Smoke and mirrors – Herbalife-

This is quite a specific post but if you have any interest in the mechanics of the market this is a good story to follow.

Herbalife is a US listed stock that for one reason or another has been grabbing the headlines recently. A very well known fund manager has effectively called it out and labelled it a ponzi scheme and is confident that its earnings and share price are going to zero.

Going to zero is the “holy grail” for a trader when it comes to shorting something, not only is it the max reward you can achieve from a short trade but also it is the maximum ego you  can achieve, you cant be more right if it goes to zero and you were short.

This particular hedge fund manager has picked a fight with Herbalife under the guise that its multi level marketing distribution scheme is nothing more than a ponzi effort or pyramid scheme, i.e. investors buy product and try and sell it and encourage others to do same but actually achieve more rewards from introducing new distributors (i.e new customers to parent company to buy stock  for distribution) than do from selling product. His argument is multi-layered and sounds quite convincing if you only hear one side of it.

They say it takes two sides to make a market (i.e a bull and a bear) and in this case another (lesser well known) fund manager has come to the defence of Herbalife and publicly rubbished the well known fund managers arguments.

What makes it more appealing as a story is this case is now so well known  amongst the investor community and tomorrow there is an investor presentation hosted by Herbalife in defence of its own company where I assume it will answer the problems raised by said “activist” investor (i.e the short seller).

What makes it more interesting to me is two things, the first is the size in which both sides of the argument have in public admitted to holding both a long and short. the said aggressor, the short is thought to be 30% of his fund invested in the trade, (which sounds ridiculous to me but that is what I’m reading) and said manager is happy to stay short till this thing goes bankrupt. The long has also committed 30% of his fund to buying this stock (after it got smashed down and if I think about it logically is probably already out of most of the position) but either way these two guys have gone out on a limb and made this affair very public.

I am no analyst and have no real access to analyse the company, but one major thing that strikes me here and a bit obvious to most people who watch markets everyday. Its very rare I see a fund manager of this man’s ” status ” organise press conferences and very detailed presentations to the press, normally secrecy is of importance for these guys. In poker overplaying a weak hand is a massive tell and even more so when you try to do it at the quietest time of the year when you know your words will have the biggest impact, Hedge fund manager X did this in December when liquidity was low and knew very well he would personally have a massive impact on the stock, ( its no co-incidence that same manager took a beating on another position and may have been trying to even out performance in to year end).

The last thing he expected was for someone to call his bluff. But this is what happened and tomorrow we will get more information to try and uncover the truth about what is really going on. To date the aggressor is about flat on the trade give or take, the buyer who defended has made a stunning return in a short space of time (that’s why I assume he is out of most of the trade).

I have no real opinion on who will win the war on this one, but it sure is entertaining to watch and gives just a little glimmer of insight into what goes on in stock markets from time to time where its all about smoke and mirrors and telling the story you want to tell. Ticker is HLF US and if you put in google/ yahoo finance you will see the moves in price recently, worth keeping an eye if only to see how the show ends. If you put a gun to my head I would say the short is going to get killed on this one but I am keeping an open mind and just want to see how it all plays out.

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