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It's been a tough two weeks for Herbalife (HLF) longs. This would include the likes of Tim Ramey, Bill Stiritz and Carl Icahn.

For those who have been paying attention, Mr. Icahn's (Icahn Partners et al.) ownership stake in Herbalife has suffered a mark to market loss of over $350 million since the start of 2014.

Could more losses be in the future?

Pershing Square's assault on the Herbalife business model is relentless, and elected officials and regulators alike seem to be paying attention.

Longs celebrated the dismissal of a pyramid scheme charge in Belgium late last year as a cause celebre.

Meanwhile, regulatory bodies in China, the USA, NY, Nevada, and California all seem to be tuning in to the idea that the carnival game known as the Herbalife Marketing Plan causes economic harm to junior recruits - mostly Latinos, mostly the lowest socio-economic segment of society, mostly unsophisticated yet optimistic people.

Mr. Icahn finds himself in a bit of a pickle perhaps Icahn Partners is most definitely an Herbalife insider. They own more than 10% of the stock and have two delegates on the board. As such, Icahn simply cannot trade on material non-public information.

a) Icahn would be unable to sell his position if he knew, for example, that Herbalife was being investigated by regulators

b) Icahn would be unable to buy more shares if he knew an LBO was in the works or levered recap was in the offing.

In all likelihood, if Mr. Icahn wanted to sell his company's position a resignation from Herbalife's board might be part and parcel of such a decision.

Recall that before Mr. Ackman disposed of his J.C. Penney stake at a price north of $12 per share (prescient in hindsight with JCP below $7 per share), Pershing Square resigned from the JCP board.

With Herbalife stock soaring in 2013, Mr. Icahn and Mr. Ramey certainly were not shy to pile-on the ad hominem criticism of Mr. Ackman. Mr. Ackman endured all of this criticism and more while remaining steadfastly committed to his investment thesis. Namely: Herbalife remains a pyramid scheme that will be shut down by regulators.

Meanwhile, Nu Skin's (NUS) share price got taken behind the woodshed due to an inquiry from Chinese authorities. Herbalife common traded down in sympathy too. As of today, Nu Skin is no longer recruiting in China.

Herbalife common is bid roughly $60 or roughly a $6 billion market cap. Over the course of the next few weeks, institutional investors will have to file their 13Fs. Any investor who has already filed a 13D or 13G will have to file amendments if their positions have changed.

In less than 3 weeks the tide has turned materially against HLF longs. Class action attorneys are now pursuing litigation v. the company. Sympatico for the individuals being harmed by the scam is gaining notoriety in high places.

This begs the question: Have any high-profile longs been running for the exits? If so, how will Mr. Market react on the news that a long has turned tail?

If you were Mr. Icahn, for example. What would you do? If you were Mr.Icahn's son what advice might you give your father?

Over the past few trading sessions well over 10 million shares of HLF have traded hands. Somebody has been selling. Is it Mr. Stiritz, Kyle Bass, Soros Investment Management, Mr. Druckenmiller? Hard to say.

However, the question remains: How does Mr. Icahn get out of his 17% stake in the company? Or, will he go down with the ship?

Is it likely a bank that takes its fiduciary duty to shareholders seriously would lend to this company with a ten foot bargepole in light of the lawsuits facing the company?

Is it likely we see lenders try to pick-up nickels in front of a bulldozer at anything more than a BB spread if at all?

Would it be rational for Mr. Icahn to sit by idly and just wait for the next regulatory shoe to drop?

Or, might it be more intelligent for Mr. Icahn to get out while the getting is good.

Isn't it possible too that other savvy institutions are deciding to cut their losses and leave the crowded theater before somebody yells "Fire".

By February 15th we may find out. Longs should also consider the potential for the following outcome.

Do not be surprised to learn that Icahn's delegates have resigned from Herbalife's board in order to race for the exits. Even as he has already given back well over $350 million mark to market on his investment he is still "in the money".

If Herbalife goes to $0 per share on a regulatory inquiry Mr. Icahn will go from hero to goat overnight.

Dan Loeb was a very smart guy. He saw a mark to market profit and he took it. Mr. Icahn has yet to pull the same trigger with Herbalife.

Is this prescient or hubris?

With the wagons circling each and every day, don't be surprised to learn if any one of the following hit the tape in the not too distant future too:

  • a Tim Ramey downgrade as he revisits China thesis and/or gets top-down pressure to pipe down from the board at D.A. Davidson
  • a Bill Stiritz exodus (a fool and his money are soon parted Mr. Stiritz - aren't you a tad overexposed?)
  • a Bass, Soros, Druckenmiller 13F showing sales of HLF common
  • a Carl Icahn board resignation
  • and/or a major regulatory intervention

Say what you want about Mr. Ackman, but he had the sensibility and good judgment to admit his investment thesis in JCP had changed and therefore liquidated his position.

Why has he not done the same with HLF?

Will Mr. Icahn equally have a change of heart on his long thesis?

HLF common is a speculative security. Owning it as a long is like playing Russian Roulette. Warren Buffett famously said (to paraphrase) "the definition of insanity is risking something you have and need for something you don't have and don't need".

Has Mr. Icahn overstayed his welcome? Has he bitten off more than he can chew here?

De minimis, the collapse of HLF common from $80 to $60 must give pause for thought.

In the end, Heisenberg's hubris lead to his demise in Breaking Bad. One thing is for sure as the Herbalife saga unfolds. One of the characters will end-up wearing the goathorns when it is all said and done. Someone will end-up King Lear. The ending is guaranteed to be tragic for someone.

Of late, we certainly have not heard from the usually chirpy Tim Ramey or the now underwater Stiritz family. Is Herbalife still D.A. Davidson's "best idea" for 2014?

Herbalife files its 10k in a few weeks too. Will we learn that Herbalife has been buying back shares in the $75-$80 range v. today's current bid of $60? Will we discover stress in the company's recruiting trends too?

Who knows?

For now, Mr. Icahn tells investors he has no plans to sell HLF common. He is still talking his book.

Just don't be surprised to wake-up one day to discover that he or his son have changed their mind.

Somebody is going to end-up the bagholder on HLF.

The plot thickens as to whom it will be.

Stay tuned.

It's a page turner.

Source: Which Herbalife Long Will Blink First?