Michael Williams

Hedge fund manager, short-term horizon, long-term horizon, options
Michael Williams
Hedge fund manager, short-term horizon, long-term horizon, options
Contributor since: 2013
Company: Silexx Financial Systems, LLC
That is the general theory, but if you review the A3 vs. A13 of the CPS tables month-over-month, the differences do not reflect that hypothesis.
Same is true with revisions to the Weekly Claims, which is a statistical improbability.
I often didn't give it much thought, but once you spend the time to review the data it becomes clear that something is a miss. Perhaps it was the model change.
This is worth a look - http://people.duke.edu~rnau/411outbd.htm
The world of arbitrage lives between certainty and uncertainty. Those that have a dog in this fight with money on the line care about certainty.
Ironically they both want an end to regulatory investigations and the Ackman. Until that eventual outcome we live in the uncertain realm and that is reflected in the volaility. August Vol is running in the 65% range - that tells me this company can and will move radically. Both $40 and $60 are easily visited in a day or two. In fact I think one could argue that vol is running a little low.
My position is simple, I don't know or care about the outcome as I am not a long-term buyer or seller. I took advantage of the volatility today to leg into a risk-free trade to profit (despite the outcome).
I appreciate you taking the long view and being bullish. I would recommend that any long (or short) always hedge their position in a company these kinds of fights, regardless of outcome.
Is it worth riding this roller-coaster naked long or naked short? Personally, I think it is foolish if one is not hedged.
I been in the business long enough to know to expect the unexpected and also to realize we really don't KNOW anything. Being humble and hedging one's position (regardless of bias) is prudent.
My position is hedged and risk-free at this point. I may jump in again if I see opportunity, but there is no way I would get naked long or short this stock.
I am not sure how much money you have on the line or the % of your investment capital, but I suggest hedging your position. This is going to be a long volatile ride, or so I suspect.
I understand why the government (and some economists) "seasonally" adjust numbers. Everything from seasonal energy consumption to holidays and pretty much everything else.
I certainly DO appreciate trying to flatten volatility of the seasonal effects, but there are some significant problems in doing so.
For instance seasonally adjusting masks the kurtosis. This is especially important to monitor when we came out of a economic crisis, as one wants to see a comparative without "adjustments" to see if and how much slack or pick-up there is.
Seasonal Adjustments are fine, but after tracking the adjustments for years there seems to be a statistical anomaly in which adjustments are biased. Of course with the announced changes to the "adjustment" who really knows.
You are correct, things HAVE improved.
I just find it interesting that the NOT adjusted numbers are frequently worse than the seasonal adjusted. Yet no one seems to notice or care.
Like to point on the following from the Labor Report:
NOT Seasonally Adjusted U3 rate is 6.5%
NOT Seasonally Adjusted U6 rate is 12.6%
NOT Seasonally Adjusted Participation rate at 63.5%
NOT Seasonally Adjusted Employment-population ratio 59.4%
NOT Seasonally Adjusted only 161,000 jobs created
NOT Seasonally Adjusted 414,000 MORE unemployed.
Amazing how some “Seasonal Adjustments” makes everything SEEM better, but it sure doesn’t change the smell.
Like to point on the following from the Labor Report:
1. NOT Seasonally Adjusted U3 rate is 6.5%
2. NOT Seasonally Adjusted U6 rate is 12.6%
2. NOT Seasonally Adjusted Participation rate at 63.5%
3. NOT Seasonally Adjusted Employment-population ratio 59.4%
4. NOT Seasonally Adjusted only 161,000 jobs created
5. NOT Seasonally Adjusted 414,000 MORE unemployed.
Amazing how some “Seasonal Adjustments” makes everything SEEM better, but it sure doesn’t change the smell.
For the record I flied off the SEP P/S position into a 60/55/50 fly for a net credit and a partially flied off the NOV P/S, that continues to have a short bias.
From here, it will either bounce off the 50-53 range or break and drop to the 40 range. Either way, I want to profit and have taken risk off.
Let the fight continue and if we see more volatility, I will leg in again.
I concur and have considered the buy side of the equation and their revenue. However, after being in business for over 20 years and seeing the Allied Capital Fight, Enron, Worldcom, GM, Freddie, and others – both sides have always had big money. However, while the company remains under scrutiny (rightly or wrongly) it bring volatility, shakens confidence on the long-side, and also usually hits both top and bottom lines as the company works through its public relation and legal headaches.
