El Sifrino and the Transitive Property.

It pains me to say it, but I have to give Bill Ackman credit. Through all the pomp and circumstance he unleashed upon all of us in an effort to convince us Herbalife is a scourge that must be vanquished from the now portly, inactive face of the world, much of his message was lost on me. It's not his fault. It's my fault. His level of detail and precision is unparalleled and I simply can't keep up. It's like I'm watching his brain bound up the subway escalator two steps at a time while I patiently wait  to ride the fetid and dank elevator, accompanied by a morbidly obese 40 year old in her rascal power scooter with her chain smoking toddler in the front basket and the homeless alligator skin guy who is wearing the NY Post for underwear. 

What can I say, he's a smart guy and it took me a long time to catch up to him. It wasn't even his presentation that did it. Nor was it the Bostick order, or the letters he sent to the SEC, or the conference calls he set up with the FTC, or his claims of product safety, or his letters to his investors or his short "restructuring", or his "Questions For Herbalife", or his www.Factsaboutherbalife.com website. No, it was none of that; it was his touching and heartfelt letter to PwC that turned me. Specifically it was page 19 of Ackman's letter to PwC. The heading on that page is "Are Herbalife's Venezuelan Assets Overstated? Should Herbalife Venezuela Be Consolidated?" In that section he does NOT go easy on the company. For such a non emotional kind of guy I was really surprised at just how viciously he went after Herbalife on those pages. He really only grazes them with his FASB ASC 830-10-45 thrust, but he virtually impales the company as he deftly wields his ASC 830-20-30-2 like a Hattori Hanzo, defiantly flicking the red ink across the faces of Michael Levitt and Leroy Barnes as he swaggers out of the Herbalife Audit Committee proceedings. I will spare you all the gory details of this section, saving you the indelible traumatic mark that has been burned into my mind, but suffice it to say that it is a horror scene. Numbers everywhere. Numerators lying next to denominators that were clearly not theirs. Pencil shavings and shredded eraser nibs covering the floor. It was hard to distinguish Dollars from Bolivars. It was a massacre and there was nothing I could do to stop it because Ackman moves too damn fast. 

I was so stunned by his prowess it took me a few days before I was even able to look at the company's 10Q and run through his allegations regarding the company's' Venezuelan operations.

So, without comment, I present the pertinent section taken directly from the company's latest earnings below (dense, but worth a read; don't have a couple minutes, not to worry as also paraphrased after the copy/paste):

Venezuela is a highly inflationary economy under U.S. GAAP. As a result, the U.S. dollar is the functional currency for our subsidiaries in Venezuela. Any currency remeasurement adjustments for non-dollar denominated monetary assets and liabilities held by these subsidiaries and other transactional foreign exchange gains and losses are reflected in earnings.The Venezuelan government has established one official exchange rate for qualifying dividends and imported goods and services. That rate was equal to 4.3 Bolivares Fuertes (VEF) to one U.S. dollar through February 12, 2013. Effective February 13, 2013, the Venezuelan government devalued its currency relative to the U.S. dollar from 4.3 to 6.3 (official rate). The remeasurement of our balance sheets in 2013 to reflect the impact of the devaluation resulted in a net after-tax charge of $236 million ($0.08 per share).  There will also be an ongoing impact related to translating our income statement at the new exchange rates.  Moving from the 4.3 rate to the 6.3 rate will reduce future total Company reported net sales by less than 1% on a going basis.  This does not impact our organic sales growth rate, which excludes the impact of foreign currency changes.  Versus our existing business plans, the exchange rate change reduced our reported earnings per share by approximately $0.04 per share in 2013.Transactions at the official exchange rate are subject to CADIVI (Venezuelan government's Foreign Exchange Administrative Commission). Our overall results in Venezuela are reflected in our Consolidated Financial Statements at the official rate, which is currently the rate expected to be applicable to dividend repatriations.In addition to the official exchange rate, there had been a parallel exchange market (SITME) that was controlled by the Central Bank of Venezuela as the only legal intermediary to execute foreign exchange transactions outside of CADIVI. The published rate was 5.3 through February 12, 2013. The notional amount of transactions that ran through this foreign exchange rate for nonessential goods was restrictive, which for us essentially eliminated our ability to access any foreign exchange rate other than the official CADIVI rate to pay for imported goods and/or manage our local monetary asset balances. When the government devalued its currency in February, 2013, it also eliminated SITME, but established a new exchange rate market program, referred to as SICAD.  As of June 30, 2013, there is little official information available on the new auction process or the underlying auction rates. As of June 30, 2013, we had net monetary assets denominated in local currency of $913 million. Local currency balances decreased 14% since June 30, 2012 due to the impact of the February 2013 devaluation and an increase in payments by the government through CADIVI, partially offset by an increase in the net amount of indirect value added taxes (VAT) receivable from the government from goods receipts and shipments. Prior to the February 2013 devaluation, a portion of our net monetary assets denominated in local currency was remeasured using the SITME rate because we planned to use that amount of the net assets (largely cash) to satisfy U.S. dollar denominated liabilities that do not qualify for official rate dollars. The remaining net monetary asset balances had been reflected within our Consolidated Financial Statements at the 4.3 official exchange rate. However, as noted in the preceding paragraph, the parallel SITME market was eliminated at the time of the February 2013 devaluation, and there is little information available on the SICAD mechanism.  Accordingly, all of our net monetary assets are measured at the official 6.3 exchange rate at June 30, 2013.
Additionally, the Venezuelan government enacted a price control law during the second half of fiscal 2012 that negatively impacted the net selling prices of certain products sold in Venezuela.
Depending on the ultimate transparency and liquidity of the SICAD market, it is possible that we may remeasure a portion of our net monetary balances (the amount of the net assets needed to satisfy U.S. dollar denominated liabilities that do not qualify for official rate dollars, approximately $240 million as of June 30, 2013) at the SICAD rate. This would result in an additional devaluation charge. Over time, we intend to restore net sales and profit to levels achieved prior to the devaluation. However, our ability to do so will be impacted by several factors. These include the Company's ability to mitigate the effect of the recently enacted price controls, any potential future devaluation, any further Venezuelan government price or exchange controls, economic conditions and the availability of raw materials and utilities. In addition, depending on the future availability of U.S. dollars at the official rate, our local U.S. dollar needs, our overall repatriation plans, the creditworthiness of the local depository institutions and other creditors and our ability to collect amounts due from customers and the government, including VAT receivable, we may have exposure for our local monetary assets. We also have devaluation exposure for the differential between the current and potential future official exchange rates.

