Gregory M. Wetherall

Long/short equity, value, special situations
Gregory M. Wetherall
Long/short equity, value, special situations
Contributor since: 2011
You make very good points Tack. As for managing other peoples' money, I fear your words will prove to be prophetic. GW
For my first twelve years as an attorney, litigation was the bulk of my practice. For the last eight, I have tried to get away from it (too stressful). Now, my practice consists primarily of consumer and business bankruptcy work with some commercial litigation interspersed. My goal is to retire from the practice of law as soon as possible. I am an active trader with a good track record. I currently manage only my own money but, in the absence of a law practice, I suspect my energy levels would demand something more. Therefore, once I leave the practice of law, I will likely gravitate towards managing other people's money.
I agree my response to your comment was harsh and I apologize. I am simply very disgusted with the federal government at all levels. The only thing the federal reserve needs to do is maintain a stable currency. The federal government needs to provide for the national defense and not much more. We need to get back to the system of federalism where police power is reserved to the states.
At this time, we find ourselves in a situation where the federal government has promised the people far more benefits than it can ever deliver. The obligations of Social Security, Medicare, Medicaid and other entitlement programs are “staggering” or, if you prefer, “excessive.” There are only three ways to deal with those obligations: (1) pay for the benefits at face value (which would require younger generations to live near poverty to subsidize a more affluent lifestyle for the elderly); (2) monetize the debt (which would allow the government to provide the promised benefits with inflated dollars); or (3) commit a hard default on the obligations by eliminating the benefit programs (of course, option # 2 is a default but not a hard default).
Absent an explosion in productivity and prosperity, Option 1 will be impossible to accomplish. As the costs of socialism become more onerous for younger generations, they will revolt against the sacrifices demanded of them. Therefore, only options 1 and 2 are viable. In the end, I am certain both of these options will be utilized. The debts will be monetized through inflation and there will be hard defaults in the form of increasing age eligibility requirements and the elimination of certain benefits.
As for your question regarding which nations currently maintain excessive debt levels, the answer is virtually the entire developed world. Of course, the glaring examples are Japan, the United States and, of lesser consequence, certain members of the European Union. At present, the Bank of Japan purchases 75% of the sovereign debt issued by the Japanese government. While Japan has been spared hyperinflation so far, it is only a matter time until it emerges. I don’t know if I would call it lucky, but Japan has been protected from inflation, to a greater degree than other nations, because of the 20% to 30% savings rate the Japanese people maintained for the last 50 years. Moreover, the Japanese are far less materialistic, far less entrepreneurial and have a deep-seated mistrust of banks which has contributed to hoarding.
In reality, Japan, and other similarly situated nations, would be better off if they just defaulted on their debt. I am a student of history and know a monetary crisis is a terrible experience for a nation but it's not permanent. At the end of the day, it isn’t the monetary system which creates wealth and prosperity. Money is just a medium of exchange which facilitates commerce. It is the people, their values, their work ethic, their intelligence, creativity and ingenuity which create the wealth. In the final analysis, a monetary crisis creates a very profound, but transient, economic discomfort. Afterwards, absent a mass exodus of is most productive citizens, the nation has the same resources as before the crisis and, by establishing a new, stable currency, will quickly rise from the ashes.
So, over the next couple of decades, I think the entire world is in for a very rude awakening as they learn socialism doesn’t work. That we all must provide for ourselves, our families and our communities without leaning on a paternalistic government. Then, we can hopefully start over with a new government that governs less and a central bank that seeks to provide a stable medium of exchange and nothing more.
"If you know of such a country, please point it out. Be sure to define "enormous" and "staggering" in non-circular terms. We'll wait."

With 6,389 comments, it appears you have way too much free time on your hands. Rather than feeding a troll, I'll let you spend some of that time looking up the definitions for yourself.
If you know of such a country, please point it out. Be sure to define "enormous" and "staggering" in non-circular terms. We'll wait.