Seeing a company suspend their dividend and borrow millions for short-term blasts of huge stock-buy backs shows me the company is in defense mode.
I don’t know who will prevail and I would also not put on a naked short position. However, with volatility this high I was able to buy the SEP 60/55 and NOV 62.5/57.5 P/S for cheap.
So my thought process is this. There will certainly be volatility in the underlying and options volatility (premium) will also stay very high through this ordeal. So If you had $ to put on a position, I believe a P/S is far better use of leverage then short-stock (which has call away risk).
Those spreads are now all in credit-fly territory and I laid some of it off yesterday. I am perhaps going to fly off the whole thing and forget about it, just need to consider where I should put the sweet spots. Then I don’t have to worry about who’s right or wrong, locked in gains and also have some additional sweet spots at expiration. Then move on…
Ackman has given me opportunity as well as volatility, for that I thank him. As per him being correct, who knows and frankly who really cares unless you have money on the line or you work for Herbalife or Ackman.
I am suspect as to how many Bulls and Bears on here have actually put their money where their mouth is or whether they just like to voice their opinions?
Thanks for the considerate and thoughtful response.
@doc brew
Let me preface again, since you seem to continue to overlook my conclusion. I do NOT know if it is pyramid scheme or not and I also do NOT believe that Ackman has made a definitive case. I also do NOT have an opinion on how current regulators will rule. However, between reading both cases (Belgium and California), which one resulted in an injunction and the other won on an appeal, coupled with their OWN documentation and data – there are certainly QUESTIONS as to their business model.
I appreciate sarcasm, but let’s just review.
“So how did that Belgium case end up...remind me?” - Doc Brew
HLF initially LOST the case based on the “recognition of the validity of personal use by direct selling distributors.” It won on appeal based on the nuance of what constitutes a “sale” and who is a “distributor”. It is interesting and important to note that the Lower and Upper court both agreed on how the model works, however the Upper court ruled on recognizing the legitimacy of personal consumption by distributors as a legitimate destination for product. This seems to be the continual debate that Ackman claims.
The California Injunction doesn’t mean that HLF won or loss, it just laid the ground works that they could no operate in a certain way. Please review section 5 of the injunction.
What I find interesting about this case is that courts and regulators have NOT disagreed over HOW their unique MLM business model works. What has been debated is the legitimacy of the personal consumption of the distributor. This continues to be brought forth because of the bulk purchases by distributors to get the discount.
So far only the higher court of Belgium sees it as a legitimate sale. The California Injunction is aimed at the recruiting over sales. However, I believe that current investigators and regulators will look at the California injunction to determine IF the recruiting of new “distributors” overlaps with what Belgium considers a legitimate sale. If it seems the distributors ARE the bulk purchases and that is seen downline, it could very well bring more scrutiny over the California Injunction that HLF is in the grey area.
Conclusion: I am not a 100% believer that HLF model is a pyramid scheme, because I don’t think a pyramid scheme in the MLM world is clearly defined. I believe that regulators will certainly review both cases along with their own data to make that determination.
Because of the scrutiny and the questions about their business model and the public relation costs, I believe the stock will come under pressure. The company continues to borrow money for stock purchases and has suspended its dividend, both are not good signs as the company struggles to ward off the attacks from Ackman and its public relations problems.
In the short-term I have a short position in the company. I don’t know if they will change their model, be ruled a pyramid by regulators or not, or if it will become even more successful. However in the current environment I believe the company is a good short.
As in my article – I have on the SEP 60/55 P/S and NOV 62.5/57.5 P/S
I will most likely fly these off for credits.
My expectation is for an initial support in the 55 range. If it doesn’t hold there, then a drop to 40 before next support is reached.
May I suggest reading:
Herabalife's (Book 4) Sales & Marketing Plan and Business Rules.
California's Injunction (section 5)
Herbalife Statement of averages gross compensation 2013
The data - as previously noted - is not reflective of a commission (downstream or otherwise) typical MLM model. Those are their own numbers.
I did notice they recently changed to their "Gold Standard Guarantees" which is a good change.
As I previously noted, as well as in my article, I am not SURE if their business practices are legal or not (lawyers and regulators will decide), nor do I feel that Ackman has made the case. However, there are certainly questions raised in both Belgium Case, California Case, and Ackman - as per how they operate within the guidelines of MLMs.
