Shakespeare wrote many of the world's great tragedies. Macbeth, Hamlet, Romeo and Juliet, King Lear, Othello to name some.
Modern-day tragedies like Breaking Bad are equally entertaining.
All great tragedies have a number of things in common.
- hubris/lack of self awareness is often a tragic flaw of the protaganist or other central characters
- the audience, through a literary device known as dramatic irony, can often see a character's fate before the player himself.
The Herbalife (HLF) story is shaping-up as a great tragedy itself. Already, the plot line has consumed a number of victims.
Our hero, Mr. Ackman, set out on a quest to have regulatory authorities shut down the evil Herbalife for defrauding millions upon millions of low-income optimists around the world with a rigged carnival game known as the Herbalife Marketing Plan.
From there, the plotline twisted and turned. Enter stage right Dan Loeb. Mr. Loeb's participation in the story was short-lived. A quick buck was all that was to be had and a quick buck was taken. Loeb leaves the tale as one of the non-casualties.
Following Loeb was Mr. Ackman's chief nemesis, Mr. Icahn who acquired 17% of the company and secured two board seats as an insider. Then Bill Stiritz joined the fray by over-committing a large percentage of his net worth to the story. Mr. Stiritz is in for 6-7% of the company. Other characters like Kyle Bass, Soros, Druckenmiller, etc. also piled into the long side.
Lest we forget the uber-bullish Tim Ramey and his firm DA Davidson. I am not sure how many people had heard of DA Davidson before Mr. Ramey's profile as a Herbalife apologist rose to prominence. For certain, in media circles, DA = Herbalife or MLM.
Then there is Shane Dinneen. Mr. Dinneen and his team at Pershing Square deconstructed Herbalife's opaque financial disclosures to uncover the business opportunity fraud.
Let's also not forget the media players, the MLM watchdogs, and any and all other scribes who have taken an interest in MLM and its sordid and perverse effect upon the global economy.
This past week Act IV, Scene 3 of the Herbalife tragedy was revealed. Most decidedly, Herbalife recruited additional victims into its scheme this past week. However, these characters seem to be of a lower profile than the following 3 players.
Tim Ramey left the stage to pursue an alliance with Mr. Stiritz at POST Holdings.
Why did Mr. Ramey leave?
My guess is if you ask the higher-ups at DA Davidson you will find the answer. Mr. Ramey had become the face of DA Davidson and after a largely successful 2013 cheering on all things MLM 2014 did not start off well. Mr. Ramey identified Herbalife as a "Top Pick" on January 1 and had a bullish outlook on Nu Skin (NUS).
Four weeks later, Herbalife's share price was down 20-25% and Nu Skin had been taken behind the woodshed for a collapse in share price from $135 to $80. Retail and institutional salespeople don't like it when they follow an analyst into an idea on behalf of their clients only to get their proverbial stones handed to them. I submit that the heat on Mr. Ramey likely turned-up rather quickly as January unfolded.
Then there is Shane Dinneen. Yesterday we were told that Mr. Dinneen has decided to pursue other opportunities. Many great causes in history often require martyrs to advance the cause. My guess is that Mr. Dinneen's analysis will be avenged fully when Herbalife is ultimately taken to task. Will Mr. Dinneen reappear at some point in the future? Who knows? For now, the legacy of his work lives on.
Also this week, media outlets advanced the idea that Mr. Ramey had left DA Davidson to help POST holdings execute an LBO of HLF. This idea is one part fantastic, two parts delusional and 4 parts loco. Here is why.
1) Bill Stiritz owns his HLF position in his personal account. It would be a total and complete conflict of interest for POST to buyout Herbalife and enrich Mr. Stiritz's personal fortune.
2) POST has a market cap of less than $2 billion. Herbalife would cost upwards of $8 billion to buy. Mice don't swallow elephants. Guppies don't swallow whales. The math doesn't work. Plain and simple.
3) POST is a 100-year old company that sells some of the most trusted breakfast cereals known to man. There is no way in the world this Board of Directors is going to risk this franchise on a nutritional supplement maker that is the target of a pyramid scheme investigation.
4) Finding a bank willing to lend to anyone looking to gear HLF's balance sheet at a low cost of capital strikes me as a ludicrous proposition.
So, what likely is the story with Tim Ramey moving to (POST)?
How is this for a hypothesis.
- What if DA's board was getting worried about the firm's reputational ties to MLM? (Out Damned SPOT!)
- What if the backlash from salespeople in January reached a fever pitch?
- What if Mr. Ramey ended-up the fall guy?
- What if Mr. Stiritz out of an act of loyalty ran to Mr. Ramey's rescue? (Recall, Mr. Ramey helped make Mr. Stiritz richer in 2013)
Doesn't this plot line seem more logical than the idea that Mr. Stiritz recruited Mr. Ramey away from DA to help buyout Herbalife in an illogical quest that might make Don Quixote seem rational?
So, where do we sit today?
The key players in the story remain Mr. Ackman, Mr. Icahn and the company itself. DA Davidson is now out, Mr.Ramey is now out as a cheerleader. Mr. Dinneen is now gone we are told.
Meanwhile, regulators continue to whittle away at the evidence that is being brought to their attention. The Canadians are on board. The Chinese are growling. Unlike J.C. Penney, Mr. Ackman remains steadfast in his commitment to his pyramid scheme thesis.
So, how will Act V play out?
Your guess is as good as mine but here are some questions I have.
1. How on earth does Mr. Icahn get out from under his 17% position without triggering a large sell-off in HLF common? Is he destined to go down with the ship? Is a levered outcome now a pipe dream? Will his son advise him to cut bait?
2. Will upcoming 13 Ds, Fs and Gs reveal the exodus if other longs like Soros, Stiritz, Druckenmiller, Bass, etc. How will the stock react?
3. Will rumors of a levered recap be addressed when HLF reports its Q4 results Feb 18th?
4. Which jurisdiction will drop the next regulatory hammer?
5. Will Mr. Ramey or Mr. Dinneen reappear?
6. Will Mr. Stiritz become the Joe Smith (see Bear Stearns) of Herbalife?
7. Will Mr. Ackman's initial quest ultimately prove successful?
8. Will more Herbalife insiders turn whistle blowers? Might we see a resignation in the executive suite? The heat must be excruciating.
My own thesis from the get go is that HLF is a pyramid scheme. It just seems obvious to me. I could be wrong. I could be a victim in this tragedy. Still, I haven't wagered half my net worth or anything so zany on the proposition. If wrong, I will live to fight another day.
If Shakespeare were alive today my guess is he would be entertained by this story of shake mix, Wall Street players, low-income purveyors, and hucksterism.
Makes The Bonfire of the Vanities seem tame in comparison.
Thesis: Herbalife is a Global Pyramid Scheme that will be Shut Down by Regulators. Longs are speculators at best. Act V should play out within 2014.