me. So they pointed me the right direction.

Now we can work out in much greater detail how the returns were made.

The pension fund is invested in a "Master Trust". Here is a statement of the assets and liabilities of the master trust:

Its pretty clear. There are $2.9 billion in US Government Securities, $3.2 billion in corporate bonds, $2.1 billion in common stock as well as a whole lot of other things ($0.3 billion in common collective trusts, $1.6 billion in limited partnerships and venture capital funds, $0.7 billion in registered investment companies, $0.6 billion in 103-12 entities and some derivative assets).

There is also some securities lending collateral which they are obliged to return.

The next page gives net income for the Master Trust by category.

We know now the government bonds appreciated by 157 million, the corporate bonds by 104 million and interest was earned of 167 million. That appears to be the bulk of the return on the $6125 million bond portfolio. That is about 7 percent - roughly the return I might have expected from a diversified bond portfolio provided they held some duration.

Much better returns are obtained from the limited partnerships and venture capital funds. They had a return of 263 million on 1383 million in starting capital. That is a very sweet 19 percent. Gretchen Tai chose funds well.

But the eye-popping number is the return of $543 million in swaps and other derivatives. This is after a more modest 152 million gain. This woman swaps cash flows amazingly well.

Breaking up the swaps return

The accounts are kind enough to give us a list of derivative exposures (at least in some aggregated form):

There is $2.8 billion up from $2.5 billion in total return swaps.

They are also kind enough to tell us the P&L for each of these types of derivatives (none of which are designated as hedges and hence all of which are marked to market).

Those total return swaps made $561 million - 22 percent return on the starting derivative asset. Its pure alpha too - the fund needs to pay out the return on the (similar sized) liability they swapped.

And so now we know at least of part of Gretchen Tai's secret. She is the wickedest, meanest and most effective trader of total return swaps I have ever seen. A good proportion of my readers would want to hire her immediately.

So here is an aspiration in life: work out what she does - learn to trade total return swaps like Gretchen Tai. (Or just hire her.)






John