Who knows at this point, but there are questions and their own materials and data certainly bring some additional questions about the business model.
Note: Just because a company has operated without scrutiny for 30 years, doesn't make it correct. One can easily provide a litany of companies that have operated in the dark for decades before regulators have caught on and in some cases even when they DID catch-on they continued to operate for some time.
In conclusion: Again I am not saying it is a pyramid scheme, but I am saying there are certainly questions brought forth by not just Mr. Ackman, but through two cases as well as their own materials. Only time will determine the outcome.
Traditional MLM models generated the bulk of their revenue through sales of products/services, either directly or through “downlines”. The criticism of HLF is how their model does NOT follow the traditional MLM methodology. Rather than “reps” or “sales people” in a traditional MLM scheme that receives “commissions” for sales (downstream or direct), HLF operates as a wholesaler to Distributors. Their “distributors” receive short-term discounts based on loading inventory. This “distribution” model, which Ackman criticizes, is wrapped up into their recruiting model, which forces more inventory loads downstream.

To consider:
The CA Injunction against HLF (Section 5) clearly (legally) describes this nuance in operating that HLF uses. Some have made a semantic argument as to what a “retail” sale is or is not. However, I think current practices (if Ackman is correct) does violate the injunction as recruiting “distributors” to take on inventory loads.
FTC considers a MLM in which the bulk of the revenue is generated from recruiting, rather than selling products or services a Pyramid Scheme. I am sure section 5 of the CA Injunction will certainly be revisited during the investigation. Combined with selling a business model that promises “sky-high” returns.
I don't believe the following numbers - generated to "distributors" reflect a traditional MLM commission/sales model. Instead the "distributors" have to load inventory to get a scaling discount from wholesale and the onus is put on the "distributor" to mark-up the product to make returns.
Whether this is legal / pyramid scheme or not - it is not a typical MLM model.
HLF Data on “business opportunity”
Total Distributors in the US: 525,251
408,640 (78%) Single-Level Distributors with NO Downline. Are only eligible for wholesale pricing and do NOT receive reward [commission] payments from company.
45,076 (9%) Non-Sales Leaders Distributors with Downline. Only 2,929 were eligible to earn rewards [commissions] from the company. Total annual average payout for the year $105. The rest did NOT earn any rewards

71,535 (13%) Sales Leaders Distributors with Downline.
Bottom = 52,210 (73% of the 71,535) earned on average for the year $300
Top = 704 (.9% of the 71,535) earned over $100,000

Herbalife paid out a total of $385,225,978 million in rewards [commissions]

Average paid based on total number of distributors is $733
462,877 (88%) received zero rewards
704 (.1%) received over $100k in rewards
No doubt he has done very well...mainly from his TWA stripping...but he does have a long list a failures...
Thanks for sharing the GAAP numbers. I listened on the call - but the quality (sound) was horrendous and I hung-up. I read through the earnings release and there were certainly some questions - because they report growth on "volume points", which seems disingenuous.
The $580 million repurchase and suspending the dividend, is just gaming EPS. So I don't like to give much weight to EPS (especially after a float change). Taking a page from of those banks during the crisis ;-)
The question I had was top line revenue, not "volume points". Seems like more digging needed to get a straight answer.
Best case scenario = HLF is forced to change their business model to conform to more traditional MLM models after investigations. Which mean lower sales/revenue since no pre-loading. Enough criticism has been leveled at the company, which should hamper growth. They will turn focus to emerging markets to expand operations, which is yet to be determine (laws and growth).
Worst case scenario = Ackman is correct.
In either case, I believe the stock will come under pressure for a while. Short-term support seems to be in the 50-55 range, and if that fades, I would look at 35-40 fall target price.
We are in a unique price range, several large long positions and short positions can get out for minor gains or losses. However, going forward one side is going to fade and this stock is going to become far more volatile.
I have the SEP 62.5/57.5 P/S and the NOV 60/55 P/S - both are doing very well today.
I am wondering do I fly them off for credit now and forget it or wait...? I was really hoping for a visit back to the 55 range before I started flying of the position for a credit, so I could widen out the position a little (down into the 40 range)
QTR - I generally agree with your long view...
Please note that was NOT my intention nor what I was trying to imply. Hence the title of that section "What we don't know"
I am sorry if I worded it in a way that would imply otherwise.
