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Herbalife: The Greater Fools Theory

Short Squeezes – Easier Said, Than Done

On December 5 Herbalife Ltd. (HLF) got as high as $76.43 and some investors might be thinking that they could get in on a short squeeze of Bill Ackman and Pershing Square Capital Management`s public and noteworthy short position on the company.

Well since then the stock has dropped to $68.36 in 6 trading days and longs shouldn`t look for any help in front of the all-important FOMC Meeting and Tapering decision on Wednesday of this upcoming week in the markets. The mood has been Risk-Off with investors taking considerable profits in many stocks the last 5 trading days.

Retail Investors shouldn`t Invest on Short-Squeeze Thesis

This just goes to show that even when the big players of the investing world are seemingly teaming up to cause Bill Ackman to cover his position and reap the benefits of a massive short squeeze, this should never influence an investor`s decision to invest in companies. An investor should first and foremost pick strong companies which are well run and have products in the marketplace that have a definitive strategic or competitive advantage.

Investing in the Gold Market 2014

Herbalife isn’t exactly GE Quality

I have done enough research on Herbalife to say definitively that this is not GE that you are investing in when it comes to a real genuine quality company. Herbalife is like the infomercial of stocks that comes on late at night to sell consumers products with all kinds of gimmicks and marketing sleight of hand.

Beware of Buying Credibility

Whenever a company spends so much money trying to make themselves seem credible it is because they aren`t in the first place. BMW doesn`t need to buy credibility, the quality of their products speak for themselves, and have for decades. GE doesn`t have to pay credible people to associate themselves with their products so as to gain credibility in the marketplace.

Just read the weekly press releases by Herbalife they are usually about trying to buy credibility. You see this with a lot of companies that are listed on the Pink Sheets, and many of these companies are borderline scam companies, or another way to put it would be un-investable.

Blackberry: A Long Strategy for 2014

Semantical Debate Meaningless

Whether one wants to label Herbalife a Ponzi scheme, a multilevel marketing firm, or some other derivation this is purely a semantical question an unimportant for investing purposes; the big picture is that this company doesn`t make for a good long-term investment because it doesn`t have a legitimate business model.

Herbalife`s Revenue Stream: Products versus Recruitment

I work out and like many people these days I buy fitness and health supplement products, but I and most people in the world do not buy overpriced commodity products from a multi-level marketer.

This is the age of the internet and many wholesale suppliers offer all the branded products that the consumer could possibly want in the health and fitness supplement industry online at much cheaper prices than the retail market.

GM: Momentum Stock Candidate 2014

Less price savvy consumers may buy some health products at their local gym or GNC outlet. Shoot Walmart even sells nutritional supplements these days and usually at very competitive retail prices. However, it is abundantly clear to all but the uninitiated that there is not a booming market for buying overpriced nutritional supplements from a multilevel marketing organization.

Greater Fools Theory

Consequently Herbalife isn`t making a fortune off of selling their products, they are making money off of predatory recruitment of greater fools, plain and simple Herbalife is a “Recruiting Company.” It is unfortunate that there happens to be an abundance of greater fools in the world to support this type of business model.

However, this is not an unusual phenomenon in the world, and it usually ends very badly when governments have to step in to protect the citizens from themselves. Alternatively, the marketing scheme ends when the economics crash on themselves because people will only participate in a scheme if there are legitimate financial incentives for the bulk of the recruitments, and/or the market runs out of foolish people to recruit.

Pink Sheets Methodology & Business Model

The business model that exemplifies Herbalife where they need so fanatically to purchase credibility with large sums of money is one of recruiting. The greater fool theory of recruitment where a few people at the top who managed to get many levels of recruited fools to buy into the scheme below them make some decent money off the backs of all the recruited fools under them, and each level down in the scheme represents larger proportions of members who make virtually nothing at all.

Call it what you want but it is a very unsavory business model. It is highly predatory and probably should not be allowed to be listed on a major exchange. This is the type of company that investors need to be wary of on the Pink Sheets that releases all these monthly and weekly press releases trying to make them seem legitimate because they have no credibility that stands on its own, so they need to affiliate with credible and respected people to attract investors.

