Monday, February 2, 2015

Dear Eurozone officials, Mr Putin is waiting

The FT has a remarkable story today about how Eurozone officials are worried about Greece. To quote:
" the fears of eurozone officials that the Greek government was unaware of the precariousness of its financial situation"

This is kind of amazing. There is an old adage - which is that if you owe someone $100 you have a problem. If you owe someone a $100,000,000,000 they have a problem.

Greece's debt (and hence the German/Eurozone problem) is somewhat larger than that.

Moreover Greece runs a primary budget surplus. The only reason the Greek government needs money (ever) is to roll existing debt.

If they default on existing debt that problem goes away.

Paul Krugman summarised the problem with devastating clarity.

Bluntly he points out the Troika (and the above worried Eurozone officials) can't hurt the Greek Government by denying incremental finance because the Greek Government does not need incremental finance.


Krugman does however point out that the Greek banks require finance. As Krugman puts it:

"the power of the creditors over Greece comes via the ability to crash the Greek banking system, which is heavily dependent on the ability to borrow at need from the ECB. Cut off that support, and Greece suffers banking collapse. So yes, the creditors have a large club they can use on a recalcitrant Greece."
But Krugman overstates that club. It is entirely within Alexis Tsipras's power to default to the ECB too. Indeed the pattern for government defaults is to simultaneously force a private sector default.

How about this for a negotiating position... we will pass a law to make it illegal for any Greek bank to repay the ECB. Period.

Then have a one week banking holiday, re-denominate all remaining Greek bank assets and liabilities in Drachma, and if a default event passes any court we will nationalise the Greek banks as-per-Washington Mutual - leaving the obligations in some stripped-down shell from which there is nothing to collect.

Finally, in this environment, depositors will receive shares in the new Greek banks in proportion to their deposits. Those shares will be worth a lot because an obscene amount of bank liabilities will be wiped out.


This will crash the Greek economy? You make me laugh. We are already at Great Depression levels and removing the burden of your silly debt schedules will be incredibly stimulative.

Sure we will lose access to clearing but Vladimir Putin is lending us a few billion dollars and we have a clearing arrangement in Singapore. [They will do this for anyone from Libyan dictators down...]

Moreover I was once told by Capital One - a respected US credit card company - that recently bankrupted people make the best credits.* After all their past debts have been cancelled and they are by definition solvent. It won't take two years and the financial markets will be happy to lend to us again.


Finally we are not a wildly interconnected economy. Its not like Finmeccanica - the Italian company which makes components for Boeing Dreamliners and thus needs the global financial and payments system to function. We do simple stuff, sell olive oil and feta cheese and lots of tourism services.

It won't take long but we expect our beaches to be overrun with fat often drunk German tourists. And we kind of like it that way. The fatter the better. At we will sell them Retsina. It will be cheap and they might learn to like it. You Germans like to drink, don't you.


So what do I want?

Enough money that I am allowed to run primary deficits. Fairly large ones. 1.5 percent of GDP would be nice but I will settle for 1 percent. And of course you know we are never going to repay it.

I don't care how you do this. You can do it as a direct subsidy, you can do it any way you like. But as we are not going to repay it so at some stage you are going to suck it up. For political purposes you probably want to dress it in some "equalisation scheme" so it is less obvious what you are doing. But that is your problem. You know what I want.

I am off to the hotel to read a little. Just kick back. Sunday night I have a flight booked to Moscow but I might go early. I hear the girls are hot there.

And besides Mr Putin is waiting.


*On a personal level I was truly told that by a Capital One senior staffer.

Wednesday, January 28, 2015

Bill Ackman is the Sabrina Rubin Erderly of anti-MLM campaigners

There is plenty of nasty stuff that happens on university campuses - so Sabrina Rubin Erderly wrote a story about a rape at University of Virginia that almost certainly did not happen.

She wrote it because she was ideologically committed to the idea that it did happen.

And in so doing she set back her own cause by a decade. 


There are plenty of abuses at multi-level marketing schemes. I have seen a few.

So Bill Ackman picks on what is probably the straightest MLM and bluntly makes up stories. In the first presentation Shane Dinneen (Ackman's staff member) got up and said that there may not be a single legitimate consumer of Herbalife products anywhere on the planet.