For those of you that have skipped through that because it's earnings and your hair is on fire, I will paraphrase as best I can.

1. Venezuela is a highly inflationary economy under U.S. GAAP and the U.S. dollar is the functional currency for our subsidiaries in Venezuela. 
2. Any currency remeasurement adjustments for non-dollar denominated monetary assets and liabilities held by these subsidiaries and other transactional foreign exchange gains and losses are reflected in earnings.
3. Hugo Chavez royally shafted everyone in February by devaluing the Bolivar from 4.3 Bolivares Fuertes (VEF) to 6.3 (per US Dollar). 
4. The remeasurement of our balance sheets in 2013 to reflect the impact of the devaluation resulted in a net after-tax charge of $236 million ($0.08 per share).  
5. The fun doesn't stop there because WTF knows where the Bolivar is going?
6. There used to be a parallel exchange market (SITME) that sucked another 20% out of our conversions at 5.3 Bolivars/dollar, but that is gone now too.
7. SITME was replaced by SICAD, but as of June 30, we really have no idea how SICAD will screw us because it really isn't operating. Rest assured it will most likely screw us though as its operations, once operating, are designed to screw us.
8. As of June 30, 2013, we had net monetary assets denominated in local currency of $913 million and all of our net monetary assets are measured at the official 6.3 exchange rate at June 30, 2013.
9. Depending on the ultimate transparency and liquidity of the SICAD market, we will probably remeasure $240M of US Dollar denominated liabilities because we think we'll probably never get those $240M out of the country under the official exchange programs, so we're telling you now we're going to take the charge.
10. Because we don't plan to just completely abandon our operations there, we will likely remain exposed to the risk of additional devaluation of the Venezuelan Bolivar, although that may be obviated by our Venezuelan counterparties going bankrupt first.

After reading through all this, Ackman decided because he viewed Venezuelan monetary policy as presenting a lack of  exchangeability that is "other-than-temporary", that the company's Venezuelan operations should be deconsolidated. He also argued that even if the company were to conclude that the lack of exchangeability were actually temporary, that the company's Venezuelan assets "should be remeasured at the fair market value based upon observable market transactions." The only oversight of  Bill Ackman's with respect to Venezuela is actually best described by something I learned in 5th grade math:  the transitive property. You'll remember that the transitive property deals with equalities and inequalities (If a = b and b = c then a = c). 

You see while Bill Ackman was O'ren Ishii'ing Herbalife over the consolidation of their Venezuelan operations and scampering his way up the conference room table toward Dennis Nally and Robert Moritz, he forgot about the double edged sword of equality.  This is particularly important in light of the fact that the pertinent section taken directly from the company's latest earnings which I quoted and paraphrased above, was actually not from Herbalife's latest filing, but was from Procter & Gamble's; of which Ackman owns the equivalent of 33,940,133 shares.  Maybe Bill actually meant to send his PwC letter to Deloitte instead. He probably would have gotten more bang for his buck if he had because P&G has $913M worth of Bolivars measured at 6.3, while Herbalife has $124.6 million in Bolivar denominated cash and cash equivalents at the same rate. Whereas P&G couldn't even be bothered to project some sort of reasonable sensitivity analysis to the Venezuelan assets, Herbalife offered a 75% devaluation projection in their sensitivity analysis that could result in a $93M charge, which they laid out very clearly in their 10Q. By Ackman's math, if a = b and b = c then a ≠ c if Pershing Square owns 33.9M of c, or is short 24.5M of a. Maybe Herbalife is just overconfident with respect to their Venezuelan assets because practically every other company has consolidated their Venezuelan assets just like Herbalife has. Colgate-Palmolive has only been around for 150 years longer than Ackman, so what do they know, right? 

I for one don't care how other reputable companies are doing it nor why Herbalife has done it the way they have because Bill says they're wrong and that's good enough for me. I can't wait to help rip apart their accounting 7 days from now. Like I said, I'm pitching for team Bill now. As hard as it is to give advice to someone you so obviously idolize, I'm going to go out on a limb here and suggest that as infallible as El Sifrino's logic is, he should consider having his kids teach him some basic pre-algebra and geometry. I'd hate for anyone to think he doesn't know what the transitive property is or that he was unfamiliar with the shape of a pyramid.

The Herbalife Short Thesis Is The Pony In The Pile

I have to admit that I've had something gnawing inside of me. A couple days ago in a post about the prospect of Herbalife's massive share repurchase program I said something I shouldn't have. I used an equine analogy to sideways infer that Bill Ackman and Dan Loeb were 'waspy'. I was WAY out of line when I said this because they are both Jewish. Now that is not to say that it would preclude them from participating in 'waspy sports' like dressage although lawn bowling would probably have been a better choice, however having recognized this fact, I hereby withdraw my waspy commentary and instead would like to point out that Dan Loeb loves beating Ackman at an expensive non-denominational sport like dressage. Turns out that some of the greatest riders in US history are part of the tribe (Robert Dover & Edith Master).

I have also been reconsidering my stance on Herbalife's share buyback I talked about in that same post. I like to bury my head in the problem and not in my burro.

So let me explain why I'm reconsidering the situation. In that post I surmised that after having carefully re-read the Q2 transcript, that:
"a clean audit was not necessary for Herbalife to re-commence share buybacks; having a new auditor on board was the contingency they wanted fulfilled before they resumed their pre-authorized share buyback. That means that they will have unequivocally undertaken a minimum of $50M in buybacks this quarter with a minimum of $50M in the next quarter, regardless of having audited financials in hand."

But, retrospectively I realize there is a flaw in my rationale. D'oh!

You see, John DeSimone referenced the prior day's guidance(released Jul 29) in the passage I was referring to when he said that the company will resume its buyback program.

Again for your pleasure I have pasted the same passage below for you too to read again carefully:

John DeSimone (CFO) :"Finally, I will address on share buyback program. Over the last couple of years, our guidance normally included $50 million of share repurchased per quarter. This indicated our intention to at least execute a portion of our buyback program on a routine basis even though in many quarters we significantly exceeded that amount.   Last quarter, we did not include any repurchase in our guidance for Q2 as a result of KPMG’s forced resignation.   We wanted to wait until we had new auditors on-board, which would provide us better visibility into the timing of securing re-audited statements. With (Peter Mussey)[sic. should be PwC, gotta love transcripts] on-board and our confidence in having re-audited statements by year-end, our guidance provided yesterday included the assumption that the company will resume its buyback program."

