Saturday, February 28, 2015
The bad elements are
(a). That volume fell - and quite sharply - minus 6 percent, and
(b). There was an inventory build in the face of the volume fall.
The shorts have played these elements up - and combined they meant that the cash flow was sequentially far less good.
The good element (which the company played up) was
(c). distributor numbers and retention went up sharply.
In the past distributor numbers and volume have been very tightly correlated.
They are no longer tightly correlated.
Inevitably they will become correlated again - but the question is which direction. Will volume growth rise to match distributor growth or will distributors leave disillusioned?
On this the Herbalife debate will hinge. [The bears will argue the FTC will also be an issue - but I doubt that strongly.]
An interpretation of the results in the light of Herbalife corporate rule changes
The company implemented three core rule changes which were trialled first in Eastern Europe and which I have cross checked with some Eastern European distributors.
i). Requiring that you qualify as a distributor slowly - ie there are no 4000 point success builder orders any more. Note that this rule change slows orders down.
ii). Requiring that the first qualification not be by "field sales" - you must buy from the company (note this slows orders down in Mexico and other countries for reasons that will be seen below).
iii). Requiring that if you sell via a website you do it under your distributor label (you get paid) on the GoHerbalife.com site. A delivery is then made direct to the customer obviating the need for the distributor to hold any inventory - and hence allowing de-stocking of distributor inventory and thus slowing current sales.
Why these rule changes
There are several reasons they implemented these rules.
One reason is that if a distributor qualifies as say 4*$1000 orders she is more likely to stay around than a distributor qualifying by a single $4000 order. The upline can then focus training on distributors who are more likely to stick around. This means new distributors become more effective.
A second (and possibly more important reason) is that they are very good at fending off Ackman's complaints. Slowing initial orders is antithetical to inventory loading (and inventory loading a required component of declaring Herbalife a pyramid). More importantly the third rule change obviates the need for any distributor inventory - and is a complete protection against a claim that Herbalife is a pyramid.
A third reason is about control of the business - particularly in developing markets. For example, in Mexico the up-line distributors have built warehouses all over the country - there are three Chairmans Club members who own the warehouses. The Chairmans club members can distribute Herbalife to you same day anywhere in the country almost everywhere - even with crappy Mexican logistics.
This is good for Herbalife (as they get lots of sales) but they are a risk for Herbalife - in that the Chairman club members might defect to a competitor taking their warehouses, customers and downline with them.
To "own" the customers Herbalife wants distributors to qualify with sales direct from the company. They are banning "field sales" for qualification.
Moreover Herbalife is building its own warehouses over the country. As it does this its distributor warehouses are being (to a small extent) de-stocked and its own warehouses are being stocked. The de-stocking of distributor warehouse is a drain on current sales and the stocking of its own is a costly inventory build.
All of these things should (i) make Herbalife stronger and (ii) explain the falling sales, increasing inventory and simultaneously increasing distributor numbers.
And if this interpretation is correct Herbalife should come back growing volume with a vengeance.
This is a deferred growth story.
Tuesday, February 24, 2015
We operate primarily in the United States, Australia, Canada, the United Kingdom and Saudi Arabia.
|Year ended September 30,|
Rest of World
"There are credible claims of widespread rorting by some agencies.... we have now completed an investigation which suggest that significant fraud, criminality is going on."
We are currently in the process of rebidding on much of our work in Australia. We anticipate that a new contract will commence during the fourth quarter of fiscal year 2015. These contracts are likely to have more contingent revenue streams, less up-front fees and will likely incur losses in early quarters. However, we anticipate that the contracts will be profitable.
Saturday, February 21, 2015
They have their eye out for the inflated claim re the efficacy of a drug and the wheeling and dealing in stock.
Unusually Martin became CEO of a biotech (Retrophin) and became a wheeler-and-dealer himself. Martin also kept a twitter account where he recommended Retrophin stock and suggested (often correctly) that other biotechs were worth shorting.
He is a 31 year old - but all the photos make him look 17. The joke about his hyperactive twitter account was that he would tweet if he had a date.
Anyway eventually - and after a saga you can look up if you want - he was ousted as CEO of his own company.
Today the company released an 8-K explaining what the board found after his ouster - and it is already being described as an epic. Here goes for some of it.
Consulting Agreements. Between September 2013 and March 2014, the Company entered into several consulting agreements and releases with individuals or entities that had been investors in investment funds previously managed by Mr. Shkreli (the “MSMB Entities”), or that otherwise had financial dealings with Mr. Shkreli. The agreements provided for the issuance of a total of 612,500 shares of common stock of the Company, and a total of $400,000 in cash payments by the Company. The Oversight Committee concluded that the Company should not continue to treat these agreements as consulting agreements because their predominant purpose appears to have been to settle and release claims against the MSMB Entities or Mr. Shkreli personally, and not to provide meaningful and sustained consulting services to the Company.And
Litigation Settlements. In the second quarter of 2014, the Company settled two lawsuits involving individuals who had formerly performed services for both the Company and the MSMB Entities. The Oversight Committee concluded that approximately $200,000 in cash payments made by the Company as part of these settlements appear to have been made to cause these individuals to transfer 176,388 shares of the Company’s common stock directly to Mr. Shkreli.
But the really dumb luck. I got sick, missed the rise when he left, and only read he resigned today - so so only shorted today. I would rather be lucky than good.
Thursday, February 19, 2015
My personality is best described as high maintenance.
Whatever: anyone want a high maintenance wife?
Thursday, February 5, 2015
Monday, February 2, 2015
" 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
And in so doing she set back her own cause by a decade.
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.
Sooner is better.
Friday, January 23, 2015
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
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 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
Good riddance. Hope the gamblers (ahem: customers) get some money back.
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