With 6,389 comments, it appears you have way too much free time on your hands. Rather than feeding a troll, I'll let you spend some of that time looking up the definitions for yourself.
"There is no connection between the monetary base and the rate of inflation in the economy."
That is the popular notion in MMT. It isn't true. At least not in an economy where the government runs enormous budget deficits and maintains staggering debt. Especially when that debt is denominated in a currency controlled by the government which issued the debt.
Your theory relies on the Fed's ability to pay interest on reserves to prevent the monetary base from flowing into the economy and creating inflation. But what happens when the interest rate necessary to prevent the flow of reserves into the economy approaches, or even exceeds, the interest rate paid on government bonds. Then, banks will dump sovereign debt in favor of maintaining reserves at the Federal Reserve.
At that point, you must either reduce the rate paid on reserves or allow interest rates on government bonds to increase. As stated in my prior comments, the government’s debt is so large it cannot afford to pay higher interest rates. Therefore, you must reduce the interest rate on reserves and allow the money to flow in to the economy. Of course, that will result in unprecedented inflation.
2008 wasn't just s cyclical economic downturn but more of a 19th century-style panic created by loose monetary policy and exacerbated by the policies of the federal government aimed at guaranteeing home ownership to the masses. The only way to moderate the booms and busts is to reform the monetary system. First, the employment maximization side of the Fed's dual mandate should be eliminated in favor of the Fed focusing solely on controlling inflation. Second, we need to implement a monetary policy similar to Milton Friedman's Monetarism model where the money supply grows at a moderate, constant rate plus any increases in productivity. To moderate the depths of general, cyclical, economic downturns, we need to reduce the size of government and implement a consumption tax in place of personal and business income taxes.
I agree with you insofar as the only saving grace for the U.S. government is the equally abysmal fiscal state of many of the EU nations. Nevertheless, while no one can predict when it will happen, it is just a matter of time until there is a major monetary crisis in the United States. With debts and deficits at this level, and the never ending rise in entitlement spending that comes with an aging population, there is simply no possible way for the government to survive without debasing the currency in a monumental way.
As with all financial crises, for most people it will seem to arise unexpectedly and without reason. It has been this way since the dawn of time. Recent examples abound. In 2000, Wall Street told us the bull market in internet stocks would never end. In 2006, investors believed real estate prices would never decline. Of course, we all know how those predictions turned out. Now, we are told there is no inflation and none in sight. The facts, of course, say otherwise. We will have to wait and see what happens
QE never ended. The Federal Reserve continues to purchase assets with the interest it receives on the bonds and mortgage-backed securities it purchased over the last 7 years. Regrettably, the Fed has no choice but to continue quantitative easing on an even grander scale in the future. One need look no further than the fiscal nightmare that we call the federal government to understand why.
The national debt stands at nearly $18 Trillion and the federal government is still running a huge budget deficit . Can you imagine what would happen if interest rates on U.S. government bonds returned to a more normal level of say 7% to 8%? If that happened, the federal debt service would increase by about $600 Billion per year.
Quite simply, the Federal Reserve can't allow interest rates on U.S. government bonds to rise as it would decimate the fiscal train wreck that exists in the federal government. Continuing with train wreck analogies, it would be like crashing a train carrying weapons of mass destruction into another train that already wrecked. The results would be incomprehensible.
But the only way to keep rates on U.S. bonds down is if someone is willing to buy those bonds at an acceptable interest rate. Although I disagree with the author that consumer inflation is low, I will agree the real inflation has been in the prices of investment class assets. Most notably equities. And why have equity prices blazed higher in a seemingly never ending bull market.? Because it is the only place to invest and receive a respectable, risk-adjusted rate of return. Unfortunately, this situation, where the government must maintain low interest rates for purposes of financing its spending, while individual investors, as well as other nations, are unwilling to accept those rates of return, means that someone must eventually arise who is willing to purchase government debt even when there is no logical basis to do so. That someone will be the Federal Reserve.