My conclusion was that they were unequivocally in the market buying $50M in shares, but I actually estimated that they had purchased more than $300M worth in Q3. I am now unequivocally equivocating.

This is my flaw: if DeSimone was referring to the buyback within the context of full year guidance Herbalife wouldn't have had to purchase 1₵* worth of shares. If Herbalife will be relying on repurchase to meet or beat guidance, what DeSimone was saying could still be true so long as it happens before the end of the year.

*Note to all of you that probably haven't seen the ₵ symbol in a while, the definition of 1₵ is 1/100 of $1.00**(aka those pieces of paper @drunkstepmother throws at strippers). 

** Note to Bill Ackman, the definition of $1 (you've probably forgotten what a single looks like) is 1/100 of $100, which is what I imagine you typically expense for your lunch***. (It is also 1/105 of John Hempton's price target for Herbalife )

***Note to Carl Icahn, the definition of Bill Ackman's lunch is that thing you ate on CNBC.

This has some important ramifications we have to consider, if it turns out my equivocations have some insight.

1. Herbalife has not repurchased a single share in Q3.
2. If Herbalife had not repurchased a single share in Q3, demand for shares came from elsewhere. 
3. If Herbalife had not repurchased a single share in Q3, they are going to achieve their numbers through growth alone.
4. Ackman covered, for reasons other than Herbalife forcing his hand.
5. If Herbalife had not repurchased a single share in Q3, they still have a $787M authorization that they can use to swallow huge chunks of shares at any moment.

I can't help but be impressed with Herbalife if they are able to beat earnings through growth alone, in the face of all the difficulty and negative publicity that Ackman has tried to create for them. If you think that possibility is far fetched you have to look no further than their last quarter to see the same thing. In Q2 2013 even if you ignore the benefit to EPS provided by audit/legal costs they beat by 23₵. By my estimates, Herbalife should be able to beat Q3 guidance by 5-14₵, just through growth alone.  

So if Herbalife crushes it yet again without having modified the public float, what does that say for investors once Herbalife does implement their buyback? If they were only to use their current authorization they could push one button on their smoothie maker and pull ~10M shares out of the float. Again, hearkening back to Mr. Dunn's reference to "having leverage" I think Herbalife will go well beyond their current authorization and will issue debt.

I know, I know, Bill says it is unlikely that Herbalife could issue investment grade debt based upon the last rating Moody's published in March 2011 of Ba1. Ackman conveniently ignores that just six months prior to Moody's last debt rating for Herbalife, they upgraded Herbalife's rating to Ba1 from Ba2. Why ever would they do such a thing? Their reasons are pretty clear in the Ratings Rationale they lay out for us:

"The upgrade in the Probability of Default rating to Ba1 from Ba2 acknowledges Herbalife's continued strong operating performance and its improved sales leader retention rate. As Herbalife's probability of default continues to decline, asset recovery rates in the event of default have become less clear. Thus, Moody's is applying its standard 50% family recovery rate to Herbalife instead of the previously used 65% rate.

Herbalife's Ba1 Corporate Family Rating reflects its very strong credit metrics, healthy liquidity profile, conservative capital structure, significant geographic diversification with sales in 73 countries, and the stable sales performance of its core meal-replacement products. These positive attributes are offset by the company's modest scale, sales concentration in a relatively narrow product segment -- meal replacement shakes and nutritional supplements -- and its small market share in the broader packaged food market. The rating also acknowledges the ongoing challenges of the multi-level selling model, particularly the high turnover of the sales representatives."

Keep in mind this rating is on a secured facility in a 2010 credit environment when, Herbalife was operating in 73 countries and revenues were around $2.5Billion. Today 5yr yields are down over 100bps, Herbalife is in 88 countries and has over $4Billion in revenues. Herbalife's 2011 revolver terms had a five year maturity with floating rates fixed to 1-month LIBOR, BAC prime & FFR that bears interest in today's environment at 4.75%. I wonder what sort of terms they could get today?

Maybe it will turn out to be mental masturbation on my part, but to try and answer this, I looked at a prime example of another direct seller, Primerica. In July 2012, Moody's gave the company a Baa2 rating on a senior unsecured $375M 10-yr (4.75% coupon). Just a few months earlier in March, Moody's Primerica disclosure stated they seemed to be rather concerned about Primerica's counterparty credit risk:

"In April 2010, Citigroup Inc., Primerica's former parent, conducted an IPO of Primerica. This IPO, and an additional secondary offering in April 2011, reduced Citigroup's ownership of Primerica to about 23%. As part of this IPO restructuring, PLIC ceded 80%-90% of its pre-2010 in-force business to a captive reinsurer that is now owned by Citigroup. As a result, Primerica is exposed to significant counterparty credit risk, although certain provisions in the reinsurance agreement help to mitigate some of this risk."

Granted, it isn't an absolutely perfect example because their product base is so different, but they face a lot of the same potential risks in implementing and managing their business models. Where I think Herbalife stands out from many other direct sellers is in their daily consumption model, which engages consumers and helps drive sales, which is a characteristic you do not see with other direct sellers. After purchasing that term policy does a Primerica customer talk to their agent everyday about their mortality? Does a Tupperware buyer call their Host or Consultant every time their lime Wonderlier "burps"? Daily consumption is such a strong part of Herbalife's growth that in their latest 10Q that it is the first thing they attribute their increase in net sales to.

Although their consumers are different, all it takes is a cursory comparison of Herbalife's and Primerica's counterparty risk, source of revenues, customer bases, free cash flow, growth rates, revenues, and leverage ratios to determine that any jackass would buy Herbalife debt before they would buy Primerica's. Which brings me to the point that if Primerica can get an investment grade rating on their 10yr unsecured debt, why exactly does Ackman think that Herbalife can't get at least that or better??? I think what Ackman was really thinking was that he is rightfully terrified that Herbalife can and will issue debt on top of their current repurchase program because he knows they are in a much stronger position to do so than other direct sales companies like Primerica. Maybe the folks at Pershing Square stopped making conclusions they would have to retrospectively back in to and started asking ratings agencies to see what Herbalife debt would actually get rated at instead of telling them what it would get rated at. And the beauty of Herbalife issuing debt to repurchase shares is that it is entirely unnecessary. Herbie generates so much cash and has such a concentrated shareholder base they could easily pull the rug out from under the float without having to go to the bankers. A debt financed buyback would be catastrophic for the shorts, to say the least. 

