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Thursday was an interesting day. I went to my mailbox and opened a check from Seeking Alpha for the articles I wrote in the 4th quarter on Herbalife (NYSE:HLF). The check was not for a large amount and yet I still made more money in Q4 as a writer than over 99% of Herbalife distributors make in a year.

Also, Senator Markey from MA called for regulators to delve into Herbalife's marketing practices. The stock cratered 10%. The heat is being turned-up on HLF.

It continues to strike me as absurd that HLF common is bid $65 here.

Why?

Herbalife is certainly no Heisenberg.

Who is "Heisenberg?"

Fans of the hit show Breaking Bad know that high school chemistry teacher Walter White became the infamous Meth Cook known in the New Mexico drug trade only as the enigmatic "Heisenberg".

The secret to Mr. White's success was simple. Mr White's skills as a chemist allowed him to cook a form of meth that was over 90% pure and had a distinct blue color.

In marketing terms, his product was both superior and differentiated.

Distributors tripped over themselves for the exclusive rights to Mr. White's formula.

Demand from junkies soared and the money rolled into Heisenberg's coffers.

Herbalife claims to have a unique product in the canisters it sells known as Formula 1. This is a protein powder that serves as a meal replacement. According to HLF it is the "cure for global obesity" and the Herbalife business opportunity is the "solution to these economic times".

What continues to confound me as a business analyst is the following. If, like Heisenberg, HLF truly was the manufacturer of a unique and differentiated product uniquely capable of curing obesity:

1) Why would it pay out such a huge % of revenues in distribution commissions?

2) Why does it make distributorships available to anyone with a heartbeat and $59 v. sponsor a distribution model that is exclusive in nature

3) Why does the value chain rely on a Shipping and Handling upcharge to drive most if its contribution margin v. real wholesale margins?

4) Why do so many distributors quit every year?

Doesn't this business model strike you as absurd too?

Whether or not Herbalife is a pyramid scheme, the distribution system is perverse. In Breaking Bad there is simply no reason pure, blue, crystal meth needs to rely upon an eleven layer salesforce to gain traction in the end-user market. Equally so, there should be no reason why Formula 1 should need an eleven layer salesforce to drive sales of F-1 if it is truly a unique brand/product.

Unless, of course, it isn't.

What if the value in the Herbalife model is not in the product but in the sale of the "American Dream"?

What if Herbalife really sells "Supervisorships" like a carnival barker seducing gamers to try for the big stuffed toy v. the cure for global obesity?

What if Herbalife is merely a successful story teller that relies on the proliferation of a confidence game v. repeat purchases from real and bona fide and loyal arm's length customers?

What if the company hired a former Disney executive not for his expertise on building a profitable and rational distribution chain but rather because he is a great storyteller that specializes in happy endings told by cartoon characters?

Could it be so?

Senator Markey from MA seems to think so. Perhaps he is on to something.

If you continue to wonder whether or not Herbalife is a pyramid scheme, ask yourself this question:

If you were like Mr. Walter White. If you were the infamous Heisenberg.

If in the bowels of your basement you cooked-up the legitimate and chemically unique and clinically proven cure for global obesity:

How would you sell it?

To anyone with $59 and a heartbeat or not?

Doubtful that MLM or Pyramid Selling would be your answer.

Don't believe the Herbalspeak.

HLF will be shut down by regulators. It is only a matter of time.

Yours truly,

Jesse Pinkman

Disclosure: I am short HLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Senator Markey From Massachusetts Skewers Herbalife