It is a whole different aspect as well, but shame on the credible people for selling out their integrity for a quick buck, but that`s where the size of the payments comes in, and Herbalife has spent quite a large sum of money to try and buy some marketplace credibility. Accordingly at high enough remuneration levels the temptation becomes too great for those who need the money – so they sell out the one quality that the multilevel marketing company needs to sell new recruits on this unique business opportunity – Market Credibility.

If you Don`t Know Anybody Who Buys Herbalife Products, then avoid Investing in Company

So needless to say Herbalife doesn`t offer any products that cannot be acquired through much cheaper means by consumers. They don`t offer any unique product offerings, they don`t own a whole bunch of patents, they don`t have one single revolutionary product. So you shouldn`t be investing in this company on its own merits.

Investing Options for Retail Strategy

Consequently is there any way to play this stock for the investor. The short answer is no, and here are the reasons why. The stock could by all accounts be a worthy short candidate, but with the big players who have publicly lined up against Bill Ackman, and once this has become an ego driven trade for some of these players, this for all practical purposes eliminates an investor taking a reasonable short position. Further exacerbated by the fact that if a short squeeze ever occurred, the stock could gap up so high that no effective stop loss could protect the investor.

Options Market: Hefty Premiums

I looked up the options prices even 16 months out, and there are no bargains to be found. The market makers are willing to sell the investor an option on the stock, but with a hefty insurance premium, in a liquidity fueled bull market that can keep poor company`s stocks afloat long after these options expire.

The investor would have to buy a strike for the option way out of the money, and hope that regulators step in, but this is a strategy that relies upon a lot of outside intervention – and I try to avoid those plays.

There are safer places to put your money as an investor than needing to have government or outside intervention for your position to work as an investor. This is a sign of a poor investment calculation, and more of a pure gambling play.

Game versus Investing

What about piggy backing upon the big players and try and force Ackman to cover his positions? Leave this to the big players as many of these players can hedge risk a lot cheaper than the average investor, and for some of these players it is more of a game than an investment.

Carl Icahn has more money than he will ever need in his remaining lifetime, he wants to win, but if he loses it is no big deal to his personal wealth as one of the wealthiest investors on Wall Street. This is a personal revenge issue between the two, and Icahn has the personal wealth to spare to play this game – regardless of the outcome; the Retail Investor doesn`t fit into this category.

Stock Gaps are Account Killers

Plus these guys are big, and they talk to each other discreetly, so they know when they are getting out of the stock, you as an average investor will be the last to know when the short squeeze party is over, or has failed altogether. The only sign you will receive is if the stock gaps down below your stop level, and forcing you to cover in a potentially account devastating manner on a crashing, free-falling stock that was at all-time highs.

Final Thoughts

In summation, the retail investor cannot go long the stock on its own merits, this is not an investable company with a great long-term future in product or market differentiation – this is not BMW or General Electric Company.

The retail investor cannot adequately control risk to play the short squeeze from a long standpoint on a short-term basis. In addition, the retail investor cannot take a short position in the stock because of the potential for the stock to gap above a reasonable stop on a short squeeze.

The options market is not a viable strategy either for the retail investor because the market makers are charg
ing too much premium for the possibility that some future volatility comes into play for this stock in either direction. So the risk reward equation makes no sense for the retail investor on this company.

There is no rational, sound investment theme for the retail investor in Herbalife. This is nothing to be sad about, this is part of investing, and there are plenty of legitimate investment opportunities in this market available that make sound investment sense for the retail investor.

Remember, it is just as important the money the investor doesn`t lose, than the money they could potentially make – always evaluate both sides of the equation when investing.

Article Update

We wrote this article before PricewaterhouseCoopers had finished re-auditing three years of Herbalife’s financial statements, and the stock soared to $81.75 on Friday December 20^th. However, since then Herbalife has sold off contrary to the overall market, and now stands at $78.55 on December 24, 2013.