Behind that salt and pepper swagger and those cold, dead cerulean eyes, Ackman knows all this, which is probably why he covered part of his short (I mean "restructured" his exposure). He may paint himself as the smartest, most majestically benevolent stallion in the stable, but he brays like a jackass and is coming up lame.

It may very well turn out that I am a jackass myself for reading too deeply into Duane Stanford's article on Jeff Dunn or John DeSimone's commentary on the Q2 call. It may be that I am wrong in my previous assumptions that Herbalife has been in the market buying back $300M in shares. Ask yourself this though, if I am wrong and they haven't been in the market this quarter and still have $787M burning a hole in Michael Johnson's spandex, is that better or worse for shareholders and is it better or worse for the short-sighted?  If Herbalife adds to their current $787M buyback authorization and issues investment grade debt to engineer a smaller float is that better or worse for shareholders? These scenarios are all decidedly very good for shareholders. All you have to do is look at Herbalife's shareholder base to recognize that the bookrunners probably would only have to walk to place a $1-2B offering; a few of those buyers would probably be happy to stand across from Ackman at the CDS table after the placement too.

Buyback aside, let's get back to why I really wrote this: I deeply regret insulting the sensibilities of Jews and Anglo-Saxon Protestants alike by inferring that Bill Ackman was a wasp on horseback, particularly because his short thesis may turn out to be a pony in a pile of manure.

Dana Bostick's shitty friend: Herbalife-Bostick-Redux

Don't have time to review all the documents in the Bostick vs. Herbalife lawsuit? Here's the slimmed down version of what has transpired.

Bostick, who is most notably not Latino, and who back in August 2012, was "Just sitting at home, making money on the Internet. Putting money in my bank everyday" decided to sue Herbalife in April 2013.

Bostick, became a distributor in 2012 and claims that he couldn't sell Herbalife's products. Instead of returning the products he couldn't sell for a refund, he consumed or gave away those goods. He then sued seeking class action status, claiming that Herbalife is a pyramid scheme that violates a bevy of state and federal laws.

Bostick alleged that Herbalife:

1. violated California's Endless Chain Scheme Law, (Cal. Penal Code § 327)
2. violated California's Unfair Competition Law ("UCL"), (Cal. Bus. & Prof. Code§ 17200);
3. violated California's False Advertising Law ("FAL"), (Cal. Bus. & Prof. Code§ 17500);
4. and committed multiple violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), (18 U.S.C. § 1961)

Herbalife filed a motion to dismiss the lawsuit.

The court then entertained whether or not Bostick's allegations were sufficient to survive Herbalife's motion to dismiss. District Judge Beverly O'Connell has denied Herbalife's motion to dismiss based on the findings that Bostick's allegations sufficiently met the requirements because he did not fail to "state a claim to relief that is plausible on its face" nor did he fail to adequately allege "for purposes of a motion to dismiss" that: 

1. distributors pay money for the right to sell Herbalife.
2. or that supervisors pay money to receive recruitment rewards which are unrelated to the sale of products to ultimate users.

Everybody agreed that the RICO allegations should be thrown out. Additionally O'Connell's order stated that if Herbalife turned out to be in violation of Cal. Penal Code § 327, that the UCL and FAL allegations would still be actionable, and thus Herbalife's motion to dismiss was denied.

The court also noted that at this stage, it was just too soon for Herbalife's anti-pyramiding safeguards to be relevant to the allegations. The actual proof in Herbalife's defense would have to wait.

As mentioned, the order recognized that Bostick's suit adequately states a plausible claim for relief if Herbalife were in violation of § 327, but notes that because Bostick consumed or gave away the goods he purchased he could only be made whole under his first cause of action by Herbalife refunding him $95.95 for his International Business Pack.

All of this is in the vacuum that the court IS FORCED TO ASSUME all of Bostick's claims are legit. That is why the phrase "for purposes of a motion to dismiss" carries so much weight in this context. In other words the court made no ruling on Bostick's allegations, merely whether or not the form of his accusations are up to snuff enough to proceed. Although some journalists would have you believe otherwise, whether or not his claims are meritorious has not been remotely considered. I think Stuart Pfeifer has written a fair article about the outcome of the motion, whereas Michelle Celarier has literally just made up quotes.

Taken verbatim from Celarier's NY Post article on the order:
“Although defendants contend that distributors should be classified as ultimate users, downline distributors are not ultimate users,” she wrote.

The actual quote from the ruling is as follows:
Although Defendants contend that distributors should be classified as ultimate users, Omnitrition points out that “[i]f Koscot is to have any teeth, [a sale for a distributor’s personal use] cannot satisfy the requirement that sales be to ‘ultimate users’ of a product.” Id. at 783. Therefore, downline distributors are not ultimate users for purposes of the second element of the Koscot test. Accordingly, Plaintiff has adequately alleged that supervisors pay money to receive recruitment rewards which are unrelated to the sale of products to ultimate users.

In typical Celarier fashion she goes on to portray that O'Connell's order states that Herbalife is recruitment focused, thus lending credence to claims Herbalife is not a legal MLM, but a pyramid scheme. O'Connell's order, however, did not make any such claim, merely that the plaintiff adequately alleged the claims of the suit and that the suit could proceed.

One of the little jewels of the case is contained in paragraph 53 of the original complaint filed by Bostick. See below:

"On June 22, 2012, he[Bostick] attempted to “pay for his position” by coordinating with his friend. They were supposed to both purchase enough product to become a Supervisor, the “gateway to the rest of the marketing plan.” On June 22, 2012, he made a single order. That order cost him over $1,800 for the product alone. Bostick’s downline did not make the purchase and Bostick did not advance to Supervisor."

So basically Bostick's shitty friend reneged on their agreement to go balls to the wall Herbalife supervisors and Dana was stuck footing the bill. I can't help but picture Badger and Skinny Pete as I envision them formulating their master plan. Skinny Pete (Dana in my scenario because he is skinny after having successfully shed 80 lbs with Herbalife, and crystal) basically blew $1800 on Badger because Badger swore he was going to lose weight and stick with the program! WTF BRO are you stupid?!?! You knew Badger was going to pussy out! He eats like six times a week at Los Pollos Hermanos and never gets off the papasan!