As the national debt and corresponding debt service continues to increase, there will be less and less private purchasers of U.S. sovereign debt. This will create the catalyst for our next economic nightmare. As it happens, the Federal Reserve will become the lender of last resort. Unlike the Panic of 2008, however, when the Federal Reserve became the lender of last resort to the nation’s financial institutions, this time it will be the lender of last resort to the federal government. While it may seem that inflation is contained at this time, the ever increasing federal debt and budget deficits, together with the Fed’s quantitative easing necessary to fund those deficits, will lead to unprecedented inflation in the United States.
In light of the most recent Fed statement, and the reasons set forth above, I am confident the Fed will do whatever is necessary to keep interest rates low. Of course, that means a continuation of the bull market for stocks. In fact, in the coming year I think we will see the beginning of a stock market bubble comparable to, if not worse than, the Dot-Com era.
From past performances, I knew Ackman was capable of saying or doing anything to make a buck. Still, even I wasn't prepared for the crocodile tears he shed during today's performance. I don't think I'm alone admitting I almost vomited watching him choke up. Then, adding insult to injury, the references to his immigrant grandparents, as the impetus for his short position in Herbalife, transformed a gag reflex into full blown dry heaves and convulsions. This man is truly revolting. Someone tell the makes of ipecac they can stop making it. If you need to induce vomiting, just let the patient watch one of Ackman's shows.
I agree with you assessment of Apple. Today's earnings release was like the opening barrage of artillery at the start of a great battle. The release of the iPhone 6, later this year, should serve as something similar to what Napoleon called a coup de main. I think an iPhone, with a larger screen, will result in an explosion in sales both domestically and abroad. With all of the other wonderful news released today, I would not be surprised if Apple trades near $800.00 before the earnings release in January of 2015.
Disclosure: I maintain a long call options position in Apple and intend to add to it in the near-term.
I am pleased to hear that. Thank you for your time.
You are right. I was confused and thought Silicon Valley was a geographical recess in the Montagnes Noires. Perhaps, you should move to Haiti and create your own business. In the meantime, I think most people here would be very appreciative if you move your comments to a more appropriate website.
KBrown83:
Sorry for the delay in responding. I was out of town shortly after this article was published, returned to a hectic schedule and, last week, succumbed to the flu.
My article was not meant to give a precise value for FNMA but merely to point out there is a great deal more value here than the market is giving credit. As you point out, of the $80 billion in profit, about $50 billion represents deferred tax benefits. I agree completely with your assessment.
My point is: that still leaves $30 billion after the non-cash items. And, from my perspective at least, that is nothing at which to sneeze. Moreover, you can't act as if the tax savings of $50 billion don't count. Even on a fully diluted basis, before the dividend sweep, the price to book valuation is astronomical. It isn't bad even after the dividend.
There are articles with great valuations of this company out there. The consensus among them seems to be about $40.00 per share. I won't attempt my own valuation but, suffice it to say, I won't complain if I only see half of that?
You are a very astute commentator. Thank you for taking time to read my article.
Greg
More than just off topic, your comment is one of the most ridiculous I have ever read. Demand creates jobs? There is plenty of pent-up demand in Haiti and other poverty-stricken areas of the world. According to your logic, these places should be overflowing with jobs.
Jobs are created by people who create businesses that produce goods and services. You can't have customers until you have the means to produce the products or services they consume. That is why free market capitalism creates wealthy nations. It rewards those who start businesses which, in turn, create the goods and services that raise the standard of living.
With the government shutdown tonight, it looks like the market is ripe for an even bigger decline in oil prices: Easing tensions in the Middle East, increased domestic production, the end of the peak Summer driving season, a slowing economy and now this. Oil could come crashing down while we sleep when European markets open. Even if a shutdown is averted tonight, the debt limit will be reached in two weeks. I am short crude oil futures overnight. Short at $102.30 a barrel with a stop at $103.91.