I promise you they are really easy to find. Daily consumers.

He did this after months of "research" which can only be like Sabrina Rubin Erderly's research - research to get your pre-determined opinion confirmed. Easily falsified research.

At some stage the anti-MLM campaigners will need to distance themselves from Bill Ackman's false research.

Sooner is better.


Friday, January 23, 2015

Herbalife after options expiry - Part III: What is UBS's game?

We now know one of the the new shareholders that Herbalife has after option expiry. My count is that there are more new and large shareholders.

That shareholder of record is UBS Group AG on behalf of itself and its wholly owned subsidiary UBS Securities LLC, UBS AG London Branch and UBS Financial Services Inc.

Note that this is UBS Group on behalf of bank and trading companies and not on behalf of their asset management companies.

Bluntly there is no way that the banks are holding that much Herbalife stock (over 6 percent of the company) unhedged. That is not what banks do. [Even Michelle Celarier - a reliable Ackman shill - has tweeted that UBS holds it as part of its market making.]

So UBS hold the stock and they have entered a total return swap or similar with some undisclosed party. I have my guesses as to who (but that is for a later post).

And it likely that the stock they hold they have in turned lent to an investment bank (which I will call Bank A) which wrote the put options to Mr Ackman. Bank A needs to borrow the stock because they need to be short the stock for the purpose of hedging the options they wrote to Mr Ackman.


The new holding was disclosed under rule 13g which is only for passive holdings. (Activist actions such as trying to influence the board are prohibited if you file on 13g rather than 13d.)

However the nature of the filing neatly falls into a widely discussed whereby an activist investor who would normally have to disclose on form 13d can hide their identity. [See this article from Harvard law blog on activist abuse of Rule 13d.]


So what do we know.

(a). There is a new shareholder.
(b). They have gone to some lengths to hide their identity and fit their holding into a loophole in the disclosure rules.

Also when I count shares I think there is more than one new shareholder. I keep counting shares and there is a missing large block.

Most new shareholders would have ten days to disclose. I would say the clock is ticking but my guess is that the UBS swap agreement might last a few months.


Thursday, January 22, 2015

Herbalife after option expiry - Part II: counting shorts and longs

With Herbalife at $31 then any puts that Ackman has (and we know the prices of them) are in the money so far that their delta is almost one.

This means if you have written a (say 100) put options to Bill Ackman and you are hedging your position you are short almost 100 shares.

If you are not short 100 shares then the puts will be exercised on you and you will wind up long 100 shares.

And if you have written 10 million puts (100,000 contracts) and you are not hedged you will wind up owning 10 million shares.

And if you take delivery of five or more percent of a company it likely you have some intentions towards it.

You may however own them deliberately (selling puts with the hope they are delivered) or accidentally (selling puts with the hope of keeping the premium).

Indeed it likely there is some deliberate and some accidental ownership of the stock.


We also have some idea of the size of Ackman's position. It was originally in excess of a billion dollars and between 20 and 25 million shares.

We know from various articles at the time his break-even was around $50. [This was corrected to $47 later as you will see.]

As the stock went up he restructured his position - some short, some puts.

In February 2014 he said that his position was much bigger than originally. To quote:
“We actually now have a much larger position notionally than we had initially. If it were to disappear tomorrow, we’d make a lot more than had it just blown up the day after I gave my last presentation.”
We also have an idea of where his break even currently is. Recently he told Reuters this:
"We shorted it at $47 but because of option premium, borrowing costs, dividends, investigative expenses, our break even is around $31, $32," 
You can do the maths. If it was a billion dollar position at $47 per share (and we know it was at least that) he was originally short 21.3 million shares.

His break even is now say $31.50 per share and he will make more money than originally - which means he is short at least 32 million shares (which produces the same result) and probably more than 40 million shares (which is what is required to make this a "much larger" position than originally.

My figuring is that Ackmans short plus put position adds up to something greater than 40 million shares. My guess is 42 million.


Now Ackman has many followers. There is Whitney Tilson (who is publicly short) and a host of Twitter gliterati who boast about being short. It is a fair guess that in aggregate they are short (say) 3 million shares.

This makes an aggregate short position of 45 million. This includes straight shorts plus puts.


The published short position is about 30 million.

As a conclusion we can guess that something like 15 million shares are not delta hedged.