Don't get me wrong, I'm not trying to belittle Bostick or dance on the grave of a what I imagine to be a dead friendship (for which I actually have no knowledge of other than what is alleged in the complaint). I have no idea what their relationship is like, but I'm using this more as an opportunity to remind myself of all the times the Badgers of my life pussied out on me or vice versa.

Maybe the crux of all my past shortcomings is also the crux of Bostick's case in that his attempt to game the system he signed up for was where he went wrong. Even though Herbalife discourages inventory loading and offers to buyback unsold inventory, his attempt to buy his position failed and he did not advance to supervisor as he'd devised. He didn't even bother to return the goods for refunds. There is no guarantee that had he followed the rules that he would have made money, but he definitely contributed to his loss by trying to conspire with his friend to boost his sales. My own failures have been similar. I've done better in life by chipping away at the monoliths than I have by scooping up a fistful of rocks when no one is looking. I think the majority of Herbalife distibutors and members don't do it for a fast buck. I think they do it for the community base they seek in attempting to achieve their own health goals, and they hope to either receive discount pricing, to subsidize their own purchases and/or to possibly get a little pocket change in the process.

Who knows how much effort Bostick put in, I don't. At least he lost 17 lbs on Herbalife products. I do know from my own experiences though that when the Skinny Petes and Badgers of the world get together and hatch a plan to make a quick buck with no effort, it should be no surprise when they fail. People like Skinny Pete and Badger will almost never get ahead or feel fulfilled; at best they'll get a few thousand dollars at the end of it all for pretending to be something they're not before they have to crawl out of the dessert and start looking for the next thing.

The Burros vs. the Lippizan (Or some other waspy equine analogy for Herbalife vs. Bill Ackman)

Last night, I sent an email to Duane Stanford at Bloomberg. In addition to thanking him for writing his article about Jeff Dunn's (Herbalife Board member) prediction that Herbalife audited financials would come in clean I also asked him for clarification on a couple points. I have not yet heard back from him, but in all fairness to him, he really has not had much time to respond. In any case I do hope that Mr. Stanford is able to reach back out to Mr. Dunn and clarify Mr. Dunn's comments.

That being said, within his article he states that "A clean bill of health on the new audits may clear the way for Herbalife to resume plans to repurchase at least $50 million of stock per quarter, the company said in July."In reading this I immediately thought about the Q2 conference call Mr. Stanford indirectly references in his article when John DeSimone said something similar but not quite the same. So I went back to the transcript and reviewed.  After reviewing the transcript you will see that what Mr. DeSimone actually said was:

John DeSimone (CFO) :"Finally, I will address on share buyback program. Over the last couple of years, our guidance normally included $50 million of share repurchased per quarter. This indicated our intention to at least execute a portion of our buyback program on a routine basis even though in many quarters we significantly exceeded that amount.   Last quarter, we did not include any repurchase in our guidance for Q2 as a result of KPMG’s forced resignation.   We wanted to wait until we had new auditors on-board, which would provide us better visibility into the timing of securing re-audited statements. With (Peter Mussey) on-board and our confidence in having re-audited statements by year-end, our guidance provided yesterday included the assumption that the company will resume its buyback program."

To be clear a clean audit was not necessary for Herbalife to re-commence share buybacks; having a new auditor on board was the contingency they wanted fulfilled before they resumed their pre-authorized share buyback. That means that they will have unequivocally undertaken a minimum of $50M in buybacks this quarter with a minimum of $50M in the next quarter, regardless of having audited financials in hand.

If Mr. Stanford's conversation with Mr. Dunn is what led him to make his statement, I would ask that he share with his readership more of his discussion so that we may all be better informed. I suspect however that Mr. Stanford's article has inadvertently mixed two issues; audited financials (which you can't have without an auditor) and Herbalife's share buyback program (which by their own criteria required having an auditor on board).
I think that based upon their last conference call that Herbalife has already been in the market buying back shares. I've stated this before and think that Herbalife's buyback combined with Ackman's restructure, significantly raised the demand, and thus the price, for Herbalife equity over the month of September. 

I think that what Mr. Dunn was referring to is the company's willingness to go beyond the currently authorized share buyback program and either authorize an additional buyback program, or that they are willing to fund a larger buyback with debt. That makes Mr. Dunn's statement all the more prescient when he says:
“Our stock’s a good buy and if we have excess cash laying around and we have leverage, that’s a great way to put our money to work,” Dunn said. “It’s good for the shareholders.” (note that i added the emphasis here, not Mr. Stanford).

I think that what he is actually saying here is that they may have blown through (or plan to blow through) the expected burn of their currently authorized buyback program (which had $787 million remaining on July 30th). He knows the buyback was already authorized so a reference to "excess cash" likely indicates that they'd be willing to authorize another buyback program that uses the enormous amounts of cash the company generates on a quarterly basis. Likewise unless he was live streaming TNT to the boardroom his reference to "having leverage"  as a means to put their money to work pretty much telegraphs that the Board has seriously discussed issuing bonds, or taking on additional debt in some manner to buyback even more shares, beyond the previously approved $787 million they had remaining in the program. It may be a subtle point that I am drawing too fine a line on, but I think everyone should review the transcript for themselves. Once you review that transcript you will also notice for yourself that just prior to discussing the share buyback the company disclosed they were raising full year guidance by between $.15-$.23/share to a range of $4.83-$4.95, with adjusted Q3 EPS expectations at between $1.09 and $1.13/share.
You know one really quick way to boost EPS to the guided numbers? You buyback shares; and you don't just buyback $50 million worth of shares. Even after you adjust for the increase in revenue guidance Herbalife provided, you still have to buyback roughly 3-5 million shares, just to meet expectations. We all know that Herbalife likes beating earnings guidance more than Dan Loeb loves beating Ackman at (insert waspy expensive sport/game of your choice here, like dressage or something).

Based on the Q2 call, Mr. Dunn's comments, and Herbalife's addiction to earnings beats, I would not be surprised if Herbalife hitches up the wagon, hauls a significant portion of shares off the float and comes in above $4.95/share while Bill Ackman attempts to pirouette-serpentine-piafe his way out of some really expensive, and really tight breeches.

Notorious PwC: Herba-Life After Death

Much has been recently said about the possibility that Herbalife will come in with fully audited financials either when they report Q3 earnings, or possibly before that. To be sure, this will be a seminal moment for Herbalife investors (long or short). 