Again we think the audit news spurred some shorts to cover, and propelled some traders to take advantage of the news for a nice trade to the upside, but this will be short-lived in our opinion, as it seems to have presented a nice entry price for new shorts to put on a position to the downside. But experience has taught us that shorting in any market, let alone a bull market is not for the weak of heart, and we advise retail investors to just stay clear of this stock. However, in the end this is not going to end well for investors who are long the stock, Herbalife is just not a good company with a sustainable business model for the long term, and eventually this company and their lofty stock price comes crashing back to the level representative of a sham, multi-level marketing company with a finite supply of dimwitted recruits in the world.

Many Ponzi schemes work for a while, even create the illusion of great returns and earnings in the short-term, but as the legacy of such enterprises teaches investors, it is only a matter of time before the tide goes rolling out to Sea, and the newest investors are left shivering on the beach with no clothes on begging for justice.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/RH-0utwPQWE/story01.htm EconMatters

Armed robber hits F'ville pharmacy on Christmas Eve

Fayetteville Police are searching for a suspect who arm robbed the CVS store located at 480 North Glynn Street on Christmas Eve.

Lt. Mike Whitlow said the robbery occurred at approximately 6:45 p.m. when a white male walked into the CVS store, told the clerk he had a gun and demanded money from the cash register.

“The suspect kept his hand in his right pocket indicating he was holding a weapon. The cashier gave the suspect money from the register and the suspect fled on foot,” Whitlow said.

via The Citizen http://www.thecitizen.com/articles/12-24-2013/armed-robber-hits-fville-pharmacy-christmas-eve

Armed robber hits F’ville pharmacy on Christmas Eve

Fayetteville Police are searching for a suspect who arm robbed the CVS store located at 480 North Glynn Street on Christmas Eve.

Lt. Mike Whitlow said the robbery occurred at approximately 6:45 p.m. when a white male walked into the CVS store, told the clerk he had a gun and demanded money from the cash register.

“The suspect kept his hand in his right pocket indicating he was holding a weapon. The cashier gave the suspect money from the register and the suspect fled on foot,” Whitlow said.

via The Citizen http://www.thecitizen.com/articles/12-24-2013/armed-robber-hits-fville-pharmacy-christmas-eve

Bloomberg TV Anchor's Bitcoin Stolen On Primetime TV

Over the past two weeks, Bloomberg anchor Matt Miller has been on a crusade to popularize Bitcoin, which intuitively makes sense: having risen ten-fold in the past year, the mainstream financial media is now paying attention and furthermore, is providing its audience the desired information about the hot meme du jour. To be sure, it is quite possible that his interest is sincere instead of merely the latest pageview-generating gimmick used by a majority of the other Series X preferred stock round media outlets.

Which is why it was ironic (and humorous) that in his quest to demonstrate just how “accessible” Bitcoin is on live TV, the anchor was “robbed” in broad daylight by an enterprising Reddit hacker named “milkywaymasta” who screengrabbed the QR code shown by Miller and promptly confiscated the $20 equivalent.

Later, said user was kind enough to offer it back, noting that a “segment on Bitcoin security and the importance of NOT showing the private key and also BIP0038 (Password Encrypted Private keys) will be more than enough compensation.”

The Blockchain confirmation of the Bitcoin wealth redistribution in question can be found here.

And the Public key of where the Bitcoin was sent:

In short: when pitching the utility of Bitcoin, do not show its QR code in HDTV.

Below is a clip of what not to do when presenting the functionality (and security) of Bitcoin:

And here is Miller explaining what happened afterward:

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/T258FQBvrW8/story01.htm Tyler Durden

Bloomberg TV Anchor’s Bitcoin Stolen On Primetime TV

The Blockchain confirmation of the Bitcoin wealth redistribution in question can be found here.

And the Public key of where the Bitcoin was sent:

In short: when pitching the utility of Bitcoin, do not show its QR code in HDTV.