"IF the bulk of the revenue generated by clubs is from "recruiting", is Herbalife aware?"
My last comment where RHETORICAL questions to @DrP79, answering his questions as to whether or not someone would join and become a distributor fro the sole purpose to purchase product cheaper. I appropriate that in both writing and reading posted comments that inference (rhetorical or otherwise) is sometimes not implied, for that I apologize.
As per my research, while certainly limited, consists of reviewing HLF quarterly earnings 2012 - the present, reading their business opportunity documents, reviewing their website, reviewing the legal injunction from California, trying their product, talking with someone that runs a NC (which I bought the product from), and a cursory discussion with my attorney about MLM, Pyramid Schemes, and the California Injunction. Admittedly it is not as thorough as (supposedly) Ackmans, account auditors, or perhaps analysts. However, I thought I had read and reviewed enough to bring forth questions. I am sorry you feel differently.
The article is to bring to question several things.
1. What IS the difference between a Pyramid and MLM?
2. What is the legal definition as defined by California's Injunction?
3. Is Herbalife operating as just a MLM or is their Pyramid Schemes involved?
4. Whether or not Ackman has presented enough evidence to bring into question HLF's practices.
Thanks for sharing comments and criticisms.
@DrP79 -
Let me preface that my questions don't not form an opinion as to whether HLF is/is not a pyramid, they are just questions.
I guess my questions are the following.
1. Why not be just a “member” to get a discount, why attempt to be a Distributor if the only goal is to get a discount for friends/family?
2. Why become a member at all, why can’t I just buy what I want?
3. From what I have read, you need to sell or recruit X amount of people to MOVE UP the ladder to get a bigger discount and also a bigger down-stream commission.
4. It would seem that a lot of people become distributors, why – to only get a discount? Or where they really interested in making money? I don’t know – but I do know there are better and cheaper products if they are actually concerned about their health.
Personal note: This is no way reflects my opinion on the company, but just personal experience using the product.
I am a health conscious guy and had purchased Herbalife Formula before. But after looking at the ingredients (note that Fructose is the second ingredient listed, with sugar the 3rd ingredient.) Low on protein of 9g vs. high sugar/carb 13g.
I found several other products out there cheaper and better, which I did NOT have to become a member.
Herbalife24 F1 Sport is 9g milk/soy protein, 13 grams carbs (sugar) for $40 1.5lbs.
Optimum Gold Whey has 24g protein and 3 grams of carbs for $40 for 2lbs (and sometimes for $30 at GNC).
Just wanted to share some data from Herbalife for their 2013 US Distributor Information. (All the following data comes from Herbalife's Statement Average Compensation data).
I only offer this for information - make your own conclusions.
Total Distributors in the US: 525,251
408,640 (78%) Single-Level Distributors with NO Downline. Are only eligible for wholesale pricing and do NOT receive reward payments from company.
45,076 (9%) Non-Sales Leaders Distributors with Downline. Only 2,929 were eligible to earn rewards from the company. Total annual average payout for the year $105. The rest did NOT earn any rewards
71,535 (13%) Sales Leaders Distributors with Downline.
Bottom = 52,210 (73% of the 71,535) earned on average for the year $300
Top = 704 (.9% of the 71,535) earned over $100,000
Herbalife paid out a total of $385,225,978 million in rewards
Average paid based on total number of distributors is $733
462,877 (88%) received zero rewards
704 (.1%) received over $100k in rewards
You make an interesting point... "let's just judge HLF on it's earnings, and leave it at that."
My counter point would be, never judge a company based solely on their earnings (especially if it is only EPS that one used to judge). I have seen too many Worldcoms, Enrons, Freddie, Fannie, Lehman, Allied Capital, AIG, GM, and a host of companies (the list is long) with great earnings reports whose company had serious problems that the accounting never reveled. I saw analyst continue to rate Enron a buy on the way down as well as other failed companies.
A great book to read, if I may suggest, is David Einhorn's "Fooling some of the people all of the time." Once you have read that, you will look upon earnings differently.
Additionally - earnings does have some basic flaws, if we only look at the per/share bottom line basis - which never clearly tells the complete picture.
My hope for this article was to differentiate the difference between MLM and Pyramid Schemes. Look at the legal language in the California Injunction and to the "supposed" evidence that Ackman provided for all of us to make decisions on our own.
Frankly, I am not sure - but I do believe this is more to the story.