One aspect of their re-audit that has been the subject of much discussion is the possibility that they will restate earnings. I think a minor restatement which is not material to Herbalife's earnings certainly may be a possibility given the change in auditors, but even if this were the case, I am doubtful that  if a minor restatement does occur that it will have any material impact on the company's future, or more acutely on the company's stock. Although I can't ignore the potential for a restatement I view it to be unlikely. The possibility of a restatement has been raised by Francine McKenna and reiterated by Ackman in letters to his investors as well as his 52 page book report he sent to PwC. Although you can't discount this possibility in its entirety, those that believe a material restatement is on the way are failing to take a very important piece of information into consideration: functionally speaking, PwC reviewed Herbalife's Q2 earnings in full prior to its release. 

Let me be absolutely clear on this point to avoid any confusion because the word "review" carries a lot of weight here. I am not saying that Herbalife filed a 10Q with PwC's SAS 100 compliant review and report (because they did not). Herbalife specifically said on their conference call that they filed "without the (SAS) 100 review and therefore, without the required stocks 906 certifications. The 10Q is complete in all other respects including SOX 302, CEO, CFO Certifications as to the accuracy of financial information." What I am saying though is that functionally speaking PwC actually reviewed the financials as part of their responsibilities as Herbalife's accountants otherwise Michael Johnson and John DeSimone would not have signed off on SOX 302 certification which requires interaction between Herbalife and PwC. In providing SOX 302, Johnson and DeSimone provided certification that:

1. They have read the report filed with the SEC,
2. The report does not contain untrue statements or omit statements of a material nature,
3. Statements made in the reports are not misleading,
4. Financial conditions and operations of the company are fairly represented by the report,
5. Internal controls of the company are their responsibility and the internal controls are designed in such a way that material information is communicated to them in a timely manner,
6. Internal controls within the company are assessed for operating effectiveness within 90 days of the certification and the conclusions on effectiveness have been included in the report,
7. Significant deficiencies in design or operation of internal controls that could impact the ability to record, process, summarize, and report financial information have been communicated to the company's independent auditors and the audit committee of the Board of Directors,
8. Material weaknesses in internal controls have been communicated to the company's independent auditors,
9. They have disclosed any fraud by senior management or other employees who have a significant role in internal controls (materiality is not a consideration with fraud), and
10. Whether there have been significant changes or corrective actions with regard to significant deficiencies and material weaknesses in internal controls or other factors subsequent to the date of the original evaluation of controls.

Johnson's and DeSimone's willingness to certify under section 302 clearly demonstrates that their report is accurate and not misleading and further leads me to believe PwC is very familiar with Herbalife's past and current accounting procedures.  

Furthermore, for all that has been made out of PwC not auditing Herbalife's latest financial results, but that other auditors have failed to share, is that under SAS 100 guidelines it states:

•  "In other situations, the accountant may determine it appropriate to issue a written report to address the risk that a user of interim financial information may associate the accountant with the interim financial information and, in the absence of a review report, inappropriately assume a higher level of assurance than that obtained."

PwC was clearly referenced in Herbalife's unaudited 10Q as being Herbalife's accountants performing the reaudits, yet PwC wrote no report stating that Herbalife's financials were unreliable in any way, although SAS 100 guidelines indicate they should do so if they felt otherwise. In the absence of such a report, I am left to believe that PwC takes no issues with Herbalife's accounting practices.

In another section of SAS 100 guidelines it also states that  "Communications Between Predecessor and Successor Auditors, requires a successor auditor to contact the entity's predecessor auditor and make inquiries of the predecessor auditor in deciding whether to accept appointment as an entity's independent auditor. Such inquiries should be completed before accepting an engagement to perform an initial review of an entity's interim financial information." This is just yet more evidence that PwC is on board with Herbalife's accounting and KPMG's prior audits. I mean, if I'm the guy that is thinking about asking out my buddy's ex-girlfriend, you better believe I'm going to ask him if he gave her the herpes I know he has, or if she really just has a cold sore. I can only think that if there was anything material to Herbalife's accounting, that it would have come up in those required inquiries, yet PwC accepted the engagement and since being engaged has issued no reports to contradict Herbalife's financials. I think that when we look at Herbalife's audited numbers, we're going to see Abreva and not Valtrex.

So what gives with 906's noticeable absence? Nothing as sexy or revealing as you'd imagine, just simply that section 906 specifies that the certification must state that the periodic report fully complies with the requirements of Exchange Act Sections 13(a) and 15(d) and Herbalife can't fully comply because their financial statements are not yet audited by an independent auditor. Even if Johnson and DeSimone wanted to furnish 906 certificates, they couldn't because by doing so they would be certifying compliance when it does not exist, and thus go to jail. Once PwC SAS 100 compliant review is complete, Johnson can put on his gear and go on a triathalon-like SOX 906 signing binge from his pool or his bike or his running shoes.

This leads to our next, but perhaps most fundamental question: Why was PwC unable to complete their audit? There must be some nefarious secrets and information lurking in the shadows at the Herbalife Headquarters, right? If you look at Herbalife's latest 10Q you'll see that is not from lack of trying as they spent $3.5 million in re-audit fees just in Q3. To put that in context, Herbalife paid KPMG $4.3M and $4.8M for all accountant services  in 2011 & 2012, respectively. The answer it turns out is yet again, pretty simple and not so interesting: the current audit will rely on auditing all prior quarterly filings and annual filings. In other words, they have to start at the beginning. In a very simple, but relevant analogy, how could PwC sign off on current carryforwards, without having fully reviewed the previously reported carryforwards or circumstances that caused them to arise?

And this brings us to the final question of the day: Why is it at all important? Well it's important for two main reasons:

1. It sets the baseline for what we can expect from PwC with respect to accounting treatments in all of the re-audits. I would be very surprised if PwC's accounting treatments for Q3, or for all prior re-audits, were to deviate from the treatments shown to us in Q2 because PwC is obviously comfortable with Herbalife's most recent accounting.
2. It also informs us as to why the Q2 financials were not provided with PwC's stamp of approval, or the company's 906 certification and why they are deficient in their filings. 