Below is a clip of what not to do when presenting the functionality (and security) of Bitcoin:

And here is Miller explaining what happened afterward:

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/T258FQBvrW8/story01.htm Tyler Durden

Risk And Reality In The US Economy

The US economy is stabilizing, but it’s not truly recovering. That’s the view of Saxo Bank’s Chief Investment Officer, Steen Jakobsen. Following the Fed’s tapering news, Steen says the risk is that we trade on perception and not reality. Clearly, the outgoing Fed Chairman, Ben Bernanke, wanted to send a signal to the markets.

Global equity markets, notably in the States, have been hitting record highs for weeks; but Steen warns “we’re coming to the end of that cycle.” Actual growth in America is well below the average rate of the past 60 years and job creation too is lagging. People may be starting to feel more confident but that’s still not translating into significantly higher employment or wages.

“We’re at the end of asset inflation,” he says, and that “will dawn on the market very soon.”

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/aNLbRUEUK0Q/story01.htm Tyler Durden

Peter Schiff On The Fed's Audacity

Submitted by Peter Schiff of Euro Pacific Capital,

There can be little doubt that last week’s Fed announcement was an epic attempt at rhetorical audacity. The message they hope to convey is that they are tightening monetary policy by loosening it. Based on the market reactions, the trick has seemed to work.

I believe the Fed was forced into this exercise in rabbit pulling because it understands far better than the cheerleaders on Wall Street that the economy, despite the soaring gains in stocks and real estate, remains dependent on continued stimulus. In my opinion the seemingly positive economic signs of the past few months are simply the statistical signature of the QE itself. There is little evidence to suggest that the trends are self-sustainable. But seemingly strong data had made the arguments in favor of continued QE increasingly untenable. As they could no longer stay the course the Fed had to do something. Ultimately they decided to play it both ways.

As far as the headline grabbing taper decision, the Fed’s hands were essentially tied by widely held expectations. Perhaps spurred by a desire to initiate the end of QE before he leaves the chairmanship, Ben Bernanke did surprise some by announcing the taper now instead of allowing Janet Yellen to do so in March. The $10 billion reduction has convinced many that the QE program will soon become a thing of the past. At his press conference Bernanke affirmed that he expects QE to be fully wound down by the end of 2014. Look for those forecasts to change rapidly.

Without QE to support the markets, in my opinion, the economy will likely slow significantly and the stock and real estate markets will most likely turn sharply downward. As a result, I expect the Fed will do its utmost to keep the markets convinced that the QE program is in its final chapters. But these “Open Mouth Operations” likely represent the full inventory of the Fed’s policy options. I suspect that when the economic data begins to disappoint, the Fed will quickly reverse course and increase the size of its monthly purchases. In fact, the Fed statement was careful to avoid any commitments to additional tapering in the future. It merely said that further changes in the amount of purchases will be dependent on the data. This means that QE could go in either direction.

But more important than the taper “surprise” was the unusually dovish language in which the Fed decided to wrap its seemingly bitter pill. The statement went significantly farther than any prior communications in assuring that interest policy, its main monetary tool, will remain far more accommodative, for far longer, than anyone previously predicted. In fact, they have now committed themselves to keep rates at zero until “well after” the unemployment rate has fallen below 6.5%. On this score the Fed is not simply moving the goalposts, they are running away with them. With such amorphous language in place the FOMC appears to be hoping that it will never have to face a day of reckoning in which they will be forced to actually raise rates. On that score they are similar to the legislators on Capitol Hill who want to pretend that America will never have to pay down its debt.

Despite the slight decrease in the pace of asset accumulation, I believe that the Fed’s balance sheet will continue to swell at a pace that would have shocked Wall Street even a few years ago. As the amount of bonds on their books surpass the $4 trillion threshold, market watchers need to dispel illusions that the Fed has any intention to actually shrink its balance sheet, or even stop its growth. Already fears of such moves have pushed up yields on 10-year Treasuries to multi-year highs. Any actual tightening could push them significantly higher. But we are still seeing much higher leverage than what would be expected in a healthy economy, and as a result, the gains in stocks, bonds and real estate markets are highly susceptible to rate spikes. If yields move much higher I feel that the Fed will have to intervene to bring them back down. In other words, the Fed will find it much harder to exit QE than it was to enter.