Thanks for your response.
Thank you...
I believe their are some substantial questions that Ackman has raised. Unfortunately it seems more conjecture than undisputed evidence.
I hope the conclusion of my article articulated that.
You are correct.
However - wiki does have a correct definition (abet not the legal definition).
I did include the legal text from the California Injunction as well, which I thought (for those interested) makes if fairly more clear, from a legal perspective.
Thanks for your comments.
I tend to generally agree with you. However, Ackman's presentation was long-winded, jumbled, and convoluted. I believe that you, or even myself, could have given a short, pointed, and certainly articulate presentation.
Yours is a well written article, ironically I wrote my own response to his presentation as well.
It's posted - I welcome your thoughts...
Your closing comment about Warren is something that crossed my mind as well.
Please note that is NOT my definition, but rather wikipedia's.
The point I wish to highlight was in the definition as: "primarily for enrolling other people", rather than making actual product sales.
David Steadson & ninjahatori
I submitted my review of Akman's presentation, perhaps it will be posted today. Please feel free to comment - I welcome your thoughts and criticisms.
I will link it here - when/if it gets posted.
Unfortunately you didn't see my other posts about the difference between MLM and PS. I certainly know there is a difference and the difference between a company like Avon in which people sell products, not recruiting to sell, in which they receive commissions.
I think Bill's presentation was poor, but I do believe these is distinct difference between say Avon model and Herbalife.
Even the California Permanent Injunction had clear language in section 5 (A & B) about this. Which - ironically the CA AG will not respond to. Which was brought to their attention to enforce HLF NOT to operate as a pyramid.
The law is pretty clear about the difference. "Pyramid schemes involves promising participants payment or services, primarily for enrolling other people into the scheme, rather than supplying any real investment or sale of products or services to the public."
I though that Bill's evidence of Club 100, the Circle Club, the Leader Club, etc. was clear that they are focused on ENROLLING people, rather than selling the product. Abet - his presentation was poor.
I think the legal text in the CA injunction 5A/B is very clear on this.
I certainly do NOT believe that Avon, Pampered Chef, and other MLM operate in this manner - as they focus on commissions for selling the product, rather than enrolling.
What did seem clear (legal or not), is that the Club 100 preys on promising RICHES to those that can least afford it. After visiting some of the websites and marketing material of Club 100 - it was rather disgusting and promises were incredible.
The biggest spenders on lotteries and get-rich-quick businesses are the poor. It is sad that companies prey on them, but I guess the question is not the moral justification, but is it LEGAL?
Arguing against HFL is like arguing against FAITH. There are just too many that just want to believe. The combination of selling a at home business that promises riches coupled with weight loss is just too darn compelling.
No one underestimated the intelligence of the poor dreaming of riches. Lotteries, real-estate, get-rich-quick, etc.
You can't argue against the believers and this train has left the station.
I believe Bill is correct, but I don't think there is anyway of stopping this juggernaut. Especially as it spreads among the ignorant poor around the world. This company will make billions on the backs of the poor.
Personally, I don't have an issue with Pyramid schemes - we should just make them legal - as I don't believe ignorance is an excuse.
I watched the China presentation, which was better than today's presentation. They are in China but do NOT have a strong foothold yet. As per Brazil and India and Russia, its small at best.
No doubt it will take hold among the ignorant poor of promised riches, as lotteries and MLM programs always do and when it does take a STRONG foothold in those nations, there is no stopping it - until it runs its course.
I guess if I was Bill, my response would be simple.
1. "Why will the company NOT provide details of their retail sales?"
2. "Why does the company promote, market, and endorse PAID FOR training programs ("clubs") and trainees MUST purchase product to test, give out, and can NOT sell the product via their own club, until they PAY FOR and COMPLETE their training?"
Then I would point to the California Permanent Injunction and point that out in section 5 A and B - which clearly states they are prohibited from doing that.
Unfortunately Bill is not very good at making compelling presentations or arguments. I could have done a far better job than him. I also think Einhorn, who was also kicked to the curb in his fight with Allied, did a far more objective and better job. Bills problem is BILL and perhaps not necessarily his criticism of HLF.
Unfortunately the company is coy about it's reporting and Bill can't make an effective presentation. Looks like a finger pointing blame game that is best left to the Democrats and Republicans. No one likes conjecture and rhetoric, Bill failed.