In closing, I have to remind myself that if you are an analyst reading this, you probably don't give a shit because you've got 30 models open in Excel right now, and you're going to back everything out to non-GAAP topline data anyway and see yet again that Herbalife is growing quarter to quarter, year to year. What is probably most likely is that you don't give a shit because you're not reading this at all, analyst or otherswise. Either way, as boring and unexciting as discussing the causes and implications of Herbalife's lack of audited financials may be, delivery of those audited financials may just kick in the door on the shorts.

So...

This goes out to you

This goes out to you, and you, and you, and you

This goes out to you

This goes out to you

This goes out to you, and you, and you

The following disclaimer disclaims any prior disclaims and disclaims any future claims and or disclaims, or so is claimed

Below is the full text of the www.factsaboutherbalife.com website hosted by Pershing Square. I have simply taken the full disclaimer they used prior to modifying their Herbalife short postion and merged that with the disclaimer taken from the website as it is currently. Strikethroughs denote their edits, followed by underlined insertions in their current version.

Disclaimer

This disclaimer is issued in connection with the Sohn Conference Foundation Special Event held on Thursday, December 20, 2012, and website www.factsaboutherbalife.com (the presentation to be made there“Website”) maintained by Pershing Square Capital Management, L.P. ("Pershing Square"), an investment adviser to funds that are in the business of actively buying and selling securities and other financial instruments.

Pershing Square currently maintains a substantial short position in the common stock of Herbalife Ltd. (“Herbalife”). This position does not include any options or puts.

Pershing Square will profit if the trading price declines for common shares of Herbalife and will lose money if the trading price increases for common shares of Herbalife.

Pershing Square may change its views about or its investment positions in Herbalife at any time, for any reason or no reason. Pershing Square may buy, sell, cover or otherwise change the form or substance of any of its investments related to Herbalife at any time. Pershing Square disclaims any obligation to notify the market or any other party of any such changes.

The information and opinions contained in this presentation (the “Presentation”) isWebsite are based on publicly available information about Herbalife and other companies. Pershing Square recognizes that there may be non-public information in the possession of Herbalife or others that could lead Herbalife or others to disagree with Pershing Square’s analyses and conclusions.

The PresentationWebsite includes forward-looking statements, estimates, projections and opinions prepared with respect to, among other things, certain legal and regulatory issues Herbalife faces and the potential impact of those issues on its future business, financial condition and results of operations, as well as, more generally, Herbalife’s anticipated operating performance, access to capital markets, market conditions, assets and liabilities . Such statements, estimates, projections and opinions may prove to be substantially inaccurate and are inherently subject to significant risks and uncertainties beyond Pershing Square’s control.

Although Pershing Square believes the Presentation isstatements it makes in the Website are substantially accurate in all material respects and doesdo not omit to state material facts necessary to make thethose statements therein not misleading, Pershing Square makes no representation or warranty, express or implied, as to the accuracy or completeness of the Presentationthose statements or any other written or oral communication it makes with respect to Herbalife and any other companies mentioned, and Pershing Square expressly disclaims any liability relating to the Presentationthose statements or such communications (or any inaccuracies or omissions therein). Thus, shareholders and others should conduct their own independent investigation and analysis of the Presentationthose statements and communications and of Herbalife and any other companies to which those statements or communications may be relevant to the presentation. .

The Presentation isThe statements Pershing Square makes on the Website are not investment advice or a recommendation or solicitation to buy or sell any securities. Except where otherwise indicated, the Presentation speaksthose statements speak as of the date hereofmade, and Pershing Square undertakes no obligation to correct, update or revise the Presentationthose statements or to otherwise provide any additional materials. Pershing Square also undertakes no commitment to take or refrain from taking any action with respect to Herbalife or any other company.

All users and listeners agree and consent to exclusive jurisdiction and venue of any dispute or proceeding relating to or arising from Pershing Square’s Herbalife Presentation, websitethe Website or any related subject matter in the Courts of the State of New York in New York County or in the Federal courts located in the Southern District of New York.

As used herein, except to the extent the context otherwise requires, Pershing Square includes its affiliates and funds it manages or advises and their respective partners, directors, officers and employees.

Shorty, Shorty, You're Blowing My Mind

Whether it is a result of Pershing's sleight of hand or the fact that we're all idiots (of which I'm often accused), there seems to be confusion around how Ackman went about restructuring his short position. It seems some people were looking for a precise reduction in the short interest that would be in lock step with Ackman's covering. This is not the case. In the same time period that Ackman was covering his short, an additional 2.1M shares were freshly sold. Also, there was a very large block trade of 3.1M shares that printed after hours on September 30. If you take the currently reported 24.5M shares short and 

1. add back the 2.1M newly shorted shares
2. add back the 3.1M printed after the close on 9/30
3. subtract out the 4% of the SI that is typically covered every day under normal market ops....

That puts you at 28.5M shares, or pretty much right back at last settlement period's short interest of 28.6M shares, which is not at all surprising.

There are also some very interesting clues contained within Ackman's letter. In this letter he states that his Herbalife short position has been reduced from 16% of his assets to 12% of his assets. With this statement he virtually draws us a map from which we can render what his position looks like. Pershing's AUM was $10.8B and we know that Herbalife consumed 16% of that book, or $1.73B. Being short 24.5M shares at $50.50 places $1.2B on the book and Reg-T would require that he post 50% collateral, or ~$600M, placing his former position at $1.8B (or 16.6% of his capital) and his restructured position at ~$1.2B (remember this number).

He goes on to state that "in recent weeks we have restructured the position by reducing our short equity position by more than 40% and replacing it with long-term derivatives, principally over-the-counter put options...." and that they were "able to purchase long-dated, privately negotiated out-of-the-money put options on terms that offer us an attractive opportunity for profit versus their cost."

Importantly we are duly informed by Ackman's letter that they bought puts and that these options are out of the money. In his usage of "principally" Ackman raises the possibility that he also purchased exchange traded puts, or that he also sold calls(either OTC or on an exchange). 

By restructuring their short, Pershing square realized a loss of $198M on the 9.8M shares that they covered. Using exchange traded options as a pricing surrogate for the price Pershing would have paid for what they characterized as "principally over-the-counter put options" we can estimate he would have paid approximately a $98M premium to establish the right to sell Herbalife at $50/share. The premium Ackman likely would have paid for Jan 2015 puts is roughly $10.50/contract. Now, if you cover 9.8M shares and are left with 14.7M shares at $50.50/share, that puts his short at $742M with $371M required under Reg-T, or $1.1B capital at work on the position. If you add the $98M I believe he paid to open his puts on top of the $1.1B he has working on the equity short, that arrives squarely at the $1.2B he has working on Herbalife (12% of his capital). 