As he left the stage from his final press conference, Ben Bernanke should have left a giant bottle of aspirin on the podium for his successor Janet Yellen. She’s going to need it.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/_AHwBZg2jlU/story01.htm Tyler Durden

Peter Schiff On The Fed’s Audacity

Submitted by Peter Schiff of Euro Pacific Capital,

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/_AHwBZg2jlU/story01.htm Tyler Durden

The Gold Rush Spreads From China And India To Saudi Arabia

In the “west”, the higher the price of gold rose, the more demand there seemingly was by momentum-chasing gamblers investors, if only for paper certificates claiming to represent gold, or GLD as the case may be. Conversely, once the momentum turned, the same investors couldn’t be bothered with gld (sic) even at 30% lower. At the same time, in the “east” the higher the price of gold rose, the lower the demand was for physical, which for that extinct breed of deranged gambler known as “value investor” is a familiar concept.” And now that gold’s price is not only back to early 2011 levels, but is essentially below production costs, demand out of China is off the charts. Demand in India – traditionally the greatest in the world – continues to also at unprecedented levels, although now that official purchases of gold are regulated and limited through capital controls, it is forcing the local population to smuggle in gold through the most innovative of schemes.

But while the west is the west, and the east is the east, and no amount of adaptive behavioral modifications can change that, much to central bankers’ chagrin, what lies in-between? Courtesy of the Saudi Gazette we learn that the uber-rich middle eastern kingdom, which floats on a sea of oil has picked its side… and it has chosen to take advantage of the ongoing paper-driven price collapse and load up on as much gold as possible.

From the Saudi Gazette:

The gold shops in Jeddah are now flourishing as more customers are buying various gold types thanks to the international drop of gold prices.

Saleh who works in Al-Amari gold shop said that more people are now buying various gold jewelries and others are buying gold bullions to store their money after staying away from gold for quite sometime.

According to him various nationalities are approaching them including Saudis, Africans and Indians. The prices he said range from SR165 to SR140 per gram based on the item being sold. The price is set based on any additional work or jewelries being added. The country where the gold comes from also determent the price, “We have Italian Indian, Bahraini, Korean and local gold creations each with a distinct price,” said Saleh.

Speaking to the Saudi Gazette, Ali Batarfi, deputy chief of gold in Jeddah, said that they anticipate that the gold prices will continue to drop towards this month to reach $1150 per once, however the prices are likely to increase during the first quarter of 2014.

Batarfi said “the gold market is now witnessing an increase in sales thinks to the drop in gold prices, however not only that but also the school break that will start very soon will also drag more consumers into the market who will buy gold for their special occasions especially weddings.”

The gold has marked a drop this year from $1,920 per once to $1,193.3, which crated a difference in the costumer attitude in buying and storing gold, said Batarfi and added, “we anticipate that more gold will be sold both with jewelries and pure bullions.”

Experts in the field believe that the international move towards investing in various sectors and the stabilization of these moves have decreased the investment in gold with China and India lessening their investment in gold. The demand on gold from central banks has also lessened. Consumer demand for gold jewelry worldwide grew by 20 percent for the year ending September 2013, reaching 3,757 tons and valued at $183.9 billion.

According to a report released lately by The World Gold Council’s Gold Demand Trends, regional consumer demand for gold jewelry has grown by 25 percent, reaching 225.8 tons and valued at $10.9 billion, with the UAE and Saudi Arabia featuring prominently.

So while the rest of the world celebrates the anti-Giffen good nature of gold, a function of sophisticated US investors for whom only momentum and 200 DMA lines matter, and is buying it up at an unprecedented pace, these same sophisticated investors in the US are dumping the certificates representing to be backed by the yellow metal in droves and are BTFATHing stock certificates exchangeable for a currency that is being diluted at a pace of $85 $75 billion per month, even as more and more gold miners are set to go out of business if the price of gold continues to drop below production cost.