I have never read a more useless article. You could say "sentiment" is what moves all markets up or down. Let me get even more scientific and predict Supply and Demand will determine whether the metals markets move up or down. With this article, and my contribution, everyone is now armed with everything they need to manhandle the silver trade. I give this advise without any expectation of renumeration because I'm Good Enough, I'm Smart Enough, and Doggone It, People Like Me!
That is where it closed on Friday. Let's revisit this in a few of months.
Correction: My position is 1,800 shares, not 2,000.
You hope Ackman takes Icahn to the "cleaners?" How is that possible? Icahn is worth over $16 billion. That is four times the market cap of Herbalife. He could literally buy Herbalife the way most people buy Nutritional Shakes.
More important, however, is the fact that Ackman is short virtually the entire supply of HLF shares available to be shorted. Due to the size of Ackman's short position, Icahn doesn't need to buy Herbalife. He can make even more money by continuing to buy the stock until Ackman is forced to cover. Then, Icahn can basically name his price for his shares and Ackman will have no choice but to pony up. Its called cornering the market.
Today, I bought 2,000 shares near the close of the market at an average price of about $41.00.
Wrong again Pinocchio. Short selling is available in most markets. For example, farmers sell produce to grocers before crops have even been planted. Petroleum refiners sell gasoline to transports before the refiners even take delivery of the underlying crude. Airplane manufacturers take orders from airlines years in advance of delvery.
Only in markets, which trade items that have a finite supply or are one of a kind, is short selling limited or nonexistent. For example, it would be extremely difficult to short sell Leonardo da Vinci's original Mona Lisa because only one exists and it isn't traded on a regular basis. However, even then, short selling could exist if, for example, somone simultaneously had the opportunity to buy and sell the Mona Lisa.
Lets say Bill Gates knows the owner of the Mona Lisa who offers to sell it to him for $50mil. Gates knows that Warren Buffett wants to buy the Mona Lisa so he contacts Buffett and negotiates a contract to sell the painting to him for $100mil. Gates then goes back to the current owner and buys the Mona Lisa which he subsequently delivers to Buffett.
At its essence, short selling in stocks is nothing more than a contract between the buyer and a short seller whereby the short seller agrees to deliver the underlying stock to the buyer at a later time. Contrary to your usual babble, short selling exists and occurs on a regular basis in the vast majority of markets. Banning short selling in equity markets would be catastrophic.
Finally, your useless banter contained another error. As far as your posts are concerned, late isn't better than never.
Sally:
If you don't like "greed," you can substitute self-interested, ambitious, driven or any other word of similar meaning. In the end, this is what motivates people to be productive.
As for short selling, it needs no more regulation than buying. I haven't seen any complaints from you about Hedge Funds who maintain large long positions in a given equity. Remember, no one can go buy unless someone is selling. Moreover, short selling is self-regulating because of the inherent dangers it presents (i.e. unlimited losses, margin calls, shares called away, etc.).
I hope you will reconsider what I said. In certain markets (e.g. equities, real estate, etc.) there is a fixed supply. This is not the case with the examples you give for automobiles, food, gas, etc. When demand goes up for cars, prices and, in turn, profits go up. As a result suppliers build more cars because they can make more money.
With stocks, on the other hand, in the absence of short sellers, the only people who could sell would be those that own the stock. So, without short sellers, demand for a given equity could, theoretically, be unlimited, while supply would be limited to those who own the stock.
You accurately point out that, even with short sellers, equity markets still experience bubbles. However, that is hardly justification for banning short selling. Only if we want even bigger bubbles would that make sense.
You characterize short sellers as manipulators and greedy people who want to hurt the people on the other sides of their trades. You go so far as saying they are profiting from the stupidity of the buyers. How are the motives of a short seller any different than those of a buyer? Certainly, the buyer thinks the stock is worth more than he is paying or he wouldn't be buying.
While I don't like Bill Ackman, or what he did with respect to Herbalife, that dislike isn't because he sold Herbalife short. It is because he made misrepresentations, about a perfectly legitimate company, to line his own wallet. I am a frequent short seller but I don't build my position and then make false statements to bolster the trade.