The premium Ackman paid for Jan 2015 puts struck at $50 would require Herbalife to break $40 for him to be in the money at expiration on those options. To subsidize the $198M realized loss as well as to recoup the $98M premium on the the puts he purchased, Herbalife shares would have to decline an additional $20.13/share beyond their previous average price of $50.50/share for Pershing Square to break even on their restructuring. Even if Ackman's counterparty GAVE HIM THE PUTS FOR FREE, Herbalife would still have to decline $13.47/share beyond Pershing's previous average to $37.03/share for Ackman to break even. In light of this, I find it particularly amusing that he would characterize a $4.16/share increase (to the analyst average price target of $77) as being a less attractive investment than a $35.81 crack to the downside. If he in fact PAID HIS COUNTERPARTY for the puts like all the rest of us schmoes have to, he'd need a $42.47 reversal just to be even stevens. 

I am often dumber than people claim I am (which gives me too little or too much credit depending on your point of view), but I have a hard time believing that Pershing Square investors are excited about a concentrated position in a stock that has to get cut in half before they break even, knowing that earnings are coming, audited financials are coming and a massive share repurchase may be on the way.  Regardless of what Ackman may have us all believe, with an effective short interest of at least 36%, and an earnings beat on the horizon, things may be easy peasy Ackman squeezy after all. Because Ackman restructured his position and lowered his breakeven from $50.50 to $30.37, Pershing square is in an even more precarious situation than they were before. Ackman's balls are in a very delicate situation right now, and I would not be at all surprised if the Street and Herbalife decided to give them a little squeeze.

Has Ackman Outfoxed the Short Hounds? (Probably Not)

Herbalife closed on October 2nd at $73.09. Later that evening Ackman revealed in a quarterly investor letter that they had restructured 40% of their Herbalife short, transitioning this to options, and on the following trading day Herbalife shed 6.6% to close at $68.25. Herbalife has since shed an additional $4.96 to close today at $63.29.

It is estimated that prior to restructuring their position that Pershing Square was short approximately 24.5 million shares at an average cost of $50.50/share, indicating that Ackman covered approximately 9.8 million shares. If you err on the more conservative side and estimate that he was short 20 million shares, Ackman still covered roughly 8 million shares, creating at most a net difference of 1.8 million shares. 

Tonight the short interest data for the period between September 14th and September 30th was published and it revealed that the Herbalife short interest had been reduced by -4,151,579 to 24,481,019 from 28,632,598 shares during that time. This is a stark difference from the 9.8 million shares that Pershing would have covered during this period. It is important to note that Ackman's quarter ended on September 30, which is the same day that the most recent short interest reporting period was settled. We can thus reasonably deduce that all of the covering that Ackman had participated in took place after September 13th and before September 30th. During this period, total trading volume in Herbalife was 37,763,625 shares. Pershing Square's short covering was responsible for between 21-26% of total demand in this period. There is no doubt this had a significantly positive effect on herbalife's stock price during the same period.

Prior to this, during Herbalife's Q2 conference call on July 30th, Herbalife noted that they had not been participating in share repurchases following the forced resignation of KPMG. This left Herbalife management with $787 million remaining in a pre-exiting share repurchase program and it was burning a whole in their pockets. They then noted on that same call that after having engaged a new auditor, the buyback program was back on. They stated that the guidance provided included a minimum of $50 million in buyback per quarter, but also that they "believe that our balance sheet is underlevered and we have available cash, and therefore, we may decide based on the discretion provided to us by our board to repurchase more than the amount included in guidance."

Using the VWAP for the period of July 30th through September 27 (which was the last trading day prior to Herbalife's earnings blackout period) of $65.83 we can set a reasonable price for any share repurchases they may have completed during the period. We know they would spend a minimum of $50M in Q3, but because they committed to spending at least another $50M in Q4, they could have purchased anywhere between $50M-$737 in shares during Q3. Even though $737M in repurchases in Q3 is feasible, I believe it is more likely they would not blow their load on a single quarter. Although Herbalife generates an incredible amount of cash on a quarterly basis, which could easily replenish such a large repurchase(assuming they obtained additional authorization from the board), Herbalife probably recognized that $787 million in repurchases would not be enough to push out Ackman completely and that it would not be prudent to utilize such a tool all at once. I think it is much more likely that they would split the authorization over the two remaining quarters in an effort to apply pressure, without leaving themselves empty handed if more pressure was needed as they close out their year.
Based on these numbers I estimate that Herbalife repurchased 5.9M shares this quarter with a possible range anywhere between 760K and 11.2M shares. This represents anywhere between 0.4% and 7.4% of total demand for Herbalife shares during this period. The supply constrictions coupled with the increased demand for Herbalife shares created by share repurchases and Pershing Square's short covering helped push the stock from its July 29th close of $60.57 to as high as $73.46 on September 19th. Now that short covering and share repurchases have both stopped, we are seeing price decline as result of decreased demand.

Herbalife's public float is 95.8M shares. Once you remove Icahn because he is an insider that leaves 78.9M shares floated. Soros owns 5M shares and Stiritz has disclosed holdings of 5.4M shares. If Soros and Stiritz were to call back their shares, or were to be classified as insiders by being named to the Herbalife BoD, that would further constrict the float to 68.5M shares. Even if you assume that no one has called back their shares, this puts the short interest at 31.1% of the float. Share buybacks during the quarter would have buoyed the short interest to anywhere between 31.4%-36.2%. If Soros and Stiritz were to call back their shares this would increase the short interest to between 36.2-42.7% of the float. 

Ignoring the possibility of a $2B debt financed partial tender that would theoretically increase any intact short interest to 79.8% of the remaining float, share buybacks alone could easily make up for the recent net decrease in short interest resulting from short coverage.

It may very well be that Ackman is the fox to a group of Wall St. hounds and he has managed to put some distance between himself and their snapping jaws before he could be squeezed between them. Maybe Ackman's trail is the only scent they care about with respect to a potential squeeze. I've met a lot of hounds in my day and I don't ever recall coming across one that was so discerning that it cared about the color of the fox, so much as that it had a fox to bite into. Based on the most recent short interest data and Herbalife's prior commitment to buyback shares in the quarter, I would venture that there are just as many foxes for the hounds to chase down as there ever was.