We are confident that we know how this latest “conflict” between “east” and “west” will end…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/dA3t2HgCi8c/story01.htm Tyler Durden

Will The Consumer Rise In 2014?

Submitted by Lance Roberts of STA Wealth Management,

I have had the distinct pleasure of visiting with Paul La Monica a couple of times during my visits to the "Big Apple" and have always made sure to read his writings. Just recently he penned an article discussing the "5 Reasons Why Stocks Will Go Up In 2014" in which he states:

"Fortunately, many investment experts think that stocks will head higher next year. And while I always worry a little bit when few others are worrying about what could go wrong, I'm inclined to ~~drink the Kool-Aid~~ believe the bull case.

1) The Fed taper is no big deal, and now that it is done investors can stop worrying about it.

2) Interest rates will remain fairly tame in 2014.

3) The "great rotation" will continue.

4) The market is not "bubbly."

5) The economy will continue to strengthen…finally.

These are all interesting points, and would very likely seem to be correct in the short term as market momentum drives stock prices higher. However, there are three potential headwinds that are likely to weigh on the economy and the markets which are potentially being overlooked.

1) Personal Income Growth Continues To Wane

The latest report on personal income continues to show real weakness. The chart below shows the annual rate of change in personal incomes which has turned sharply lower in recent months despite reports of stronger employment and economic growth.

The problem here is simple. The economy is almost 70% based on personal consumption and weakness in personal incomes does not augur for stronger economic growth in the months ahead which is highly anticipated, once again, by the majority of analysts and economists. One of the side effects of lower incomes is a reduction in tax revenue which will negatively impact the deficit. One of the hopes of economists has been the drastically reduced budget deficit which, as I discussed previously, is likely a short term illusion that will be reversed in the quarters ahead.

Furthermore, the recent passage of the Murray-Ryan budget bill drops extended unemployment benefits at the end of the year which will reduce the personal incomes of roughly 1.5 million families in the U.S. The withdrawal of subsidies, combined with the ongoing slack in the labor force which continues to pressure wage growth, will further erode consumption in the next year unless those benefits are restored.

2) Dependence On Government Assistance Still To High

Of course, if there was ever a single issue that suggests the economy will continue to struggle in the months, and quarters, ahead it is simply the number of American's that continue to subsist on government subsidies. The chart below shows the percentage of social benefits as a percentage of real disposable income.

As stated above, the lack of wage growth, high unemployment and rising costs of living continues to keep dependence on social benefits near record levels. This does not bode well for acceleration in consumption in the coming year particularly when that income is exposed to a threat of higher healthcare costs.

3) The Impact Of The ACA On Consumption

As I have stated many times before, the onset of the Affordable Care Act (ACA) has been greatly dismissed by most economists and analysts. A recent article at Breitbart.com goes to the heart of the problem that I have been discussing for some time which is higher costs for individuals across the country.

"Increasingly, experts in health insurance are becoming concerned that many of these first-time buyers will be in for a shock when they get medical care next year and discover they're on the hook for most of the initial cost."

If we just assume that healthcare costs rise by just $100 per month, based on a national per capita income level of $47,585 as of Q3-2013, that will equate to a $73.25 billion dollar impact to the overall economy each quarter. The chart below shows the potential net diversion of real disposable incomes, before and after the higher costs of healthcare, if the ACA had started in Q4-2012.

While the increased costs of healthcare are included in the calculation of GDP, for the average American it will mean more dependence on leverage and reduced savings rates in order to make ends meet. Unfortunately, the lack of savings has its own contribution to weaker economic growth due to reduced productive investment.

Paul is correct that there are good reasons to be bullish going into 2014; however, there are ample reasons to remain vigilant with respect to your investments. The stagnation of wage growth combined with higher costs leaves an already cash strapped consumer with few options. It is likely that we will see a push by consumers to re-leverage their household balance sheet which will be hailed by the media as a return of consumer confidence. However, one should not forget the last time a highly levered consumer ran into problems.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/rULHyJu90Wk/story01.htm Tyler Durden