Those puts are issued by someone who is going to take (or has taken) unhedged delivery of 15 million shares.

Given the number of puts exercised on Friday I suspect they have largely taken delivery.


Some of those shares are going to be delivered accidentally. The person sold puts in the hope they would not be delivered and when they are delivered they just sell the shares. This creates downward pressure on the stock. I think we saw that on Monday.

Some of those puts are sold by someone willing and able to take delivery. And most importantly wanting to take delivery.

Normally a new large shareholder has to disclose ownership at ten days (and that would be ten days after they take delivery).

And there must be some new fundamental long (or more than one) who sold those puts to Ackman. People sell a few million dollars of premium for speculation - but someone has taken delivery of hundreds of millions of dollars worth of shares - and in my experience they don't do that by accident.

We have had the first disclosure today - and it was a gentle one. UBS owns 6.4 percent.

I still think there will be another person. At least that is my count.


PS. There was a serious correction to the original version of this post regarding the ownership of the UBS stake.

Tuesday, January 20, 2015

Vale Saxo Bank

If this story in the Danish press is correct Saxo Bank is not long for this world.

Good riddance. Hope the gamblers (ahem: customers) get some money back.


Sunday, January 18, 2015

Herbalife after the January option expiry: Part 1

I have deliberately refrained from writing about Herbalife until the 17 January 2015 option expiry.

We know from public disclosures that Pershing Square (PSQ) had a huge put option position on Herbalife.

There were also a vast number of put options that expired on 17 January.

Here are the outstanding in-the-money put contracts as at market close Friday.

issueopen interest

They add up to 325 thousand contracts outstanding representing 32.5 million shares.

These options expired on Saturday morning and I presume that the stock has been delivered.

The delivery of these options may have a profound effect on the Herbalife share register. These effects will be part of this series. For reference there are less than 82 million basic shares outstanding and about 91 million diluted shares. However basic shares are the right comparable because delivery has to be effected through basic shares outstanding.

It was generally assumed that these options belonged to PSQ.

Bill Ackman however has issued a denial. To quote:
To set the record straight, 97% of the Herbalife put options owned by Pershing Square have been extended and have expiration dates up until 2016.  The January put options held by Pershing Square have a strike price of $US65 share. Pershing Square may choose to extend, sell or exercise the January put options depending upon market conditions and other factors.
Those in the know have understood that the options expiring on 17 January were not PSQ's options.

PSQ's option position in Herbalife is an off-market position.

I know the contract terms as do many others.

Some of the strikes are very unusual.

They include 44,362 call contracts [which I presume hedge a short position] expiring on 17 April with the very unusual strike price of $69.99. [The contracts represent 100 shares.]

They also include puts expiring 15 May, 11,550 contracts with a $44.50 strike and a further 19,500 contracts with a the unusual $49.99 strike.

There are a further 25 thousand contracts for calls with another $69.99 strike.

I could go on... and on. Ackman's position is well known amongst connected and sophisticated longs.

Moreover like many things that Bill Ackman says he is being cute-with-the-truth. Bill said his "puts" largely didn't expire on 17 January. He however owned a large number of calls that expired - and these calls hedge the oversized short position. For example PSQ carried 4,375 call contracts that expired this weekend with a strike price of $89.90. Presumably these hedged 437,500 short positions.

I wouldn't bother disclosing that I knew details of PSQs unlisted positions except that it is useful in future posts.


Post script: If you (like me) believe that Herbalife is a legitimate business and (like me) you believed that the end game was a private equity bid - then I have a puzzle for you.

How could you - knowing the detail of Bill Ackman's position - make a simply humungous amount of money at least partly at the expense of Pershing Square and their clients? Because I assure you some people want to play rope-a-dope with Mr Ackman. [If you think that Carl Icahn has really suddenly become Bill Ackman's bosom buddy then you don't know Carl...]

Secondly: I suspect that this post will cause Pershing Square's office to be quiet and unusually tense on Monday.

Can you say witch-hunt?

Sure, I knew you could.

Friday, January 16, 2015

It is time to close Saxo Bank down

Saxo Bank is a retail foreign exchange trading bank. The idea of forex trading as a retail product is mildly offensive any way. [I simply can't see how you can make money doing this in any consistent manner.]

