Tuesday, November 26, 2013

The Herbalife Hunger Games: Setting Fires

After surviving the 2012 Hunger Games, Ackness Nevergreen returned home to the far off and desolate reaches of District 211, CPW. On the eve that Ackness is scheduled to begin her powerpoint tour of Pay 'em, Ackness is visited by President MJ White, who explains that when Ackness defied the rules of capital by breaking the rules so that she and Pershing both survived the last Hunger Games of December 2012, she inspired rebellion in the hedgerow districts and now must continue to pretend to be in love with her short position or Pershing will be killed along with Dinneen and Indago to maintain the illusion that her actions were out of love for Hispanics, or risk that she incites a short squeeze. Just as she has returned home to her triumph, she finds herself thrust back into the spotlight to once again fight for her survival, but this time will be different; this time she is up against mature, professional killers.

Ackness had undoubtedly returned home to a different district. For months now, those residing in District 211 idolized Ackness for her hunting prowess and bravery. She was reportedly up as much as $260 million in her Herbalife trade and had she covered the position in early January she'd have walked away with a tidy profit of $340 million. Many have witnessed with their own eyes how she stealthily slid arrows out of her famed quiver and leveled them reliably at an unwitting investments. It's understandable that she'd been idolized. After nine months of hunting she did return to District 211 yielding an 8% return (never mind that had she just gone to the market she would have come home with 18%). We easily forget the shortcomings of our hero because she deftly proved herself in battle and she did it all for love and justice.  No one that had never fought in the games could ever appreciate how Ackness felt hearing that cannon's boom and seeing the faces of Target, JCPenney and Gotham Partners flash across the night sky. She'd sacrificed a lot to get here and people like me would simply never understand that burden.

After her victory, she'd left Pershing Square investors toiling in the mines under the false assumption that she was in love with THEM and not Latinos. While she was away at the capitol, rubbing elbows with investigators and investors, celebrating her triumph and apparent invincibility she had said time and again that her average cost was $50/share (and approximately 20 million shares), all the while secretly lobbying to support her true love, Latinos. In her letters and broadcasts  we began to see the lingering truth that Ackness slid the dagger into the heart of her own mystique. 

We had suspected for months that it was impossible for Ackness to remain faithful to her claims of $50/share and 20 million shares. It was not until a recent television appearance that we were certain she had been hiding the truth all these months. Aside from the Medusa-like eat shit and die eye daggers she occasionally shot at Stephanie Ruhle, shortly into Ackness's interview ( 00:45), she let slip that she has shorted Herbalife in the "mid to high forties". But how could this be? We've all know for months that the position had gotten away from her, but the difference between $50/share and "mid to high forties" quickly amplifies itself over twenty four million shares to become $100 million or more. And we are shaken again when in an aftershock of disbelief we comprehend that the phrase "mid to high forties" also means that our dear Ackness had realized a loss in September of almost a quarter billion dollars when she restructured her Herbalife trade.

We're betrayed. Using Herbalife's VWAP for Ackness's September duck and cover exercises, and her average cost of $46/share she realized a loss of $242 million in September and as of November 22nd's close has marked an additional $377 million in losses on the ~14M shares she is still holding short. That means that Nevergreen is $604 million underwater in Herbalife. She also carried 24.5 million shares short for three quarters with $0.30 dividends so to truly appreciate how deeply she has betrayed her District 211 compatriots we have to add another $22 million to her losses, as well as an absolute minimum of $22 million in the cost of borrow for all those shares, bringing Ackness to ~$650 million that her pretend romance has cost her district. Using market traded options as a spot surrogate for Ackness's OTC options expiring in January 2015, it would appear that Ackness notionally paid around $98 million for those puts, which are now valued at approximately $71 million today(or an additional $27 million loss). To subsidize a $242 million realized loss as well as to recoup the cost of the puts she purchased, and the cost of carrying the short, Herbalife shares would have to decline an additional $9/share beyond Ackness's average price of ~$46/share for Ms. Nevergreen to break even on the restructuring and prove that Pershing is her true love. This is an important consideration because it would require that Herbalife declines no less than $37 points to ~$34/share before she is able to claim that she does in fact love Pershing and is finished smooching for the cameras with Latinos

In watching the broadcast I am also slightly unnerved by the delusional confidence Ackness has about her. It makes me wonder if she has an ace up her sleeve. And then I catch a rare glimpse of her true self that infers to me she is holding no more cards; a Freudian slip in which she states that her short restructuring took the short thesis off the table(03:33). As unsettled as Ackness may seem in her interview as she fumbles, admitting her cost and subsequently pretending to not know what Herbalife shares were trading at ("high sixties, a number like that?"), she defiantly continues to extend herself further, offering to pay the legal fees of those that she claims to have been duped by Herbalife and promising to pay for the cost of auditing Herbalife retail sales for the past two years. It is in this moment I grasp that although she is mildly flustered she is flippantly defiant because she isn't playing with her own life, but the lives of others. It doesn't matter who she loves because she will not pay, it is the citizens of her district that will pay the price for her infidelity. Ultimately, Ackness will survive the Fiscal Third Quarter Quell because she'll sacrifice Pershing, despite her fiduciary promises to the contrary. 

And as Ackness traipses around pretending to love another, Pershing is dutifully back home reading the prospectuses left for him by Ackness, searching for any reassurance buried within her text that proves to him that he is the one she truly loves. After reviewing the 2/20 fee structure contained in Brochure A of the ADV, Pershing arrives at section C and shockingly rediscovers a passage he paid little attention to the first time he read it:

C. Additional Fees and Expenses
Each client bears its own expenses, including, without limitation ... expenses relating to regulatory or similar investigations, inquiries and “sweeps”, professional fees and expenses (including fees and expenses of investment bankers, appraisers, public and government relations firms and other consultants and experts), investment-related expenses (including research and expenses associated with activist campaigns (both long and short) such as expenses related to event hosting and production, public presentations, public relations, public affairs and government relations, forensic and other analysis and investigations, ... expenses relating to short sales (including dividend and stock borrowing expenses), ...payments or contributions to lobbying or not-for-profit organizations, which payments or contributions are expected to benefit a specific investment, the investment program or the operations or business of the Funds.
In rereading this passage Pershing shudders in horrific recognition that Ackness has betrayed him, and despite Ackness's gross infidelities she has every right to force Pershing to pay for her trysts with Herbalife. Even if Ackness fulfilled her promise to fight this battle to the ends of the Earth, she would only ever return to Pershing with a charred shadow of the love she promised him (less all appropriate fees, interest charges and various other expenses of course). She has simply set too many fires. Pershing understands that although Ackness probably loves him in some sort of weirdly dysfunctional codependent sort of way, her actions, her returns and her prospectuses tell a different truth. When Pershing fully appreciates that it will be a messy breakup requiring eight quarterly redemptions before he'll be able to cleanly split from Ackness Nevergreen, he wishes silently to himself that she would have just swallowed the fucking poison berries last year.

Fear not dutiful Pershing, you'll have your justice, although it may cost you your own life as well. The game's afoot and her fellow tributes are plotting the demise of Ackness Nevergreen.
(mockingjay song heard in the distance)

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