As for your disdain for what you consider human frailties, especially greed, such emotions are what make the world go round. For lack of a better word, greed is good. I know, its been used before, but it is true. Greed is what motivates people to, among other things, go to college, build businesses and, for that matter, trade markets. There are, of course, bad people who are willing to achieve the objectives of their greed through nefarious tactics. That, however, is a result of a character flaw, not a flaw in the emotion itself.
In the end, short selling serves a very good purpose.
Short selling is vital to all financial markets but especially equities. Most equities are owned by institutions and are held for the long term. In the absence of short selling, the demand for most equities would far outweigh supply. As a result, the equity markets would frequently experience extreme overvaluations followed by crashes.
Short selling is practiced mostly by traders who, for the most part, are contrarians. They tend to sell when others are buying and buy when others are selling. This trading, whether it is done on the buy side or the sell side, helps moderate markets and prevents extreme over-valuations and under-valuations. Therefore, contrary to what most people believe, traders on both sides of a transaction, including short sellers, provide liquidity that reduces market volatility.
Traders are even more important during market extremes. During these periods, they provide liquidity to the market when, in their absence, there might very well be none. They buy during crashes when no one else will buy and sell into bubbles when no one else will sell. For example, during a market crash short sellers cover shorts and some even begin going long putting a bottom in the market. Without them, there literally might be no buyers in the market at all.
The recent bubble in real estate markets illustrates what happens without short sellers. Everyone believed that real estate values would never go down so demand for real estate far outstripped supply. In turn, real estate values climbed to the point of absurdity. This bubble was sustained for an unprecedented period of time by the government which pumped money into real estate through low interest rates, tax breaks and government subsidized and guaranteed loans. There was literally no check on the demand for real estate. In the end, the massive bubble burst, as all bubbles do, and almost brought down the entire global financial system.
Similarly, the next bubble to burst will be the global sovereign debt bubble. In the United States, the Fed is keeping interest rates low by purchasing massive amounts of treasuries. They are aided in their efforts by countries such as a China that enjoy large trade surpluses with the U.S. and are willing to hold their massive reserve of dollars in treasuries. As a result, the demand for these securities far outweighs supply.
The Bond Bubble will burst when China and others begin to demand a larger risk premium on their treasury holdings. When that happens, the massive government debt and budget deficit will render the Fed incapable of allowing rates to rise. If they did allow such a rise, the debt service paid by the government would grow exponentially to an unsustainable level.
When the Fed fails to provide an adequate return to these investors, they will begin pulling their money out of treasuries and transfer those dollars to higher yielding assets. At that point, the Fed will, in essence, become the lender of last resort to the government and will be forced to expand its balance sheet in a never-ending stream of quantitative easing. In the final analysis, the Feds ever-expanding balance sheet will result in massive inflation that will bring an ugly end to the monetary and fiscal orgy in which Washington has been engaged for so long.
Today, I closed by 1,000 share long position, which had a basis of $28.25, at $38.63. In addition, I got to keep the $2.40 premium on the 10 put contracts I wrote with a Dec 28 expiration and a strike price of $27.50. Not a bad return for a two week holding period. I expect a correction in the next couple of days and, if it occurs, I will get back in. I hope everyone made some money on this one.
Actually, it is very easy to have shares, which have been loaned by your broker to a short seller, recalled. First, only shares which are held in a margin account can be loaned out by a broker. So, if your shares are not held in a margin account you don't have to worry about them being loaned out. If, on the other hand, you own shares, of a hard to borrow stock, in a margin account, you can be virtually certain the shares are out on loan. To have the shares recalled, all you have to do is enter a good till cancelled order to sell the shares at a limit price much higher than the current market price. At that point, your shares are subject to an open order and must be recalled.