However the (a) lack of systems and (b) depth of the scam is revealed by Saxo's statement after the giant Swiss Franc move today. To quote:
“Due to today’s exceptional market movement in CHF crosses, we have been filling client orders and positions in an extremely illiquid market. Once we are better able to establish true market liquidity, all executed fills will be revisited, and will be revised and amended to more accurate levels. This may result in a worse execution rate than the originally filled level.”
It is of course garbage of the highest order that in the biggest currency movement of recent times there pertained an "extremely illiquid market". If Saxo quoted the wrong price the problem is Saxo's systems.

Instead Saxo is just stealing from its clients. It did a deal and they traded at a rate - and they are rewriting that deal to suit them.

Theft is the right word.

Any regulator that lets Saxo Bank do this is failing it core functions.

Saxo bank's licenses should be revoked.


Hat-tip to Reuters.

Disclosure: no positions.

Tuesday, January 13, 2015

The return of cookie-jar earnings: United Technologies edition

I was just listening to a November presentation made by United Technologies - a large and very fine American company. Mostly I was listening for the comments on Pratt & Whitney as Bronte has multiple investments in the jet-engine business.

But I was struck with the forthrightness with which Gregory Hayes (now the Chief Executive Officer) discussed earnings manipulation. You can find the transcript here. To quote:
So we'll be able to deliver on the numbers that we had talked about earlier in the year, which essentially was in a range. We started out at $6.55; we're now at $6.75 to $6.85. We'll be right around $6.85 when the year is said and done. Still some puts and takes, some headwinds around currency. But top line looks solid at $65 billion; bottom line looks solid around $6.85. 
I'd just point out, tax extenders is not in our numbers for the year. Who knows if we're going to get extenders here in the last couple of weeks of the year. My own view is that if we get extenders, we'll probably just restructure against that benefit or do something else, as opposed to trying to pass along another dime that's probably not going to give anybody much of a benefit. So I think we're done at $6.85.

So if President Obama signs a tax bill they won't reflect that properly in their earnings they will just take a restructuring charge so they don't need to show the earnings to you.

In other words they will create "cookie jar earnings".

Cookie jar earnings were all the rage when I got into this business. Alex Berenson even wrote a book about them. What shareholders wanted was smooth earnings growth regardless of the vagaries of economic cycles - and people created cookie jars and manipulated earnings to show precisely that.

Listening to United Technologies I felt about 15 years younger. What is old is new again.


Disclosure: No position in any mentioned stock.

Monday, January 5, 2015

A comment on current Chinese vs Second World War Iron Ore demand

China uses roughly 700 million tonnes of steel per year (or at least used that much before recent declines).

Really good iron ore  62 percent iron - so there is at least 1.1 billion tonnes of iron ore used per year.

My summer weekend reading is Winston Churchill's history series - and I am currently on his book on the lead up to and the early phase of the Second World War.

In it he is writing to the then Prime Minister about interdicting the shipping of iron ore from then neutral Norway to Nazi Germany.

Churchill estimates that German industry needs 9.5 million [presumably imperial] tons of ore between 1 May and 15 December 1940.

During the armaments build-up phase of the Second World War Germany was using less than 20 million tonnes of iron ore per year or way less than 2 percent of current Chinese usage.

Gosh there is a lot of steel usage and capacity in China.


Saturday, January 3, 2015

A shameless plug for the Southern Investigative Reporting Foundation

I have agreed with and disagreed with Roddy Boyd more than once in the past year. Sometimes I have agreed with him on the analysis but not on the stock. [Insurance scams in particular can take years to unravel - but that does not mean it is not a scam.]

Moreover Roddy wrote the best "narrow" book on the financial crisis. His book on AIG is a gem though extremely narrow focused on one company rather than on the whole global shebang.

Whatever, narrow, deep investigative journalism on financial chicanery is not a highly profitable business. Doing it well is rare.

The Southern Investigative Reporting Foundation (SIRF is Roddy Boyd's baby) is thinly funded - and I think worthy of more. One of his targets has already gone to prison for fraud - and that is reward but not reward enough.

Anyway SIRF has a tip-jar. You know the usual donate-by-Paypal drill.

Tip a little in.

I have.

And if you are an American it is tax deductible. I had to donate out of post tax income.


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The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.