It was nearly three months ago when we warned that Ackman’s latest strategy of converting 40% of his Herbalife short exposure into puts would massively backfire, first because he still have major short squeeze potential left on his books, and second because now he is subject to theta or a time horizon, for his thesis to play out. Ackman’s (il)logic was summarized as follows: “The explanation of being forced out of nearly half of his position is amusing: “we minimize the risk of so-called short squeezes or other technical attempts by market manipulators to force us to cover our position.” So Ackman is forced out by his Prime Brokers so as not to be forced out by market manipulators? That’s an interesting explanation for what is a far simple situation: booking your paper losses.” Just under three months later HLF hit its all time highs, and Ackman’s puts (not to mention his stock short) have generated material losses.
Back then we concluded that “with trades like this, which has now become an ideological obsession and moved beyond and semblance of rational investing (any normal person would have pulled the plug on the nearly half a billion dollar losing trade long ago) and is rapidly morphing into a replica of Pershing Square IV, said career may not be too long.” Today, the embattled so-called retail expert pours more fuel in the futre, and provides a 7-page update on what his plans for Herbalife are. In short: it really does seem that Ackman is prepared to take his HLF short until the end of the world… or its LBO. Whichever comes first.
From Pershing Square:
It has been one year since our December 20, 2012 Herbalife presentation. In light of the passage of time, recent developments, and questions we have received, I thought it would be useful to review this investment and our approach year-to-date.
ZH: readers can catch up on how one hedge funds can lose over half a billion on one trade at their own leisure in the letter below.
Two recent developments, a Belgian appeals court decision and the recent completion of the Pricewaterhouse reaudit, have been mischaracterized by analysts and misconstrued by the market. When combined with the false rumor that Pershing Square has quietly capitulated on its position, these developments have caused the stock to rally to new all-time highs.
ZH: Uhm, no. What has propelled the stock to all time highs is the audit, the increasing probability of a major debt-funded stock buyback, or, worse for Ackman, an LBO, as well as the fact that while one may allege the company is a ponzi scheme, it is a cash flow generating ponzi scheme, something which in the Old Normal school of investing was the only thing that mattered. And as long as HLF continues to generate cash, the stock will continue to rise.
It gets better:
Beginning in early January and up until the present, we have been contacted by a number of former Herbalife employees who have shared with us additional information that confirms the illegality of the Company’s business practices. We have also communicated with hundreds of former Herbalife distributors who have shared their stories of being seduced into the so-called Herbalife “business opportunity,” and manipulated into spending thousands, and often tens of thousands, of dollars on the false hopes of financial success as a distributor.
We have chosen not to disclose this information publicly in order to allow the regulators the time to do their own investigations and analysis. For this reason, at the recent Robin Hood investor conference, we were careful to limit our presentation to disclosures which would not interfere with ongoing regulatory activity. Our Robin Hood presentation described the SEC’s recent investor alert which identifies seven hallmarks of a pyramid scheme and an Herbalife victim video made by Make the Road, a well-regarded Latino advocacy organization.
While we believe that our approach has been successful in garnering significant regulatory interest, there has been a substantial short-term economic cost to Pershing Square due to our silence. Because Pershing Square has a reputation for doing extremely thorough research, Herbalife investors incorrectly assume that we have disclosed everything negative we know about the Company’s business, particularly in light of the more than 300-page original presentation. While the original presentation was certainly comprehensive, we limited it to an introduction to Herbalife and only those facts and issues that we could prove at the time, with a plan to present additional information in future presentations as we completed our research.
ZH: Ah, ye olde “we know stuff, but we won’t disclose it until the right time” bluff. Does that include spurious, unfounded leaks to the NY Post? Or maybe Ackman’s losses have to hit $1 billion, $2 billion or more on HLF before he decides that the time has come and to unleash this torrent of evidence that would crater the stock once and for all. Either way, brilliant strategy. Just keep accumulating all that uber top-secret damning stuff.
And the punchline of all punchlines, when Ackman talks about the biggest risk to Pershing Square: a levered recap:
While a recap would facilitate the exit of large illiquid shareholders, we believe that it would destroy rather than create shareholder value. As a result, we would welcome a recap which would have the ancillary benefit of the creation of a CDS market where we could more efficiently effectuate our investment at greater scale, at lower cost, and with less risk.
ZH: So…. you are saying there is shareholder value here? Which is a little contrary to the original thesis that said the value of Herbalife is $0. Which is it?
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It goes on. For those who want more amusement on this slow news day, here is what Ackman “plans to do going forward”
In one or more future presentations and/or other communications, we will be describing our analysis and conclusions from the last 12 months of our investigation including information we have obtained from former Herbalife employees, a number of whom have sought whistleblower status with regulators. Our next presentation, among other issues, will include an analysis of the three principal sources of revenue growth for the Company: Internet-based Lead Generation, nutrition clubs, and the Company’s China operation.
We will show that the Company’s decade-old Lead Generation recruiting methods promoted by Herbalife’s top distributors, which were ostensibly prohibited by Herbalife beginning on June 30th – several months after we shared the details of this business method with the FTC, SEC and several State Attorneys General – continue to this day.
We will show that nutrition clubs, which the Company has suggested demonstrate “daily consumption” for products principally from the Latino community, are in fact recruiting venues to attract low-income distributors who do not have the $3,000 required to become an Herbalife supervisor.
We will show how Herbalife’s Chinese operation likely violates the multi-level marketing restrictions
in that market. We will share data that will enable investors to understand the extremely high distributor failure rates in countries around the world, providing additional evidence of the deceptive nature of what Herbalife management calls “The Best Business Opportunity in the World.”
Finally, we will focus on the plight of the Herbalife victims and share their stories in their own words.
We continue to believe that our Herbalife short position offers an extremely compelling, and, as now structured, even greater asymmetric payoff than before because of the stock price’s substantial rise.
Unfortunately, there was no update in Ackman’s letter how many investors in his fund have pulled money as a result of the concerted strike back effort of Herbalife and Moelis to convince LPs to pull their capital from the hedge fund with a seemingly unperturbable ideological crusade.
Full letter below:
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