A Confidence Game in Reverse
This article should serve to remind you two things:
1. There's generally always a method to Mr. Ackman's madness.
2. Potential monetary benefit can easily blind even the smartest of money managers.
Part of Mr. Ackman's presentation yesterday - regardless of whether or not Wall Street liked it - was to take aim at Herbalife's (NYSE:HLF) confidence game. What is a confidence game?
It can be loosely defined as "an attempt to defraud a person or group after first gaining their confidence, in the classical sense of trust." Mr. Ackman, and skeptics of the company, are positive that it's the confidence of both its bullish investors and analysts, as well as its distributors, that allow the inherently fraudulent scheme to continue.
Yesterday, I learned that Herbalife may not even have the confidence of its bullish investors and that Mr. Ackman may be offering a reason for distributors to retract their confidence, as well.
Herbalife is running a confidence game because it relies on the confidence of its distributors, Mr. Ackman has noted numerous times in the past. He reiterated on this yesterday.
Yesterday, he called this "the big lie", and explained in detail why some of the biggest, boldest lies are often the ones that take the longest to topple. Forbes quoted Mr. Ackman:
"The big lie is used by totalitarian regimes, and by the Nazis and by lots of people and people generally believe big lies because they are so bold that how can they possibly be false," Ackman said.
One of the byproducts of yesterday's conference - the residual damage aside from providing regulators with disgustingly ridiculous amounts of concrete proof of fraud - could potentially be that Herbalife begins to lose the confidence of its distributors.
I'm sure the confidence of some of Herbalife's employees has also been on the mind of many an employee who lies their head down at night. Forget about the C-level suite and Mr. DeSimone's uneasy demeanor during his interview yesterday on CNBC. I don't think it was a coincidence that he was making faces like he was having a bad reaction to ethnic food in between questions.
What if you were a VP at the corporate level? Surely you've considered your options and asked yourself the questions:
"What will happen if regulators do step in?"
"Is it better to cooperate now than to wait it out?"
"Should I begin looking for other employment?"
These are certainly the questions I'd be asking myself if I were in their shoes. And, having worked for a company that was once previously probed by regulators, I know what it feels like to be an innocent bystander at a company asking yourself those questions.
By now, we know the market's reaction to Mr. Ackman's presentation yesterday favored the bull case. Today, Herbalife is correcting slightly on some profit taking, but it's still trading more than 20% higher than yesterday's open.
However, has anyone thought that Mr. Ackman's statements made on Monday were done so specifically for the reason of garnering a massive audience on Tuesday? Is there a chance that yesterday could have actually gone exactly as Mr. Ackman planned? If his sole strategy was to get a ridiculous amount of eyes on the presentation, that strategy worked. The number 10,000 is being passed around online as the number of people who were on PSQ's webcast yesterday. If those 10,000 people each disseminate the message to 100 people via their mediums, all of a sudden you have a ton of eyes on Mr. Ackman's presentation; not to mention a great downline, should you ever want to pitch them some Formula 1 shake.
Had there have been that many people on the Herbalife in China webcast, I'm certain Herbalife would be in major dire straits in China (if they aren't already).
Getting a massive amount of eyes on yesterday's presentation was important for a couple of reasons:
1. It increases the chance that Mr. Ackman is going to find a reporter that is interested not just in reporting the stock price, but actually will investigate the serious claims that Mr. Ackman made yesterday. Any reporter that scratches the surface of what Mr. Ackman said yesterday, as opposed to reporting on the stock price independent of the evidence, is likely to find themselves with a story of massive substance. So, if you're in the media and you're reading this, let me remind you that fortune favors the bold.
2. It's likely to send yet another ripple effect through Herbalife's distributor network. If Mr. Ackman can effect distributor confidence and start to show people how they're being defrauded, you have another scenario in which the company could potentially implode from the inside out. You can tack that on top of removing nutrition clubs, false and misleading statements, and simple perpetuating a pyramid scheme.
While we wouldn't be likely to see distributor regression in this upcoming earnings report, it is something that could carry through into the future. However, I'm not sure that the company is going to make it far enough for us to watch a regression via loss of distributor confidence.
But ultimately, all of the short theses behind the company fall under the umbrella of the company being a confidence game. In others words, what Bill described as "The Big Lie" yesterday.
If you had read the posts on Twitter (NYSE:TWTR) and in the media yesterday while watching the stock price, you'd see that initial media reaction was rather harsh to Mr. Ackman. You'd see longs and bulls claiming that the argument is over and that Mr. Ackman has clearly been proven wrong. However, if you've learned one thing about Mr. Ackman to this point, it should be that he's extremely persistent and is not going to let this go.
This morning, the sentiment on CNBC's non-scientific poll seemed to suggest that Mr. Ackman has a far more balanced support with more than enough undecided voters to put the consensus well into the realm of supporting Mr. Ackman's thesis. So, maybe it's possible that Mr. Ackman's presentation was not the trainwreck the media is making it out to be?
(source - CNBC)
But, again, not a scientific survey - just something I happened to come across this morning. But, if this balance proves to be true, it could lend some credence to Mr. Ackman's thesis that Herbalife was buying back shares into his presentation yesterday. We'll have to see if the bid can hold up going forward.