That is what I do with all of my trades where I am hoping for a short squeeze. So, if you want to have your HLF shares recalled from short sellers, but you don't want to miss out on the upside potential of a short squeeze, just enter a good till cancelled order to sell your shares at a limit price of say $60.00.
McGonicle:
I agree with your assesment of Ackman's predicament. When I heard the size of his short position, relative to float, I was dumbfounded. By shorting to the point where virtually no more shares are available for further shorting, he has produced the perfect opportunity for someone to corner the market on Herbalife shares.
Herbalife is much too small to do what he has done. This is one of the most facinating trading situation since Porsche attempted to corner the market on Volkswagen shares in 2008. It will be another great learning experience watching it play out. I am long HLF.
It is quite obvious that you will write anything, true or not, as long as it is derogatory towards Herbalife. This is a website dedicated to the investment community, not a place for psychotics to come and babble about their obsession with MLM companies. You have written the same thing hundreds of times and clogged up an otherwise constructive thread. While the professional therapist would have been a smart move, I just can't make it to Wednesday. http://bit.ly/UpjEE4
Everything you write demonstrates that you know nothing about which you speak. The prima facie case for defamation does not require the Plaintiff to prove the Defendant gained from the defamatory statement. What you are probably referring to is the requirement that the Plaintiff prove Damages (i.e. that his reputation was damaged by the statement). Even if the Plaintiff were required to prove personal gain by the Defendant, the Defendant couldn't escape liabilty by giving the money to charity. That would be tantamount to the Defendant in a patent case claiming he isn't liable for illegally using the Plaintiff's patent because the profits were donated to charity.
At this juncture, i realize that you are a Dumb Ass of the first order. Reading your moronic comments is causing me to lose all faith in the human race. i intend to seek the assistance of a professional therapist the day after Christmas. In the meantime, please respect my privacy during this difficult period in my Life.
Thanks Lazy. I am sure you have a whole lot of experience and really know what you are talking about. What do you do for a living and how long have you been investing?
As I understand it, Bill Ackman started shorting MBIA in 2002. His short thesis only became profitable 6 years later after one of the worst financial panics in history. A panic which brought the entire financial industry, including institutions far bigger and more important than MBIA, to its knees.
While Ackman was obviously correct in seeing greater risk in MBIA than did the market as a whole, he was far from the only person who warned against those risks prior to September of 2008. Moreover, you could have shorted any financial stock in 2007 and made a fortune. So, to make Ackman out to be some lone wolf who single-handedly fought the establishment and made a fortune by picking the perfect stock to short is absurd.
Confidence Game makes Ackman out to be a modern-day, Wall Street Robin Hood who tried to save everyone else's money. Nothing could be further from the truth. In that trade, Ackman did what he always does. He built his position and then went out and talked it up so he could make as money as possible.
While I have no problem with people making as much money as they legally can, don't try and make them out be altruistic soldiers for the little guy. People like Ackman don't care about little people, they care about making money and they will accomplish their goals any way they can. For example, if Ackman really believed that Herbalife was a pyramid scheme, and wanted to help the little man, why did he wait until he had amassed a 20 million share short position before letting retail investors in on the "truth."
In the end, all of the small investors who had positions in Herbalife sold out and took a huge loss based on Ackman's statements. Now, those same people, some of whom are posting glowing reviews of Mr. Ackman here on Seeking Alpha, have initiated short positions in Herbalife after it has crashed more than 65% since March of this year. Again, their actions are based on Mr. Ackman's comments. Of course, Mr. Ackman will now ring the register and force even more losses on all those poor people he loves so much. While I guess they deserve what they get for playing a game they don't understand, that does nothing to build credibility in Bill Ackman. If you think it does, give me a break.
One more thing. Anyone who knows anything about litigation doesn't want to be a party to to it. So, when someone claims to welcome being sued, you can be certain they are trying to discourage it. What Ackman says about gaining access to inside information cuts both ways. The Plaintiff will be able to conduct discovery and comb through all of Mr. Ackman's emails, computer files and communications with other money managers. I would love to see what that uncovers.