The Insanely Irresponsible Herbalife Bull Argument Plaguing Wall Street: Admit the Company is Fraudulent, Go Long Anyway
For the longest time, Wall Street has been given the reputation of people that will sell their soul for a dollar. It's a "dog eat dog" world, a "cutthroat" business; I could rattle off clichéd sayings until the cows come home. You all know what I'm talking about.
I'm not a political activist by any means, but much of the sentiment that bankers and financiers are inherently evil is drawn from the history of past events. I'm talking, of course, about things like Worldcom, Enron, Autonomy, MF Global, Lehman Brothers, the subprime crisis, and the dot com IPO bubble - just to name a few.
As long as the market is flourishing and profits are rising, I'm sure that someone is unethically finding a way to book a profit somewhere in a small pocket of a sector or a business. As a little lie or a little misstatement gestates day after day with Wall Street turning a blind eye as the markets rise, we find ourselves on the verge of another bubble. Bad debt is offloaded until it can't be anymore. Banks leverage until they can't anymore. And then, one day, mom and pop investors wake up and find out the economy has collapsed and they've sacrificed tons of their hard earned money via their 401ks to bail out corporations and Wall Street insiders.
Then we find out that those same insiders bought derivative bets that these bubbles would burst, and that they made ridiculous amounts of money doing so.
So, is it any wonder that Wall Street warriors can get a reputation?
For now, we have the Fed to come around and couch the blow of when these things occur. However, it doesn't make it right for people to accept these collapses as "the norm".
Fund manager John Hempton, who has personally called multi level marketers "scumbags", has gone on the record as a bull. Ethical conflict of interest? Proving yourself wrong? Never heard of it. Mr. Hempton penned a response to Mr. Ackman's presentation yesterday that was extremely critical of his take on nutrition clubs and questioned the validity of what Mr. Ackman said, despite his demonstrable evidence to the contrary.
So, in essentia, Mr. Hempton knows the company is deceptive, but believes that its the consumer's fault for allowing themselves to be bilked. Astonishing way to look at it, no doubt. Finding out that his thought process was prominent on Wall Street was even more baffling to me.
After leaving the presentation yesterday, I spent three hours in downtown Manhattan having a fantastically spirited argument about the bullish vs. the bearish case on Herbalife with both a friend and fund manager - both of whom I respect immensely.
What I learned was astonishing.
1. There are bulls that absolutely cannot look past the cash flow to see the inherent fundamentals' behind the business model as being material in this case.
2. There are bulls that base their entire strategy on openly admitting that the company is fraudulent and deceptive, but then investing under the extremely confident pretense that the regulators aren't going to do a thing.
In other words, their ideological argument is that it's the distributors fault for being too stupid to realize they're being duped.
This is a great country, isn't it?
This morning, I wrote the following to my friend Whitney Tilson, regarding Mr. Hempton's blog post and this appalling perspective on the situation:
Not surprisingly, I'm going to side with the guy who did due diligence to the tune of 240+ nutrition clubs and has no doubt read everything the company's ever produced probably 20 times over.
It's so interesting. One of the bulls that I spoke to yesterday took the same approach that [Mr.] Hempton takes in his video (http://video.cnbc.com/gallery/?video=3000139284) - he contends that "MLMs are scumbags," but that it's the distributors right to piss away their money any way they please.
"They're scum, but they're the stock market's scum."
In other words, it's been an ideological argument as to whether or not the government should have a role in intervening.
Hempton and others think no - I think it's a unbelievably sketchy and incredibly risky way to make a bet to the upside. We know 7 regulators (at least) are involved.
Making a blind bet that they don't have the balls to do anything, especially when longs themselves admit that Herbalife is deceptive, is an interest[ing] experiment in human psychology at the least, and enough to make [me] fall out of my desk chair at worst.
It's also a piss poor investment strategy.
I guess that's why I don't have millions of dollars of assets under management. I don't know what school of thought that is from; but I assure you, it's not the one I subscribe to.
Don't you think investors like Mr. Ackman have thought about going bullish on the company? Don't you think shorts have noticed the company is trading at a sickly low multiple and would otherwise be a $120-$150 stock? Don't you think Mr. Ackman et al are capable of looking at the bull case objectively? I have, and I do.
But, that's called "taking the disingenuous and easy way out" - condoning the fraud, hoping it continues slipping past regulators for years, and lining your pockets based on Herbalife's financials, which are padded by an inherently fraudulent business model.
"Not one Herbalife analyst ever called us," Mr. Ackman stated yesterday. Regardless of how you feel on an investment or a trade, regardless of how you feel about Herbalife - don't you think analysts responsible for hundreds of millions would be better served trying to embrace the opposite case for their equity? Don't you think that would offer up necessary perspective? I sure do.
Is it any wonder that Wall Street has garnered the reputation that it has?
I'll leave you with a relatively simple question that I think many people should ask themselves the next time they take personal inventory on the Herbalife situation.
What's worse: Mr. Ackman trying to shed sunlight on this company, or the people that admit that its intrinsically fraudulent yet continue to support it?
Disclosure: The author is short HLF. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.